Creature From Jekyll Island by G. Edward

two centuries it faithfully adhered to the principle of safe deposit. So scrupulous was its administration that, when Napoleon took possession of the bank in 1813, he found 7,506,956 marks in silver held against liabilities of 7,489,343. That was 17,613 more than was actually needed. Most of the bank's treasure that Napoleon hauled away was restored a few years later by the French government in the form of securities. It is not clear if the securities were of much value but, even if they were, they were not the same as silver. Because of foreign invasion, the bank's currency was no longer fully convert-1. Galbraith, p. 16.

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ible into coin as receipt money. It was now fractional money, and the self-destruct mechanism had been set in motion. The bank lasted another fifty-five years until 1871 when it was ordered to liquidate all of its accounts.

That is the end of the short story of honest banking. From that point forward, fractional-reserve banking became the universal practice. But there were to be many interesting twists and turns in its development before it would be ready for something as sophisticated as the Federal Reserve System.

EARLY BANKING IN ENGLAND

In England, the first paper money was the exchequer order of Charles II. It was pure fiat and, although it was decreed legal tender, it was not widely used. It was replaced in 1696 by the exchequer bill. The bill was redeemable in gold, and the government went to great lengths to make sure that there was enough actual coin or bullion to make good on the pledge. In other words, it was true receipt money, and it became widely accepted as the medium of exchange. Furthermore, the bills were considered as short-term loans to the government and actually paid interest to the holders.

In 1707, the recently created Bank of England was given tlie responsibility of managing this currency, but the bank found more profit in the circulation of its own banknotes, which were in the form of fractional money and which provided for the collection of interest, not the payment of it. Consequently, the government bills gradually passed out of use and were replaced by banknotes which, by the middle of the eighteenth century, became England's only paper money.

It must be understood that, at this time, the Bank of England was not yet fully developed as a central bank. It had been given a monopoly over the issue of banknotes within London and other prime geographic areas, but they were not yet decreed as legal tender. No one was forced to use them. They were merely private fractional receipts for gold coin issued by a private bank which the public could accept, reject, or discount at its pleasure. Legal tender status was not conferred upon the bank's money until 1833.

Meanwhile, Parliament had granted charters to numerous other banks throughout the empire and, without exception, the issuance of fractional money led to their ultimate demise and the ruin of THE SECRET SCIENCE

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their depositors. 'Disaster after disaster had to come upon the country,' says Shaw, because 'of the indifference of the state to these mere private paper tokens.'1 The Bank of England, however, was favored by the government above all others and, time after time, it was saved from insolvency by Parliament. How it came to be that way is an interesting story.

THE BANK OF ENGLAND

England was financially exhausted after half a century of war against France and numerous civil wars fought largely over excessive taxation. By the time of the War of the League of Augsberg in 1693, King William was in serious need for new revenue. Twenty years previously, King Charles II had flat out repudiated a debt of over a million pounds which had been lent to him by scores of goldsmiths, with the result that ten-thousand depositors lost their savings. This was still fresh in everyone's memory, and, needless to say, the government was no longer considered a good investment risk. Unable to increase taxes and unable to borrow, Parliament became desperate for some other way to obtain the money. The objective, says Groseclose, was not to bring 'the money mechanism under more intelligent control, but to provide means outside the onerous sources of taxes and public loans for the financial requirements of an impecunious government.'

There were two groups of men who saw a unique opportunity arise out of this necessity. The first group consisted of the political scientists within the government. The second was comprised of the monetary scientists from the emerging business of banking. The organizer and spokesman of this group was William Paterson from Scotland. Paterson had been to America and came back with a grandiose scheme to obtain a British charter for a commercial company to colonize the Isthmus of Panama, then known as

Darien. The government was not interested in that, so Paterson turned his attention to a scheme that did interest it very much, the creation of money.

The two groups came together and formed an alliance. No, that is too soft a word. The American Heritage Dictionary defines a cabal b W.A. Shaw, Theory and Principles of Central Banking (London & New York- Sir I 1 itman & Sons, Ltd., 1930), pp. 32 -32.

2- Groseclose, Money and Man, p. 175.

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as 'A conspiratorial group of plotters or intriguers.' There is no other word that could so accurately describe this group. With much of the same secrecy and mystery that surrounded the meeting on Jekyll Island, the Cabal met in Mercer's Chapel in London and hammered out a seven-point plan which would serve their mutual purposes:

1. The government would grant a charter to the monetary scientists to form a bank;

2. The bank would be given a monopoly to issue banknotes which would circulate as England's paper currency;

3. The bank would create money out of nothing with only a fraction of its total currency backed by coin;

4. The monetary scientists then would loan the government all the money it needed;

5. The money created for government loans would be backed primarily by government I.O.U.s;

6. Although this money was to be created out of nothing and would cost nothing to create, the government would pay 'interest' on it at the rate of 8%;