The History Of Central Banking - The Bank Of England

After fractional reserve banking was discovered, the Money Changers were creating vast amounts of wealth for themselves. Between the 14th and 17th century the goldsmiths did not concentrate on minting coins or creating jewelry as much as they concentrated on perfecting the system of fractional reserve banking. They found out exactly how many banknotes they could loan out to generate the most profit, but still keep their secret of not having enough gold to go around. As the end of the 17th century approached, the Money Changers in England saw a new opportunity for wealth and power beyond measure. They saw the opportunity to create the first central bank.

In 1642 England became involved in a series of wars which would span almost 50 years, and nearly bankrupt the country. The country's half-century of conflict ended with the French naval victory at the Battle of Beachy Head in 1690. At this point England desperately needed to build a new navy, but did not have the gold to do it. This meant that the demand for money was up, and the supply was down; the perfect situation for the Money Changers to make a profit. They said that they would create a central bank which could provide every last pound the Country needed to beat the French. However, the Money Changers did not want to do this for free. In exchange for the money, the English government needed to raise taxes on the English people in order to secure the future repayment of the money that the Money Changers were about to loan out. The English government agreed, and the Bank of England, a private bank with stock owned by Money Changers and their banks, was created in 1694. All member banks had to use the same banknotes. England and her citizenry, were now in debt to the Money Changers.

As the 18th century approached, England welcomed it. With her new ships and booming economy the country emerged as the dominant world power, and created the vast English empire with the navy as its cornerstone. The Colonies in the New World held large amounts of timber which was used to repair ships, and build new ones. There were many other resources in North America, which made the Colonies a very valuable asset to the empire. These resources meant jobs, and these jobs, coupled with the prospect of religious freedom and large pieces of land, attracted many people to the new world. Early in the 18th century the colonies had a local economy all their own. Much trade occurred within the colonies themselves, and metal currency was scarce.

When there is not enough currency in an economy recessions, even depressions, occur. This is because money is needed to facilitate trade. If there is no money, there is no trade, which means no jobs. The colonials understood this basic monetary principle and came up with a solution to the problem; make their own currency for trade within the colonies. This currency would need to be created by the Colonies, hard to counterfeit, made tender by law, and the supply increased at the rate of economic expansion so that inflation does not occur. The currency was called Colonial Scrip, and it was fiat currency, meaning it was a paper note which was not backed by any commodity, such as gold or silver.

Benjamin Franklin

Many people today say that the way to solving the debt issue in the US is to put the dollar back onto a gold standard. This is not necessary, and even a bad idea. Gold is a fairly scarce metal, and very expensive. This means that a few super-rich people or companies can very easily take gold off of the market or pump it into the market to affect the price. The fiat currency that the Colonies used worked very well, and again it was not backed by gold. Because the currency was working so well news of its success soon reached England, where Benjamin Franklin resided in the years before the Revolutionary War. When asked why the Colonies had such a great economy Franklin replied, “That is simple. In the colonies we issue our own money. It is called colonial scrip. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers. In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one.”

Eventually the Money Changers at the Bank of England also learned about the new currency in the Colonies. This currency system was a threat to their system of total control over England's currency, and thus it had to be stopped. The bankers pushed Parliment hard to pass a law which would make Colonial Scrip illegal, and taxes were increased on the Colonies. These tax increases were only payable in gold. Soon the Colonies had no currency left to pay either taxes or to trade, and fell into a depression. Franklin writes in his autobiography, “In one year the conditions were so reversed that the conditions of prosperity ended, and a depression set in, to such an extent that the streets of the colonies were filled with unemployed.” He continued, “The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War."