300 Years of the Bank of England
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300 Years of the Bank of England

Note: This article was written in 1994 for "Financial Research Bulletin", which had four issues, all published that year.

"Thus you labour, but not for yourselves"

This, according to the Royal Mint, was the motto of William Patterson, the entrepreneur who suggested the plan on which the Bank of England was established in 1694. It, perhaps more than anything, gives an insight into the attitude of mind of someone who could propose the creation of such an institution as the Bank of England. It is clearly a sneer at creative people who actually have to work for their living and on whom people such as Patterson have always depended for their existence, much as they do not like to admit it.

Over the years the Bank has become a national institution. More recently it has been treated as an instrument of government, acting as broker and underwriter for government borrowing. But in its 300 year history it bears an awful responsibility for the terrible peverty and famines that have regularly been inflicted on the British people. Regularly throughout the eighteenth and nineteenth centruies the Bank operated a policy of cruel restriction of credit. It provoked the American colonies into declaring independence after gaining control of their currency and then contracting it by 50 per cent. Its policy of adherance to the gold standard brought suffering and starvation to millions of people and was only alleviated by the discovery of fresh supplies of gold in California, Alaska and Australia. Later, its restriction of credit made life miserable for millions in the 1920's and 1930's. It fought hard for the reimposition of the gold standard after the First World War, forcing the UK to repay in gold millions of pounds of War Loans made up of ficticious paper money. It fought to keep this gold standard, with all its ruinous consequences, right up to the abandonment of it by the government in 1931.

Consistently throughout its existence it has pursued policies of the restriction of domestic credit, depressing agriculture and industry. By linking the money supply to gold reserves and using gold reserves to pay for trade imbalances, it has proviked economic and political instability by causing the wages of agricultural and industrial labourers to be pinned down. This has been necessary to keep costs, and therefore prices, down, so as to be competitive in overseas markets, where wages are also depressed for the same reasons. A kind of global wage slavery, with workers in all countries unwittingly competing with each other in a struggle to get by on the lowest possible starvation wages.

All this the Bank of England has fostered, and yet the image projected is of a wise and respected institution, a rock of sound common sense in a sea of uncertainty and mayhem. It has even, at times, held itself out as a model that other countries should seek to emulate when (foolishly) establishing their own central banks.

Now, after 300 years of acting as a central bank, the "banker's bank", the "lender of last resort", the Bank of England and its Governor of one year, Eddie George ("Hard Eddie"), are, true to form, seeking to prolong the current recession by keeping domestic interest rates high. When Chancellor Kenneth Clarke sought to reduce base rate by half a per cent to 5 per cent in February [1994] the opposition of Eddie George to any reduction resulted in a compromise of a one quarter per cent cut to 5.25 per cent. Productive industry was calling for a substantial cut to stimulate the economy.

The Bank was also considerably influential in keeping the UK in the disasterous Exchange Rate Mechanism (ERM) for so long. This was entirely in keeping with all its previous policies. By tying the value of sterling to the value of other leading European currencies, and at the same time reducing or eliminating quotas and tarrifs on manufactured and agricultural imports, the government kept interest rates artificially high and prevented itself from being able to spend sufficient money on essential services - health, education, housing, and so on. On "Black Wednesday", 16th September 1992, the government desperately tried to keep the UK in the ERM by hiking interest rates to 12 per cent (from 10 per cent) and then 15 per cent (to take effect the next day). These increases were cancelled once the UK had left the ERM, but the high interest rates alone would have turned the "recession" into a major national catastrophe with thousands more insolvencies and millions more out of work. These are the kind of policies Eddie George and the Bank of England consistently pursue. Now the Bank's objectives include the rejoining of the discredited ERM in spite of the disaster of 1990-1992 when the UK was a member. This cannot be entirely unconnected with the Maastrict Treaty and its timetable for a common European currency by 1999. Membership of the ERM is a necessary pre-condition to a common currency.

But with a common currency there has to be a common bank, and the hidden policy makers of Maastrict have provided for this. There will be a European Central Bank, based at Frankfurt. Under the horse-trading deal the Germans got the bank's headquarters on their soil (their currency being the strongest in Europe) and the French got the first choice of Governor. It is quite obvious that a common currency and the increasing and enforced federallism of the historic European nations will give the ECB powers much superior to those of any member-state's central bank, which will be relegated more and more to the status of simply a branch office of the ECB. The Bank of England, in seeking to become independent of the UK government, will find itself without a role if it declines this junior partnership. So the "Old Lady" had better enjoy its 300th birthday. It is not likely to survive to celebrate its 400th.

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