Conversationalist’s History of : Central Banking
In Canada, we often talk about the fact that our Senate is appointed and not elected. The Canadian central bank has had a large expansion in assets. Canada has never engaged in quantitative easing to the extent it has during the Covid pandemic. The bonus is the Bank of Canada board is not an elected body, but it has had one of the biggest impacts on our reaction to Covid. Why does this organization have the sole control of issuing Canadian banknotes, and loans money to Canadian financial institutions? Why does it get to set the prime rate for loans in Canada? It is a long journey to how we got here in Canada, and we should look back to similar growths in debt and central bank power from history.
Privately owned central banks: Bank of England
This section could be really long. Essentially England — after being thoroughly trounced by Louis IX in the Battle of Beachy Head (1690) in the 9 years war. With Queen Elizabeth and previous Monarchs outlawing anyone but the crown printing currency.. Britain(William III) decides to do some financial engineering to make it so this will never happen again. They needed £1,200,000 and raise it in 12 days by making it so subscribers to the loan would be incorporated by the name of the Governor and Company of the Bank of England. All individuals who participated in the investment were given exclusive possession of the government’s balances, and it was the only limited-liability corporation allowed to issue bank notes. By selling the right to be the central bank to their most successful entrepreneurs, Britain was able to amass a force through this that would go on to stalemate the French in The War of the Spanish Succession and go on to dominate the Seas of the world for over two hundred years, culminating in Pax Brittanica.
Leveraging a Privately owned central banking system Britain was able to add 10,000,000 square miles (26,000,000 square kilometers) of newly acquired territory. Despite many successes, this was time was far from perfect, with events such as The Bank Restriction Act of 1797 where the banks were no longer required to honor the gold conversion rate. This was a problem because prior to this the private banks printed too many bills and abused its power to print currency so that Britain could declare war on France during the French Revolution. This restriction would last until 1821, and in 1844 the Bank Charter Act would finally rein in the runaway interests of banks by creating a system where all bills were to be printed by the central bank and backed by either gold or by Federal debt. This would cement Britain’s currency as a reliable world reserve currency until the events and aftermath of WWI and WW2 when it nearly bankrupted itself to defend (and liberate the majority of) its territories. This led to them leaving the Gold Standard and forsaking their currency as the Reserve currency.
Skewering the Eagle, one, two, three times.
In America, the federal Reserve System is more powerful than the Federal government. It has more power than the President, Congress, and the Courts. The Federal Reserve determines what the average person’s car payment is going to be, the Federal Reserve determines their house payment, it determines whether they have a job or not, and it determines how much their wages are worth. That is nearly total control of the average American family. The accounts for the Federal Reserve System have never been audited. It operates outside the control of Congress and freely manipulates the credit of the United States.
The most recent American central bank was established by Woodrow Wilson in response to the Panic of 1907. A crisis that was averted by the outstanding response of J.P. Morgan to lend out his personal funds to avoid a run on the banks. Woodrow Wilson saw this unfold and decided to re-introduce a Central Banking system that the united states lacked since The Bank War. Woodrow Wilson would go on to describe his presidency as such, deeply regretting this action and dragging the United States into World War I.
I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men… We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.
-Woodrow Wilson
The Bank war is the conclusion to the second Bank of America. Where efforts to continue the model set by Alexander Hamilton’s First Bank of the United States, ran up against Andrew Jackson. Andrew Jackson is a man who declares war on anything that isn’t Andrew Jackson, so naturally when looking at the BUS (Bank of the United States) he saw it as a bloated coalition of societies elites that maintained undemocratic control of America’s resources. He was also a firm believer in the concept of Hard Money and deeply resented the fiat currency being generated by the BUS, believing it to be the cause of things such as Panic of 1819, The Post war speculative land boom, mass unemployment, and plunging property values. The bank came under attack by the Jackson administration in December 1829, on the grounds that it had failed to produce a stable national currency, and that it lacked constitutional legitimacy. The Central Bank became a central issue in his second term and he was eventually successful in abolishing this system. This is one of the events that keeps America on the track of having Silver/Gold backed currency, and allowing private banks to issue notes backed by these metals. I recommend “A History of Central Banking in Great Britain and the United States” if this area interests you more.
The First Bank of America is pretty uneventful considering The Bank War and America’s current issues with the Federal Reserve, its national debt, a currency that is backed by no tangible assets, and over 40% of notes being printed after 2020.. It was an idealistic approach modelled after the British and French system by Alexander Hamilton that had a built in expiration date due to widespread opposition given that it would increase in Federal power. This bank’s goals were:
- Have the Federal Government assume the Revolutionary War debts of the States
- Pay off the war debts
- Raise money for the new government
- Establish a national bank and create a common currency
After these tasks were completed the bank’s purpose supposedly expired and the bank’s charter expired in 1811. The Bank really doing nothing wrong, and having many supporters led to the creation of the second Bank of America and the Bank War.
John Law, The Mississippi Bubble, and The first Banque Royale
John Law is a Scottish Gambler adventurer who convinced Louis XIV to adopt a Fiat Currency and central bank for France. The wars waged by Louis XIV left France completely economically and financially devastated. Having spent the countries entire precious metal reserves waging war on the rest of Europe in The 9 years war and the War of the Spanish Succession, Louis XIV needed some way of stimulating growth and recovery. Law proposed to stimulate industry by replacing gold with paper credit and then increasing the supply of credit, and to reduce the national debt by replacing it with shares in economic ventures. This is Modern American Economics. On 1 May 1716, Law presented a modified version of his centralized bank plan to the Banque Générale which approved a private bank that allowed investors to supply one-fourth of an investment in currency and the other parts in defunct government bonds. His proposal also centered on the premise that this private bank was able to issue its own currency backed by Louis of gold. This made it so the currency was valued at its weight of silver from the original deposit instead of the fluctuating value of the French livre, which had been in a free fall of value.
The Mississippi Bubble can be compared to The Dot Com Bubble, or the American Housing Bubble, or the Modern BitCoin Bubble. The Banque Royale’s Major backing asset was a speculative shares in The Mississippi Company. A corporation holding a business monopoly in French colonies in North America and the West Indies. In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in seventeen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second instalment was even due, and ordinary citizens flocked to Paris to participate. In October 1719 Law’s Company lent the French state 1.5 billion livres at 3 per cent to pay off the national debt, a transaction funded by issuing a further 300,000 shares in the company. Between May and December 1719 the market price of a share rose from 500 to 10,000 livres. As the public rushed to convert Mississippi banknotes to coin, Law was forced to close the Banque Générale for ten days, then limit the transaction size once the bank reopened. The queues grew longer, the Mississippi Company stock price continued to fall, and food prices in France soared by over 50%. Louis had to ban the sale of gold to avoid France’s bankruptcy from honoring the speculative currency. The company’s shares were ultimately rendered worthless, and the speculation about their worth led to widespread financial stress, which saw Law dismissed at the end of 1720 and the end of Central banking until Napoleon reverses the tarnished name of Banque in France.
The similarities of this bubble to the value of the American Dollar are not hard to come by. The American dollar isn’t backed by Gold or Silver, not since 1971 when Richard Nixon decided that people should just trust the government’s word. It is backed by the NYSE, the NASDAQ, American Real Estate, and the opportunity to participate in those markets. Much like the ability to participate in the Mississippi Company, that can be a tenuous relationship. If the Market goes down, the dollar will too.
What Canada can learn
Central banks are not a good or a bad thing. Countries have been wildly successful and unsuccessful with central banks. What is dangerous is what backs the money that the central bank issues, How much debt it takes on, and the backing of debt incurred by tangible assets (Historically Gold or Silver). Canada sold all of its gold. Canada has taken a large amount of debt to deal with the pandemic. The TSX is close to all time highs. Experts such as Steve Eisman (depicted by Steve Carell in The Big Short) have been shorting Canada banks and Real Estate before these events. Canada has no reason to be alarmed, but Canada should be aware we are making many of the same mistakes historical Banks and Countries have made, and course correct before issues arise.
