Signs from Allah: History, Science and Faith in Islam
81. The Rise of the Global Credit Economy, Part 2 of 3
By Professor Nazeer Ahmed
Concord, CA
The wealth of Bengal did not stay in the hands of English entrepreneurs for long. Within a span of 50 years, the keys to the treasuries of capitalist England passed from the merchants to the bankers. This transformation was so profound that it affected not just Europe but the entire globe.
The Industrial Revolution and the acceleration of international trade required an increase in monetary liquidity. The value of a currency was determined by its gold or silver content. In the halcyon pre-industrial age, an international merchant, upon completion of his sale, would deposit his money in local currency with a banker and receive from him a note. Upon returning to his own country, the merchant would cash in his note from an agent of the banker. For his service, the banker charged a discount. Such banks were well established in the principal cities of Europe, in London, Antwerp, Paris, Florence, Venice and Genoa. Since currency was based on gold and silver, an increase in the amount of currency in circulation required an increase in the supply of the precious metals. The availability of gold and silver thus put a limit on monetary liquidity, and hence on the amount of trade.
New mechanisms were therefore devised to reduce the liquidity crunch and to enhance trade. The bankers had found from their experience that their depositors required only a portion of their deposits for their current use. The difference between deposits and withdrawals was available to be loaned to customers on a short-term basis. A banker could thus lend out a sum larger than the amount of deposits and earn interest on it. This was the origin of the credit system in England. The assumption in these transactions was that the depositors would not cash in their deposits all at the same time. If they did, the bank would be unable to pay them, and would go under.
Historically, the credit system was not a new invention. In the year 1280, Kublai Khan of China minted leather coins to increase liquidity and enhance trade. In 1335, Emperor Muhammed bin Tughlaq did the same in India. We know from the accounts of the Tughlaq dynasty that the Delhi experiment was a failure because the Indians, Hindus and Muslims alike, sabotaged the effort by minting bogus coins and flooding the market. The Emperor had to abandon his innovative idea and redeem the leather currency at enormous expense to the royal treasury.
The leverage on capital that the credit system provided the bankers was not popular with everyone. Not only could the banker lend out money that he did not own; he charged interest on it. One could see that it enabled the bankers to increase their wealth in relation to the merchants. The payments that were made to retire the credit came back to the banks as additional deposits. The process worked in the direction of economic centralization, with money gravitating towards the banks. Political battles were fought between the merchants and the bankers on the issue of whether credit instruments should have legal recognition. History was on the side of the bankers and provided them with plenty of opportunities to win their case.
The wars between Britain and France, fought on and off between 1689 and 1815 for control of trade routes, were enormously costly. England was broke and approached the bankers for financing. In 1694, by mutual agreement, the Bank of England agreed to offer a perpetual loan of 1.2 million pounds at 8% interest to the British Crown, in return for certain privileges. These included the authority to handle public lotteries, accept deposits, discount bills, and most important, put its own notes into circulation.
This was the first recognition of the negotiability of credit. In effect it meant that the Bank could create money, a privilege that had hitherto resided only with the kings.
Monetary policy passed on to the bankers who could either fuel an expansion by increasing the supply of money and easing credit, or cause a contraction by withholding credit. This was a fundamental paradigm shift. From times immemorial, one of the essential privileges of a sovereign soldier-king was his authority to mint coins. This privilege now passed on to the bankers, although they printed money in the name of their sovereign. While the expansion of credit encouraged spending and expanded trade, this very action could fuel inflation. Conversely, the withholding of credit, and a tightening of the money supply, made it difficult for debtors to make payments on their debt, and they were forced to sell their assets at a discount to meet their debt obligations. In addition, as long as the standard of currency was gold, the bank could demand payment in gold whose supply was affected by war and was subject to monetary manipulation by the bankers themselves.
This is what opens up banking to charges of exploitation. The merchant makes his money when the value of his goods relative to the money he has borrowed goes up over time. The usurer, on the other hand, makes his money when the value of the credit he has advanced goes up in relation to the goods that are held in mortgage. Thus, it is in the usurer’s interest to ensure that your property is worth less tomorrow than it is today so that he can get more of it when payment is due.
A credit advance of 1.2 million pounds in 1694 did not solve the cash requirements of the British throne. The protracted struggle with France for control of trade routes in India and America required enormous funds. England tried increased taxation and lost the American colonies in the process (1776-1783). The French revolution (1789) and the Napoleonic wars (1797-1810) were enormously expensive and financially exhausted the nations of Europe. The countries of Europe borrowed heavily from the bankers who were more than willing to fund the wars with cheap credit thanks to the gold from India and the silver from the Americas. The system worked to the advantage of the bankers.
(The author is Director, World Organization for Resource Development and Education, Washington, DC; Director, American Institute of Islamic History and Culture, CA; Member, State Knowledge Commission, Bangalore; and Chairman, Delixus Group)
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