76. De bank van Engeland, of...... Hoe het allemaal begon.

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

parties.

(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

Bank.

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.