Originally presented as a program at an MCCA meeting.
It is easy to assert that Federal reserve policies have a more direct effect on each of us than any other entity in our society or government.
Tonight, I will attempt an overview of how banking evolved, the needs central banks serve, and what may play out when they fail. Next meeting will focus on the evolution of American Central banks and attempt to explain the workings of our current system.
I am going to start by exposing my prejudices and premises. If you disagree, I hope we remain friends, and have discussions that spur learning and growth.
So here we go. I posit human nature is conflicted between cooperation and killing, between producing and theft, between honesty and fraud. Thus, we perpetually endow religions and government institutions with power to curb the curses of killing, theft, and fraud.
That power corrupts those who receive it, and Homo Sapiens perpetually experience the Protectors becoming worse than the criminality they are supposed to suppress. These cycles do not repeat exactly the same, but their history is the best guide to predicting outcomes.
The data flow from market activity mimics our nervous system. These data signals and feedback are essential to commerce and health. When government force and corruption cause hardship, they try to distort or overrule the resulting market signals. Markets are never perfect, but they eventually overcome deviant government actions. Thus they are hated by Government Elites and their Cronies.
How & why did our banking system evolve out of such a mess?
If your only option for electrical power is solar generation, a battery is essential. For nighttime and cloudy weather, you must capture a “Store” of electrical energy from the mid-day surge that can be used later.
There were identical needs by societies that transitioned from Hunter-gatherer to plant cultivation, soon named agriculture. Human population exploded. This overwhelmed the capacity of untended nature to supply essentials. There was a surge of wealth at harvest season, but a yearlong need for food, clothing, shelter, etc. Centuries of barter evolved items or substances widely accepted as “stores” of value. We call those Money.
Classically, money is defined as a store of value, unit of account, and a medium of exchange.
There is a paradox here. At its heart, money is an intangible belief that fellow humans will accept it. To further muddy things, Governments universally try to dictate what can be used as money.
Thousands of years ago, Gold, silver, and copper alloys became standards of value common to diverse societies. That further evolved into standards for purity and weight in the form of bars and discs with a Stamp declaring their value. These are called specie, and the discs, or coins. prevailed. Governments got involved. They wanted the convenience of money to extract taxes and fees. And, they universally cycled between enforcing stated specifications for their coins, and debasing the coins for short term gains.
Paper receipts or written promises to supply money enabled longer trade routes and long-distance wars. Those receipts can also function as money. Again, governments piled on with their own receipts and written promises I the form of currency and bonds. Finally, credit evolved. That is, a promise to pay in the future that is not backed with money. These promises may be journal entries or contracts that are also used as a money substitutes.
Again, these all hinge on belief and trust that takes long to establish, but be quickly lost.
Jews had an edge because their culture emphasized honest conduct. Unlike the pious Muslims and early Christians, they created a work-around for religious prohibition of interest and loans. They decided it was fine to loan to non-Jews and charge interest. Thus, they fanned out to the powerhouse economies of Asia, and west as Europe developed. Their networks let money flow where distance and cultural differences obscured trust. They also created insurance to facilitate trade.
That expertise became the foundation of finance and banking as Medieval Europe finally edged toward commercial significance. European royalty appointed Court Jews to coordinate evasion of church edicts. Catholic prohibition of lending withered as their subjects also created work-arounds. The Catholic Templars became the financial arm of European Crusades.
Merchant banking was mostly about trading grain and centered in Italy. It progressed to settling trades for others. and holding deposits for notes from people holding actual grain. They worked from benches in grain markets. Banca is the Italian work for bench, and that was shorten to “Bank” in English. The first state banca, or bank in the modern sense, was set up in Venice in 1157. Merchants were forced to make deposits, and they were loaned to fund Italian government expansion and Catholic crusades.
Our culture is mostly a derivative of England’s. For centuries, England ruled what is now western France. English life was constant clashes and pillage with the Lowly French, untrustworthy Irish, crazy Welsh, slimy Spaniards, devious Dutch, and suicidal stubborn Scots. The really big wars were between the English warlords for control of England’s monarchy.
There was never enough money for wars and royal lifestyle. English Monarchs were eager customers of the European banks. Like their European counterparts, it was love-hate all the way. They often kidnapped, arrested, or blackmailed Bankers who shut down now loans and insisted on repayment
Let’s use a coin as a snapshot of this era. The Battle of Sluys was a sea battle in 1340. It was the opening of the Hundred Years’ War between England and France. Edward III of England started a war to gain the French throne. In that era, victory in war was proof of God’s approval.
French King Phillip attacked English holdings on the continent, and sent his navy to raid England’s coast. Spanish and Dutch privateers joined the fun.
The English had no navy. Edward leased a flotilla of merchant ships, filled them with archers and sailed toward France. He stumbled across a great gathering of the French navy and their thieving allies in the harbor of Slues. The French chained their ships together in an impregnable line across the harbor. Impregnable until Edward had his Archers shower arrows on the ship at the end of the line. English Sailors boarded the ship, killed the survivors, and repeated the process. The French abandoned their boats and swam for their lives. Remember, God loves a winner, so the townspeople flipped to the English side, killed the French survivors, and stripped the corpses.
This is celebrated by England’s first large gold coin, the Nobel of King Edward III. We see him atop his ship with shield and sword. These were hammered dies, produced one side at a time. The back inscriptions is not modest – “Jesus passing through their midst went His way”.
This gave the English fleet complete mastery over the channel. As the war dragged on, Edward began confiscating English ships instead of leasing them. Remember my premise that markets eventually prevail? Merchants were ruined and shipbuilding ceased. By the end of Edward’s reign the French dominated the channel and raided at will.
After a century of these battles, war fever was spent. Henry grabbed the English throne in 1485 with a motley little army of expats. His foe, Richard III raised a large army, but they were conscripts, hungry, tired, and indifferent. When Henry’s little band approached, Richard’s troops sat on their shields. To rally them, Richard himself did a “Follow Me!” and personally led a charge. His Troops stayed seated and watched him die.
Henry’s Reign was the opposite of the war cycle, with a 500 year mystery. He expanded his empire with a flood of bribery, spies, and hired mercenary armies. The constant state taxes, fees, tariffs, and sale of monopolies could not cover those expenses. In spite of these, judicial reform and peace allowed commerce to flourish. English wool and weaving were part of a booming European textile industry.
Historians did not see the big picture of Henry’s finances until the explosion historical data on the internet. Henry was Lord of the black market Alum pushers.
Today, we only think of alum to put pucker in a pickle, or tang in tartar sauce. In Henry’s era. alum was Europe’s most precious commodity. It had been coveted for medicine, cosmetics, and leather tanning. Now, alum was a dye-fixer in the wool and cloth trade. Without it, the English and Low Country economies would collapse. It was also used in papermaking, and the printing press had spurred that market as well.
Alum was plentiful in the Mideast, but not found in Europe. Earlier, Turkish Muslims cut off alum to Europe in response to the crusades. The price of smuggled alum stymied European development. And then, God intervened. An Alum deposit was found on Papal-owned land near Rome. The Papacy created a Holy monopoly on Alum in Christian Europe. Anyone trading in infidel Turkish alum faced excommunication and death. Of course, God intended alum monies to pay off papal debt and fund the mother of all crusades.
Henry conspired with the rising Medici bank syndicate in Italy to fund massive alum smuggling. His navy protected fleets of alum ship transports. Neighboring countries did his bidding in exchange for access to cheap alum. His agents met the Pope’s Spies at the dock and cut them in on the action.
Alum deposits discovered in Wales and northern Europe deflated Henry’s racketeering. However, the flood of wealth into England created an enduring gold trade in London. These gold traders would evolve into English bankers.
Their financial clout grew to the point that England could finance private stock companies to colonize America, India, Africa, Australia, etc. A key to colonial control was monopoly on money and banking.
Cynics point out many leaders of the American colony revolt of 1776 owed their souls to British banks. Was it a war of independence, or debt relief?
That war should have been over in a year. The Americans were certain France would pile on with the Dutch to give support. They did not know France was running on fumes, barely able to hold itself together. It would take four miserable years for the French to scrape up funding for military support.
The cause of French impotence was the Mississippi bubble earlier in the 1700’s.
The French explored the Mississippi river valley in the 1690’s, and tried to establish a profitable economy. Their own had been devastated by war expenses. Alas, the intense heat killed crops, fresh water became scarce, illness spread, and boredom destroyed discipline.
Finally, they encouraged crops such as tobacco, indigo, and rice. Prisoners were set free if they agreed to marry prostitutes and go Louisiana. Deerskin trade flourished, but the colony was still a drain. France decided to turn the colony over to a private company like the British had done.
They turned to a fast-talking Scottish Economist named John Law. Law had urged Scotland to let him create a bank for national finance and a state company for commerce. The profits from this monopoly would pay off the national debt. The thrifty Scots wanted nothing to do with his scheme, but the desperate French thought it is was music from heaven.
His French National bank was allowed to issue paper money partially backed by worthless bonds the French could pay off. Law organized a joint-stock company, named the Mississippi Company. Shareholders were promised huge profits when their money was invested in the colony. His main investment was a false media blitz about the glories of and success of the colony. The shares caught on, and eventually soared to 60 times their issue price. The bubble broke. Law convinced the king the Mississippi company was too big to fail. The National Bank issued unbacked paper money to buy up shares and halt their decline. Still, panicked investors sold stock. Remember what I said Elites do when their policies fail? Law printed more paper money.
Now, the rush to convert paper money caused bank runs and riots. Bankrupted Squatters attacked the financiers that had sold the stock. John Law fled under cover of night, and finished his life as a hanger on at gambling casinos.
France struggled in poverty for decades, and finally collapsed into the disastrous French revolution. Out of that wreckage, a dictator emerged who put the country back on a gold standard money system. Napoleon would use the resulting economic recovery to take French conquest and glory to unknown heights.
In spite of the evidence, Politicians cannot resist the allure of magically erasing debt and financing war. Law’s banking scheme has been adopted worldwide.
Next meeting, we will look at Americas experience with Federal Reserve Banks. Will John Law’s scheme be vindicated? Stay tuned!