The History of Central Banks - Part 1 (48 B.C. - 1791 A.D.)

A great many people believe the current crisis we are in is a direct result of the playing out of the debt-based monetary system and the scourge of Central Banks in our society.

A battle over the place and power of a central bank in America has rumbled throughout U.S. history.

It has pitted capitalists against populists who feared the wealthy few would hog power and crush liberty. The skirmishing has resurfaced amid the current credit crackup, with book after book faulting the Federal Reserve for allowing Americans to run up some $34 trillion in domestic non-financial debt.    

But most people have no idea what the Central Bank is and what role they play in our economy.

US Republican Presidential Candidate Ron Paul has vowed to end the Central Bank and has written a book about it.

But what is the Central Bank? 

How did it evolve and what is their place in our economy?

To understand why there is a push to end the US Federal Reserve we must understand the history behind the Central Banks.  That's what this series will be about.  The content is adapted from a history written by Andrew Carrington.

It will be long and broken down into multiple parts, but I hope you will take the time to read through it all.

In this first installment we look at the period from 48 BC to the introduction of the first Central Bank in the United States in 1791, the Bank of North America.

Central Banks sprung from the money changers of the time, so we start with them.

(Click on all images to enlarge)

48 B.C.

We can find reference to the money changers in the time of Julius Ceasar.

Julius Caesar took back from the money changers the power to coin money and then minted coins for the benefit of all. With this new, plentiful supply of money, he established many massive construction projects and built great public works. By making money plentiful, Caesar won the love of the common people.

But the money changers hated him for it and this is why Caesar was assassinated. Immediately after his assassination came the demise of plentiful money in Rome, taxes increased, as did corruption.

Eventually the Roman money supply was reduced by 90%, which resulted in the common people losing their lands and homes.

The growth and contraction of the money supply is a common theme throughout economic history.

30 A.D.

We next find reference to the money changers in the Bible in the time of Jesus Christ.

When Jews came to Jerusalem to pay their Temple tax, they could only pay it with a special coin, the half-shekel. This was a half-ounce of pure silver, about the size of a quarter. It was the only coin at that time which was pure silver and of assured weight, without the image of a pagan Emperor, and therefore to the Jews it was the only coin acceptable to God.

Unfortunately these coins were not plentiful, the money changers had cornered the market on them, and so they raised the price of them to whatever the market could bear. They used their monopoly they had on these coins to make exorbitant profits, forcing the Jews to pay whatever these money changers demanded.

Jesus Christ in the last year of his life uses physical force to throw the money changers out of the temple. He threw the money changers out as their monopoly on these coins totally violated the sanctity of God's house. These money changers called for his death days later.

1024

The money changers had control of Medieval England's money supply and at this time were generally known as goldsmiths.

This is when the concept of paper money started out.

Paper money was simply a receipt you would get after depositing gold with a goldsmith, in their safe rooms or vaults.

This paper started being traded as it was far more convenient than carrying around a lot of heavy gold and silver coins.

Over time, to simplify the process, the receipts were made to the bearer, rather than to the individual depositor, making it readily transferable without the need for a signature. This broke the tie to any identifiable deposit of gold.

Eventually the goldsmiths recognized that only a fraction of depositors ever came in and demanded their gold at any one time, so they found out how they could cheat on the system. They started to issue more receipts than they had gold to back those receipts and no one would be any the wiser. They would loan out these receipts (which were not backed by the gold they had in their depositories) and collect interest on them.

This was the birth of the system we know today as Fractional Reserve Banking, and like this system of today this meant the goldsmiths were able to make astronomical amounts of money by loaning out what were essentially receipts. Critics of the paper money system call these receipts "fradulent receipts" because they were receipts for gold the goldsmiths didn't possess.

As the goldsmiths gradually got more confident with the system they had created, they would loan out up to 10 times the amount of paper receipts vs the gold they had in their deposits.

To simplify how they made money on this let's give an example in which a goldsmith charges the same rate of interest to creditors and debtors. In this example a goldsmith would pay interest of 6% on gold you had deposited with them, and then charge 6% interest on the paper receipts (money) you borrowed from them.

As they would lend out ten times what you had deposited with them, they're paying you 6% interest while they are making 60% interest.

This is how they made money on your gold.

The goldsmiths also discovered that their control of this fraudulent money supply gave them control over the economy and the assets of the people. They exacted their control by rowing the economy between easy money and tight money.

The way they did this was to make money easy to borrow and therefore increase the amount of money in circulation. Then they would suddenly tighten the money supply, taking it out of circulation by making loans more difficult to get or stopping offering loans altogether.

Why did they do this?

Because the result would be a certain percentage of the people being unable to repay their previous loans. By not having the facility to take out loans they would go bankrupt and be forced to sell their assets to the goldsmiths for literally pennies on the dollar.

This is the early version of what some claim is exactly what happens in the world economy of today. Today we use words like, "the business cycle," "boom and bust," "recession," and "depression." Critics contend it is nothing more than an extension of the money changer game of pulling money from the money supply, but on a much grander scale.

1100

King Henry I succeeds King William II to the throne of England. During his reign he decided to take the power the money changers had over the people, and he did this by creating a completely new form of money that took the form of a stick.

This stick was called, a "talley stick," and ended up being the longest lasting form of currency, lasting 726 years until 1826 (even though other currencies came and went in that same period and ran alongside the talley sticks).

The talley stick was a stick of polished wood into which notches were cut along one side, to indicate the denomination of money the stick represented. The stick was then split lengthwise through the notches, so that both pieces had a record of the notches. The King kept one half to protect against counterfeiting and the other half was spent into the economy and circulated as money.

It was also one of the most successful money systems in history, as the King demanded that all the King's taxes had to be paid in, "talley sticks," so this increased their circulation and acceptance as a legitimate form of money. This system would work well in keeping the power away from the money changers in England.

1225

St. Thomas Aquinas is born. And as the leading theologian of the Catholic Church, he argues that the charging of interest is wrong because it applies to "double charging," charging for both the money and the use of the money.

This concept followed the teachings of Aristotle that taught the purpose of money was to serve the members of society and to facilitate the exchange of goods needed to lead a virtuous life. Interest was contrary to reason and justice because it put an unnecessary burden on the use of money.

Thus, Church law in Middle Ages Europe forbade the charging of interest on loans and even made it a crime called, "usury."

1509

King Henry VIII succeeds King Henry VII to the throne in England. During his reign he relaxed the laws regarding usury, and and the money changers did not waste any time in re-asserting themselves over the population.

They quickly made their gold and silver coin system plentiful again. It is interesting to note that under King Henry VIII the Church of England separated from Roman Catholicism, whose Church law prevented the charging of interest on money.

England will become a prominent place for the money changers to codify their practice.

1553 

Queen Mary I succeeds Lady Jane Grey's nine day reign to the throne in England.

During her reign, Queen Mary I, a staunch Catholic, tightened the usury laws again. The money changers were not amused and in revenge they tightened the money supply by hoarding gold and silver coins and causing the economy to plummet.

1558

Queen Elizabeth I succeeds Queen Mary I, her half sister, to the throne in England.

During her reign, Queen Elizabeth I decided that in order to wrest control of the money supply she would have to issue her own gold and silver coins. She did this through the public treasury and successfully took control of the money supply from the money changers.

1609

The money changers in the Netherlands establish the the first central bank in history, in Amsterdam.

1642

Oliver Cromwell is financed by the money changers for the purposes of formenting a revolution in England, and allowing them to take control of the money system again.

After much bloodshed, Cromwell finally purges the parliament, overthrows King Charles I and puts him to death in 1649.

The money changers immediately consolidate their power and for the next few decades plunge Great Britain into a costly series of wars. They also take over a square mile of property in the center of London which becomes known as the City of London.

1688

The money changers in England following a series of squabbles with the Stuart Kings, Charles II (1660 - 1685) and James II (1685 - 1688), conspire with their far more successful money changing counterparts in the Netherlands, who had already set up a central bank there.

They decide to finance an invasion by William of Orange of Netherlands who they sound out and establish will be more favorable to them. The invasion is successful and William of Orange ascends to the throne in England as King William III in 1689.

1694 

Following a costly series of wars over the last 50 years, English Government officials go, cap in hand, to the money changers for loans necessary to pursue their political purposes. The money changers agree to solve this problem in exchange for a government sanctioned privately owned bank which could issue money created out of nothing.

This was deceptively named the "Bank of England." Critics content this was done for the sole purpose of duping the general public into believing it was part of the government, which it was not.

Like any other private corporation the Bank of England sold shares to get started.

The private investors, whose names were never revealed, were supposed to put up £1,250,000 in gold coins to buy their shares in the bank, but only £750,000 was ever received. Despite that the bank was duly chartered and began loaning out several times the money it supposedly had in reserves, all at interest... a theme that lies at the heart of every private Central Bank throughout history.

Although the Bank of England's private investors were never revealed, one of the Directors, William Paterson, stated:

• "The Bank hath benefit of interest on all monies which it creates out of nothing.”

Furthermore the Bank of England would loan government officials as much of the new currency as they wanted, as long as they secured the debt by direct taxation of the British people.

The Bank of England amounted to nothing less than the legal counterfeiting of a national currency for private gain, and thus any country that would fall under the control of a private bank would amount to nothing more than a plutocracy.

Soon after the Bank of England was formed it attacked the talley stick system, as it was money outside of the power of the money changers, just as King Henry I had intended it to be.

1698 

Following four years of the Bank of England, their plan to control the money supply had come on in leaps and bounds. They had flooded the country with so much money that the Government debt to the Bank had grown from the initial £1,250,000, to £16,000,000, in only four years.

That's an increase of 1,280%.

Critics content this increase in the money supply is the first step in a crucial process.

If the money in circulation in a country is £5,000,000, and a central bank is set up and prints another £15,000,000, then by sending this money out into the economy through loans etc, reduces the value of the initial £5,000,000 in circulation before the bank was formed.

This is because the initial £5,000,000 is now only 25% of the economy.

It also gives the bank control of 75% of the money in circulation with the £15,000,000 they sent out into the economy.

This inflation which is the reduction in worth of money borne by the common person, due to the economy being flooded with too much money, an economy which the Central Bank are responsible for.

Critics content Stage 2 of the Central Bank plan occurs as this inflation takes hold. The common person's money is worth less so he has to go to the bank to get a loan to help run his business etc. When the Central Bank is satisfied there are enough people with debt out there, the bank tightens the supply of money by not offering loans. 

Stage 3 occurs as the Central Bank sits back and waits for the debtors to them to go bankrupt, allowing the bank to then seize from them real wealth, businesses and property etc, for pennies on the dollar.

Inflation never effects a central bank in fact they are the only group who can benefit from it, as if they are ever short of money they can simply print more.

1757 

Benjamin Franklin travels to England and spends the next 18 years of his life there until just before the start of the American Revolution.

1760

Mayer Amschel Bauer changes him name to Mayer Amschel Rothschild and sets up the, House Of Rothschild, and soon learns that if he loans out money to Governments and Royalty then this is far more profitable than loaning to individuals. This is because the loans made are bigger and backed by their nations' taxes. He trains his five sons in the art of money creation.

1764

Benjamin Franklin is asked by officials of the Bank of England to explain the prosperity of the colonies in America. He replies:

• "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 no one."

As a result of Franklin's statement, the British Parliament hurriedly passed the Currency Act of 1764. This prohibited colonial officials from issuing their own money and ordered them to pay all future taxes in gold or silver coins.

Referring to move after this act was passed, Franklin would state the following in his autobiography:

• "In one year, the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the colonies were filled with the unemployed... 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 viability of the colonists to get power to issue their own money permanently out of the hands of King George III  and the international bankers was the prime reason for the revolutionary war."

Control of America's money system will change hands 8 times since 1764.

1775

April 19th sees the start of the revolutionary war in Lexington, Massachusetts.

By this time the colonies had been drained of silver and gold coins as a result of British taxation. As a result of this, the continental government had no choice but to print money to finance the war.

At the start of the revolution the American money supply stood at $12,000,000. By the end of the war it was nearly $500,000,000 and as a result the currency was virtually worthless.

An example of this is that a pair of shoes now sold for $5,000 dollars. This also shows the danger of printing too much money. The reason Colonial Scrip had worked was because just enough was used to facilitate trade.

1781 (The Central Bank comes to America) 

Towards the end of the American Revolution the Continental Congress were desperate for money, so they allowed Robert Morris, their Financial Superintendent, to open a privately owned central bank, in the hope this would sort out the money problem.

Morris was a wealthy man who had grown wealthier during the revolution by trading in war materials.

This first central bank in America was called the Bank of North America, which was set up with a four year charter, and was closely modeled after the Bank of England. It was allowed to practice the fraudulent system of fractional reserve banking, so it could create money it didn't have, then charge interest on it.

The bank's charter called for private investors to put up $400,000 of initial capital, which Morris found himself unable to raise. Nevertheless he unashamedly used his political influence to have gold deposited in the bank, which had been loaned to America by France. Morris then loaned the money he needed to buy this bank from this deposit of gold that belonged to the government, or rather the American people.

This Bank of North America, again deceptively named so the common people would believe it was under the control of the government, was given a monopoly over the national currency.

Next up will be Part 2 (1791 - 1865).

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