Breaking the Bondage of Interest:
A Right Answer to Usury, Part 3

Hieronymous Bosch, “Death and the Miser,” detail

2,448 words

Part 3 of 4

States that Broke the Bondage of Interest

Any efforts to advocate alternatives to banking that might extricate nations from the grip of the money-changers are dismissed as “funny money” by defenders of a system that has for centuries resulted in nothing but “poverty amidst plenty,” cycles of economic bust and war, and servitude at every level. Yet there are many examples of states that have broken free and implemented alternative forms of banking that have brought well-being while others have languished in stagnation at best, while paying their hidden masters for the privilege via usury.

Of course it is not in the interest of the financial and economic status quo that any light be shed upon these historical examples, and they are sent down the Memory Hole, or the nature of their financial systems are obscured by focusing entirely on other factors. Hence, while many financial reformers are aware of the way Lincoln funded his war partly through the issue of Greenbacks, few even among banking reformers realize that the Confederacy was also funded with state credit called Graybacks, and that system is obscured by focusing on questions of slavery. Likewise, few understand much about the manner by which Germany extricated itself from socio-economic misery through a new financial system, and the matter is buried by focusing on the Holocaust or the war, and Germany’s reconstruction it is reduced merely to rearmament.

It took a poet, Ezra Pound to explain the history of money more cogently than economists and historians. Pound stated that:

The history of usury begins with the loans of seed-corn in Babylon in the third millennium BC. The first mention I know of a state monetary policy refers to the year 1766 BC when an Emperor of China, in order to alleviate distress caused by famine and aggravated by grain monopolizers, opened a copper mine and coined discs of metal perforated with a square hole. We read that he gave this money to the starving, and that they could then buy grain where the grain was.[1]

Nearly four thousand years later, politicians either do not have the wisdom or the courage to adopt a similar policy for getting food on the table during the Great Depression, or for dealing with the present global debt crisis without getting into further debt and implementing “austerity measures.”

Pound wrote of the Medici bank the Monte di Paschi that had been founded in 1600 and remained standing in his own time: “Siena was flat on her back, without money after the Florentine conquest.” Cosimo, first duke of Tuscany, guaranteed the capital of the bank, using grazing lands as collateral. He underwrote 200,000 ducats, paying 5% to shareholders and lending at 5½%, with minimum overheads and salaries, and profits going back into hospitals and public works.[2]

Of the American Colonies Pound wrote that, “The Colony of Pennsylvania lent its colonial paper money to the farmers, to be repaid in annual instalments of ten percent, and the prosperity that resulted was renowned throughout the western world.”[3] He writes that in 1750 there were sanctions imposed (by the Bank of England) forbidding Pennsylvania from issuing its own scrip, which played its role in fomenting the American revolt.[4]

Guernsey

One of the most successful and enduring examples of usury-free state credit has been that of Guernsey, British Channel Islands, whose banking experiment was initiated in 1820. Guernsey’s banking system was prompted by dire need, the island being in serious financial trouble from the beginning of the 19th Century. Guernsey’s town was undeveloped, the roads were cart-tracks, and there was no prospect for employment. The most serious problem, however, was the encroaching sea that was washing away large tracts of land because of the disrepair of the dykes. Neither tax increases nor further loans were practicable.

However, it was the need to upgrade the Public Market that prompted a committee to report back with a solution in 1816 to issue £6000 worth of States Notes.[5] The committee also recommended that the States Notes be used not only for the new market, but also for Torteval Church, road construction, and other State expenses. The notes’ issue was started in 1820, and was followed by other issues, until by 1837 £55,000 of the Notes were in circulation, debt-free and having created prosperity and development, which in turn stimulated visitors to the island.[6]

Of course there were complaints to the Privy Council that such debt-free issues were being made, but the States Financial Committee gave such good account of the island that the objections were unsuccessful. However, two banks on the island flooded Guernsey with their own notes to undermine the State Notes, and for reasons unknown it was the Island that agreed to limit the issue of its Notes.[7] Just such a tactic used by the North to undermine the Graybacks of the South during the American Civil War caused inflationary problems, but these maneuvers do not discredit the efficacy of state credit. With the outbreak of war in 1914, Guernsey restarted the State Notes issue according to requirements. While State Notes continue to circulate alongside British Pounds Sterling, there has never been inflation, and the prosperity of the island continues as it has since 1820,[8] operating on minimal taxation.[9]

As mentioned, Lincoln had recourse to the issuing of the Greenbacks during the Civil War. Not so well known is the issue of Graybacks by the Confederate States, backed by cotton. Despite the claim that the Confederacy was under the thrall of the Rothschilds via the Confederate Secretary of State Judah P. Benjamin, nothing could be further from the truth, and the South was at no time beholden to international finance, nor was Benjamin anything less than a patriotic Southerner. As the subject of Confederate finance has been dealt with at length elsewhere I shall not repeat it here.[10]

New Zealand

The election of a Labour Government largely centered on its platform of nationalizing the Reserve Bank and issuing state credit. The 1934 tour by Douglas had a major impact, with organizations such as the Auckland Farmers’ Union and the NZ Legion adopting Social Credit, but in particular the flamboyant, one armed war veteran John A. Lee kept up a continuous agitation for the Party to fulfill its election promises despite the resistance of Prime Minister Joseph Savage and his Finance Minister Walter Nash. Lee had written several pamphlets on banking reform which should serve today as seminal references for banking reformers, but are forgotten, or transgress orthodox Douglasite principles.

The first of Lee’s pamphlets, Money Power for the People, outlined what he hoped the Labour Government would adopt as legislative policy, based upon what the party had presented to voters at the 1935 General Election as official party policy.[11] This was the demand for the “immediate control by the State of the entire banking system,” including the “state issue of credit for production and distribution of commodities”[12] The party’s manifesto for the 1935 election stated:

A planned economy will be of little use if the Government has not the power to carry its plans into effect. Such power will require the control of credit which, if it remains in private hands, can be used to thwart the will of the Government.[13]

As I have remarked upon previously, the Great Depression was a period in which, unlike today with our supposedly more educated populations, people were all talking about the question of finance and banking reform. Lee recalled that the largest political meetings in New Zealand history had been held throughout New Zealand, and the question to the fore was that of money. He vividly related, “Wherever people were gathered,” whether on street corner, in the factory, stock yard or on a tram, “there was discussion about banking and money.”[14]

In Money Power for the People which might be seen as a reminder to the party Caucus of its election pledges, Lee states that the first meeting of the Labour Cabinet in Office in 1936 reaffirmed its commitment to “winning complete financial power as the first move toward a new social order.” Parliament met in March and the following month the Government introduced the Reserve Bank of New Zealand Amendment Bill.[15] The Bill was supposed reform the Reserve Bank that had been established in 1933 on the prompting of the Bank of England as a corporation that included private stockholders, with the directors being a mix of those nominated by the state and those elected by the stockholders. The bank was independent from the State, despite theoretically being a State Bank, at least in the popular imagination, like the Federal Reserve Bank in the USA or the Bank of England. This 1936 Bank amendment bought the private stockholders out “at a handsome profit,” the bank came under State control, and the Board of Directors became “the direct servant of the Government of the day,” who were obliged to fulfill the policies of Government and were subject to removal. The Bank’s function set out in Section 1 of the Act was to “regulate and control credit and currency in New Zealand” for the “economic and social welfare of New Zealand.”[16]

The second part of Lee’s 1937 pamphlet deals with what the Labour Government had achieved over the past year. Lee stated that the Government’s powers had been used cautiously, but that state credit was being provided to the dairy industry account, which worked with the state’s control of the marketing of produce (through marketing boards), and hence there was a guaranteed price for farmers.[17] The Reserve Bank issued the dairy industry state credit, at minor profit, where hitherto the private banks had gained through interest, with the additional factor that the profits that were made by the State on these advances were placed back into a Consolidated Fund. The aim was to eventually reduce the amount of interest to a charge for costs.[18]

Nonetheless, despite these great reforms, the Government was still borrowing from overseas moneylenders, a matter that was never resolved. Lee warned that unless the State assumed sole responsibility for creating and issuing credit, “the debt will be compounded forever” and that “at some future date the Capitalist bailiff will liquidate New Zealand’s social experiment.” That is precisely what happened, ironically, when a “free market revolution” proceeded decades later under a Labour Government, in a typical example of socialists playing lackey to international finance. New Zealand is still in the process of divesting itself of what few state assets remain to pay off debt.

However, there was a great achievement in the funding of the iconic state housing project with Reserve Bank state credit, this one measure being sufficient to resolve 75% of unemployment in the midst of the Great Depression. Lee commented in his 1937 assessment that so far the State Housing project was the only program on which the State had availed itself the prerogative to issue its own credit. An initial £5,000,000[19] of state credit through the Reserve Bank was issued for housing via the Housing Account of the State Advances Corporation.[20] Lee cites Finance Minister Nash as stating to Parliament that the credit would be state issued in entirety as “new money” on which the interest earned in its entirety would return to the State as profit, while the houses would remain in State ownership. In a Government document over a decade later the project was explained as follows:

Reserve Bank Credit: To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money – interest is the heaviest portion in the composition of ordinary rent. The newly created Department was able therefore to obtain the use of funds at the lowest possible rate of interest, the rate being 1% for the first £10 million advanced, and one and a half percent on further advances. The sums advanced by the Reserve Bank were not subscribed or underwritten by other financial institutions. This action shaped the Government’s intention to demonstrate that it is possible for the State to use the country’s credit in creating new assets for the country.[21]

Canada

Canada was another British Dominion that had recourse to state credit, and for a much longer period than most others. Canada maintained this state credit system into the 1970s. The state owned Bank of Canada issued up to half of all new money at low interest, which in turn forced the commercial banks to keep interest rates low. This resulted in decades of prosperity. Now the Bank of Canada creates just 2% of the credit. From 1935–1939 the Bank of Canada was issuing most of the nation’s credit, and 62% of the credit during the last years of the War. Until the mid 1970s the Canadian Government continued to create enough new state money to monetarize 20% to 30% of the state deficit.

That ratio is now only 7.5%. While the money supply increases by $22 billion annually, the Bank of Canada now issues less than 2% of that money. It has been estimated that if the Canadian Government had continued to operate such a financial system as she had for around three decades, that nation would today be operating with a surplus of $13 billion.[22]

Notes

1. E. Pound, America, Roosevelt & the Causes of the Present War, op. cit., p. 6.