A Dutch-bred King Charters the Bank of England
on Behalf of Foreign Moneylenders.
The man who would become King William III began his career as
a Dutch aristocrat. He was elevated to Captain General of the Dutch
Forces and then to Prince William of Orange with the backing of Dutch
moneylenders. His marriage was arranged to Princess Mary of York,
eldest daughter of the English Duke of York, who reigned as James II
of England from 1685 to 1688. James was then deposed, and William
and Mary became joint rulers in 1689.
William was soon at war with Louis XIV of France. To finance his
war, he borrowed 1.2 million pounds in gold from a group of moneylenders,
whose names were to be kept secret. The money was raised
by a novel device that is still used by governments today: the lenders
would issue a permanent loan on which interest would be paid but the principal
portion of the loan would not be repaid.
The loan also came with
other strings attached. They included:
(1) The lenders were to be granted a charter to establish a Bank of
England, which would issue banknotes that would circulate as the
national paper currency.
(2) The Bank would create banknotes out of nothing, with only a
fraction of them backed by coin. Banknotes created and lent to the
government would be backed mainly by government I.O.U.s, which
would serve as the “reserves” for creating additional loans to private
(3) Interest of 8 percent would be paid by the government on its
loans, marking the birth of the national debt.
(4) The lenders would be allowed to secure payment on the national
debt by direct taxation of the people. Taxes were immediately
imposed on a whole range of goods to pay the interest owed to the
The Bank of England has been called “the Mother of Central Banks.”
It was chartered in 1694 to William Paterson, a Scotsman who had
previously lived in Amsterdam. A circular distributed to attract
subscribers to the Bank’s initial stock offering said, “The Bank hath
benefit of interest on all moneys which it, the Bank, creates out of nothing.”9
The negotiation of additional loans caused England’s national debt to
go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By
1815, the debt was up to 885 million pounds, largely due to the
compounding of interest.
The lenders not only reaped huge profits,
but the indebtedness gave them substantial political leverage.
The Bank’s charter gave the force of law to the “fractional reserve”
banking scheme that put control of the country’s money in a privately
owned company. The Bank of England had the legal right to create
paper money out of nothing and lend it to the government at interest.
It did this by trading its own paper notes for paper bonds representing
the government’s promise to pay principal and interest back to the
Bank -- the same device used by the U.S. Federal Reserve and other
central banks today.