Thesis Number: #5 (Page 2 of 9)

The Origins of Perverse Debts

Credit assumed pathological characteristics when cheating was converted into a social practice.

• Sovereign Debt         The primary steps were taken in the 16^th century. Monarchs abused their power by transgressing people’s common rights to land.

Land grabs and credit creation were linked when kings embarked on dynastic and territorial wars. They needed money “upfront”. The ensuing debts could be repaid out of future streams of Land Tax revenue.

Previously, kings borrowed from goldsmiths who were willing to risk the profit they earned from trade. For the new era, this arrangement was too tenuous. Monarchical ambitions grew beyond the means of merchants in Amsterdam and the City of London. A mechanism was needed that could provide sovereigns with an open-ended source of credit. That credit would be most easily secured by mortgaging the lands of their kingdoms. The lead was taken in England. The turning point was Henry VIII’s appropriation of monastic lands.

• Personal Debt           Building on Henry’s monastic land grab, aristocrats initiated the buying and selling of land into a commercial business. To create their petty princedoms, they also needed upfront money, first to buy land, and then to build palatial monuments in their rural retreats.

Debts incurred to construct what are now called “heritage” homes were serviced by the rents squeezed out of peasants. The mortgaging of land began to flourish. This created the opportunity for merchants to cream off a slice of the rents. Mortgages transformed land from its natural status into a commercial asset.

Previously, merchants had funded sovereign and private deals out of the profits they made from trade. Their money was earned. By lending their capital, they were entitled to compensation for the risks they took. But with the advent of land as a commodity, the money-lenders learnt how to share in the cannibalisation of the kingdom’s rents.

Initially, although the money they advanced as mortgages was earned, the interest which they charged came from individuals who did not earn their money. By the middle of the 17^th century, imaginative schemes were devised that linked what pamphleteers described as “imaginary money” to the extraction of rents through “land banks”. Land, they emphasised, was better than gold or silver as security, and should be the basis of credit (Richards 1965: 98-100).

The emerging financial architecture was corrupted at the outset by its association with the land market. As one City operator noted: “Securities on lands are capable of being made money” (Richards 1965: 117). Charlatans sensed the opportunities, and moved in. They created land banks to dupe speculators who were seeking easy profits. This was possible for one reason only: rents had been cut loose from their social moorings and became vulnerable to the “artifice” of scam artists.

But something was missing: a mechanism for bringing order to the business of milking the nation’s rents. Something special was needed, like a bank that was privileged by the State, backed by the law of the land.