Thesis Number: #5 (Page 3 of 9)
The Bank of England
England in the 17th century was emerging as contender for superpower status. But further development of the model unleashed by Henry would not be possible without a secure constitutional settlement. James II was on the throne. He was displaying pro-Catholic tendencies. This threatened the vital interests of the elites.
- The Reformation had initiated the market in land, which required mortgage-based transactions. The Catholic Church, which censured usury, had to be neutralised.
- Protestant land owners feared the return of Catholic sentiments. They needed a liquid money market that facilitated their lust for rents. Defensive action was needed.
In 1688 the plot was laid for William of Orange to snatch the throne from James. Then, to secure the accession of a king who could not speak English, a war against France was required. That war had to be funded. A solution was needed that incorporated the budgetary challenge – reducing revenue from the Land Tax.
These various interests could be united by a simple trick: debasing the State’s budget by driving the nation into permanent indebtedness. But that required the creation of a new kind of bank that exercised the power to wave a magical financial wand – the power to create credit out of thin air.
The full title of the Act of Parliament of 1694 lays bare the motives and the tools that would be deployed to routinize the indebtedness of England:
An Act for granting to their Majesties several Rates and Duties upon Tunnage of Ships and Vessels, and upon Beer, Ale and other Liquors: for securing certain Recompenses and Advantages… to such persons as shall voluntarily advance the Sum of £1,500,000 towards carrying on the War against France.
The Act was the tool for trapping government in permanent debt, to serve the interests of both land owners and money makers. Government debt would be funded by taxing trade and the beer consumed by peasants (aristocrats brewed their beer on their estates, so they did not pay the tax). War would consolidate the secular needs of land owners and eliminate the threat from a Christian denomination that censured the charging of interest on loans.
To serve the interlocking sovereign and private interests, the Bank had to issue paper money, rather than be constrained by its holdings of precious metals. The Bank of England accomplished this, by extending credit to government far in excess of the gold held in its vaults.
Investors in the Bank understood that this “money” (which was no more than entries in ledgers) was safe. Their “capital” and the interest they charged were guaranteed by the power to tax the king’s subjects. And the budget that “guaranteed income from the taxes” (Giuseppi 1966: 14) was structured so that interest payments on government debt would not come out of the rents pocketed by land owners.
The creation of the Bank of England was a political act that was designed to accelerate the redistribution of the nation’s rents from those who created that value to those who exercised privileged power to appropriate rentfor their personal benefit.