Bank of England

The Stepford Daughters of Brexit and Slavery and the Emergence of Capitalism

Yesterday for our amusement the awesome Kerry Anne Mendoza posted a video on twitter made by two very definitely overprivileged girls talking about the evils of socialism. The two young ladies were Alice and Beatrice Grant, the privately educated granddaughters of the late industrialist and former governor of the Bank of England, Sir Alistair Grant. With their cut-glass accents and glazed, robotic delivery of their lines, they seemed to fit the stereotype of the idiotic Sloane perfectly, right down to the ‘Okay, yah’, pronunciation. Mendoza commented ‘I don’t think this was meant to be a parody, but it’s the perfect roast of the “yah-yah” anti-left.’

Absolutely. In fact, what the girls were describing as socialism was really Communism, completely ignoring democratic socialism, or social democracy – the form of socialism that demands a mixed economy, with a strong welfare state and trade unions, progressive taxation and social mobility. It also ignored anti-authoritarian forms of socialism, like syndicalism, guild socialism or anarcho-Communism. They were also unaware that Marx himself had said that, regarding the interpretations of his views promoted by some of his followers, he wouldn’t be a Marxist.

But it would obviously be too much to expect such extremely rich, public school girls to know any of this. They clearly believed, and had been brought up to believe, the Andrew Roberts line about capitalism being the most wonderful thing every invented, a mechanism that has lifted millions around the world out of poverty. Etc. Except, as Trev, one of the great commenters on Mike’s and this blog, said

If “Capitalism works” why are there a million people using foodbanks in Britain today? Not working that well is it? Why did the Government bail out the Banks using our money? Why did the Banking system collapse in the first place, was it because of Socialism? I don’t find these idiotic spoilt brats in the least bit funny, I feel bloody angry. When was the last time they ate food they found in the street? Bring back the Guillotine!


The two girls were passionate supporters of the Fuhrage and his wretched party, and were really looking forward to a no-deal Brexit. It shows how out of touch these girls are, as Brexit is already wrecking the British economy, and a no-deal Brexit and subsequent deal with a predatory America would just wipe it out completely. Along with everything that has made post-war Britain great – the NHS and welfare state. But these girls obviously have no connection with working people or, I guess, the many businesses that actually depend on manufacturing and exports. I think the girls’ family is part of financial sector, who stand to make big profits from Brexit, or at least are insulated from its effects because they can move their capital around the globe.

The girls’ views on the EU was similarly moronic. They really do seem to believe that the EU is somehow an oppressive, communistic superstate like the USSR. It wasn’t. And the reason anti-EU socialists, like the late, great Tony Benn distrusted it was partly because in their view it stood for capital and free trade against the interests of the nation state and its working people.

And they also have weird views on slavery and the EU’s attitude to the world’s indigenous peoples. To the comment by David Lammy, the Black Labour politico, who dared to correct Anne Widdecombe for comparing Brexit to the great slave revolts, they tweeted

“Lammy being pathetic as usual. The chains of slavery can be intangible, as amply shown in China, the Soviet Union and the EU; to deny that just shows your ignorance and petty hatred for the truth”.

To which Zelo Street commented that there two things there. First of all, it’s best not to tell a Black man he doesn’t understand slavery. And second, the EU isn’t the USSR.

They were also against the Mercosur deal the EU wishes to sign with the South American nations, because these would lead to environmental destruction and the dispossession and exploitation of the indigenous peoples.

“As usual the GREED and selfishness of the EU imposes itself using their trade ‘deals’ in the name of cooperation and fake prosperity. The indigenous tribes of the Amazon need our protection not deforestation”.

To which Zelo Street responded with incredulity about how they could claim environmental concern for a party headed by Nigel Farage.

And they went on. And on, going on about how the EU was a threat to civil liberties. And there was more than a touch of racism in their statement that Sadiq Khan should be more concerned to make all Londoners feel safe, not just EU migrants. They also ranted about how Labour had sold out the working class over Brexit in favour of the ‘immoral, money hungry London elite’. Which shows that these ladies have absolutely no sense of irony or any self-awareness whatsoever.

In fact, Zelo Street found them so moronic and robotic, that it dubbed them the Brexit party’s Stepford Daughters, referring to the 70s SF film, the Stepford Wives. Based on the novel by Ira Levin, the films about a community where the men have killed their wives and replaced them with robots.


There’s a lot to take apart with their tweets. And perhaps we shouldn’t be two hard on the girls. They’re only 15 and 17. A lot of young people at that age have stupid views, which they grow out of. But there is one issue that really needs to be challenged.

It’s their assumptions about slavery and the genocide of indigenous peoples. Because this is one massive problem to any assumption that capitalism is automatically good and beneficial.

There’s a very large amount of scholarship, much of it by Black activists and researchers, about slavery and the emergence of European capitalism and the conquest of the Americas. They have argued that European capitalism was greatly assisted by the profits from New World slavery. Caribbean historians like Dr Richard Hart, in his Blacks in Bondage, have shown that transatlantic slavery was a capitalist industry. For the enslaved indigenous peoples and the African men and women, who replaced them when they died out, capitalism certainly did not raise them out of poverty. Rather it has done the opposite – it enslaved them, and kept them in chains until they were able to overthrow it successfully with assistance of European and American abolitionists in the 19th century.

And among some left-wing West Indians, there’s still bitterness towards America for its constant interference in the Caribbean and Central and South America. America did overthrow liberal and progressive regimes across the world, and especially in the New World, when these dared to challenge the domination of American corporations. The overthrow of Jacobo Arbenz’s democratic socialist regime in Guatemala is a case in point. Arbenz was overthrown because he dared to nationalise the banana plantations. Which upset the American United Fruit Company, who got their government to overthrow him in coup. He was replaced by a brutal Fascistic dictatorship that kept the plantation workers as virtual slaves. And the Americans also interfered in Jamaican politics. They were absolutely opposed to the Jamaican Labour party politician, Michael Manley, becoming his nation’s Prime Minister, and so did everything they could to stop him. Including cutting trade.

And then there’s the enslavement and genocide of the indigenous peoples.

Before Columbus landed in the New World, South America had a population of about seven million. There were one million people in the Caribbean. I think there were similar numbers in North America. But the indigenous peoples were enslaved and worked to death. They were also decimated through diseases carried by Europeans, to which they had no immunity. The Taino people were driven to extinction. The Caribs, from whom the region takes its name, were able to survive on a reservation granted to them in the 18th century by the British after centuries of determined resistance. The conquest of the New World was a real horror story.

And Britain also profited from the enslavement of indigenous peoples. I doubt the girls have heard of it, but one of the scandals that rocked British imperialism in the late 19th and early 20th centuries was that of the Putomayo Indians of South America. They had been enslaved by British rubber corporations. It was this abuse of a subject people that turned the Irish patriot, Roger Casement, from a British civil servant to an ardent Nationalist.

On the other side of the world, in the Pacific, British imperialism also managed to dispossess an entire Polynesian people and trash their island. This was in the 1920s. The island was rich in mineral deposits, and so moved the indigenous people out, ultimately relocating them to Fiji. Their island was then strip-mined, leaving it a barren, uninhabitable rock. In the 1980s the survivors were trying to sue the government over their maltreatment, but with no success.

This is what unfettered British imperialism and capitalism did. And what I’ve no doubt Farage and other far right British politicians would like to do again without the restraints of international law. It’s why I believe that, whatever the demerits of the Mercosur agreement are, it’s probably better than what individual nations would do without the restraint of the EU.

The girls are right to be concerned about the fate of indigenous peoples. But they are profoundly wrong in their absolute, uninformed belief that unregulated capitalism will benefit them.

It doesn’t. It enslaves, dehumanises and dispossesses. Which is why we need international organisations like the EU, and why the Brexit party isn’t just a danger to Britain, but to the world’s weaker, developing nations and their indigenous peoples.

Q&A with Andy Haldane, Bank of England

Published by Anonymous (not verified) on Fri, 19/07/2019 - 11:50pm in

Andy Haldane, Chief Economist and Executive Director, Monetary Analysis & Statistics at the Bank of England has been spearheading the efforts of the Bank to engage more fully with the public, and to encourage greater understanding of its role, and of the data the Bank publishes. He has also been an enthusiastic supporter of CORE, and spoke at our launch in November 2013.

As we near completion of the next release of our Doing Economics practical projects, we asked Andy why he believes that what he calls the “tsunami of data” offers a huge opportunity for all citizens, and how CORE’s material can help develop these skills for economists and non-economists alike.

In 2019, how important are data skills for people who are not economists?

There are some simple but important reasons why that’s the case. Firstly, there’s more data around. In 2020, 1.7MB of data will be created every second for every person on earth[1]. We are all being bombarded with numbers ever greater regularity, so it is important to be able to make sense of them—and just as importantly, to avoid making big mistakes when we use these numbers.

Why should everyone be engaged with this?

People are the economy. The things they say, how much they spend, when and how much they work: these are the building blocks of our economy. And so we all benefit if we can make sense of data. It helps us understand the trends in society, the decisions we take day-to-day, and the choices we make when we vote.

I’ve been aware of the CORE Project since the get-go … It has been fantastic to see the vision turn into something real

What do we lose if we leave the decision-making to an expert class?

That was the way it was done for many years. But the world has changed, and that expert class is no longer as trusted as it was.

Interrogating the numbers is one of the important mechanisms through which society can hold the executive to account. It’s also a mechanism by which trust can be built. If more people believe that our judgement is sound, because they can see the data that underpins it, it helps to build understanding of our role.

In the Bank of England we’ve made a big push over the last few years to improve the degree of understanding and trust in us, and that means pushing out more information and opening up more data, for example in the Bank of England’s KnowledgeBank initiative.

Learning how to apply principles rigorously in the real world has traditionally been challenging for many students.

True. But “rigorous” does not mean “making it boring and technical and complex”. It means things like being able to make judgements soundly based on the data and—very important—being able to spot where data has not been used appropriately.

One of the most important roles of the Bank of England is to be able to point out situations when non-rigorous judgements are being made by people on the basis of a poor understanding of the data, sometimes our own data.

Do you have an example?

There is a lot of focus right now in the UK on the impact of our businesses on the economy, some of which are making the decision to delay investment. They are doing this for a number of reasons, one of which is obviously Brexit. But it’s very important that the conversation about our economy is not only about what businesses are doing, because there are also these things called ‘consumers’, and it turns out that consumers make a contribution to aggregate GDP that is seven or eight times more important than the contribution of firms. And so, we need to ensure that the conversation about what goes on in the economy gives at least equal weight to the activities of firms and consumers.

For creating understanding of statistics, how important is it to work with real-world data, such as the projects in our Doing Economics ebook?

That’s one of the most crucial things about real data. At the Bank, we bring a lot of our economists straight from university. An important part of learning the job is to understand what types of data exist, and which data does not exist, which types of data are solid, and which are less reliable. Also, where data comes from, when we can believe it, and when we should not believe it.

When I joined the Bank I spent many years learning this. To get under the skin of data, what it means and its limitations, it is essential to get your hands dirty by working with real datasets.

Should our teaching emphasise that working with data is a detective story, rather than a question with one correct answer?

Preparing for the Bank’s Monetary Policy Committee meeting is like doing the world’s most complicated jigsaw puzzle. Some of the pieces of data are missing. Some of the other pieces of the jigsaw are damaged, because the data isn’t as robust as you want it to. We’ve also lost the cover of the box, and so we don’t even know what the jigsaw puzzle would look like if we finished it.

But we still have to try to do the jigsaw, and that’s exactly what makes working with data fascinating. Sometimes we have to go out and look for new pieces for an entirely new jigsaw, because suddenly we have new questions, and putting our existing pieces together can’t answer them.

And so are more pieces becoming available for you, or anyone who wants to try to solve these puzzles?

Yes! For example, at the Bank we now have the opportunity to make use of very granular microdata. This is data on things like VAT returns, or the benefits people get paid, or the taxes that they pay, or even how much traffic is on the roads, the number of ships coming through our ports, or satellite data. This data is just beginning to be used to make sense of our world.

Interrogating the numbers is one of the important mechanisms through which society can hold the executive to account

But do we still need those practical data skills you learned?

More than ever, yes. This data is not neat, like the data you get from the Office for National Statistics. It has ragged edges, and noise, and the samples may not be consistent. Big Data is so big that sometimes you need to know how to filter it to extract information that you can work with.

Some of this new data isn’t even made up of numbers. In economics there has recently been a very interesting push to make use of the words that people speak and write and analyse the frequency and meaning of them as well.

Does this require an interdisciplinary approach?

One of the great virtues of bringing in all this new data is it means that we can develop techniques that draw on a number of disciplines. Bringing big data into the equation, literally and metaphorically, means we need insights from data science, machine learning, physics, sociology, anthropology, history, and psychology among others.

How does CORE contribute?

I’ve been aware of the CORE Project since the get-go. I was at the launch in 2013 because at that time it absolutely was needed. It has fulfilled that promise. It has been fantastic to see the vision turn into something real.

You couldn’t wish for more from the project as a way of resetting the clock on the curriculum. It has engaged students with the principles that make the economy interesting, tackling issues that we know matter most, like financial crises, inequality, the climate crisis. These are front and centre in CORE’s work. This type of thinking is also front and centre of what we are trying to do.

Finally it is interested in reaching wider audiences, not just those studying economics. I think it’s absolutely the right direction of travel, and the desire to develop those skills for non-economists and well as economists is absolutely the direction that we’re also taking at the Bank. All of that counts as a huge success story.

[1] Domo (2019), Data never sleeps, sixth edition.

The post Q&A with Andy Haldane, Bank of England appeared first on CORE.

Why targeting productivity is a bad idea

Published by Anonymous (not verified) on Mon, 13/05/2019 - 10:37pm in

Last week I attended a workshop entitled "Enhancing the Bank of England Toolkit," hosted by the Progressive Economy Forum. Presented at the workshop, and underpinning most of the debate, was this report from GFC Economics and Clearpoint Advisers, which was written for the Labour Party and first issued last June. The report was widely criticised at the time, as one of its authors ruefully observed in the introduction to the presentation. Nonetheless, the authors presented it unamended.

The report recommends setting a productivity target for the Bank of England in addition to its existing inflation target:

An additional target will be introduced: productivity growth of 3% per annum. The Bank of England will be required to explain how its policies are impacting upon productivity and, therefore, the potential growth path of the economy.

This target is extremely challenging. A footnote in the report notes that labour productivity growth since 1950 has averaged 2.4%, and describes the proposed uplift of 0.6% above this average as a "small increase." Forgive me, but an increase of 25% in the rate of change is not by any stretch of the imagination "small." It's an absolutely whopping hike, particularly when you take into account the fact that in the 1950s and 60s, the labour force was much smaller due to lower immigration and female participation, and the UK was rebuilding after WWII. In a mature economy which is 80% services and which has nearly full employment of both men and women, that 3% target looks well-nigh impossible.

That said, the report doesn't actually define what it means by "productivity," which makes it somewhat difficult to determine whether the target is at all realistic. So here's the OECD's definition:

Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output.

Simples. Or maybe not:

There are different measures of productivity and the choice between them depends either on the purpose of the productivity measurement and/or data availability. 

The OECD goes on to explain the difference between labour productivity, capital productivity and multi-factor productivity (often misleadingly called "total factor productivity," TFP):

One of the most widely used measures of productivity is Gross Domestic Product (GDP) per hour worked. This measure captures the use of labour inputs better than just output per employee.... 

To take account of the role of capital inputs, an appropriate measure is the flow of productive services that can be drawn from the cumulative stock of past investments (such as machinery and equipment). These services are estimated by the OECD using the rate of change of the ‘productive capital stock’, which takes into account wear and tear, retirements and other sources of reduction in the productive capacity of fixed capital assets. The price of capital services per asset is measured as their rental price.... 

After computing the contributions of labour and capital to output, the so-called multi-factor productivity (MFP) can be derived. It measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organisational innovation.

So we have three potential productivity targets: labour productivity, capital productivity, and TFP. Which of these would the Bank of England be expected to target?

If it targeted labour productivity,  there would be implications for environmental sustainability. In the absence of measures to improve efficiency of resource usage, raising GDP or GVA increases the rate at which finite resources are used. It is hard to see how this is remotely compatible with achieving carbon neutrality or sustainable use of resources.

The strong investment focus of this report might make it attractive to target the marginal productivity of capital: after all, if you are going to engineer a massive increase in capital investment, you will want to know how effective it is. The fact that the rate of return on capital has been falling for the best part of forty years could suggest that capital is not being deployed efficiently. If the measures outlined in this report significantly increased the marginal productivity of capital, the rate of return on capital should rise, no doubt accompanied by loud cheers from pension funds. But the Bank of England's responsibility is the risk-free rate: the return on risky assets is determined by the market. It is not clear to me why the Bank, or any other public body for that matter, should be targeting a 3% per annum rise in the marginal return on capital.

Total factor productivity is another potential target. But targeting it would be extremely problematic. In the Cobb-Douglas production function, you calculate the combined output of labour and capital, then multiply it by the number needed to make it agree with your GDP figure. That number is "total factor productivity" (TFP). It is a residual, or perhaps more accurately a fudge. It is usually explained as the unknown effect of technological change and other efficiency gains, but the truth is it arises to a considerable extent from measurement problems. And it suffers from the usual problem with targeting a residual, namely too many moving parts. Targeting TFP is as impractical as targeting the velocity of money.

So it is not clear what the Bank of England would be targeting. And it is also not clear how it would meet that target. The report says it would be given new credit guidance tools to enable it to direct bank lending into high value-added sectors. But the Bank would not be allowed to decide which sectors those should be:

...the Strategic Investment Board, an analytical and strategic ‘hub’, must be instrumental in outlining the sectors that should be targeted. It will be in a better position to understand the risk-reward profiles of companies. This would also ensure that any future purchases of corporate bonds by the Bank of England are consistent with the strategic investment required. 

The Bank would be tasked with directing credit to industrial sectors determined by the Government, and would be held accountable for ensuring that the sectors selected by the Government delivered the desired productivity improvement. I'm really not sure how this is compatible with the report's recommendation that the Bank should continue to have operational independence. The "new tools" would come with very tight strings attached.

The idea that a productivity target can be met entirely through credit guidance assumes that there is a simple linear relationship between the amount of bank credit provided to "productive sectors" and productivity in the economy as a whole. I don't think such a relationship exists. The last decade has shown conclusively that throwing money at businesses doesn't necessarily make them borrow. Yes, many SMEs face high nominal interest rates on borrowing. But SME lending is risky, and managing it is expensive. Lending against fixed assets, especially property, is considerably safer and doesn't have the management overhead, so it is hardly surprising that banks prefer it. It's really not good enough to beat up banks who don't lend enough to SMEs (or rather, to the "right" SMEs). If the Government wants interest rates on loans to its preferred SMEs to reduce significantly, it will have to provide guarantees.

But anyway, what does "productive sectors" mean? I found the chapter on "industrial strategy" deeply disturbing. For me, it was far too narrowly focused on science and technology, and on manufacturing.There was barely a mention of service industries in the entire report, except for financial services which the authors want cut back hard. At one point Nesta's report on the importance of creative arts was cited, but there was no recognition of the need to invest in creativity. Even more seriously, there was no mention of the the desperate need to ramp up and professionalise the care sector in the light of the approaching demographic timebomb.

The idea seems to be that the 3% productivity target could be met solely by directing credit to highly productive sectors. But this could easily result in a dual labour market - a relatively small number of highly paid people (mostly men) working in high value-added export industries, and everyone else working in low-paid, domestically-focused jobs. Do we really want our manufacturing and exports fetish to result in a German-style labour market?

Arguably we already have a dual labour market, but the high-low wage split is finance/not-finance. I don't really see how replacing one group of highly paid, mostly male workers with another, while doing nothing to raise the wages of women & less skilled men, is progress. Where jobs are concerned, services are the future for most people. The challenge is how to raise productivity and wages in service industries.

Productivity is notoriously difficult to raise in service industries. William Baumol's "cost disease" theory arose from his study of the economics of the performing arts: he observed that although a violinist in 1965 earned a lot more than a violinist in 1865, he didn't produce any more music. And in many service industries, raising productivity has unfortunate welfare consequences. Amazon's "human robots", for example. Or cleaners paid less than the minimum wage because they can't meet productivity targets. Or 15-minute care slots for frail elderly. Is this really what we want?

Realistically, productivity in service industries is not going to rise by anything like 3%, not least because the quality cuts needed to achieve it would be political dynamite. So to have any chance of achieving that demanding 3% target, either there must be a considerable shift away from services or a much smaller workforce. A large increase in capital investment could deliver a sizeable expansion of manufacturing, but there wouldn't necessarily be an associated increase in well-paid jobs. It is all too likely that the capital investment would go into robots and automation.

Furthermore, there would be a considerable temptation for the Strategic Investment Board - stuffed as it would be with people from the STEM sectors - to define "productive industries" so narrowly that funding for important service industries such as the creative arts would be  squeezed to death. This is utter folly. Creative people may not be hugely productive in themselves, but without them, manufacturing dies.

As an example of how narrow the focus is, a footnote to the report envisages that the productivity increase would come from one particular industry:

The pace of technological change suggest that governments should be aiming for a higher rate of increase in productivity than recent historic averages....The current rapid advances in the global semiconductor industry hold the key to faster productivity growth... 

Semiconductors alone are to deliver a 3% increase in productivity, apparently. That is one heck of an enormous responsibility for the semiconductor industry.

I suspect this narrow focus on high value-added manufacturing is partly driven by the Left's resurgent obsession with the trade balance, as if the UK were still on a gold standard. Indeed, the report makes some reference to "ending persistent current account deficits." Seriously, guys - a current account deficit is not a big deal for a reserve currency issuer with a floating exchange rate and a centuries-long record of meeting its obligations, and it's mostly outside our control anyway. We really don't need to return to the mercantilism of the past. Let's focus on things that make a real difference to the lives of people in the U.K., such as having a properly funded care system. And let's also focus on the vibrant creative industries in which the U.K. leads the world.

As the workshop was supposedly about the Bank of England's toolkit, I was also concerned by the lack of interest in aggregate demand management tools such as helicopter money. When someone suggested this at the workshop, one of the panellists said "Oh I don't think we will need that." Apparently there will never again be any need to support aggregate demand. I don't believe it.

And finally - a warning. The Bank of England's primary job is to manage aggregate demand, and it should have freedom to use whatever tools it sees fit to do that job. It does not, and should not have, any responsibility to deliver, or help to deliver, political promises. But the recommendations in this report would force the Bank to be instrumental in delivering a Labour Government's industrial strategy as outlined in its manifesto. This would amount to politicisation of the central bank. I think it would be a terrible error.

Related reading:

Keynes and the death of capitalism
Bifurcation in the labour market
The silent gender divide
Productivity and employment, a cautionary tale
We need to talk about productivity

Image from Hyacinth at Wikipedia.

Origins of Central Banking

Published by Anonymous (not verified) on Mon, 01/04/2019 - 1:17am in

[] In this post, we provide some details regarding the origins of the Bank of England, the mother of all Central Banks and discuss some implications of this early history for our modern world. The post summarizes the 16m Video-Lecture:

For a more in-depth analysis of the significance of these historical events which led to the creation of the Bank of England, see “Monetization, Maturity Transformation, and MMT“

We start with an excerpt from Ellen Brown in the Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Below, selected passages from Chapter 6: Pulling The Strings Of The King: The Moneylenders Take England: [passages in italics are my comments on the text, rest are quotes]

The first passage discusses how Queen Elizabeth asserted her sovereign right to issue money, and how the financiers worked to undermine this:

In 1600, Queen Elizabeth issued base metal coins as legal tender in Ireland. All other coins were annulled and had to be returned to the mints. When the action was challenged in the highest court of the land, the court ruled that it was the sovereign’s sole prerogative to create the money of the realm. What the sovereign declared to be money was money, and it was treason for anyone else to create it. Zarlenga states that this decision was so detested by the merchant classes, the goldsmiths, and later the British East India Company that they worked incessantly to destroy it.

Cromwell’s revolution was instigated and financed, on the condition that financiers were allowed back into England. In the process, the power to print money was given to the Parliament.

The moneylenders agreed to provide the funds to back Parliament, on condition that they be allowed back into England and that the loans be guaranteed. That meant the permanent removal of King Charles, who would have repudiated the loans had he gotten back into power. Charles’ recapture, trial, and execution were duly arranged and carried out to secure the loans to the Parliament.

Having wrested the power of creation of money away from the King, the moneylenders restored the aristocracy, but gained much greater powers in the process, by providing financial aid to the King. The process of “Enclosure” which was the privatization of the “commons” – land belonging to the public – enriched the wealthy elites enormously. It has been called a revolution of the rich against the poor by Polanyi. The financiers consolidated their grip on the power to print money:

After Cromwell’s death, Charles’ son Charles II was invited to return; but Parliament had no intention of granting him the sovereign power over the money supply enjoyed by his predecessors. When the king needed a standing army, Parliament refused to vote the funds, forcing him to borrow instead from the English goldsmiths at usurious interest rates. The final blow to the royal prerogative was the Free Coinage Act of 1666, which allowed anyone to bring gold or silver to the mint to have it stamped into coins. The power to issue money, which had for centuries been the sole right of the king, was transferred into private hands, giving bankers the power to cause inflations and depressions at will by issuing or withholding their gold coins.

None of the earlier English kings or queens would have agreed to charter a private central bank that had the power to create money and lend it to the government. Since they could issue money themselves, they had no need for loans. But King William III, who followed James II, was a Dutchman and a tool of the powerful Wisselbank of Amsterdam

Important additional historical detail, taken from Wikipedia:

England’s crushing defeat by France, the dominant naval power, in naval engagements culminating in the 1690 Battle of Beachy Head, became the catalyst for England rebuilding itself as a global power. England had no choice but to build a powerful navy. No public funds were available, and the credit of William III‘s government was so low in London that it was impossible for it to borrow the £1,200,000 (at 8% p.a.) that the government wanted.

Back to Ellen Brown

A Dutch-bred King Charters the Bank of England on Behalf of Foreign Moneylenders

The man who would become King William III began his career as a Dutch aristocrat. He was elevated to Captain General of the Dutch Forces and then to Prince William of Orange with the backing of Dutch moneylenders. His marriage was arranged to Princess Mary of York, eldest daughter of the English Duke of York, who reigned as James II of England from 1685 to 1688. James was then deposed, and William and Mary became joint rulers in 1689.

William was soon at war with Louis XIV of France. To finance his war, he borrowed 1.2 million pounds in gold from a group of moneylenders, whose names were to be kept secret. The money was raised by a novel device that is still used by governments today: the lenders would issue a permanent loan on which interest would be paid but the principal portion of the loan would not be repaid.6 The loan also came with other strings attached. They included:

  1. The lenders were to be granted a charter to establish a Bank of England, which would issue banknotes that would circulate as the national paper currency.
  2. The Bank would create banknotes out of nothing, with only a fraction of them backed by coin. Banknotes created and lent to the government would be backed mainly by government I.O.U.s, which would serve as the “reserves” for creating additional loans to private parties.
  3. Interest of 8 percent would be paid by the government on its loans, marking the birth of the national debt.
  4. The lenders would be allowed to secure payment on the national debt by direct taxation of the people. Taxes were immediately imposed on a whole range of goods to pay the interest owed to the Bank.7

The Bank of England has been called “the Mother of Central Banks.” It was chartered in 1694 to William Paterson, a Scotsman who had previously lived in Amsterdam.8 A circular distributed to attract subscribers to the Bank’s initial stock offering said, “The Bank hath benefit of interest on all moneys which it, the Bank, creates out of nothing.”9 The negotiation of additional loans caused England’s national debt to go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By 1815, the debt was up to 885 million pounds, largely due to the compounding of interest. The lenders not only reaped huge profits, but the indebtedness gave them substantial political leverage.

The Bank’s charter gave the force of law to the “fractional reserve” banking scheme that put control of the country’s money in a privately owned company. The Bank of England had the legal right to create paper money out of nothing and lend it to the government at interest. It did this by trading its own paper notes for paper bonds representing the government’s promise to pay principal and interest back to the Bank — the same device used by the U.S. Federal Reserve and other central banks today.

End of Excerpt from Ellen Brown.

Some more detail of interest is that the creation of Bank of England was tremendously beneficial for England. The King, no longer constrained, was able to build up his navy to counter the French. The massive (deficit) spending required for this purpose led to substantial progress in industrialization. Quoting Wikipedia on this: “As a side effect, the huge industrial effort needed, including establishing ironworks to make more nails and advances in agriculture feeding the quadrupled strength of the navy, started to transform the economy. This helped the new Kingdom of Great Britain – England and Scotland were formally united in 1707 – to become powerful. The power of the navy made Britain the dominant world power in the late 18th and early 19th centuries”

The events described can be viewed from the perspective that accumulation of capital is a central driver of history:

Lessons from History

Contrary to what is commonly believed, history is not a sequence of facts, recorded observations of events. The central contribution of Ibn-e-Khaldun in his study of the rise and fall of civilizations was to discover the hidden logic, the short and long run causal chains, which were the drivers of history. In such a study, there is always room for error, because these causal chains can only be recovered on a speculative basis – they are not present on the surface. Yet, we must make the effort required for this deeper examination, because without it, we would be blind to the possibilities for our future. In attempting to understand the drivers of history, we come across the difficulty that there is always a multiplicity of causes, with complex interactions between them. In such situations, it is useful to isolate and simplify, and attempt to explain history on the basis of a small number of causal factors, while knowing that the reality is more complex. Another way of saying this is that every attempt to understand history is necessarily subjective; the best we can do is to present history from a multiplicity of perspectives. One of these perspectives is the view that money and finance have been the central drivers of history. As Giovanni Arrighi puts it, history is driven by cycles of accumulation of capital. While we understand this is a vast oversimplification, it is useful to take this perspective, just to see how far it can take us, without committing ourselves to believing in this perspective. It is in this spirit that we offer a “finance drives history” view of the creation of the first Central Bank. The history above can be encapsulated as follows:

  1. Queen Elizabeth asserted and acquired the sovereign right to issue money.
  2. The moneylenders (the mysterious 0.1% of that time) financed and funded a revolution against the king, acquiring many privileges in the process.
  3. Then they financed and funded the restoration of the aristocracy, acquiring even more privileges in the process.
  4. Finally, when the King was in desperate straits to raise money, they offered to lend him money at 8% interest, in return for creating the Bank of England, acquiring permanently the privilege of printing money on behalf of the king.

The process by which money was created by the Bank of England is extremely interesting. They acquired the debt of the King. This debt was used as collateral/backing for the money they created. The notes they issued were legal tender in England. Whenever necessary, they were prepared to exchange them for gold, at the prescribed rates. However, when the confidence of the public is high, the need for actual gold as backing is substantially reduced.

There is a small mystery here. The King’s debt was used as the backing for the money issued by the Bank of England. Why couldn’t the King issue debt directly, and have it used as money? This is the basic concept of sovereign money, and would have saved the King the 8% interest on the amount he had to borrow. The key here is to understand Minsky’s dictum: “Anybody can create money. The problem lies in having it be accepted.” The reason King William could not create money which would be widely acceptable by the public are the following

  1. The authority to create money had been transferred to the Parliament.
  2. The King could borrow, but did not have gold to pay back his debts.
  3. When the King borrowed from the moneylenders, they did not give him gold. They gave him the authority to write checks on the Bank. The Bank could redeem these checks in notes which were backed by the King’s debt. Thus, the Bank “monetized” the debt of the King.
  4. The Bank’s created money was far more acceptable than the King’s debt, because it had the appearance of being backed by gold (in addition to the King’s debt). The bankers, unlike the King, could convert bank-notes to gold as needed. This ability of the Bank to do so, created the confidence in the public, which allowed the bank to keep only a fraction of the entire amount of notes in circulation, in the form of gold.

This same system, fractional reserve banking, and the monetization of the debt of the Government, is still in operation. But very few have correct understanding of how the system works. It is worth pointing out that the reason the Bank of England was able to obtain a charter to print money was because it offered very generous terms to King William. It offered to provide him with all money that he needed, in return for his IOU’s — After all, having captured the Sovereign right to print money, it had the ability to print arbitrary amounts. Also, it did not ask for repayment of the principal, but only the interest on the debt. Finally, it also offered to collect this repayment, in form of taxes, on behalf of the King. This was a very sweet deal for the cash-strapped King. 

For more material, see:  The Battle for the Control of Money 

The full 90m Video lecture is linked below; above material is covered in the first 16m.

This is Lecture 13 of Advanced Macro II, Spring 2019 by Dr. Asad Zaman at PIDE. Link to entire Lecture 13 on course website.