Deel 3 publicatie The Big Reset van Willem Middelkoop.
Chapter 2 – Central Bankers: The Alchemists of our Time
The Bank hath benefited of interest on all monies which it creates out of nothing.
– William Paterson, one of the founders of the Bank of England (1697)
Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.
– Alan Greenspan, former Chairman of the Federal Reserve (1999)
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.
– Thomas Jefferson, third President of America and drafter of the Declaration of Independence (1808)
It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.
– Paul Volcker, former Chairman of the Federal Reserve in the foreword of The Central Banks (1995)
The very first form of banking started well over 5,000 years ago, while fractional and fiat money systems began appearing almost 1,000 years ago. The first central bank appeared some 500 years ago. (Central) bankers, the alchemists of our time, have a monopoly on the creation of money, just like the police and army have a monopoly on violence. In the last century, central bankers have succeeded in turning paper into gold36 and gold into paper.37 The bank notes of the European Central Bank (ECB) no longer refer in any way to any intrinsic value, although the ECB still owns some 660 tonnes of gold. We have all become used to seeing unbacked paper money as value, which is precisely what our central bankers have been conditioning us to believe for over a century. Our entire monetary system is built on trust. Since the outbreak of this credit crisis, this trust has been waning rapidly worldwide. Even central banks have started buying gold to hedge the risks of their fiat own money system. Apparently, they also lack conf idence in the long-term value of the dollar, still the world’s reserve currency, and other fiat currencies.
36 On the f irst bank notes used in the Netherlands, a promise was printed that the bank would pay gold ‘to the bearer of ten golden guilders’. Later on, that changed into ‘to the bearer of 10 (silver) guilders’, followed by ‘to the bearer’ and finally ‘lawful means of payment’. 37 Since the 1980s, the price of gold has been determined by selling ‘paper gold’ on the futures markets. According to an LBMA study, total (paper gold) trading volume was a few hundred times the annual production of actual gold. (LBMA gold turnover survey Q1 2011, The Alchemist).
20. When did the first form of banking emerge?
The history of banking could well be much older than is often thought. From archaeological f inds, we know that a form of banking existed over 5,000 years ago. Clay tablets from around that time show transcripts of debt positions by farmers in southern Mesopotamia. Based on these findings, anthropologist David Graeber wrote a book entitled Debt: The first 5,000 years (2011) in which he claims that the first recorded debt systems were in the Sumer civilization around 3,500 B.C. in the region of what is now Iraq. In this early form of banking, farmers often became so mired in debt that they were periodically pardoned by kings who cancelled all debts. The Greeks and Romans also had financiers. In ancient China and India over 2,000 years ago, there were money lenders who sponsored farming projects, for example.
The first European banks appeared only in the early Middle Ages when goldsmiths also started to store the gold coins they were assessing for traders. At that time, merchants brought with them all sorts of gold and silver coins from abroad whose gold and silver content was not clearly known. The receipts for the stored coins soon became a form of money.
When the goldsmiths realized that the merchants often left their gold coins with them for long periods of time, the goldsmiths began to lend out the gold for a small fee, or ‘interest’. Because the gold did not actually belong to the goldsmith and the risk therefore lay with the merchants, the latter received a portion of the interest. The rest was prof it for the goldsmith. This activity was the first form of banking in Europe. The word ‘bank’ comes from the Italian word ‘banca’, the name used for the marble tabletop upon which Italian goldsmiths dropped foreign coins. From the sound of the coins being dropped, they could assess whether a coin contained a lot of copper or nickel.38
Banks as we know them today were first set up during the Renaissance in the Italian cities of Florence, Venice and Genoa. The most famous is without doubt the Medici Bank, founded by Giovanni de’ Medici in 1397. The oldest bank still in existence at the moment of writing is the Monte dei Paschi di Siena (1472), although it is currently fighting for its very survival.
When people realised that the profits that could be made from money lending as practiced by goldsmiths, more and more bankers sprung up. Only much later, after the decoupling of the gold standard, did bankers find out that lending fiat money – money created out of nothing – was even more profitable. Bankers do receive interest every month on all debts, after all.
21. How did central banking start?
During the Middle Ages, European royalty and even the church often needed to borrow money to fight wars. This financing was provided by so-called moneychangers. These early bankers also serviced travelling merchants when they needed to exchange foreign coins into local ones. As the size of the operations of moneychangers grew, they began to provide lending activities.
These moneychangers understood pretty quickly that lending to powerful entities such as kings and churches carried less risk because of the continual stream of income.
The German Rothschild family established an international banking business and dynasty, becoming one of the most powerful families in the 19th century. In return for financing royal empires, several family members were even elevated to nobility in Austria and the United Kingdom. At its height, the Rothschild family is believed to have possessed the world’s largest private fortune by far.39
This can be seen as the start of modern banking. Often an intimate relationship developed between governments and bankers – one that can still be discerned today – and led to the establishment of the first central banks. Increasingly, bankers were given the right to print money in exchange for their financial support of the royal houses.
To this day, many central bankers regard politicians as loyal operators of the financial architecture they have been building for over 400 years. Over the years, bankers have learned that citizens could always be taxed by governments to pay back the banks. Moreover, banks know they will be bailed out if they run into trouble because the economy cannot function without them.
39 The family’s wealth is believed to have declined subsequently because it had to be divided amongst hundreds of descendants. Now, Rothschild banking and investment businesses are much smaller than they were throughout the 19th century.
22. The first central bank
In the early 17th century, the Dutch Republic was a powerful economic force in Europe, with Amsterdam as the capital of trade. At the time, over 800 different gold and silver coins were used in European trade, many damaged and worn. In order to value all the various coins and at the same time reduce the city’s dependency on a number of moneychangers, the Amsterdam Wisselbank40 was founded in 1609. It is frequently regarded as the first central bank.41
Within the Dutch Republic, 54 different mint masters had the right to mint gold and silver coins. The Wisselbank ensured that all coins that satisfied the quality requirements were accepted. The Amsterdam Wisselbank thus had a supervisory role but did not take action when issuing banks or institutions encountered problems. Its main function was the withdrawal of clipped,42 doctored and counterfeit coins from circulation. They were melted and turned into coins that conformed to the quality requirements. Bills could be settled with bills of exchange, so coins could stay in the vaults of the Wisselbank. When customers exchanged their metal into paper currencies, they received a 5% premium. 35 years later, in 1644, Sweden would start the second central bank along this model, the Swedish Riksbank.
Most central banks in the past 400 years were initiated by rich businessmen who understood quite well that (central) banks, which owned the monopoly on creating money and were backed by government tax revenue, had a wonderful business model. But most central banks came under the control of the government in the course of the 20th century. There are two exceptions to this. Half of the shares of the central bank of Belgium are still in the hands of private entities. And in the US, the American government does not own a single share in the Federal Reserve (Fed), which is owned entirely by affiliated banks. This explains why the Federal Reserve almost always champions what is good for banks on Wall Street.
40 ‘Wissel’ means exchange, so Wisselbank means exchange bank.
41 Stephen Quinn and William Roberds, ‘An Economic Explanation of the Early Bank of Amsterdam, Debasement, Bills of Exchange, and the Emergence of the First Central Bank’, Working Paper Series 2006-13, Federal Reserve Bank of Atlanta.
42 Clipping (shaving metal from the coin’s circumference) and sweating (shaking the coins in a bag and collecting the dust worn off) were practices often used to exploit the value of gold and silver coins.
23. Who created the first government bonds?
In the 1690s, the Scotsman William Paterson, who travelled throughout Europe just like John Law to spread his financial expertise, attempted to found an independent Scottish Empire in what is now Panama. He tried to sell the scheme to the governments of England, the Holy Roman Empire and the Dutch Republic, but none were willing to support him. After this failure, Paterson returned to London and made his fortune by setting up a business in trade with the West Indies.
In 1694, he wrote a pamphlet entitled A Brief Account of the Intended Bank of England. It explained how the British government could be helped to create money by setting up ‘a jointstock company’ by the name of the ‘Bank of England’ to act as the English government’s banker. He proposed a perpetual loan of £1.2 million to the government, but with an annual interest of 8% a year to the shareholders.43 In return, the investors would be allowed to incorporate a ‘Company of the Bank of England’ with banking privileges, including the issuing of bank notes.
Paterson was backed by a group of rich traders from the City of London who would generate the starting capital. He was also supported by Charles Montagu, one of the most important officials within the Ministry of Finance. Together, they persuaded the government to create a bill so that the Bank of England could be established. The Royal Charter was granted on 27 July 1694. The first loan by the Bank of England was to finance the Royal Navy by issuing Navy Bills. British debt rose from one million pounds in 1688 to 48 million pounds in 1714. Over a quarter of taxes were used to fund the creation of the British Navy.
The start of the Bank of England is often seen as the start of a new era. Fiscal deficits by governments could be financed by means of selling (perpetual) bonds. We could in fact say that the current financial system of bond financings started with the foundation of the English central bank more than three hundred years ago.
43 See the complete list of shareholders on: http://www.bankofengland.co.uk/ about/Documents/pdfs/bankstock_transcript.pdf
24. How large has the bond bubble become?
The perpetual character of the first national loan was replaced in most countries by bonds with a duration of up to thirty years. Actually, these loans are almost never paid off but ‘rolled over’ continuously. New loans pay off old loans. Whoever sees this as a Ponzi scheme44 is quite right.
This British model was so successful that other countries soon started their own private central banks. It all led to a mountain of government debt, which now totals around $ 50 trillion (as of 2012). There is no way this debt can ever be repaid in nondeflated currencies. Strangely enough, most of the money that is supposedly safely invested in risk-free bonds are most at risk.
Japan’s external debt – i.e., the country’s debt that has been borrowed from foreign lenders – has risen to almost 250% of GDP, while the external debt of the US is now on a parabolic move upwards. In Europe, the growth in the external debts of countries such as the United Kingdom, Greece, Portugal, Italy and Spain (and soon many others) is simply unsustainable. A recent study of eight centuries of government debt defaults by economists Carmen M. Reinhart and Kenneth S. Rogoff warns of the real likelihood of national debt crises in the near future.45 We will look into this subject in more detail in chapter 4.
A global debt restructuring will probably be needed, and could be part of the Big Reset. In 2012, Bill Gross, founder of the largest bond investor house Pimco, advised investors to start buying ‘hard assets’ instead of paper assets such as government bonds.46 This is the equivalent of a car salesman advising people to start using the train instead of buying a new car.
44 Named after the con man Charles Ponzi (1882-1949) who invented a system whereby payments are financed out of investments from new clients.
45 Carmen Reinhart and Kenneth Rogoff, This Time is Different: Eight Centures of Financial Folly (2009). http://scholar.harvard.edu/files/this_time_is_different_short.pdf 46 http://www.investopedia.com/stock-analysis/2012/bill-gross-says-to-buyhard-assets-gsg-gld-gltr-rwo0614.aspx
25. Who supervises central banks?
In a good functioning banking system, central banks keep a watchful eye over commercial banks to prevent them from taking irresponsible risks that could be harmful for the whole monetary system.
As we have learned, in the course of the 20th century, many governments took over central banks from private shareholders. Often, this was because politicians wanted to gain more control over the financial sector. Since then, central bankers have fought to gain more independence from politicians. Their main argument was and still is that it is far too dangerous when monetary policy is dependent on the short-term perspective of politicians. This often led to a compromise whereby central bankers work for the government but are granted a significant degree of autonomy in conducting monetary policy.
Initially, this independence worked rather well. But many Western central bankers have abused their freedom, often in collusion with private bankers, in order to increase their wealth and power. This is especially the case in the US.
Central bankers and private bankers have completely different mindsets. While the first are often academics and enjoy their position of power, private bankers are the real deal and moneymakers. As we have seen in the past, some will even sell their country for money. Napoleon stated in 1802:
The hand that gives is above the hand that takes. Money has no motherland,
financiers are without patriotism and without decency; their sole object is gain.
In the current banking system, central bankers often turn out to be lap dogs for private bankers instead of watch dogs. This explains how Wall Street banks were able to sell increasingly risky products (derivatives) without the US central bank standing in their way. Other central banks were pressured by the Fed to refrain from regulating the worldwide trade of derivatives.
Not much has changed in the US since the start of the credit crisis. Annually, the financial sector spends about one million dollars per member of Congress on financial lobbying.47
47 http://www.opensecrets.org/lobby/ http://www.publicintegrity.org/2010/05/21/2670/five-lobbyists-each-membercongress-financial-reforms
26. Where are the most important decisions about the banking industry made?
Despite this collusion between central banks and commercial banks, politicians still believe that the best way to reform financial institutions is via self-regulation. The most important international banking regulations – known as ‘the Basel Rules’ – are still decided at regular meetings of the Bank for International Settlements (BIS) in Basel. The BIS can be seen as the mother of central banks and was founded at the International Bankers Conferences at Baden Baden (1929) and The Hague (1930).48,49 The BIS was originally intended to facilitate the payment of reparations imposed on Germany by the Treaty of Versailles after World War I. But after hyperinflation in the Weimar Republic from 1921 to 1924, a new plan for settling German reparations was written in 1929.50
Between 1933 and 1945, the BIS board included Walther Funk and Emil Puhl, both high-level Nazis who were subsequently convicted of war crimes at the Nuremberg trials. After World War II, it became clear that the BIS, which had been a kind of house banker to the Nazis, had helped to launder stolen gold.51 Under the supervision of Funk and Puhl, Nazi Germany had confiscated gold from Jewish concentration camp victims and melted it down to make new gold ingots. During the Bretton Woods conference of 1944, the bank was even accused of acting under orders from the Nazis. The Americans were appalled, and the US government supported a motion that called for the abolishment of the BIS. The proposal was supported by other European delegates but was opposed by John Maynard Keynes, the head of the British delegation. In April 1945, a decision to liquidate the BIS was made, but it was reversed by the US in 1948. The BIS had survived but was badly wounded. It had less influence and needed time to find a proper new role behind the scenes.
The BIS still operates as a counterparty, asset manager and lender for central banks and international financial institutions.
Switzerland agreed to act as the headquarter state for the BIS. The headquarters would be situated in Basel.
During the 1970s, the functions and the number of BIS members were substantially enlarged. Today, 60 central banks are members of the BIS, including those from the most important industrialized countries. Surprisingly, the Fed did not join until 1994.52 This was because the Americans saw the BIS as a competitor to ‘their’ International Monetary Fund (IMF). At the start of the 1990s, the US realized they needed the BIS for European central bank support in its war on gold (of which more later) and in order to prevent regulation on derivatives.
While the presidents of the ECB and the Fed can still be held accountable by parliament or congress, no single form of democratic control exists over the decision-making process of the BIS. Their meetings are concealed from the outside world. Even ministers of finance have to guess what decisions bankers in Basel will take. The same bankers that brought our global financial system to the brink of collapse are deciding – behind the scenes and not answerable to anyone – on the banking reforms needed to prevent another credit crisis. It seems that not much has changed since the fall of Lehman.
To this day, BIS directors enjoy diplomatic status and cannot be prosecuted even after the end of their tenure. They are also allowed to move house with their family at any time to neutral Switzerland.53
48 James C. Baker, The Bank for International Settlements.
49 The famous historian Carroll Quigley writes about this in Tragedy And Hope (1966, p.278): ‘The powers of financial capitalism had a far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.’
50 The Young Plan reduced further payments to 112 billion Gold Marks, equivalent to US $ 8 billion in 1929 (US $ 109 billion in 2013) over a period of 59 years, which would end in 1988.
51 One of the main f igures behind the establishment of the Bank for International Settlements in Basel in the 1930s was Halma Schacht, the central banker of Nazi Germany.
Dit is het derde deel dat wij op Edelmetaal-Info publiceren uit het boek The Big Reset van Willem Middelkoop. Met zijn toestemming uiteraard. En alle hoofdstukken zullen volgen. Zoals al gemeld, er zijn zo’n 30.000 woorden toegevoegd aan de oorspronkelijke druk. Dat is niet het geval in de Nederlandstalige versie, vandaar dat we de Engelse versie publiceren.
Volgende deel – hoofdstuk 3 The History of the Dollar – zal as donderdag 6 februari verschijnen.