In Part 2 we ended off with The Bank of Hamburg which lasted for only 55 years when it was ordered to liquidate……
That is the end of the short story of honest banking. From that point forward, paper money only partially backed by depositors’ coins became the universal practice. But there were to be many interesting twists and turns in its development before it would be ready for something as sophisticated as the Federal Reserve System.”
The Bank of England: In (1694), the Bank of England (a privately-owned bank) was formed and circulated its own banknotes (the bank’s paper money, not the government’s paper money) backed by a small percentage of gold coin held in its vault. It must be understood that, at this time, the Bank of England was not yet fully developed as a “central bank.” It had been given a monopoly over the issue of banknotes within London and other prime geographic areas, but they were not yet decreed as legal tender (a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation). No one was forced to use them. They (the Bank of England’s banknotes backed by a small percentage of gold coin) were not required for use: the public could accept, reject, or discount (value the paper money at a lower value than the face amount printed on the paper) at its pleasure. Legal tender status was not conferred upon the banknotes until 1833.
Meanwhile, Parliament had granted charters to numerous other banks throughout the Empire and, without exception, the issuance of paper money not backed by coin led to their ultimate demise and the ruin of their depositors. England was financially exhausted after a half a century of war against France and in numerous civil wars fought largely over excessive taxation. By the time of the War of the League of Augsburg in 1693, King William was in serious need for new revenue.
Twenty years previously, King Charles II had repudiated a debt of over 1,000,000 Pounds which had been lent to him by scores of goldsmiths, with the result that ten thousand depositors lost their savings. This was still fresh in everyone’s memory, and, needless to say, the government was no longer considered a good investment risk (because of the absence of trust).
Unable to increase taxes and unable to borrow, Parliament became desperate for some other way to obtain funds. The objective was not to bring the money mechanism under more intelligent control, but to provide a way, outside taxation and/or public loans to raise more money, regardless of the consequences to their subjects.”
And along came William Paterson (1658-1719), who was a Scottish trader, privateer, and entrepreneur of the highest order. In 1675 he emigrated to England and then to the Bahamas. He approached the governments of England, the Holy Roman Empire, and the Dutch Republic to help him establish a trading colony in Panama to advance Far East trade to no avail.
A “privateer” is a private person or ship authorized by a government (in Paterson’s case, England) to attack foreign shipping during wartime. “Privateering was a way of mobilizing armed ships and sailors without having to spend public money or commit naval officers…..they disrupted commerce and pressured the enemy to deploy warships to protect merchant trade…..and were equivalent to the ‘military contractors’ of today….
The cost was borne by investors hoping for top profits from ‘prize money’ earned from captured cargo and vessels. The proceeds would be distributed among the privateer’s investors, officers and crew.”
To be continued…