Financialization and the Road to Zero Guest Post by ICE-9
fi·nan·cial·i·za·tion
/fYÌnanCHYlYÈzSHYn, f+ÌnanCHYlYÈzSHYn/
noun
The process by which financial institutions, markets et cetera increase in size and influence.
This definition is about as complex as one finds in the popular financial media, nestled in a hyperlink somewhere between a continuous onslaught of graphs, numbers, and opinions shouted from frenetic podcasts. One enters financialization’s surface world as if it is the natural and evolved state of things, and leaves believing every increase in that buzz and energy must be good, progressive, and lead to some kind of a collective better tomorrow. There is this perpetual urge and ever present push to “do something”. Everyone’s piling in – get in now or you’ll miss the boat. Thirty year mortgage refi rates are at historic lows. It has never been a better time to buy a house. Zero commission brokerage accounts click here (fees and restrictions apply). Buy, sell, or hold? What are you waiting for? Another all-time high! Synergies, paradigm shifts, raising the bar, the deal of a lifetime, low hanging fruit, win-win. Get off the fence, get your ducks in a row, step up to the plate, and think outside the box and push the envelope because failure is not an option. The business of America – is business.
Somewhat “deeper” discussions about financialization exist within the Fourth Estate front page editorials filled with explanations of its effects and non-explanations of its causes penned by an assortment of well-compensated Nobel Laureates, PhDs, think tank advisors, and Wall Street promoters. After reading such well- crafted pieces one barely senses the authors’ constrained yet directed criticisms of financialization nudging one’s doubts towards acceptance of “reforms” and away from underlying systemic issues. Adjustments and a minor compromise are always the solutions. A tweak here, a Congressional rider there, a new regulation or two should patch things up. Who could possibly argue against such esteemed credentials?
And then there are the “learned” journal tomes full of lofty enumerations of financialization’s effects, theories as to its complex workings complete with equations full of Greek letters and predicate logic, and so many competing ideas that the sum total of all this erudite thinking is a zero sum non-consensus that for all the tens of thousands of pages does not definitively identify causa principalis. Here are some random examples –
“Financialization refers to the increasing importance of finance, financial markets, and financial institutions to the workings of the economy.”
“A pattern of accumulati on in which profit making occurs increasingly through financial channels rather than through trade and commodit y production.”
“The fusion of the interests of domestic and foreign financial capital in the state apparatus as the institutionalized priorities and overarching social logic guiding the actions of state managers and government elites, often to the detriment of labor.”
The above three sentences penned by distinguished scholars took a combined twenty-four years of college to construct, so it is little wonder why it is so difficult for the uninitiated layman to compile the true workings and objectives of financialization. The more one reads, the closer one comes to this educated zero sum non-consensus and no closer to unlocking the secrets of not only why does financialization exist, but also why has a mass edifice of confusion been purpose built to hide these secrets?
Profits and risk mitigation are standard replies to that existential why, spoken with all the confidence bestowed by Fourth Estate economists. Mockery and conspiracy theory accusations follow every mention of the purpose built mass edifice of confusion surrounding financialization. But these are the ground level foot soldier answers that push one squarely back into financialization’s surface world, just more of that buzz and energy that is the perceived natural and evolved state of things. Profit motive – case closed. But profit and risk mitigation were achieved with the old industrial production and export model, so why has financialization today risen to supremacy? Higher profits and greater risk mitigation – just more begging the question, ad infinitum. But could there be hidden mechanisms at work facilitating this rise of financialization and, is there a larger opaque objective to it?
At a ground level perspective one generally sees the accumulation of money as power. But when one looks at “wealth” from a higher level perspective, it is actually vouchsafed, gathered up in that “free market” scrum called “competition” from the invisible hands of those with the ability to conjure money out of thin air and throw it into the general arena. And the working mechanisms within “wealth” accumulation also hold the mechanisms of “wealth” destruction and confiscation, so “wealth” cannot be power in of its self, as it can be both granted and denied, and therefore is only a tenuous grant of privilege. And granted by whom, by what higher authority? What class of people are above the power of money, control the mechanisms of “wealth” accumulation and destruction and confiscation, and are able to both vouchsafe and expropriate this privilege that money provides? Is there a higher order level design at work within financialization, and if so, what are its means and end goals?
This essay examines and defines what financialization is, identifies what has enabled it to rise above all other economic activity in stature, and binds together financialization with the role it plays in this higher order design for the nation. The preceding essay The Evolution of Fiat Money, Endless War, and the End of Citizenship provides much of the underlying philosophical premises upon which this present work is constructed. It is necessary background towards a comprehensive understand of how financialization is ultimately regressive, dehumanizing, and will not lead to a better collective tomorrow – rather, it will serve as an evolutionary societal dead end for the bulk of humanity.
The Evolution of Commerce
For untold millennia the human economic condition remained that of the hunter-gatherer where simple goods of utility were produced and consumed by their users. Sharing produced goods among tribal members or stealing them from other tribes were probably about as complex as commerce got during this long stretch of pre-history. Then roughly 40,000 years ago cave paintings and sculpted objet d’art began to appear in the archeological record indicating some amount of leisure was afforded our ancient ancestors. This advent of leisure appears to have led to the development of other time consuming and non-essential activities like ritualistic burial practices and simple jewelry craft. Soon afterward the first instances of proto-industrial labor specialization appears where flint, chert, and obsidian were quarried to mass produce a surplus of sophisticated arrowheads, stone axes, spear tips, and implements used to skin and dismember hunting kills. It is this first indication of surplus that suggests some form of trade existed between our Mesolithic brethren and is supported by the wide distribution of these manufactured tools far beyond their quarry and production sites. From analogy to Mesolithic peoples encountered during European colonialization of the Americas, our ancestors did not use money and therefore, surplus was not produced to obtain profit, but instead was an ancient form of “foreign policy” that brought the various scattered tribes together and served as a means of maintaining cordial relations. Thus in the Mesolithic world, our ancestors did not prosecute trade wars, but likely practiced a kind of trade peace.
Our Neolithic ancestors developed additional survival skills like animal husbandry and proto-farming so they tended to spend more time in one place and their settlements began to take on a permanent nature. They depended less on hunting and gathering and more on tending animals and crops for their existence. Surplus food was stored as reserve for times of scarcity and individual private ownership is not well defined in the archeological record. Proto- industry now matured into industry where labor specialization expanded with the rise of cities requiring large amounts of standardized building materials, pottery stockpiles, and large scale meat, cooking oil, and grain processing capabilities. Within these cities we begin to see the development of a managerial class – the priests and their administrators – who control the cities’ collective food surplus but do not own it. Using this control over food surplus the theocratic-managerial class were able to entice workers away from their own food producing activities to instead undertake civil works projects like digging and maintaining irrigation canals, excavating cisterns, constructing perimeter fortifications, erecting public buildings, the provision of sanitation, and maintenance of a bureaucracy to provide project services like design, procurement, and execution. Again by analogy with Neolithic peoples encountered during colonialization, all of this occurred in a world without money and would not have been possible without the rise of barter trade and most importantly – the advent of labor barter.
The civilized Neolithic world had a quasi-collective property ownership structure evidenced by large repositories of unearthed clay pots used to store grain, cooking oil, and wine with no identifying ownership markings, a prevalence of communal buildings in the city layout – possibly mess halls, interconnected housing units et cetera. Barter was the sole form of commerce, and is defined here as the mutually agreed exchange of goods and / or services between individuals without the aid of an intermediate exchange means (i.e., money). Thus barter suggests some nascent concept of private ownership, and labor barter implies a notion of independence from the collective where one “owns” his labor to offer in exchange for rations from the collective stores. With the growth of cities and the collection of groups of cities into civilizations, labor barter became the primary economic transaction in the civilized Neolithic world where money and private ownership of large surplus does not appear to exist. Thus labor barter is one of humanity’s oldest and most fundamental social interactions and is a critical component to what it means for an individual to belong to a complex society – a necessary part of being human among one’s fellow men.
Labor barter allowed individuals to temporarily walk away from their personal food producing activities to provide collective labor for civil projects, yet still procure food from the city surplus for them and their families and was the necessary prerequisite for the development of both cities and industry. E.g., it was common practice in ancient Egypt for Nile Valley farmers to move to the mountain quarries during the flood season and work there until the waters subsided, where they would then return home to survey their fields and plant, sow, and harvest that year’s single crop. A societal equilibrium was established where the laborer received food for his labor and the theocratic-managerial class got the manual labor they needed for their public works projects, and more elaborate benefactor schemes were provided to full time skilled laborers and the administrative bureaucracy. This equilibrium worked successfully for several millennia as archeology suggests there was no need for slavery in the civilized Neolithic world, nor was there the need to force people into a labor corvée to accomplish these ancient civil works projects.
As cities grew and our Neolithic ancestors entered the Bronze Age, it did not take long for larger families to become predominate under the barter trade system as they could pool their superior collective resources to accomplish more ambitious endeavors. Over time these large families accumulated a surplus to themselves and used it to purchase the labor of others in pursuit of accumulating further surplus to themselves with which they then exchanged for land, animals, implements, and materials to build larger homes. This development is evident in the archeological record in Bronze Age cities where for the first time there are clearly demarcated housing units and the clay pots in grain repositories bear ownership markings. With the advent of bronze in faraway mountain lands these families assembled some of their surplus into caravans for export and trade with early metallurgists, salt workers, and native metal and gem miners. Laden with goods for their return journey, these early traders picked up other exotic goods from cities along the route home. Once home, these traders then exchanged the metals, salt, and exotic goods with other families possessing surplus and generated a “profit” in these exchanges – e.g., 50 jars of commonly available wine could be traded for scarce brass ingots that were brought back home and traded again for 200 jars of wine. Thus begins the dawn of private property and private enterprise embodied in this surplus of goods accumulated through one’s own endeavors – the mercantile period of human history. Mercantilism is defined here as the exchange of goods for the purpose of generating a profit where the merchants and creditors of goods assume full liability and risk in the event of loss, theft, spoilage et cetera. There is no mechanism within mercantilism to lessen or adsorb these potential risks and real losses.
Trade between cities and civilizations flourished through the Bronze Age into the Iron Age with labor barter, goods and service barter, and mercantile commerce all practiced simultaneously and settling into a similarly ordered societal hierarchy with the theocratic- managerial class now replaced at the highest level with kings and their royal lieutenants. These kings assumed ownership over the collective surplus that was used more and more to provision standing armies and provide for a coterie of advisors and enforcers. And for the first time, we observe not only a surplus in food stuffs but a surplus in gold and silver accumulated by the sovereign obtained through war, tribute, and the collection of taxes. Thus it appears that this change in ownership of the communal surplus is the seminal factor in the formation of standing armies and prosecution of wars of conquest. And with the advent of standing armies and taxes, we also observe the first instances of slavery and people forced into a labor corvée.
With rising Iron Age trade, networks of extensive, well maintained, and secured overland trade routes were constructed complete with toll and excise stations, and port cities proliferated for the transport of goods by sea. It is safe to assume that with the expansion of trade facilities, the profits from mercantile endeavors were expanding as well and so too was the tax take from these activities as cities grew larger and better fortified and offered increased public amenities. So the rhythm of civilized Iron Age humanity was established by the activities of trade, supported by the actions of agricultural, pastoral, and industrial producers with piracy, highway robbery, and war always lurking to disrupt this rhythm. And thus the mercantile story remains consistent for approximately 4,500 years from the kings of Akkad to the French Revolution where the mercantile model operated and spread to nearly every corner of Eurasia and North Africa. Despite the many advents and inventions to facilitate mercantile trade – usury, credit vehicles, precious metal coins and their use as a store of value in of its self, coin debasement and inflation, et cetera – this commercial model in its essential form as defined earlier continued unabated despite a kaleidoscope of empires, peoples, and technologies rolling through it. That was, until the late 17th century arrived to the City of London Corporation and a small group of bankers and promoters would change the world forever.
At the onset of the end of mercantilism all modes of commerce described up to this point were practiced at some place in the world. The hunter-gatherers remained active with the Bushmen of southern Africa, the arctic Eskimo, and the Australian Aborigine. Mesolithic cultures were predominant in what was to become the United States and Canada, and civilized Neolithic peoples were predominant in Mesoamerica and the northern Andes mountains of South America, although they had declined significantly from their technological and cultural zeniths. Thus a great swath of the world lay open to musket, canon, and credit based ventures seeking unlimited stocks of exotic goods and undiscovered gold and silver reserves for the taking. But that taking was expensive, dangerous, and represented a significant risk and not unlikely loss of large quantities of gold and silver to both entrepreneur and creditor. To get at these exotic goods and untouched mineral resources, one had to first invade and subjugate these regions, and due to the extreme investment risk inherent in colonization, a new commercial model was needed to make these endeavors profitable – to generate a “positive expected value”. And that new commercial model was capitalism.
The imperative for the development a new commercial model was presented with the “conquest funded by physical money” rapid rise and failures of the Spanish and Portuguese states. Although the 16th century Spanish conquest of the Americas brought the crown tremendous amounts of silver and gold, the costs to support their navy flotillas to protect and transport these riches were great, and losses through piracy and storms at sea occurred regularly. These losses could have been adsorbed and profits maintained had colonial extraction been the only pursuit of the Spanish kings. However, these riches soon drew the envy of rivals and grew the European continental aspirations of the Spanish kings themselves. So when the high operating costs of colonial wealth extraction were combined with the very high costs of prosecuting wealth depleting wars closer to home – wars paid for in physical silver and gold – the mercantile commercial model began to show its flaws when applied to modern super-states as the Spanish treasury depleted with every battle. This mature mercantile commercial model could not simultaneously secure extensive colonial trade networks and simultaneously prosecute large scale wars of attrition, and it inevitably led to state bankruptcy and military defeat. The sovereign existing in the mercantile commercial world therefore had to choose between either trade or war, but ego generally led to the sovereign choosing both and therefore secured the downfall of many prosperous mercantile states. And, as Spain was a Catholic country, foreign creditors were rare that would lend money to a nation that had banned usury and had not long before expelled its nascent bankers en masse. The Portuguese experience was even more convoluted as their empire delivered little in the way of silver and gold and all commodities extracted like spices and textiles had to first be sold and converted into physical gold and silver to cover the costs to secure its colonial holdings and fund its wars on the European continent. So if there were no buyers, there was no secure colonial empire and no European wars other than defensive, which did not last long as national gold and silver reserves depleted. In the end, when the silver ran low, defeats at home and abroad mounted and the bankrupt states fell to those countries that could afford to continue to pay for these wars of attrition. Some other funding solution was needed if a nation was to conquer the world, keep hold of it while extracting every conceivable thing of value from it, while at all times prosecuting wars of attrition on the European home front.
Capitalism is specifically defined here as a commercial model whereby investment risk is not wholly borne by entrepreneurs and their creditors, but instead spread over the entirety of society through the deployment of fiat money connected to a fractional reserve banking system. Fiat money acts as the mere representation of some physical underlying store of value held in trust by the controllers of this fractional reserve banking system. Under capitalism, investment losses transacted in fiat money do not jeopardize the physical holdings of real value – stockpiles of gold and silver – but only depreciate the perceived exchange “value” of that fiat money relative to some unit price, again in fiat money, of the underlying gold and silver reserve assuming a transparent and impartial banking system. Thus as credit based business ventures in the aggregate progress into “profits” or “losses”, in the transparent and impartial banking system, fiat money will either appreciate or depreciate in purchasing power relative to the underlying unit reserve of real value held in gold and silver. For those who control this fiat money, capitalism is a risk free proposition as the real value – gold and silver held in “trust” – never leaves their possession as fiat money losses accumulate. It is instead the populace and especially the peripheral fiat empire satellites that bear the full effects of inflation and inevitably “pay” for aggregate commercial losses through their erosion of purchasing power. Unlike mercantilism, losses are pushed onto both participants and non-participants in commerce which makes capitalism the ultimate “heads we win, tails they lose” banking hedge. This hedge against any real value loss is the core mechanism of modern “free enterprise” as it is indeed enterprise free of risk and loss at the highest level of its system – the central bank cross- ownership nexus. So unlike mercantilism where creditors lose physical gold and silver, under capitalism entrepreneurs lose chits of paper and credibility, and the central banks lose only chits of paper and continue to hold their gold and silver reserves regardless of all aggregate gains or losses transacted in fiat money.
Three mechanisms were required to enable this new capitalism to operate effectively – an opaque central bank, an empire forced to import value added goods from and export raw commodities to the home country, and a fiat currency used throughout the empire to pay for all these goods exchanges that tolerates no rival. The central bank exercises full macroscopic control regarding who it will issue credit to or withhold credit from, is the sole agency that sets interest rates to its primary dealers who then devolve this fiat money down to all hopeful debtors, and provides the only store and account for gold and silver held in “trust” that theoretically gives fiat money its “value”. Private ownership of the central bank is required to ensure the home country government does not interfere in monetary policy and risk the central bank’s power and profitability. And besides discretely making its owners the most powerful unseen men in their home country, private ownership provides the opacity required to shield the true amounts of gold and silver held in “trust”, allows the initiation of economic “crises” as political weapons with reduced interference from the home government, and enables the covert manipulation of foreign exchange rates and commodity prices. The empire was needed to cycle the fiat money out of and back into the home country via a “virtuous cycle” that provided underwriting to the aggregate credit-based export ventures domiciled in the home country. The home country’s value added export economy was necessary for the return of the fiat money as this “virtuous cycle” underpins “growth” within the home country, increases the “value” of all goods and services including labor simultaneously through inflation, and acts as a dampener on inflationary pressures for imported raw materials at home. And the fiat currency itself required only a printing press and a formidable standing army to assure its supremacy.
A special note on communism. Both communism and capitalism are unnatural commercial models invented by monetary and political scientists and forced upon the world through conquest, revolution, legislation, incrementalism, and subterfuge. Capitalism is no more a natural and evolutionary progression from mercantilism as is communism a natural and evolutionary progression from capitalism. As capitalism is not a natural commercial evolution, it follows that neither is communism. When one compares the nature of both commercial models using the definition of capitalism provided earlier, one finds that in both systems investment risk is not wholly borne by entrepreneurs or state entities and their creditors, but instead spread over the entirety of society through the deployment of fiat money connected to a fractional reserve banking system. The aggregate accumulating gains or losses in fiat money from commercial activity in both systems never puts the underlying reserves of gold held by either capitalist or communist central banks at risk. Furthermore, both systems employ opaque central banks to set monetary policy and both systems have fiat empires attached to their home countries. Additionally, as both systems issue loans at interest, the accumulating amount of loans grows much faster than the underlying value of reserves held in “trust”, and this widening disparity depreciates the “value” of each systems fiat money equally. This depreciation generates the inflation required in each system to simulate economic “growth” and the illusion of “prosperity”. All aggregate losses from individual or state commercial activities are socialized to both participants and non- participants of commercial activity through this process of inflation. Both systems tax their subjects, both systems rely heavily on war for economic “stimulus”, and both systems will tolerate no rival to their fiat empires. Both see the other as the enemy, both strive for the destruction of the other, and both claim the moral and righteous prerogative. Despite nearly 100 years of animosity, wars both hot and cold, and entire military infrastructures designed at the ready to destroy the other, there is at their fundamental cores no operating difference between communism and capitalism, and for all practical purposes they are identical systems. Thus communism and capitalism are, in fact, the equivalence of choice between baked and boiled potatoes in political economy.
Thus with the advent of the capitalist commercial model of debt- based fiat money enterprise, the world stage was set for the consolidation of the colonial empires into an integrated nexus, the industrial revolution was set to proceed, and the prosecution of endless wars that no longer depleted national treasuries could be undertaken in earnest all thanks to the magic formula of unlimited fiat money.
From Capitalism to Financialization – Part I
But 4,500 years of mercantilism were not going down without a fight. Fractional reserve banking had been steadily growing since the 14th century but was exclusively a private business affair unrelated to the state. These early fractional reserve “banks” began as safe stores for gold and silver but it did not take long for their unscrupulous owners to start speculating with their customers’ deposits, thus the nascent fractional reserve nature of these deposits where redemption coupons in circulation outnumbered physical gold and silver held in “trust”. After many rounds of speculative losses with other people’s gold and silver, “banks” crashed, losses accumulated, and the Renaissance city states ultimately stepped in to ban this fractional reserve practice and re-enforce the Catholic prohibitions against usury. As a result, the early 16th century mercantile “banking” industry evolved into a transparent and audited business based upon fees received for the facilitation of foreign coin exchange, notary services, and the provision of letters of account credibility. With usury removed, the business of transparent and audited mercantile banking spread from Northern Italy throughout Western Europe and control of the banking industry transferred to Catholic and later, Protestant businessmen. So from 1585 to 1650 the golden age of transparent and audited mercantile banking laid the groundwork for the rise and exploitation of the Dutch and English colonial empires, and the success of mercantile banking also sowed the seeds for its eventual corruption by unscrupulous players in usury friendly Protestant England.
With the resurrection of the European super-state after centuries of dormancy, the various crowns found it increasingly difficult to secure funding to fight their continental wars of ego, secure their growing colonial empires, and fund their increasing opulence at home, so sovereigns began to form nascent “central banks” within their court administrations. These nascent “central banks” served the crown and the crown alone and existed as polite shake-down operations as wealthy subjects placed themselves in peril if they refused to lend their gold and silver despite high probability the sovereign would default as was his divine right. So after depleting the royal treasury during the Second Anglo-Dutch War, the English crown initiated a shakedown of the goldsmith bankers when Parliament passed The Great Stop of the Exchequer in 1672 which repudiated all outstanding loans and all but destroyed the English mercantile banking system. What gold and silver was left to the Exchequer immediately went to use in prosecuting both the Third Anglo-Dutch War and the Franco-Dutch War, which by 1678 left the Exchequer in such dire financial circumstances that it put national security at serious risk. A funding void followed where loans to the crown in gold and silver were nearly impossible to secure, so a first attempt at pure fiat money promoted as “legal tender” followed without success. Then in 1685 Charles II died and the Catholic James II ascended the throne putting usury and national finances at risk of eliminating any recourse at replenishing the depleted Exchequer. So under cover of religion, the Catholic king’s authority was nullified, his Protestant daughter ascended the throne, usury was preserved, and Parliament with its powers to raise funds acquired legal supremacy over the crown.
With a weakened monarchy, new relative strength in Parliament, and a depleted Exchequer, Parliament pulled itself together and got to work and, once lingering legal succession issues surrounding James II were resolved, it passed the Bank of England Act of 1694. The overt exigencies in this act were related to funding the new war with France and controlling rebellion in Ireland. But the act also replaced the old rarely used pure fiat money of Charles II with bills redeemable in gold which also paid interest to their holders. Thus usury was legally preserved by an act of Parliament which a weakened future potentially Catholic monarch could not overturn. These bills backed with gold gained in popularity and filled the Exchequer’s immediate funding gap and allowed England to continue prosecuting its wars against the Dutch. For a brief eleven years, from 1696-1707, England had returned to sound mercantile banking practice and acceptance of these interest bearing bills spread, filling the Exchequer with physical gold and silver.
But then enter one Sir William Paterson. This same Sir William – chief organizer of the ill-fated Darien Scheme where investors lost everything and 1,200 Panamanian colonists perished – in 1694 was the primary promoter behind the joint stock incorporation and charter of the privately owned Bank of England. A major conflict of interest – not recognized by divine right – arose here whereby King William III was himself a major shareholder in this newly chartered bank. But this bank was merely one of many banks chartered at the time operating under the ruinous fractional reserve practice, and nearly all these banks eventually failed save one – the Bank of England. What made this bank charter special was its inside connection to the House of Stuart and its location inside the untouchable City of London Corporation – that one square mile of sovereign within a sovereign ceded in 1067 by William the Conqueror to the inhabitants of London. And, this special Bank of England had discovered the magic formula that transformed Parliament into a perpetual debtor, turned the bank’s liabilities into assets, and as the money they created had zero cost, afforded the owners of this special Bank of England an infinite rate of return on fiat issuance. Not since the Pharaohs convinced the Egyptians they were Gods had such an elaborate fraud been perpetrated upon mankind.
To coincide with the Union of England and Scotland in 1707, this special Bank of England – one of many chartered banks at the time – was awarded responsibility for managing the issue and redemption of the popular interest bearing bills of what was now the Exchequer of Great Britain. Given the enticement of near infinite rates of return, it did not take the Bank of England long to begin issuing its own fiat money for use by Parliament and to retire the old interest bearing bills with redemptions. The magic formula was set – the Bank of England had figured out not how to receive interest from lending its own money, but how to receive interest by creating new money. And the opaque nature of the magic formula with its unknown gold and silver reserves held in “trust”, together with pomp and trappings, gave the fiat money financial process the appearance of authority and legitimacy. Parliament got its means to fund a new round of wars of attrition with France, the people got taxed at a slower rate of increase, and the House of Stuart and their banker friends got wealthy beyond belief. And to the holders of accumulated fiat money, they discovered a way how to transfer the bulk of a society’s real wealth – land, gold, labor, and raw materials – into their own possession for free, using this fiat money of no inherit value to purchase things having real intrinsic value. Therefore, at its most fundamental level, capitalism became the mechanism by which one trades the family cow for a bag of magic beans.
This special relationship between Parliament and its wars of attrition and the House of Stuart and its banker friends had solved the riddle of Exchequer funding so Great Britain could now focus on its primary 18th century endeavor – war with France. From 1701 to the final defeat of Napoleon in 1815, Great Britain prosecuted eighteen officially declared wars against France. The stakes were serious now as France and its livre had wrested control of the world’s reserve currency from the mercantile banking Dutch after their late 17th century wars with both England and France had exhausted the Dutch treasury and the Dutch, with their mercantile banking model, could not print their way back from defeat. The House of Stuart and its banker friends now saw defeating France and appropriating the world reserve currency to their Bank of England as the overriding collective purpose of Great Britain, and Parliament was ready and eager to assist for the “Glory of Britannia”. But neither France’s nor Great Britain’s empires contained large quantities of gold or silver, so privateers on both sides played a large role in wartime funding but this stolen loot was especially important to the French corsairs and their mercantile banking system. Thus the inherent empire self-destruct mechanism latent in all physical money based commercial models – depleting the crown treasury – would play a major strategy in the prosecution of Great Britain’s prolonged wars of attrition with France. Thus 18th century Europe pitted infinite paper fiat money versus limited physical gold and silver to the death in winner-take-all stakes for control of the world reserve currency.
The first Industrial Revolution from 1760–1820 did not create a large “virtuous cycle” for British fiat money, and given the fractured nature of the British chartered banking system, this early land empire was not yet conducive to establishing a fiat money empire. For an idea of the imbalance in economic scale versus land size existing within the 18th century British colonies, at the cusp of the 1755 tobacco price crash the tiny Caribbean island of Barbados brought in more customs and excise income to the crown than all American colonies combined. And, economic depressions in the colonies caused by events in and taxes imposed by the home country were common which prompted early colonialists to build up a high degree of productive diversification and self-sufficiency. However, after more than 100 years of war against France and the final defeat of Napoleon, the mantle of world reserve currency passed to the House of Hanover and its banker enablers, so Parliament’s favorite charter bank began in earnest to churn out incredible amounts of bank notes that were now no longer needed to fund wars of attrition. Other charter banks knew well of this special relationship between Parliament and the Bank of England so these banks began accumulating the Bank of England fiat money to use as their “reserves” held in “trust”. The inflation caused by this round of excessive money printing, combined with little to no increase in wages, reached the point of starvation in the London streets, and Parliament’s disastrous Corn Act of 1815 drove grain prices even higher resulting in food riots and complete economic stagnation. Thus to this point first the House of Stuart and their banking friends, then the House of Hanover and its banker enablers, through the magic formula of fiat money, had brought the United Kingdom 121 years of near continuous war, recurring national bankruptcies, and now open starvation. Something had to be done.
So Parliament set about to save its favorite banking charter. Six years after the London food riots, it required the Bank of England to maintain a minimum reserve held in “trust” and to facilitate conversion of its fiat money into gold. So the House of Hanover and its banker enablers discovered the new magic trick of borrowing gold to fulfil this new inconvenience, and promptly went back to churning out more fiat money and by 1825 had precipitated a collapse of the United Kingdom banking system that effectively eliminated nearly all competing charter banks. For their disastrous actions, in 1833 the Bank of England was again rewarded by Parliament with the Bank of England Act granting its fiat money monopoly status as “legal tender” for a “limited period” under “certain conditions”, which over time became unlimited and unconditional as no certain conditions were ever enumerated. Thus the act wiped out all competing charter banks and forced every person and entity in the British empire to either use or pay exchange fees to use the Bank of England’s fiat money. And on top of all this, the House of Hanover and its banker enablers, ensconced within the untouchable City of London Corporation, from the safety of this “anachronism gifted by the Normans”, found even more profitable ventures than fraudulent banking and war funding in the forms of the slave and opium trades. So by 1833 the same people behind slavery and opium were handed gratis sole control over the fiat money that would soon engulf 26% of the world’s land surface. What could possibly go wrong?
The Bank of England itself, that’s what went wrong. Another major financial crisis initiated by the House of Hanover and its banker enablers’ boom-bust magic formula was “solved” by Parliament’s Bank Act of 1844 that set a fictional amount of imaginary gold as a fabricated “reserve” held in opaque “trust” and thereby “limited” the amount of fake fiat money the Bank of England could issue out of thin air against its imaginary gold reserves, but excluded loans to the public whose losses bothered no one in the House of Lords. The Bank Act worked so well that by 1847 the Bank of England itself teetered on the brink of insolvency, so to retain their special relationship, Parliament repealed the Bank Act of 1844 and now the Bank of England was legally free again to print as much fiat money as it wanted. And so economic crises and near collapse followed again from 1857-8, 1867-9, and 1873-96, each time fixed by Parliament with a tweak here, and act there, and a new unenforced regulation or two. Thus following the 1833 grant of “legal tender” status, during their 67 years of 19th century money monopoly the House of Hanover and its banker enablers gave the United Kingdom 32 years of recession, depression, bankruptcy, and financial collapse. But despite its delivery record its special relationship with Parliament continued into the 20th century where it once again found its raison d’être – war funding.
One side benefit inadvertently derived from the never ending 19th century financial crises precipitated by Bank of England fiat money mis-managers was Parliament spent so much time dealing with economic problems at home and unrest in the colonies abroad that it had little time to prosecute new European wars of attrition. With the Crimean War excepted, a sort of Pax Decoctur gripped the United Kingdom’s European aspirations as it focused on its Second Industrial Revolution at home and small scale conflicts abroad to secure far flung provinces against both people that mostly didn’t use money and people that mostly did use opium. This “Peace through Insolvency” enabled the United Kingdom to continuously reduce its national debt without exception from a level of about 265% of GDP in 1820, down to around 40% of GDP at the start of the 20th century. As a result, the House of Hanover and its banker enablers were able to finally develop the “virtuous cycle” necessary for the proper function of a true fiat money empire – the colonies ship raw materials to the home country and receive fiat money in payment, the home country took those raw materials and produces value added manufactured goods, then exported those manufactured goods back to the colonies that paid for these value added goods with fiat money received from the sale of raw materials. All value added activities remained in the home country, and with European populations increasing across the colonies, this “virtuous cycle” generated economic “growth” and “profit” across the United Kingdom’s industrialized areas. However, these cheap raw materials from abroad also sealed the demise of domestic producers, promoting urbanization at home that stagnated factory wages and led to large scale emigration to the colonies abroad, both phenomena adding to the “virtuous cycle” and increasing “value add” to those with access to capital and ownership of the means of production.
A key component to this British “virtuous cycle” was the House of Hanover and its banker enablers were able to capture the bulk of world raw material sales and thus expand its fiat money empire outside the colonies by the process of commoditization. Large brokerage houses, often controlled by subsidiaries of the Bank of England, bought and sold such huge quantities of these raw materials on forward contracts that they were able to manipulate their prices. These hedge purchases and sales not only provided trading income, but also ensured all contracts were settled in Bank of England fiat money regardless of point of sale or purchase. To squeeze even more profit from this “value chain”, other Bank of England subsidiaries expanded into corporate plantation holdings throughout the colonies, especially in India following the 1862 Cotton Famine. This practice then spread to mining tenements following the discovery of huge gold deposits throughout Australia and the annexation of the Transvaal. Thus the vast majority of the “virtuous cycle” was captured and maximum “value” squeezed out the entire “value chain” and into the hands of the House of Hanover and its banker enablers. And so began a new line of exploitation for capitalism – the manipulation of commodity prices via the coordinated bulk purchase and sale of these commodities in concert with the manipulation of the “value” of fiat currency. Entire sectors of commodity production around the world were sent into financial ruin by a coordinated attack from both the brokerages and Bank of England monetary policy, these sectors bought nearly en toto for a shilling on the pound, then pumped and dumped using the same coordinated mechanism but in the opposite directions. Large swaths of entire industries like cotton, land, oil, wheat, coal, iron ore, et cetera regularly passed into and out of the hands of the House of Hanover and its banker enablers generating tremendous profits for them and debilitating losses for others.
At the dawn of the 20th century, capitalism had fully matured, sound money mercantile banking no longer existed, and the magic formula had made the United Kingdom the most powerful financial, economic, and political empire ever assembled. The covert secret formula however was it had fought only one major European war – The Crimean War – since the defeat of Napoleon, and since then the Exchequer had reduced its outstanding budget deficit relative to GDP a full 85%. And for the first time in the fiat empire’s history, it began delivering large amounts of gold into the City of London Corporation. The sun never set on Britannia, it ruled the waves, it had commoditized every basic raw material important to the Second Industrial Revolution, and it had subjugated nearly every primary producer on the planet to its service through price manipulated contracts denominated in Bank of England fiat money. The United Kingdom was in a commanding position but had not yet proven itself as undisputed world military power, and the German Empire was beginning to accumulate victories and influence on the Continent. So it was inevitable that the egos in Parliament would go back to their old bad habits of 100 years ago and start looking for a major fight to revive the “Glory of Britannia”. And thus began a 50 year effort to destroy the rising European star of Germany, with its formidable military, efficient and technologically advanced industry, growing colonial empire, and Hegelian guiding principles of “objectivity, truth, and ethical life” which now threatened to not only swallow up and assimilate all the Germanic peoples of Europe, but to swallow up and eliminate their privately owned central banks as well. The City of London Corporation would tolerate no fiat money rival and Germany could not continue to grow unchecked in influence – nigh, could not continue to exist – and put at risk ownership of the Bank of England’s magic money formula.
From Capitalism to Financialization – Part II
This is where the banking story of the United States merges with that of the House of Hanover and its banker enablers. To its great credit, the United States had three times in its early history repelled the external imposition of a privately owned central bank. After Andrew Jackson allowed the Federal charter for the den of vipers – aka Second Bank of the United States – to expire in 1837, the existing network of disunited state chartered banks grew across the young country with the addition of every new state, each charter issuing its own semi-fiat money backed by reserve requirements dictated by each state. Fiat money from the states varied in exchange value and bank failures were common, but the distributed and discretized nature of this Free Banking Era localized the crises and generally did not lead to national economic disasters as did the regular and recurring management failures of the Bank of England. It was during this laisse-faire period that the United States experienced incredible growth of territory, population, political clout, and economic output, and the Federal Treasury had financially strengthened to the point where the country had the temerity to negotiate for territory, wage its own wars of conquest, and purchase new territories without serious economic repercussion. With regards to banking it seemed the United States had found the magic money formula by not finding the magic money formula and had instead wandered into a kind of balanced budget quasi-capitalism where state charter banks issued local fiat money that few wanted as it had to compete with the gold and silver specie put in circulation by the Federal Treasury. But then every balanced budget just begs for a good war of attrition and that’s exactly what came next.
At the cusp of the American Civil War, the Bank of England had coopted the South into its commoditized fiat empire as most of their raw cotton exports went to British textile mills. Thus the Bank of England’s fiat empire had crept quietly into America when the London financiers gave full support to Confederate war funding by purchasing its heavily subscribed and sterling denominated Cotton Bonds. To facilitate war funding at home, both the Union and Confederacy resorted to fiat money issue, with the Confederacy printing greybacks and the Union printing greenbacks. To enforce these new greenbacks as Union fiat money, Congress passed the National Banking Act of 1863 establishing a system and network of national banks using a uniform fiat money with a stipulated uniform fractional reserve requirement mandating these banks purchase and hold US Treasury bills as “reserves”. Both sides struggled with inflation, but the Confederacy, if not defeated in battle, would likely have succumbed eventually to inflation that by war’s end ran at 9,000% of prewar levels rendering the greybacks effectively worthless. But the old magic money formula of turning liabilities into assets worked just well enough for the Union and with this National Banking Act their greenbacks replaced the former hocus pocus uncoordinated sideshows from state charter bank fiat issue antics commonly backed with no more than borrowed gold. Ironically, counterfeiting during the Civil War was a persistent problem, so the National Banking Act not only removed gold convertibility and gold and silver reserve requirements, but also established the United States Secret Service to ensure the Union’s new fake paper money was not fake fake paper money. And just like the creation of its progenitor the Bank of England, greenbacks were only to be in circulation for a limited time, which in 1878 became legally unlimited time but with the re-imposition of convertibility into gold. America had officially entered into the world of capitalism, and for the first time had a uniform national banking system under the control of the US Treasury using a single fiat currency convertible into gold with a fractional reserve requirement. But the greenback was finding itself more and more controlled by Wall Street proxies of the City of London Corporation, Wall Street’s influence was growing immensely within the US Congress, and the bankers of the City of London Corporation had set their sights on gaining control of the levers of America’s new magic formula.
But full control of that magic formula would take some time to acquire as the American people proved more intractable than the pliant Dickensian subjects of the City of London Corporation. The weakened post bellum United States with its new national bank network, huge Federal budget deficit, new fiat money empire throughout the defeated Confederate States, and fast expanding Northern modern industrial base presented the City of London Corporation bankers with proverbial low hanging fruit. After both sides weathered the depression caused by the Panic of 1873, the City of London Corporation bankers’ first salvo at usurping the American money creation mechanism was the financially engineered Panic of 1893 where a coordinated commodity price crash was timed with a run on the US Treasury gold holdings that nearly drew down the country’s entire gold reserve and sent the United States into prolonged depression. But there’s no depression a good war can’t fix, so the politically popular 1898 Spanish-American War was prosecuted and with a quick victory the US spirits and economy sprang back to life. The City of London Corporation bankers’ initial crude efforts was thwarted, so a second better organized salvo was launched in 1907, this time at the undertaking of Wall Street proxies, complete with a ready-made plan to fix everything and paid agents ready in Congress to promote the benevolence and virtue of the Money Trust. And to show the American people their selfless good intentions, both J. P. Morgan and John D. Rockefeller magnanimously gifted their own money to acquire and “save” insolvent banks after the US Secretary of the Treasury secretly pledged taxpayer bailout money should Morgan’s and Rockefeller’s bank investments fail. Wall Street began its marketing campaign through Congress for the privatization of both the national currency issue and monetary policy, promising America that once control of these powers passed into secret hands all these recurring depressions caused by these very same secret hands would immediately cease. But not all members of Congress were yet paid agents of Wall Street, and in 1913 the Pujo Committee released the results of its scathing Money Trust investigations. The American public was in no mood to submit their sovereignty to the Wall Street Money Trust on behalf of the City of London Corporation bankers, and time was running out for the bankers to get America ensnared into their plans to deal with the new, powerful Continental upstart that threatened the Bank of England’s fiat empire gravy train – Germany.
The second half of the European 20th century following the brutal wars of unification saw the Prussian state and its German coalition fiefdoms start to grind out military victories over first Denmark and next Austria, but it wasn’t until the German Empire coalesced after its decisive and highly efficient defeat of world power France in 1871 that alarms began ringing in the City of London Corporation. The German people, united under one state and the Hegelian principles of “objectivity, truth, and ethical life”, was one thing, but this Hegelian destiny to unite all Germanic peoples under that state – including Germanic peoples living in states with privately owned central banks – was another thing entirely. But the German Empire with its sound monetary policy, advanced high tech ground based military capability, and expanding colonial empire presented a formidable adversary, one that guaranteed mutually assured destruction if challenged alone. Initial efforts to destabilize the German Empire from within using communist agitators all fell flat as the German government enacted liberal labor and social reforms blunting each new call for a general strike. Against this rising German Empire stood a United Kingdom that had won just one major war in 85 years, was crawling out of the 20 years Long Depression, and whose banks and investment houses were clear culprits in ever recurring financial panic, one after the other, that had disastrously rippled throughout the global economy. The limits of growth had been reached with the industrial-colonial model of the British Empire, the system was devolving into stasis, and the Exchequer’s budget deficit had been reduced to the point where a new major war of attrition could now be prosecuted.
On the American home front the Jekyll Island conspiracy between the Wall Street proxies for the City of London Corporation bankers and the US Congress had been in play since 1910. Its success was a crucial step for the Exchequer to gain a reliable overseas source of credit and for the Ministry of Defense to establish a supply chain prior to prosecuting its coming war of attrition against the German Empire. It is likely these conspirators knew full well their plans would commit the United States to not only massive war funding to Great Britain, but also pit the Americans as enemy against whatever countries Parliament might declare war upon for the “Glory of Britannia”. So in practice, when Congress passed the Federal Reserve Act in August 1913 despite the Pujo Committee findings, it not only robbed the American people of control over its monetary policy, but to a large extent robbed it of control over much of its foreign policy as well. Thus this fateful act of betrayal to both American citizens and British subjects joined the eventual downfall of the British fiat empire with an American commitment to Endless Wars in defense of its coming fiat empire. This was a master stroke for the City of London Corporation bankers that brought the Federal Reserve System into its cross ownership nexus that now facilitated trans-continental coordination of both monetary and foreign policies that assured aggregate coordinated outcomes always resulted in a net gain to the City of London Corporation bankers, regardless of which side of the Atlantic experienced victory or defeat. And this new Federal Reserve System was isolated from all direct European land based military threats and had the ability to create huge quantities of fiat money adsorbed by a brand new tax base within the expanding American industrial economy which was now inescapably locked into ever growing Federal debt by the XVI Amendment. Thus not since the fall of Troy had a free and independent people willingly invited such unseen dangers into their midst, and by subterfuge the Federal Reserve Act ended 137 years of fierce American independence with a single unconscionable law and just 30 words contained in a new constitutional amendment.
Click for Full Text!
Poster Comment:
Very long article but well worth the read.