The European crisis has to be tackled in order to bring back democracy. It can be done by learning from the past why democrats felt discomfort with banks in order to be in a position to envision a new future.
Revolutionary no Tax Policy
The principle of no taxation proved to be revolutionary in the low prosperous countries where there was tension between citizen creditors and monarchs. In cities such as Amsterdam, influential men demanded that as citizens, they should only agree to lend money to governments and pay taxes only if they were granted the power to decide who governs them. It was formulated in the name of democracy in a Dutch pamphlet called The Discourse which elaborated the start of a revolution in matters of public finance since governments had to be paid for by citizens lending them money or paying them as taxes. They were obliged to be treated by the government. Financial trust implied political trust where the government proved that they could be trusted by creditor’s money. For trust to be maintained, the citizens demanded openness and propriety.
A Government of the People by the People
Democracy is the form of government in which the most competent citizens are elected by their fellow citizens on certain conditions and for a specific period of time. It implies the readiness to out of office those who prove to be inefficient. In the ancient democracy of Athens, Pierre Vidal-Nacquet and others pointed out that banks were small-scale money changers and pawn brokers. They were not credit institutions geared to productive investment, they were capitalist institutions aimed at making money to secure political settings. Elected representatives were to be held accountable to the lenders and taxpayers. This worked in favor of the wealthy but it backfired.
In the history of modern representative democracy, the principle of political trust fed a second democratic trend with efforts to break up big banks that abused their powers and violated the trust of investors. They recognized that banks could not become too big for their boots and that periodically elected governments had to bring them down for the sake of democracy and equality. The first attempt was in the 1830’s in the United States, a movement led by President Andrew Jackson who took on the Bank of the United States in the name of ‘the people’ and he managed to win. He explained that large banks make the rich richer and this threatens the vulnerable citizens by giving financial power to the rich. He further stated that the solution was by breaking up the most powerful banks, to enable the smaller banks to flourish.
Bank of America’s Big Withdrawal
President Jackson ordered the withdrawal of funds from the Bank of America and redirected it to smaller banks fuelling investments in land, canal construction, cotton production and manufacturing until the demand for gold and silver coins went up to the point where many banks collapsed. A huge panic ensued followed by stagnation which took years for the American economy to recover.
The collapse was compounded by crisis in Britain where banks issuing papers receipts and lending excessive quantities of money pushed up prices and destabilized the economy.
It was until the conservative government led by Sir Robert Peel passed the 1884 Bank Charter Act that the government was able to regain control over the creation of Bank notes.