Managing America- What is the Reserve Banking System?
Reserve
banking is the practice of making loans in multiples of the gold deposits on
hand in the hope that depositors won't make a run on the bank, all claiming
their deposits at the same time. The English goldsmiths accepted gold deposits,
earning money on the difference between what they paid for the gold and what
they could get by lending it to borrowers.
How the English Reserve Banking System Created Wealth
William
of Orange came to England from the Netherlands in 1688 to claim the English
throne on behalf of his wife Mary. Parliament restricted the King's taxing
power, leaving William without funds he needed to defend his crown. He couldn't raise money by taxation and the
King's credit was nonexistent. William's only hope lay in persuading the
English Parliament to adopt a national banking system similar to that of his
native Netherlands, that had inherited the practice of reserve banking from
Venice.
William Patterson, a Scot, studied reserve
banking and worked up a proposal for an English reserve national bank system.
The survival of the King’s sovereignty depended on the implementation of
Patterson's proposed white paper. The English goldsmiths were opposed to
financing William's wars with debt-created currency. The proposed national bank
would compete with their operations and, if given the power to deal in gold on
behalf of the King, eliminate their profession altogether.
Patterson
noting that currency circulates as an integral part of commerce, he reasoned
that the panic resulting from the loss of confidence that drove depositors to
demand their gold would not infect currency holders. He proposed creating a
national bank that would lend money to the King in exchange for a note.
The
King's note would then be used to back paper currency that the bank would lend
into existence. The King would receive the value of all movies the bank lent
into existence, with the national bank receiving interest from both the King
and the loans created by its currency issuance.
The
currency holders could not run on the national bank because the currency would
be in perpetual circulation.
Bank of
England was created over the active opposition of Parliament and the existing
banking establishment, Charles Montagu, a member of William's party, tackled
the task. Charles Montagu had befriended Isaac Newton, eventually taking
Newton's niece as his lover.
He was
interested in Newton for his practice of alchemy. Alchemy was the physics of
the time. The public held a belief of alchemical accomplishments. Alchemy
involved mixing three substances, an impure metal such as iron ore, a pure
metal such as lead or mercury, and an organic acid together in a mortar.
The
mixing could take months. The finished compound was slowly heated in a crucible
and then dissolved in an acid under polarized light, the source of Newton's interest
in optics. The distillate was oxidized using potassium nitrate, producing a
rough form of gunpowder.
The
sealed container was heated, and when cooled reportedly produced a powder known
as the White Stone.
The White
Stone could be used to transmute base metals into silver, allowing alchemists
to stock their pantry with silverware made from iron.
Applying
their knowledge of the hidden secrets of the universe, alchemists could then
distill the White Stone into the Philosopher's Stone, which could transmute
base metals into pure gold.
Charles
Montagu was interested in the Philosopher's Stone because of its reputed power
to turn base metals into gold. He knew that the success of a reserve bank
depended on its ability to withstand a run on its assets. He was aware that the
ability to withstand a run would depend on the confidence the national bank's
depositors had that their deposits were safe.
Montague
understood that confidence in the safety of a national bank's deposits depended
solely on perception, that depositors would not run a bank if their deposits
appeared safe. He set out to exploit the widespread public belief in alchemy
and its claim that the Philosopher's Stone could turn base metals into gold to
establish the Bank of England, whose paper currency-purportedly representing an
equal amount of silver on deposit-would be backed by nothing.
Montague
wanted Newton close in case his alchemical reputation was needed to give the
bank the appearance of having unlimited supplies of silver to back its paper
currency. He didn't care whether Newton could turn base metals into gold and
silver as long as the public believed he could.
The
first step in making the public believe that Newton was, in fact, capable of
such a feat was to promote Newton's universal gravitation as the discovery of
the heretofore hidden secrets of the universe, the secrets the alchemist needed
to produce the Philosopher's Stone.
Charles
Montagu became the president of the Royal Society and used its influence to
promote the Principia, with Newton's ideas of universal gravitation becoming
drawing room talk throughout London. Montagu also tackled Tory control of
Parliament, successfully unseating the Tories in favor of William's Whigs in
1694.
He
immediately tacked a provision onto the annual Ways and Means bill securing
legislative authorization for the Bank of England. The national bank was organized with a loan of £1,200,000
to William. He returned a note to the
bank, which then lent pound sterling notes into public circulation.
The Recoinage Act of
England
The
goldsmiths, however, countered with a provision in the Recoinage Act requiring
that old coins be surrendered for their face value rather than for the value of
the silver remaining after clip-ping. England had introduced the milled coins
invented by Pierre Blondeau in 1662, but failed to make any provision for
retiring clipped coins.
The
legislation that created the Bank of England empowered it to handle bullion
transactions for England. Because the bank was now responsible for Recoinage
Act, it would be forced to pay for retiring all of England's debased coinage at
face value.
The Bank of England Challenged
The Recoinage Act was ordered to take
effect February 1, 1697
However;
in the summer of 1695, Montagu discovered that the goldsmiths were collecting
clipped coins and cashing them in for their full value in the pound sterling
notes the national bank had been issuing.
He
realized that when the goldsmiths controlled enough of the pound sterling
notes, they would demand their full value in silver, causing a public panic and
a general rush on the bank to redeem all of its paper notes for silver the bank
didn't have.
Montagu
immediately started rumors that Sir Isaac Newton would be made master of the
national mint in charge of the Recoinage Act. With the master alchemist, the
man who had demonstrated intimate knowledge of the secrets of the universe,
serving as master of the mint, the national bank would give the appearance of
holding unlimited amounts of silver bullion. The appearance of unlimited wealth
would eliminate the public's fear of collapse and stop a run on the national
bank's assets.
Charles
Montagu gave up trying to install Newton as master, instead moving the warden
of the mint to Customs and installing Newton as the new warden on March 19,
1696-not a moment too soon. The goldsmiths, having amassed £30,000 in paper
notes, made their run on the bank the week of May 4, 1696.
At this
time, Sir John Houblon was the Lord Mayor of London, a large stockholder in and
governor of the Bank of England was the official who, on that morning in 1696,
met the angry mobs demanding their paper pound notes be traded for silver.
He told the mob, we can assume it
had something to do with Newton being at the mint and whose genius put the
Philosopher's Stone at the beck and call of the bank.
Question:
What else would have sent the angry crowds home, never again to question the
liquidity of the Bank of England?
Answer:
The Bank of England’s claim it had possession of the Philosopher's Stone became
irrelevant as the world came to realize that reserve banking is the money
machine that buys an empire and England's enemies would never again question
her ability to finance wars on the world stage.
A few
years later, Sir Isaac Newton took over as head of the Bank of England. His new
job gave him the power of life and death over counterfeiters. It was known that
he in prosecuting his duties, enjoyed disguising himself in rough garb to
carouse London bars in search of counterfeiters.
With
the Bank of England’s armed men close by, rogues attempting to pass counterfeit
coins were arrested, and with Sir Isaac as the sole judge and jury, these men
were slowly drawn and quartered, a practice he indulged in for the rest of his
life.
“I am
afraid the ordinary citizen will not like to be told that the banks can and do
create money. And they who control the credit of the nation direct the policy
of Governments and hold in the hollow of their hand the destiny of the people.”
Reginald McKenna: Chairman of the
Midland Bank, addressing stockholders in 1924.
Questions: How does the Federal Reserve Banking System work in America?
and
Is the U S Dollar backed by anything of value?
Mr. Martin Chekel, a noted international businessman and
author of the thought provoking “Managing America” six book series and the
retrospective eight book series “The Diary of American Foreign Policy 1938 –
1945” that laid the foundation for US foreign policy the past seventy-four
years.