THE DEVIL'S BARGAIN

Let's start with a few quotes:



Thomas Jefferson

I sincerely believe that banking establishments are more dangerous than standing armies.” -- Thomas Jefferson





James Madison



"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments .....”  -- James Madison



Abraham Lincoln

 “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.”   -- Abraham Lincoln

Henry Ford



“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” --  Henry Ford



Franklin Roosevelt



“The real truth of the matter is … that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson.”  -- Franklin D. Roosevelt

These gentlemen didn't share the same politics.  But there's one thing they agree on.  Banks and bankers have always been dangerous.  The question is, why?   It would also be nice to know how it got that way, and if there's anything that can be done about it.


The Short Answer

Why are the bankers dangerous to democracy?  The short answer is that debtors are inevitably beholden to their creditors.  When the debtors are democracies, this means elected officials -- indeed, entire governments, are beholden to unelected individuals and organizations.  It's as simple as that - not exactly rocket science.  The more interesting question is, how does this come to happen?  Only when we understand that, can we figure out what, if anything, can be done about it.

Wars Cost Money ....

Historically, the story starts with a war.  It could start other ways –  such as excessive public spending on welfare benefits or celebrations or public monuments, but it generally doesn’t.  Because while there are many ways to squander resources, only when we fight wars do we use resources to destroy other resources, which virtually guarantees there won't be enough resources to go around.


Guns, bullets, artillery, tanks, aircraft, warships, smart bombs – are manufactured not only to kill and maim, but also to destroy infrastructure –  blow up bridges, burn crops, level factories. Even if the winner engages in plunder, exacts reparations, or steals natural resources, the booty rarely reimburses its cost for the war –particularly if we include the loss of trade and agricultural production.

The consequences are far worse for the loser. Along with destruction come disgrace, dishonor, and the sure and certain downfall of every political leader even remotely associated with the conflict.  Although nobody wants to lose a war, the aversion is probably greatest among the rulers and politicians.

History teaches that the biggest and best-equipped armies generally wind up winning. Given the enormous cost of arms and armies, there is never enough in the national treasury, and taxes can never be raised fast enough in the face of looming hostilities. So in the run up to a war, the prospective combatants tend to compete strenuously in a preliminary battle ... to borrow money.

Who lends this money?  Why do they lend it?  And how?

In early times, the motives for lending were as clear as those for borrowing: patriotism (mingled with an aversion to being enslaved or murdered), and the protection of property. As to the identity of the lenders, they were generally those who stood to lose the most if the war was lost; or, in other words, the richest members of society.

The important thing to note about these arrangements is that the wars were, in essence, being financed out of SAVINGS. Since the sovereign didn't have sufficient savings, it borrowed from the savings of private citizens.

But about 500 years or so ago, a new wrinkle was introduced. Wars began to be financed through intermediaries using various types of legal instruments evidencing government indebtedness. The motive of these intermediaries was neither patriotic nor personal. They did it in hopes of realizing a profit from an activity that would have been illegal in the absence of government complicity.

Other People's Money ....

The use of gold as a store of value allowed for the accumulation of wealth beyond the perishables you could store in a granary or warehouse.   But gold involved problems of transit and storage.  In ancient Egypt and Mesopotamia, gold was stored in temples under the auspices of priests -- presumably on the theory no one would steal from a house of God.  In Greece and Rome, private entrepreneurs began offering additional services.  Not only did they accept deposits, they also financed trade by arranging credit in distant cities, so physical coins didn’t have to be transported.

With the fall of Rome, trade declined.  Throughout Mediaeval times, wealth was land, the ownership of which was concentrated in the feudal nobility.  Still, finance was necessary for war – especially the Crusades. Since the Church took a dim view of money-lending, the need for finance was met largely by Jews (a favor returned in modern times by born-again Christians who help finance the State of Israel).

With the rise of the Italian city states, lending to finance trade again came to the fore. This came to be concentrated in Florence, particularly in the hands of the Bardi and Peruzzi, who also dabbled in the financing of wars. This could be profitable, but it was risky.  The Bardi discovered this in 1354, when Edward III of England defaulted on his loans during the Hundred Years War, sending the family into bankruptcy.  But another Florentine family quickly took their place, mixing commerce, finance and politics – the Medici.

With the rise of the Habsburgs, the center of power -- and finance -- shifted to Bavaria.  The Fugger dynasty rose to prominence making loans to Archduke Sigismund and Emperor Maximilian I. With the assistance of a brother in Rome, they handled remittances to the papal court of proceeds from the sale of indulgences. However, in addition to this low-risk enterprise, they leant heavily to Philip II of Spain, who wound up defaulting four times in the second half of the sixteenth century when cash flow from the New World proved insufficient to finance his various wars in Europe.

Two hundred years later, a Frankfurt coin dealer by the name of Mayer Amschel Rothschild rose to power by assisting William IX, wealthy ruler of the German state of Hesse-Kappel, with his banking  needs.  Eventually, with William’s blessing, Mayer and his sons gained entrée into other royal courts of Europe. When the Napoleonic wars broke out, the Rothschilds gambled heavily on the eventual defeat of Napoleon by arranging loans to his enemies.  In this case, the bankers bet right.  By the end of the war the family had built a network of financial connections that placed it at the heart of government finance across Europe, a position it has never really lost.

Which leads to a single historic truth:

The rise and fall of bankers has always been inextricably linked to the rise and fall of governments.

Have you ever asked yourself why that is?   Why would a bank finance a war?  At present, in the aftermath of a historic housing crash, the overall delinquency rate on residential mortages in the United States is about 8%.  Yet in a war, 50% of the participants generally wind up losing. And the losers generally don't pay back their loans.  So why take the risk?


Why Banks Finance Wars
 
To understand the link between banks and governments, you need to go back to the nature of banking.  Recall that it began with dealers storing other people's gold. When the owner of the gold made a deposit, the dealer issued a receipt. Over time, people came to realize that so long as the gold was held in secure storage, it made no difference if the physical gold was transferred, or merely the receipt for it.  And since it was easier to transfer the receipts, they came to be traded like the gold they represented. In other words, they became money.

Knowing that the gold dealers had gold, people came to them seeking loans and, naturally, these potential borrowers were willing to pay interest. The easiest way for the dealers to make the loans was to issue gold receipts that the borrowers could use in trade and, since there was no way to know how much gold a dealer held for his own account or how many receipts he had issued against it, there was a clear temptation for the dealers to issue receipts – and earn interest – on gold they didn’t really own. So long as they had enough gold on hand to satisfy periodic demands for physical delivery, no one would ever know the difference.

In the beginning, gold dealers imposed a charge on gold owners for storage.  But the practice of money lending quickly became so profitable that the gold dealers began offering to pay interest on deposited gold, instead. At this point, the legal relationship between gold dealers and gold depositors was subtly transformed from one of safekeeping, in which the dealer was providing a storage facility, to a form of loan, in which the gold depositor lent gold to the dealer and the dealer became indebted to the depositor for return of gold in an amount equal to the amount deposited, plus interest.

Over time, gold dealers realized that they could create gold receipts in an amount far in excess of the amount of physical gold they actually held on deposit. In fact, they could issue receipts in an amount that was limited only by the degree of confidence their depositors had in their ability to return the metal when it was needed.

This was the beginning of so-called fractional reserve banking, which exists to this day, and there are two critical points to understand about it.

The first is, that what the gold dealers did when they issued gold receipts in excess of the amount of gold they had on deposit was to create money out of thin air.  Before that time, money (gold) had to dug out of the ground by the sweat of a man’s brow. When gold receipts came to be accepted in lieu of physical gold, money could be created with the stroke of a pen, and in unlimited amounts.

The second point is that what the gold dealers did was a form of fraud (defined, in the California Civil Code, for example, as "the suggestion, as a fact, of that which is not true, by one who does not believe it to be true" or "the suppression of that which is true, by one having knowledge or belief of the fact"). By lending gold, the dealers were making an implied representation that they owned the gold which, of course, they didn't.  In fact, when they lent gold in an amount greater than the reserves they had on hand, they actually purported to lend something that didn't exist. This certainly seems to constitute fraud by any reasonable definition.

Now, clearly this situation was known to the kings and princes who did business with the banks – or, anyway, to their finance ministers. So why didn’t they just send the gold dealers to prison.

The simple answer is this: The governments needed more money than there was gold, and the only way they could get that money was to let the banks create it.

Wars destroy resources, as mentioned above.  And they’re unimaginably expensive. They always cost more than the sovereign has on hand at the outbreak of hostilities. So in the fervor to raise the necessary funds for war, a bargain is struck, between the bankers and the governments.  The bankers are allowed to create money, so long as it is created for the benefit of the government.

Of course, there are problems. Once the government is indebted to the bankers, it loses its ability to regulate the bankers. It has to tread lightly, covering up their peccadilloes and blunders.  It has to go easy in establishing reserve requirements.   It has to institute a system of insurance to make sure depositors keep depositing.  If the system stumbles the government has to prop it up. (After all, government is the biggest borrower.)  It has to establish a central bank to bail the bankers out when depositors run for the doors. Eventually, it becomes complicit in the fraud.

Those guys at the beginning of the post -- Jefferson and Madison and Lincoln, FDR and Henry Ford?  That’s what they were talking about.

To finance wars, nations spend money they don’t have. And to get that money, they make a deal with the bankers to create it out of thin air.

A Devil’s Bargain.

You were wondering why the banks are too big to fail?  Because if they fail, they take the governments down with them. 

Let’s end with another quote.



“Give me control of a nation's money and I care not who makes it’s laws.”

 --  Mayer Amschel Rothschild

Is this the face of democracy?  Until we stop borrowing money and fighting wars, I'm sorry to say, the answer is, yes.