Over the past couple of months I have been posting intermittently about money and have had some interesting comments. I understand that reordering your understanding of this issue is hard to take. As Galbraith so eloquently put it: ‘The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.’ But as is so often the case in economics, as well as home economics, the proof of the pudding is in the eating. So for those who are not yet convinced by this account of the nature and instability of the money-banking system some examples from history can be used to illustrate the theory in practice.
Such periodic disasters are inevitable, indeed symptomatic of capitalism as an economic system. They are the boom-and-bust cycles that are generated because the capital that lies at the heart of the system is created in such an illogical and unstable way. In the words of Galbraith again: ‘As banking developed from the seventeenth century on, so, with the support of other circumstance, did the cycles of euphoria and panic. Their length came to accord roughly with the time it took people to forget the last disaster’. One cautionary tale follows. I'll post more over the next month or so.
The establishment of the Bank of England was the other side of the coin of the creation of the national debt called a ‘fund for perpetual interest’, rather like a perpetual motion machine. Initially the Bank was established privately by Scottish entrepreneur William Paterson who persuaded the government to raise £1,200,000 by selling the national debt to citizens who would redeem their share with interest in a fixed number of years. The scheme was accepted in 1694 and from then until the following year Paterson served as a director, when he fell out with the other members of the Court (or board) and was sacked. Paterson was an entrepreneur and the Bank of England was merely one of his many schemes to create money from thin air. He is probably most famous for the subsequent disastrous Darien project.
In 1693 he set up the Company of Scotland Trading to Africa and the Indies, which sold shares of a proposed colony on Darien on the Panama isthmus. The Scots were keen to see their own advantage from expanding international trade and so there was no shortage of investors: about half a million, half Scotland’s national capital, was invested. Darien was in fact the original Mosquito Coast and most of the settlers died within the year. The scheme was also sabotaged by English traders and the English governor of Jamaica who did not want any competition. Thanks to Paterson the Scottish economy was nearly bankrupted preventing Scottish entrepreneurs from competing with the ‘British’ empire, and we have lived with the national debt for the past 300 years and more. In its weakened state Scotland agreed to be subservient to the English Crown under the so-called Act of Union just a few years later in 1707.
Galbraith’s conclusion on banking seems most apt: much discussion of money involves a heavy overlay of priestly incantation. Some of this is deliberate. Those who talk of money and teach about it and make their living by it gain prestige, esteem and pecuniary return, as does a doctor of witch doctor, from cultivating the belief that they are in a privileged association with the occult. (Galbraith’s Money: Whence it Came, Where it Went, p. 5).
viding the wealth to support the British Empire.
