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to issue it himself. For a brief period in the 1500s, King Henry VIII
relaxed the laws concerning usury when he broke away from the
Catholic Church; but when Queen Mary took the throne, she tight-
ened the laws again. The result was to seriously contract the money
supply, but Queen Elizabeth I (Mary™s half-sister) was determined to
avoid the usury trap. She solved the problem by supplementing the
money supply with metal coins issued by the public treasury.2
The coins were made of metal, but their value came from the stamp
of the sovereign on them. This was established as a matter of legal
precedent in 1600, when Queen Elizabeth issued relatively worthless
base metal coins as legal tender in Ireland. All other coins were
annulled and had to be returned to the mints. When the action was
challenged in the highest court of the land, the court ruled that it was
the sovereign™s sole prerogative to create the money of the realm. What
the sovereign declared to be money was money, and it was treason for
anyone else to create it. Zarlenga states that this decision was so detested
by the merchant classes, the goldsmiths, and later the British East India
Company that they worked incessantly to destroy it. According to
Alexander Del Mar, writing in 1895:
This was done by undermining the Crown and then passing the
free coinage act of 1666, opening the way for the foreign element
to establish a new Monarch, and to reconstitute the money
prerogative in the hands of a specific group of financiers “ not
elected, not representing society, and in large part not even

Web of Debt

Britain thrived with government-issued currency (tallies and coins)
until the king™s sovereign authority was eroded by Cromwell™s revolt
in the mid-seventeenth century. The middle classes (the traders,
manufacturers and small farmers) sided with Parliament under
Cromwell, who was a Puritan Protestant. The nobles and gentry sided
with the King -- Charles I, son of James I, who followed the Church of
England, the English Catholic Church. The Protestants were more
lenient than the Catholics toward usury and toward the Dutch
moneylenders who practiced it. The moneylenders agreed to provide
the funds to back Parliament, on condition that they be allowed back
into England and that the loans be guaranteed. That meant the
permanent removal of King Charles, who would have repudiated the
loans had he gotten back into power. Charles™ recapture, trial, and
execution were duly arranged and carried out to secure the loans.4
After Cromwell™s death, Charles™ son Charles II was invited to
return; but Parliament had no intention of granting him the sovereign
power over the money supply enjoyed by his predecessors. When the
king needed a standing army, Parliament refused to vote the funds,
forcing him to borrow instead from the English goldsmiths at usurious
interest rates. The final blow to the royal prerogative was the Free
Coinage Act of 1666, which allowed anyone to bring gold or silver to
the mint to have it stamped into coins. The power to issue money,
which had for centuries been the sole right of the king, was transferred
into private hands, giving bankers the power to cause inflations and
depressions at will by issuing or withholding their gold coins.5
None of the earlier English kings or queens would have agreed to
charter a private central bank that had the power to create money
and lend it to the government. Since they could issue money them-
selves, they had no need for loans. But King William III, who fol-
lowed Charles II, was a Dutchman and a tool of the powerful
Wisselbank of Amsterdam . . . .

Chapter 6 - Pulling the Strings of the King

A Dutch-bred King Charters the Bank of England
on Behalf of Foreign Moneylenders

The man who would become King William III began his career as
a Dutch aristocrat. He was elevated to Captain General of the Dutch
Forces and then to Prince William of Orange with the backing of Dutch
moneylenders. His marriage was arranged to Princess Mary of York,
eldest daughter of the English Duke of York, and they were married
in 1677. The Duke, who was next in line to be King of England, died
in 1689, and William and Mary became King and Queen of England.
William was soon at war with Louis XIV of France. To finance his
war, he borrowed 1.2 million pounds in gold from a group of money-
lenders, whose names were to be kept secret. The money was raised
by a novel device that is still used by governments today: the lenders
would issue a permanent loan on which interest would be paid but the prin-
cipal portion of the loan would not be repaid.6 The loan also came with
other strings attached. They included:
(1) The lenders were to be granted a charter to establish a Bank of
England, which would issue banknotes that would circulate as the
national paper currency.
(2) The Bank would create banknotes out of nothing, with only a
fraction of them backed by coin. Banknotes created and lent to the
government would be backed mainly by government I.O.U.s, which
would serve as the “reserves” for creating additional loans to private
(3) Interest of 8 percent would be paid by the government on its
loans, marking the birth of the national debt.
(4) The lenders would be allowed to secure payment on the na-
tional debt by direct taxation of the people. Taxes were immediately
imposed on a whole range of goods to pay the interest owed to the
The Bank of England has been called “the Mother of Central Banks.”
It was chartered in 1694 to William Paterson, a Scotsman who had
previously lived in Amsterdam.8 A circular distributed to attract
subscribers to the Bank™s initial stock offering said, “The Bank hath
benefit of interest on all moneys which it, the Bank, creates out of nothing.”9
The negotiation of additional loans caused England™s national debt to
go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By
1815, the debt was up to 885 million pounds, largely due to the

Web of Debt

compounding of interest. The lenders not only reaped huge profits,
but the indebtedness gave them substantial political leverage.
The Bank™s charter gave the force of law to the “fractional reserve”
banking scheme that put control of the country™s money in a privately
owned company. The Bank of England had the legal right to create
paper money out of nothing and lend it to the government at interest.
It did this by trading its own paper notes for paper bonds represent-
ing the government™s promise to pay principal and interest back to the
Bank -- the same device used by the U.S. Federal Reserve and other
central banks today.

The Tally System Goes the Way of the Witches

After the Bank of England began issuing paper banknotes in the
1690s, the government followed suit by issuing paper tallies against
future tax revenues. Paper was easily negotiable, making the paper
tallies competitive with private banknote money. For the next cen-
tury, banknotes and tallies circulated interchangeably; but they were
not mutually compatible means of exchange. The bankers™ paper
money expanded when credit expanded and contracted when loans
were canceled or “called,” producing cycles of “tight” money and
depression alternating with “easy” money and inflation. Yet these
notes appeared to be more sound than the government™s tallies, be-
cause they were “backed” by gold. They appeared to be sound until a
bank™s customers got suspicious and all demanded their gold at the
same time, when there would be a run on the bank and it would have
to close its doors because it did not have enough gold to go around.
Meanwhile, the government tallies were permanent money that re-
mained stable and fixed. They made the bankers™ paper money look
bad, and they had to go.
The tallies had to go for another reason. King William™s right to
the throne was disputed, and the Dutch moneylenders who backed
him could be evicted if the Catholics got back in and forbade
moneylending again. To make sure that did not happen, the
moneylenders used their new influence to discount the tallies as money
and get their own banknotes legalized as the money of the realm. The
tallies were called “unfunded” debt, while the Bank of England™s paper
notes were euphemistically labeled “funded” debt. Modern economic
historians call this shift a “Financial Revolution.” According to a
scholarly article published at Harvard University in 2002, “Tallies and

Chapter 6 - Pulling the Strings of the King

departmental bills were issued to creditors in anticipation of annual
tax revenues but were not tied to any specific revenue streams; hence
they were ˜unfunded.™” When debt was “funded,” on the other hand,
“Parliament set aside specific revenues to meet interest payments, a
feature that further enhanced confidence in lending to the
What seems to have been overlooked is that until the mid-
seventeenth century, the tallies did not need to be “funded” through
taxes, since they were not debts. They were receipts for goods and
services, which could be used by the bearers in the payment of taxes. It
was because the tallies were accepted and sometimes even required in
the payment of taxes that they retained a stable value as money. Before
Cromwell™s Revolution, the king did not need to borrow, because he could
issue metal coins or wooden tallies at will to pay his bills. The Harvard
authors present a chart showing that in 1693, 100 percent of the
government™s debt was “unfunded” (or paid in government tallies).
“By the 1720s,” they wrote, “over 90 percent of all government
borrowing was long term and funded. This, in a nutshell, was the
Financial Revolution.” 10 In a nutshell, the “Financial Revolution”
transferred the right to issue money from the government to private bankers.
In the end, the tallies met the same fate as the witches “ death by
fire. The medieval “witches” were mainly village healers, whose natu-
ral herbs and potions competed with the male-dominated medical pro-
fession and papal church. According to some modern estimates, nine
million women were executed as witches for practicing natural herbal
medicine and “occult” religion.11 The tallies were similarly the money
of the people, which competed with the money of the usury bankers.
In 1834, after the passage of certain monetary reform acts, the tally
sticks went up in flames in a huge bonfire started in a stove in the
House of Lords. In an ironic twist, the fire quickly got out of control,
and wound up burning down both the Palace of Westminster and the
Houses of Parliament. It was symbolic of the end of an equitable era
of trade, with the transfer of power from the government to the Bank.12

Web of Debt

John Law Proposes a National Paper Money Supply

Popular acceptance of the bankers™ privately-issued money scheme
is credited to the son of a Scottish goldsmith named John Law, who
has been called “the father of finance.” In 1705, Law published a
series of pamphlets on trade, money and banking, in which he claimed
to have found the true “Philosopher™s Stone,” referring to a mythical
device used by medieval alchemists to turn base material into gold.
Paper could be converted into gold, Law said, through the alchemy of
paper money. He proposed the creation of a national paper money
supply consisting of banknotes redeemable in “specie” (hard currency
in the form of gold or silver coins), which would be officially recognized
as money. Paper money could be expanded indefinitely and was much
cheaper to make than coins. To get public confidence, Law suggested
that a certain fraction of gold should be kept on hand for the few
people who actually wanted to redeem their notes. The goldsmiths
had already established through trial and error that specie could
support about ten times its value in paper notes. Thus a bank holding
$10 in gold could safely print and lend about $100 in paper money.13
This was the “secret” that the Chicago Federal Reserve said was
discovered by the goldsmiths: a bank could lend about ten times as
much money as it actually had, because a trusting public, assuming
their money was safely in the bank, would not come to collect more
than about 10 percent of it at any one time. (See Chapter 2.)
Law planned to open a National Bank in Scotland on the model of
the Bank of England; but William Paterson, who held the charter for
the Bank of England, had the plan halted in the Scottish Parliament.
Law then emigrated to France. He had another reason for leaving the
country. Notorious for escapades of all sorts, he had gotten into a
duel over a woman, which he had won; but he had wound up with a
murder conviction in England. In France, Law was able to put his
banking theories into practice, when the French chose him to head

A Ponzi scheme is a form of pyramid scheme in which investors are paid with
the money of later investors. Charles Ponzi was an engaging Boston ex-convict
who defrauded investors out of $6 million in the 1920s, in a scheme in which he
promised them a 400 percent return on redeemed postal reply coupons. For a
while, he paid earlier investors with the money of later investors; but eventually
he just collected without repaying. The scheme earned him ten years in jail.

Chapter 6 - Pulling the Strings of the King

the “Banque Generale” in 1716. Like the Bank of England, it was a
private bank chartered by the government for the purpose of creating
money in the form of paper notes.
It was also in France that Law implemented his most notorious
“Ponzi scheme.”i The “Mississippi bubble” involved the exchange of
a significant portion of French government debt for shares in a com-
pany that had a monopoly on trade with French Louisiana. The ven-
ture was called a “bubble” because most of the company™s shares were
bought on credit. In a huge speculative run, the shares went from
about 500 French livres in 1719 to 10,000 livres by February 1720.
They dropped back to 500 livres in September 1721. When the mania
ended, the investors were completely broke; and Law was again on
the run.
The Mississippi bubble was short-lived because it was recognized
as a sham as soon as more investors demanded payment than there
were funds to pay them. Law™s more enduring Ponzi scheme was the
one that escaped detection, the “Philosopher™s Stone” by which a
national money supply could be created from government debt that
had been “monetized,” or turned into paper money by private bankers.
The reason this sleight of hand never got detected was that the central bank
never demanded the return of its principal. If the bankers had demanded
the money back, the government would have had to levy taxes, rousing
the people and revealing what was up the wizard™s sleeve. But the
wily bankers just continued to roll over the debt and collect the interest,
on a very lucrative investment that paid (and continues to pay) like a
slot machine year after year.
This scheme became the basis of the banking system known as
“central banking,” which remains in use today. A private central
bank is chartered as the nation™s primary bank and lends to the na-


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