With the evolution of the banking business arose the need to standardize money for the sake of its value. The 17th century Europe was a more connected region that thrived in commerce, and the wealthiest members in the society were judged by how much money they had. Having more gold meant having more money and this meant greater influence to determine the outcome of wars, who becomes king, and which state the world could do business with. This was a period when money was gradually replacing religion as the most formidable tool of power.
To truly understand gold standard of monetary system, and how the value of the most precious metal standard revolutionized the global economy, we have to take a step back to the fall of the Roman Empire. At its peak, the Romans were very successful for the simple reason that their coin-based economy was inflation-proof. This was because the value of the money the Roman Empire had was directly tied to the value of Gold and other precious metals. For most of Roman history, their money was made from copper, orichalcum, silver, bronze, and Gold.
After the fall of the Roman empire in 434 C.E, their success in storing wealth and value with money persisted. The resulting fragmented states all over Europe, Asia, and North Africa minted their own coins from precious metals and within no time, Silver and Gold emerged as the most feasible for use as currency. With the rise of money lending in Florence, Italy, in the 13th century and subsequent success of shipping and international trade, money played a central role in shaping political dynasties as religion was relegated to the ceremonial background.
The Bank of England and The Stock market
By the end of the 17th century, England was in financial ruins. Over half a decade of unending wars against the French and other Kingdoms had drained the Kingdom’s resources and they had to turn to private lenders to finance new wars. The money lenders, who mostly made their fortune in money changing, charged a high price and demanded taxes as security. These turned out to be private banks that controlled and manipulated the British Pound in the stock exchange. The Bank of England was founded by these private banks in 1674 to consolidate their power and monopolize the issuance of Gold-backed currency. The Bank of England became the first privately owned central bank in the world.
During the era before the Napoleonic Wars, multiple European Kingdoms were constantly feuding and fighting over territory. Wars cost money. Soldiers had to be fed and paid and weapons and horses cost a fortune to acquire and mobilize. Governments turned to the then richest banks for loans, which was paid back with interest. In 1803, an alliance of European powers including the United Kingdom, the Kingdom of Spain, the Kingdom of Prussia, and the Kingdom of Hanover formed a coalition to fight Napoleon in 1803. For funds, they turned to the then richest bankers, the family of Mayer Rothschild.
Government bonds, then known as War bonds/War consoles, were issued by governments as promises to pay the bearer an equivalent of currency denomination and was traded in the stock market. The Rothschilds financed government wars but at the same time speculated and traded in the stock exchange. The value of government-issued bonds fluctuated based on the confidence investors had in the government, just as currencies do today. During the battle of Waterloo, the financial market held its breath as it awaited the results of the battle between the French and two of the coalition forces — United Kingdom and Prussian forces. This was the war that would determine whether the value of Government bonds, in particular the British, would rise with a victory or sink with a loss.
The Rothschilds and the Battle of Waterloo
No individual or group of people played a more central role in shaping the evolution of modern money than the Rothschild family. The entire history of modern money and its unfailing relationship with Gold can be traced back to one decisive battle in Europe that may have shaped the entire human history: The battle of Waterloo of June 18th 1815. It was during this battle that Nathan Rothschild, a popular banker and bonds trader, leveraged the information about the outcome of the battle of waterloo to carry out the largest financial coup that saw him take control of the stock market and even the bank of England.
To get a clearer picture of how one family got to get control of an entire stock exchange and a central bank of one of the most powerful kingdoms in the world, it is imperative that we go back a little further and get to know how the Rothschilds came to dominate European Banking.
Mayer Rothschild was born in Frankfurter Judengasse (Jewish Ghettos of Frankfurt) in the Holy Roman Empire (present day Frankfurt) in 1710. Like most people living in the Jewish ghettos of the city, he quickly learned the money changing and money lending business. At the time, only Jews could engage in the money business because the majority Christians considered it a sin to lend money at an interest. Mayer was very successful at what he did, and he did a good job of teaching his five sons how to conduct the money business.The Jewish Encyclopedia proclaims that Mayer Rothschild made most of his fortune by selling coins to Prince William IX of Hesse, and was eventually entrusted with the task of managing his accounts and banking in general.
When the sons were older, Mayer Rothschild sent them to start the same business in different cities across Europe. Nathan went to London, where he started a textile and money lending business, Amschel took over the Frankfurt family bank, Salomon established himself in Vienna, Calmann went to Naples, and Jakob started the family bank in Paris. Like their father, the Rothschild brothers made most of their money by associating and handling banking for nobility. Nathan Rothschild became so close to the Duke of Wellington and was appointed the Court Jew, a special title for Jewish bankers who handled finances for European royalty.
The Rothschilds proximity to power gave them a business advantage that they maximized on. From 1809, all the five banks across Europe began dealing in gold bullions and government bonds. When Napoleon was wreaking havoc in Europe, the kingdoms turned to the Rothschilds for loans to fund their wars against him and this is where the family banks made the most money. This is because loaning to governments was very lucrative — the bankers could dictate the terms and since they were secured by taxpayers, the risks were minimal. And who did Napoleon get money for funding his wars? Correct, he received also from the Rothschilds.
By the year 1815, the five Rothschild brothers were supplying gold and silver secretly to both the coalition forces led by the Duke of Wellington and the Napoleon Army (via Jakob’s bank in France). This may have been when they embraced the policy of funding both sides in wars. The Rothschilds, with time, grew to love wars for the simple reason that they were expensive to the warring sides, but massively profitable to whoever had the funds to loan them. It did not matter who won or lost the war when they were funding both sides because the victor would always honor the terms of the loan. The policy of funding both sides persisted beyond the 19th century through the 20th century.
The Rothschilds were in the best position to fund every major war in Europe, not only because they already had banking infrastructure spread out across Europe, but also because they had set up an unparalleled spying and message delivery network complete with fast couriers and secret routes. Since this was a time when the price of government bonds fluctuated massively, the Rothschilds were always a step ahead with current events and were very successful in speculating and even determining bond prices. Besides, since the Rothschilds were funding both sides of the war, their couriers were the only merchants who were permitted to pass through the French and English blockades. Nathan, like his father, understood that money was power. He was so confident of his position that he has been quoted saying:
During the final battle of the Napoleonic era in Waterloo on June 18th 1815, it is alleged that Nathan Rothschild, already a looked-upon figure and richest man in the stock exchange, started a selling frenzy by spreading false news on the outcome of the battle to crash the price of the Sterling pound and bought them secretly. Rothschilds’ sophisticated and multi-faceted messaging system of spies and homing pigeons proved to be invaluable. Nathan Rothschild had positioned a man named John Roworth on the northern side of the battlefield, closer to the English channel, with instructions to send news of any developments on the battlefield as soon as they happened.
When the battle was decided, agent Roworth immediately dispatched a homing pigeon to Nathan informing him of the coalition’s victory. The news may have been delivered on the evening of Monday June 19th, over 24 hours before the government’s messenger arrived with the news on horseback on 21st. It is claimed that Nathan capitalized on his knowledge of the outcome of the battle by spreading rumors that the coalition forces had been defeated, causing panic selling of the Pound Sterling bonds on the stock exchange. The Rothschild’s agents were then instructed to buy up all the bonds at a fraction of the price they were worth just a few hours earlier.
By the time the news of Napoleon’s defeat arrived in London and the price of Pound Sterling shot back up, Nathan Rothschild and the Rothschild family bank were the largest shareholders of the Bank of England. It is estimated that Nathan Rothschild’s investment on that day increased by a factor of 20 to 1 and the Rothschild’s family fortune doubled from £0.5 million to £1 million in a day, a fortune unfathomable at that time.
The Gold standard of Money
The Gold Standard of money is a form of monetary system where a particular currency, typically in coin and paper money, has its value directly tied to a specific value of Gold. This means that the value of the currency is ‘sound’ or ‘stable’. Countries with a currency set a fixed price for Gold and bought and sold the precious metals at that price. This paved the way for the production of non-inflationary bank notes that were printed on cheaper and more convenient paper to represent a certain amount of gold. With the government converting the value of their gold reserves to paper money and using debt instruments issued to private banks and individuals, the struggle between paper money and gold eventually resulted in the popular gold standard of money.
In 1816, England became the first Kingdom to standardize the value of money based on gold. This meant that banks and individuals who owned the most shares of the government bond had similarly large shares of the treasury gold. This was a major development in the history of money because it meant different denominations of the same currency could be produced by a central authority without actually proving that the gold the money represented was available on demand. The paper currency was essentially a receipt that proved the bearer had a certain amount of gold deposited with the issuer (the government) and was ‘good for the money’.
Despite the introduction of paper money in Europe in the 16th century, gold coins and bullions continued to rule the global monetary system until the 18th century when paper money became more popular.
The Genesis of Fractional Reserve Banking
Following the dramatic improvement in technology, particularly shipping, and global trade, England quickly rose to be the world’s biggest economy. The exploration and exploitation of the new worlds including Asia, Americas, and Africa brought large amounts of Gold to The Bank of England, which played a crucial role in solidifying the Gold standard and use of paper money as the ideal currency. Since trade imbalances between Kingdoms, colonies, and even businesses were settled with Gold, the goldsmiths who owned the central bank of England essentially controlled the old and the new worlds. To this day, the stockpiles of gold accumulated by the bank over the centuries still exist.
Something else emerged with the use of gold-backed paper money as primary currency. Since no one really knew how much gold the banks had in reserve, the banks could print more paper money than the much they had in reserve and issue it out as loans and no one was the wiser. For instance, the bank could issue £100 for every £1 worth of gold in reserve and charge full interest on it and no one could know. The money they made in interest was used to buy more gold and to print more money and the circle continues.
Today, this practice is legal and it is referred to as Fractional reserve banking. It is defined as a banking system where only a fraction of a bank’s deposits is backed by on-hand cash available for withdrawal. This form of banking is responsible for expanding the economy as it frees up capital that can be advanced out to other parties. Most banks around the world are required to keep a minimum of a few percent of the cash reserves acquired through loans and customer deposits.
Some banks, however, are exempt from this reserve requirement but all are paid at the rate of reserve interest called ‘interest rate on reserves’. According to Investopedia, in the US, banks with assets valued over $110.2 million in assets are required to meet the 10 percent reserve requirement. Those with assets worth between $15.2 and 110.2 million are required to have at least 3 percent in reserve while banks with assets worth less than 15.2 million are not subject to the reserves requirement.
The gold standard of money became international in 1871 when it was adopted by Germany, peaking in 1914 at the start of the First World War. Its success led to adoption by other states and countries around the world. The US was one of the last countries to adopt the international gold standard of currency in 1900 with the enactment of the Gold Standard Act which laid the ground for the establishment of the Federal Reserve to enforce the Gold standard of money and tame inflation. Fractional banking, change in political alliances, the increase in international indebtedness, and deterioration of government finances led to the collapse of the international gold standard of money.
As the world lost faith in the gold standard during the First World War, the entire global economy slumped and economic difficulties were exacerbated. Some experts blame the greed of the goldsmith banks for this, while others say the demise of the gold standard was inevitable. Whatever the case, it became apparent after the war that the world needed a newer, more flexible yet reliable way on which the global economy was to be based.
In the next article in this series, we will focus on why the US dollar and the British Sterling Pound grew to become the reserve currencies of the global economy in place of gold.
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