Licence to Rip Off Taxpayers

In 2008 the Bank of England made its biggest profits since its foundation in 1694. The billion pounds of windfall profits[1] were largely a result of the extraordinary behaviour of financial markets in the past year. The Bank makes most of its profits extending credit to commercial banks in exchange for collateral. The financial crisis has led to the bank lending far more cash than usual, with a five fold increase in profits as a consequence.

A spokesman said that it was entirely right to charge fees to set the right incentives for financial institutions to use its facilities, and protect itself and taxpayers from potential credit risk. Governor Mervyn King used the Bank of England’s Annual Report to call on the Government to give the bank more power in the future to oversee City institutions, saying: “The Bank's new statutory responsibility for financial stability is welcome. But...I regret that [it] has not been accompanied by any new powers to deal with banks before they fail.”

In 2008 Governor King's salary increased to £297,000, but his final pension scheme remuneration, which involves the pension pot increasing every year the member has worked, increased by over half a million pounds to £5.4 million,[2] despite the Bank’s failure in its oversight role during the worst year for financial markets since the Great Depression. When he retires in 2013, King will be one of the best remunerated civil servants with an annual pension of £220,000 - far in excess of the average private sector worker who retires with a pension pot of £33,000. The pension funds of top public sector employees often dwarf their already substantial salary.[3]

‘Nothing would persuade the English people to abolish the Bank of England; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent.’ That was the verdict of the Victorian political economist Walter Bagehot in Lombard Street, his famous book on banking published in 1873.

When Bagehot wrote his book, the Bank had been in existence for almost two centuries, and had become the pillar of the British financial system. As he put it, ‘on the wisdom of the directors of that one joint stock company, it depends whether England shall be solvent or insolvent’. Today[1], more than a century later, the Bank is no longer a privately owned joint-stock company, but a publicly owned arm of government[2]. Its influence is, if anything, greater and more pervasive than it was a century ago.

Yet the bank is one of the least-known institutions in Britain and has taken great pains to remain so. The attitude was well summed up by a member of the Bank’s inner cabinet, the Committee of Treasury, who wrote to the Governor of the Bank in 1894 that it was ‘wholly beneath the dignity of the Court that any of its members should be influenced by the ignorant comments of the Press. It would scarcely be more indecorous if they themselves were to influence such comments.’ It was not until 1941 that the Bank appointed, with extreme reluctance, an ‘Advisor’ on dealing with the Press[3]. Montagu Norman[4], loathed the Press, and took immense pains to avoid journalists. His view of the Bank’s operations, as he put it to his colleagues, was ‘never explain, never excuse’.

For many years the Bank has been accustomed to being master in its own house; doing what it felt was needed in the economic life of the nation untrammelled by legal limitations or statutory restrictions. It has always preferred to operate in a quiet and informal way, and such methods of working require freedom from the spotlight of public interest. So the Bank has fought off assaults on its operational and practical independence - some from the Treasury, its nominal master, but mainly from Parliament[5], which has struggled in vain to make this least-public of publicly owned institutions more accountable to its proprietors. And while almost every other institution in British life - even, to some extent, the monarchy - has opened itself to the all-pervasive eye of the television camera over the last few years, the Bank has resisted such intrusions[6].

For most people, the Bank is just the place where they make banknotes and intervene to protect sterling against speculation. Although these are two of the Bank’s most publicly visible jobs, the range of its work is much wider . At the heart of its job is the management of the money and foreign-exchange markets. This involves influencing interest rates and the foreign-exchange rate. In addition the Bank is the legally appointed guardian of the banking system: it supervises and licenses anyone wishing to set up in business as a bank in the United Kingdom.

The Bank is also a key part of the process of economic policy formulation in Britain; it advises the Treasury on economic matters and executes key aspects of policy. This arises out of one of its traditional functions, as banker to the Government. It keeps the Government’s bank accounts and manages both the funding and the administration of the national debt. And there are other jobs the Bank undertakes, none of which has anything to do with its statutory duties or its role as the Government’s banker: it exercises informal supervision over the City of London and the financial sector as a whole, and does not hesitate to intervene in the affairs of the City when it feels that intervention is required.

On top of that, it has also taken on a role in managing the rescue of ailing industrial companies. It was also the Bank that pushed the [London] Stock Exchange into accepting that deregulation was necessary; it is the Bank that has quietly orchestrated the upheavals in the structure of the City that have followed. In so doing the Bank has taken an enormous risk: it has made a heavy investment of its prestige and authority in the hope that Big Bang will be good for Britain. If the City fails to meet that challenge the Bank will carry the blame for encouraging it in the first place.

Endnotes:
[1] Text copyright © 1987 Philip Geddes; from the introduction to Inside the Bank of England (Boxtree Ltd, London, 1987, ISBN 1 85283 203 7) in association with the production of a Television South television documentary.
[2] This was the situation in 1986. The 1987-2009 Blair-Brown New Labour Governments meddled extensively with a number of constitutional arrangements during its terms of office. Where the Bank of England was concerned the several restructurings took place with minimal parliamentary scrutiny and outside the Labour Party’s own policy formulation procedures.
[3] Robin Leigh-Pemberton was the first Bank Governor to give on-the-record interviews to the media: 1983-1993.
[4] Montagu Norman was the Bank’s longest-serving Governor: 1920-1944.
[5] For further details go to William Shepherd's Bank of England blog.
[6] Philip Geddes remarked that the mood inside the Bank began to change in 1986. ‘In the autumn of 1986, after lengthy negotiations, the Bank invited a film crew from Television South to make a film inside the Bank on its work. An extraordinary degree of access was given, and Bank officials opened the doors on the whole range of the Bank’s activities…Perhaps its most important job in recent years, and one which may be the reason for the new policy of much more openness, is the part the Bank has played in the process of Big Bang: the deregulation of the City’s financial markets which has opened them to world competition.’

Usury Act of 1571

There are two aspects to the English Parliament's deliberations on the Usury Act of 1571. Firstly they took the Francis Bacon line (see his Essay on Usury, a masterpiece of concise erudition) by an ABC analysis of the problem of usury identifying outrageous behaviour (Class A), sensible socially acceptable behaviour (Class C) and then a grey area in between (Class B).

As a first approximation civil society was given the OK to adopt 10% as the discerning factor (Bacon put it at 5%) and the Doctrine of Discernment is a key concept in Catholic christian ethics. So we get Class A Usury as anything over 10%, Class B Usury as 0 - 10%, and Class C Usury at 0% and under, at which point the lender pays the borrower a Stewardship Fee for looking after his money.

Secondly Parliament adopted distinctly different approaches to the three classes of usury in the administrative procedures of the Doctrine of Usury.

Class C cases are dismissed out of hand. ‘No case to answer! Don't waste the Court’s time! Credit makes the world go round! Of course the merchants are right and the theologians are splitting hairs! Go dance on pins!’ However the poor should pay lower and not higher rates of interest for their credit. Why? Because they are poor so they don’t have any money. Christian charity, common courtesy and run of the mill justice.

Class A cases are also dismissed, but by the courts, so that the dismissal is backed up by the full force of the law, its prisons, its law enforcers and its property confiscators. The penalty imposed on the usurer is three times the amount stolen, although previously, as Henry Swabey demonstrates, it was much worse than this for the usurers who could expect eternal damnation, no Christian burial and then some.

Class B cases reveal one of the real subtleties of the Act of 1571, because in these cases, civil society is commanded to deal with the problem by the Parliament of 1571 taking what constitutes in effect a Citizen's Arrest approach. Tawney's understanding of this is spot on in his Compromise of 1571 essay where he quotes from the author of The Death of Usurie (1595) - see Page 82 in the full text version of Tawney’s Introduction to A Discourse on Usurye by Thomas Wilson.

Source: Endnote 21 to Public Cash for the Real Economy by Peter Etherden (2008)

The Tale of the King of Buen Consejo by William Shepherd
© 2006 William Shepherd

In 1693 a gentleman by the name of William Paterson was invited to a private audience with King William III of England. Here is a long-lost transcript of the meeting. After some polite preliminaries about the effect of cannons and gunpowder on the climate Mister Paterson broached the subject on both their minds...sovereigns.

“Look,” said he, “You need money. You’ve no chance of getting any from Parliament. But I have several rich Dutch contacts and they have expressed an interest in helping out. Don’t worry. We’ll sort out the details and tell you what to say. Here’s how the scam…whoops what a giveaway…how the scheme works. It’s up and running in the Netherlands as we speak. And we hear everyone’s pleased with the way it’s working out. So have a chat with the Dutch and get back to us. Same time and same place two weeks from now? Good. This could be the start of a beautiful friendship.”

The King didn’t have to think for long. He knew about the transformation of the Dutch king’s fortune. Soon he would find out what was behind it. And so it was that six weeks later - on his own initiative of course - the King invited the leader of the merry band of brothers that were to form the Bank of England Joint Stock Company to bring two or three of his trusted business colleagues to a specially convened meeting of the Privy Council four weeks hence.

Four weeks later with the meeting duly convened the King opened the proceedings. “Now look here, young fellows. We’ve brought you here to discuss a proposal that will be good for this great country of ours. We appeal to you as patriots. Do not dismiss it out of hand. But take it away with you and think carefully upon it. These are difficult and dangerous times. Your country needs you. The crux of the matter is that Progress requires this country to have a Central Bank. The Netherlands has got one. So we must have one. What will our position be if France and Spain get one and we are left in the lurch? But it must have the support of the Merchant Community. Your task is to gather this support. Do this and I will ask you to run the bank for the benefit of your fellow countrymen. What d’you say?”

“We are intrigued, Your Majesty. Pray tell us the nature of the charter you propose. How will the bank sustain its legal monopoly over the issue of notes of credit? Everybody writes notes. And what are the precise conditions you are proposing for our Royal Charter?”

“Well, my loyal subjects,” the King continued in his most pompous manner, “I have given this matter some thought and have consulted widely in Europe. This is the idea. You supply me with the money I want. And in return I’ll give you a royal monopoly. Only your notes will be legal tender within my realm. How much you print is your business. The only condition is that you print the same amount of money for me. That way we’ll both be happy. Got to stick together, after all? Agitators. Deists. Atheists. Mobs. Eh what?”

“Well, you could blow me down with a feather,” replied the leader of the merry band of brothers. “What a truly brilliant idea. How noble, intelligent and wise are the ways of kings. How truly fortunate we simple businessmen are to have a King with so astute a mind and one so versed in the ways of finance. For peace of mind we will back our notes with gold. But don’t worry. You won’t have to pay for the gold. We will issue some of our legal tender and buy the gold with that. Best to get it for nothing.”

“Yes, yes. Very pretty,” replied the King. “I’ll give that to my Minister without Portfolio Lord Alistair of Campbell to put in the newspapers. I’m a big picture man, myself. I’ll leave you young lads to sort out the details. Good. That’s agreed then. Meeting adjourned.”

After the meeting was over, the King took the leader of the merry band aside. “Went well, don’t you think? Just one question. When do I get my money? Wife’s spending money like there’s no tomorrow. And I’m starting to get discrete enquiries from her shopkeepers. So undignified. Still if they know just a quarter of what I know about my financial situation I can hardly blame them.”

“Here are a few guineas to be getting on with. Mustn’t rush this. Must be seen to haggle. We’ll go around looking uneasy. Slip the word out to those agitators in Parliament that this outrageous proposal will bring us bankers to our knees. Tell the old die-hards in the house that this is our only chance. Some Emperor - any emperor - will be in the City of London ravishing the Flower of English Maidenhood in forty-five minutes unless we sign up. And so on and so forth. Must be statesmanlike about these things.”

“A few details to attend to. Some of your privy counsellors are being difficult. Plenty of side deals needed with Lord Here and the Marquis of Somewhere Else over the next few weeks. And there’s the scoundrel Harvey and his pyramid selling. Land Banks indeed! Must be exposed! Agent for the Vatican they say. All takes time. Companies to register. Shareholders to appoint. No rest for the wicked. Let me know if you need any directorships for your people.”

“Well, thank you. I’ll do that. But we have other ways. Let me have the names of those Privy Counsellors...refer to them in future as teepees...code for Turbulent Priests...then I’ll have my wife have a discrete word with their wives. Normally does the trick. The parliamentary session after next, you say. Nine months, eh? Best you can do? Well if that’s what it takes. Now down to the small print. The price of hats in London beggars belief…”

And so it went on for almost a year. The merry band of bankers enjoyed themselves immensely. Every few months a few more guineas for the king who paid a few more of the queen’s bills. Every few months a few more details settled to their satisfaction...small details like the written promise that the merry band would pay no tax on their winnings; inconsequential matters like a novel new definition of usury. It would now come in two flavours referred to privately as Major and Minor Usury. But at last it was done.

In 1694 Parliament passed the Charter for the Bank of England. Over the next few decades things carried on much as before. The rich got richer. The poor got poorer. War and Taxes increased by leaps and bounds. Eventually even the English Imperial System started to crumble when the American Colonies had the audacity to declare independence and refuse to pay their taxes.

A hundred years later a few Freethinkers began to question the Bank’s Charter mumbling darkly of a National Malaise...even hinting that this Central Banking Monopoly might be the cause.

first published on 14th August 2006

The Tale of the King of Buen Consejo (Part The Second)
© 2006 William Shepherd

The Germans have a literary genre they call a Staatsroman - a state novel. These are exercises in literary fiction for the purpose of illuminating the implications of a social theory. This is one reason they were much more receptive to John Seymour's Retrieved from the Future than the English. But we can do it too. G.K. Chesterton did it with The Napoleon of Notting Hill for instance and nobody come more English than the Chester-Bellocs and Distributism.

For the past 15 years I have had a dream of devoting a third of each year writing, another third microbusinessing...I used to call it money-making but this is more realistic...and the other third doing whatever else takes my fancy which before my partner died in 2002 was sailing the ocean blue. High on my writing agenda is The King of Buen Consejo by William Shepherd. I rather like this king of mine so rather than abandon him I thought I would tell his full life story.

My tale will be in four parts. In the first part I will change the ending to Shaw’s Apple Cart. The election goes ahead, ballots are rigged, the king loses, a republic is declared and the king is sent to St. Anne’s at the head of a company of the King’s Cavalry...his gaolers...to put down the Alderney insurgency. This is a temporary expedient as you cannot have an ex-king and his pretty young queen...complete with a social conscience and charity work among the downtrodden...running around all over the place. They become pretenders and ferment Royalist Rebellions.

Unfortunately for the Government the king takes a leaf out of Mark Twain’s book about the Connecticut Yankee in the Court of King Arthur, goes among his people in disguise, joins the rebels and is bought off by some splendid titles and the promise of independence for the Confederation of Channel Island States.

After their victory the king will be given a year or two to be footloose and fancy-free among the idle rich while conditions back home deteriorate...republics normally last a decade before imploding. They will appear in popular pamphlets like Tassler and OY! in a before and after story, go to fashion shows and hobnob with celebrities in Paris and Boston. The second part of the books ends with our queen having a passionate love affair and leaving the king.As a man I will really go to town in the third part showing that men can be hurt too...even big men cry.

In the first part of the book a daughter will have been invented doing good deeds in undeveloped foreign parts...a Priestley character from Festival in Farbridge campaigning against the Arms Race. She returns home, finds Daddy moping around the house, tells him to pull himself together and get a life and drags him off to British Imperial India.

Here she leaves him to his own devices to make the best of it...without any money. From time to time he bumps into his old cronies and is almost rumbled but keeps his promise to himself and his daughter to stay disguised for three years. We don't need to stop there. In the best Anthony Adverse manner we could arrange a stay with Benjamin Franklin's son in New Jersey followed by a trip to the Mayan pyramids in the company of a Jesuit priest with an inside line to the urator of the Vatican's secret hoard of sacred South American books. There was real substance in those 'polite preliminaries about the effect of cannons and gunpowder on the climate'.

Meanwhile the reader will be given the first inkling that lust is lapsing and all is not well with the queen. She will need a good friend to help her know herself better...Hetty Clarkson in Edwina Curry's novel Chasing Men is the type I have in mind.

In the third part the king gradually acquires a social conscience and gathers the facts upon which his social conscience can go to work. Meanwhile the queen's world falls apart. She retreats back into her rural retreat, goes organic and starts to read books...something that was alien to her before.

Her daughter...a Jane Austen heroine...now turns her counselling skills onto her mother. She takes her out to see George Bernard Shaw's plays and gets her reading political tracts like The Intelligent Woman's Guide to Socialism and Capitalism and J.B.Priestley's plays and novels...with the help of Twain’s Connecticut Yankee. Gradually the queen acquires ideas better suited to her husband's former station...and to the king’s own improving consciousness.

A Bildnungsroman within a Staatsroman. Value for money if ever I saw it. Buy one get one free.

At the end of the third part of the book the queen's daughter contrives a reconciliation between her mother and father...and together they sketch out a cunning plan to enable the king to reclaim his throne. I'm not going to tell you the fourth part. But I have it all worked out. I believe in happy endings...and I have my Queen-in-Waiting.

first published on 15th August 2006.

in draft - to be posted shortly

in draft - to be posted shortly

"A 'sound' banker, alas, is not one who forsees ruin and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."

John Maynard Keynes

in draft - to be posted shortly