By Shaykh Umar Vadillo
A highway robber leaps from behind a tree, sword in hand, and confronts a well-dressed gentleman. “Hand over your money,” the robber cries. His intended victim says, “You fool!… I’m the mayor!” The robber lowers his sword and sticks out a hand. “…hand over MY money.”
Good poetry like humour gives new meaning to words. Poetry should provoke introspection forcing to see issues and problems from a new perspective. This is important, since most of us uncritically and subconsciously absorb our political and moral stands from parents and friends, from schools and media. As such, poetry can be profoundly disorienting and equally threatening to fragile self-concepts. Viewing the world through new lenses requires a period of unsettling adjustment. To be effective, then, a poet must keep his audience off-balance, leave them reeling. Inducing comfort is most emphatically not the goal of a good poet.
We are simply pointing out that we cannot give validity to a word simply because we are comfortable with it. The value of a word, is that it helps you to discern, to discriminate, to identify. In our case, a good definition of State should give us understanding of this institution and by extension of our society. It should help us to act. And because we are Muslims this implies understanding from an Islamic perspective, and acting means acting fisabilillah. It is in this light that I value the necessity to create a new definition of the State. Whether we like it or not, our cultural and historical values are embedded in language. When we challenge language -this is what a poet does- we are challenging the cultural and historical values of our society. For us this should be done in order to establish our own Islamic understanding of life. This is important. Our language should reflect who we are.
Words are windows that open “worlds” before us. Which words we use and how we use them determines the way we see the world. I forged this definition of the State out of necessity. I was not happy with the present definitions. They were too vague to create identity or too partisan to recognise a problem. They all seemed to ignore what I call “the event”. This event is the marriage between banking and government that took place somewhere in the past. This event was not nothing. It was a huge evolutionary step in our history and the consequences have been even bigger as they reached our days. As a result of this event the way people interacted with government changed, including how revenues were collected, the creation of debt, the way of accumulation of capital, the meaning of money and investment, and many other collateral issues involving the basis of trading and finance between countries. In short, almost every way in which we relate to each other changed for ever. The world changed for ever after this event. Yet, I realised, no one had named this new institution. This institution was more than government, it was more than banking. But it had no adequate name. This is a danger, because if you cannot name it, you cannot think it.
The event that I am referring to took place in England in the year 1694 with the birth of the Bank of England as the national Bank. The Bank of England was not the first national bank. Two other national banks were created before the Bank of England. The first national bank was the Banco de Spiritus Sanctus or the Bank of the Holy Spirit (amazing name!) which became the first national Bank in 1605 of, which State? None other than the Vatican. The Bank, founded by Pope Paul V, has ceased to perform financial miracles for the Popes -now it is in the hands of the Italian State- but the Vatican possesses its own official bank, piously called the Institute for Religious Works. The second was the Bank of Sweden (Sveriges Riksbank) founded in 1668. The reason why we have chosen the Bank of England as the birth of the State is because only England with the beheading of their King and the creation of the Parliament had the right social chemistry to trigger the unprecedented unfolding of this institution, the State. Only in England, and for the first time, the debt of the Sovereign had the conditions to become what became known as the National Debt. A concept whereby the debt incurred by the Sovereign, no longer belongs to him, but to the entire nation.
This does not mean that in the year 1694, the State, with all the features with which we know today, suddenly appeared. No, the State gradually developed into its full flesh in the years to come. What took place in this year, was the coming together of two institutions banking and government in a new fashion which created the necessary mixture for the unfolding of the State. We can say that the seed of the State was created. This seed contained the potential for all the features that were to unfold in the years to come. The seed contained the forerunner elements of the Central Bank, fiat money and the national debt. How did it happen? And what happened?
The Revolution over, and the Dutch William of Orange on the throne of England (1689-1702) a climate of discovery and experimentation with money matters was flourishing in England. It was a time of treasure hunting companies, “quick money making” schemes and new banking designs. It was all further encouraged by the small boom of 1692-5. In this climate the Bank of England was born.
At the time England was financially exhausted after half a century of war. Unable to increase taxes and unable to borrow, Parliament became desperate for some other way to obtain money. 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 opportunity came in 1694, when the King needed money to raise an army for the war with France. The King went to the rich merchants and goldsmith bankers in London to acquire this money. Several schemes for a public bank were submitted. Finally, William Paterson, a Scotsman, fronted several syndicates and made a proposal in imitation of similar successful ventures in Italy and the Netherlands (especially the Bank of Amsterdam founded in 1609 -seen by many as the father of modern banking). After a few failed attempts, he and his merchant backers eventually proved successful.
Patterson wrote a brief presentation for the initial stock offering entitled “Brief Account of the Intended Bank of England” [quoted by Prof. Carroll Quigley of Georgetown University, in “Tragedy and Hope: A History of the World in Our Time”, 1966], in which he wrote: “the bank hath benefit of interest on all moneys which it creates out of nothing.” This simple sentence, by the world’s first Central Banker, was going to become the key issue to the unfolding monetary destiny of the world for the next three hundred years.
The meaning of the sentence is that “under the government’s authority” the Bank of England would issue paper money created “out of nothing”, which would in turn be loaned at interest to various borrowers. The commercial banks had done this before, but this time it was endorsed by the “authority of the people”, the Parliament. The meaning of “out of nothing” is that the notes of the Bank of England were only partially backed by gold or silver, not to the point of complete convertibility. From the very beginning the Bank never professed to make its issues of notes square exactly with its coin and bullion, though, of course, it made its liabilities square with its assets. This issue has remained a mystery for most people even today. How can the liabilities be equal to the assets, and yet there are more notes than specie? The issue is at the heart of banking itself, but we leave this issue of “magical” accounting for another occasion, we will simply refer to it as fractional reserve banking, meaning, the ability of the bank to lend more than what it holds in cash or creating money “out of nothing”.
By early May 1694 the parliament passed a statute appointing a new tax on ship tonnage expected to raise £140,000 per year. £100,000 of this was earmarked to pay interest (at 8% per annum) on a new £1.2 million loan which the government was going to borrow from the Bank. The loan would “only” cover about ¼ of that year’s expenditures upon the Nine Years War (1689-97) with France.
The £1.2 million loan was paid into the Exchequer in instalments between August and December. Shareholders received interest of 8% on the full amount of the loan, although they had “only” had to contribute £720,000 in actual cash, the rest had been created “out of nothing”. The loan was paid to the government with the cash of the shareholders, who by November had supplied 60% of the amounts for which they had subscribed. The rest was paid with so-called “sealed bills”: £1000 paper notes stamped with the Bank’s corporate seal. The government used these bills in turn to pay its suppliers. Since they bore interest at about 3% per annum, many were held as investments; those few that were returned to the Bank for cash were reissued and employed in further loans.
The Bank had a double function: it managed the Government’s accounts and made loans to finance the Government but it also operated as a commercial bank: it took deposits and issued notes to private customers. Much of the cash from the shareholders was used not for the war loan but to circulate additional sealed bills issued out to private borrowers, raising returns even further.
The authorizing statute had imposed two important limitations: the Bank could lend no more than £1.2 million to the government without parliamentary dispensation and could issue no more than £1.2 million in sealed bills. The first limitation actually proved an asset, since over the next year or two Bank directors often made it an excuse for refusing further loans to the Crown (loans they were reluctant to make in any case). But the ceiling on sealed bills was a real constraint. Bank directors evaded it by issuing what they called “running cash notes”. Instead of being stamped with the Bank’s seal, these small-denomination notes were merely signed by its cashiers and they bear no interest (unlike the sealed bills). The Bank’s numerous critics tried to make an issue of this, but the notes continued in circulation. These “running cash notes” became in fact the forerunners of present-day paper currency.
By February 1695, the bank had advanced to the Government not only the whole of its original capital of £1,200,000, but also a further sum of £300,000. But there were even bigger remittances to follow within the next eighteen months. The government could not stop borrowing, breaking the limitations that it had imposed on itself. The government had just discovered the possibility of an “almost” endless means of finance. But of course, the problems started to come.
The new money created by the Bank of England splashed through the economy like rain in April. Consequently, when these plentiful banknotes landed in the other banks’ hands, they quickly put them into the vaults and then issued their own certificates in even greater amounts. As a result, prices doubled in just two years. Then, the inevitable happened: There was a run on the bank, and the Bank of England could not produce the coin. In May of 1696, just two years after the Bank was formed, a law was passed authorizing it to “suspend payment in specie” [suspend payment in gold for the face value of the note being presented]. By force of law, the Bank was now exempted from having to honour its contract to return the gold. Fiat money had been born. With it one of the key features of the modern State had been born.
With this event two other institutions had been born: the Central Bank and the National Debt. That Central Bank is still with us and has become a dominant institution in today’s economy and that national debt we, the citizens, still carry forward and which in aggregate, is in fact unrepayable. The citizens of Britain still have not been able to repay their debt three hundred years later. Today the national debt of Britain is 1 trillion pounds.
In 1694, the Bank of England was not yet a central bank in the modern sense but it was the seed for the central bank. The capacity to act as lender of last resort and regulator of financial activity within the economy at large was only developed gradually during the next century as the complexity of the financial system grew.
As the Government borrowed more and more money, these outstanding loans were called the National Debt. This debt was different from before. Sovereign’s debt had always existed. However, how the king could make his promise to pay trustworthy, was the critical problem. Defaulting had become a common phenomenon in England since the medieval period. In the medieval period, tax collection was a very difficult task; the king often relegated local agents and office holders to collect taxes for the sovereign, a practice curiously called tax farming. Generally, these agents or office holders had tax exemption privilege, narrowing the tax base and reducing tax revenue. Tax was never enough. Borrowing against the taxes was the only choice. For the king the best choice was to default to his creditors. Although cooperation with the creditors seem to be the best choice, this was not always possible. Creditors (later bankers) and Kings had a difficult relationship. Cooperation could not crystallise. This changed for ever with the Bank of England.
The establishment of the Bank of England altered the sovereign’s (State’s) incentives to accept debt. The debt could be easily distributed to all the people by a new mechanism: the issue of non-redeemable or partly redeemable paper money. Thanks to the Bank the State was capable of making its debt trustworthy. It was not “his” debt it was the “national” debt. The State provided the Law to make the new money legal, the bank could provide almost endless amounts of that money. The two institutions seemed to gain, they could cooperate for the first time. This event altered the sovereign’s (State’s) incentives to accept more debt. From this moment onwards, the raising and raising of debt would reach unprecedented levels in history. This debt fuelled the extraordinary rise of the banking institution and brought it from the fringes of society to the very centre by becoming the new master of the economy.
The Need of a Name
From the day of the Caesars to today, we have seen a great variety and many forms of government. The word “form of government” already calls upon certain familiar definitions: anarchy, monarchy, oligarchy and democracy. In this classification the word State stays out. The State is not seen as a form of government, it is rather identified as a higher institution that encompasses government. Nowadays, we vaguely speak of the State as comprising the land, the citizens, its laws, its culture, its economy and the government. For some the word equally encompasses the Egyptian State of Pharaohs, the State of the Caesars, or today’s British State; and encompasses regimes as different as the Soviet Union or German Third Reich. This “all encompassing” meaning of the State does not tell us anything about the crucial event which we want to describe.
Let us go back to our own Western culture in search of some help. Of all revolutionary movements in Western Europe, the one that resisted more ferociously the advent of the State was the anarchist movement. The anarchists since Proudhon spoke “against the State”. Often, this is mistakenly seen as a proposal for “no-government”. But this is not what they were saying. Since we are not here to study the anarchist movement, but in search of a new meaning, or perhaps, we should say an original meaning, I would explore the “word” of an artist and a poet who sympathized with them. This artist is Richard Wagner, whose great hero was Bakunin (he saw him as Siegfried -the hero born without fear). He wrote in the barricades on Dresden that the new society will be based on “government without State”. What he meant is that government is acceptable, the problem is the State. He was referring to the State as some addition to the government that needed to be removed. With this sentence, although still lacking the substance for a complete definition, sets us on a different path to find a “meaning” for the State.
The sentence “government without State” points to two possibilities: one is a “government with/within State” -this is seen as a problem-, and then “government without State”, seen as the solution. These two possibilities already point to an event in which from one we move to the other. It already indicates a point of devolution or evolution depending of the direction. The important thing is that it recognises the existence of a critical event, a turning point. This event, even without understanding what it is, points to the originality of its meaning. It is from here that we can ask the following questions: what was that event? What was that event that put government and State together? What is the State that was added to the government? When did it happen?
Here (when the State is seen as a problem), our proposed definition stands out thriving with answers. Our equation “State = government + banking”, and our solution, “eliminate banking”, acquires a dynamic force. It explains this event that Wagner was pointing out. Our definition gives full meaning to the sentence “government without State”. It now reads, the problem is not government, the problem is that banking (the cause of the problem) was mixed with government. This mixing or marriage created the State. In my reading of Proudhon and Bakunin against the State, this “fine” tuning, this critical discrimination was missing in their undestanding of the State. In my view, this missing element haunted like a dark cloud the revolutionary attempts of the XIX century to eliminate the State and still rob us today of any decisive understanding of this key institution that can lead to a change.
What happened in Britain at the end of the XVII century has not had a name for too long. It needs one. My proposal to call it the birth of the State, brings forward the possibility to understand this phenomenon and by extension to understand the times we are living in.
Is the Word “State” the Right Word for This New Institution?
I believe it is. The word State is in itself in need of definition. The first issue is that it is acknowledged that the State is relatively a new phenomenon in history. Andrew Vincent, in his book “Theories of the State” writes:
“Many anthropologists and sociologists would argue that there is a rich array of pre-State and Stateless societies. Most scholars now agree that the State is a comparatively recent phenomenon in terms of the history of social existence. If these societies were subject to authority and rules, it is feasible to speak of politics existing but not the State”.
From a purely historical point of view, the first modern use of the word State is attributed to Machiavelli (lo stato) in his “The Prince”. Machiavelli was fascinated by Cesare Borgia, not just his person, but rather the “the structure of the new state” that had been created by him. Machiavelli was the first thinker who completely realised what this new structure meant. Yet, according to JH Hexter, who examined the 115 uses of “lo stato” in The Prince, Machiavelli relates not to the State in the modern juridical sense, but rather to the medieval idea of “standing” or “condition” as in the term “status regni”. He argues that the modern use of the word, may have been inspired by Machiavelli, but it was only forged by French sixteenth-century thinkers like Du Haillan, Bude, and Bodin and politicians like Richelieu. In England, nevertheless the word came much later and the preferred words in mainstream political thought were still in the sixteenth century, commonwealth, kingdom or realm.
For Jean Bodin the issue is related to the idea of sovereignty. France was passing rapidly out of feudalism in the French Wars of Religion. Sovereignty was for him a “supreme power over citizens and subjects unrestrained by law”. This attribution was still directed to the King. Only when the figure of the king disappears in the seventeenth and eighteenth century that the word State gains its supremacy. The sovereignty is then expressed in the “personality of the State”. In this idea the attributes of the person, the capacity to perform duties and possess rights, the ability to act and so forth, are attributed to the State. The personality is legal, not physical or psychological. At this point, the State acquires its modern sense as “the abstract person with the authority”, not connected in any way with individuals.
This historical account of the usage of the word, coincides with the timing of what we call the event, which took place in Britain after their king had been beheaded. In my view, this transferral of sovereignty from the king to the State is critical in giving strength to the modern usage of the word by a recognition that a new entity had been created; although not quite in terms of the event in which I formulate my definition, but yet it is simultaneous to it.
In relation to government Vincent argues the following:
“In fact government is a far older term that State or administration. Historically and anthropologically it is clear that both the concept and practice of the State existed before the State. Government can and does without the State.”
For me this proves that there is an event that needs to be located in history by which the transition takes place. Naturally this birth is owed to be contested by different political and historical opinions, since the political world is already saturated with different ideas and values. Yet we must seek coherence and consistency in order to gain understanding of the past.
Finally Vicent argues:
“The State is a good example of such essential contestability. Yet one should be wary of holding to essential contestability as a dogmatic assumption. It is useful in educational terms to acknowledge that there are diverse views of the State which should be explicated. The State is certainty not one thing. It needs to be unpacked. But we do not need to go on from this to the conclusion that there are either in principle no grounds for finally adopting a particular view of the State or that the State must always, in all situations in the future, be subject to dispute. There are certain logical oddities in such a view which link up a dogmatic adoption of essential contestability. There seems to be an implicit claim that all concepts now and in the future must in principle be subject to such dispute. This is an inverted form of essentialism which makes the thesis of essential contestability self-refuting. A more balanced thesis is that at the present moment there are neither completely satisfactory explanations of the State nor ultimate empirical grounds which can be agreed to test theories. We need to pay attention to the way in which the concept has been used. It reflects values and views of human nature and constitutes political reality. Since theories of the State reflect such fundamental values and self-images, it is important that they should be open to discussion, criticism and disagreement. To dispute about the nature of the State is to dispute about the character of social existence. It is doubtful whether endless dispute is either possible or fruitful.”
Is the word State the right word for the new institution? I believe it is. We, Muslims, need to have our own definition, our own understanding of this “alien” institution in the light of our world view. It is only in this light that my definition has value or not.
The Political Value of My Definition
Saying “the State was born out of the marriage of government and banking” calls for a re-evaluation of what political activism means and can do. For centuries, any civic attempt to curve the increasing power of this institution has always knocked at the door of government. Any protest reflecting social anger was always directed at the political agents of the State, namely the Parliamentarians or in their defect the “tyrant”. The problem is that the government has been entrenched in its role out of a basic necessity. Government is necessary. The attempt to remove the State, seen as removing the government is helpless, and even if successful, pointless: the State still remains there even if you “change” (since you cannot truly eliminate) the government.
Our definition opens a new window, a new door. The political value of our definition is that social protest must have a different focus: not against the government, but against banking. This opens a new reading of revolutionary strategy: the issue is not government and its political agents, the issue is banking. Our definition re-invents the meaning of social protest by indicating that the problem is banking.
To fight banking is very different from fighting the government. Government is necessary, banking is a newcomer. From the point of view of us, the Muslims, the affair is much clearer. Banking is haram, government is halal. This definition forces Muslim political activity to gain a completely different meaning and consequently to gain a new reputation and standing. We can, for the first time in a hundred years be understood. If Muslim protest is re-directed from the political agents to the banking system we will obtain the favour of society. We can become its leading force. In itself this can create a new tool of da’wa. We can channel the dormant social protest to a new path in which success is guaranteed. Allah has declared war on riba. Allah is the guarantor that this strategy will be successful.
This is the potential of a “word”. As we said on the beginning: “Words are windows that open “worlds” before you”. The State, as we see it, has been for too long unnamed. Our word “State” brings clarification which we desperately need so that Muslims can re-think and re-design our social strategy. This meaning that we are proposing here, can bring the Muslims to the frontline of political activity in a way in which we can succeed. This new meaning can become a key to our future as the masters of the XIX century. We will be able to channel all trade unions, consumer unions, civil liberty groups and social movements in general into a new possibility of political activism, in which we are the leading force.
Revolution against government implied violence and terrorism (Bastille, Russian Winter Palace, British Gunpowder plot against Parliament). Fighting banking has a social modality, it entails the abandonment of the key element on which banking continues to exist: paper money. Fighting banking is to return to the true form of money on which society and trading can be constructed without banking.
The word State remains vague and misunderstood in our language. We, Muslims need to provide our own definition of this institution. The event that in my view is the determining factor for the creation of this institution is the establishment of the Bank of England in 1694. With this institution the State was born and simultaneously three other elements of the modern State: National Debt, fiat currency and Central Bank. The essence of this new institution is the mixing for the first time in history of two other institutions government and banking. This gives us the equation on which I base my definition: State = government + banking. On the basis of this we can formulate the idea of the problem of the State, namely, banking. Government is halal, but banking is haram. With this understanding, the struggle against the State should be read as the struggle against banking. This clarification is in my view the true value of my definition. In this way, a word is not only a window, but a weapon.
This definition should also help to eliminate the confusion created by terms such as “Islamic State”. This rejection includes also other terms such as Islamic banking or Islamic constitution or Islamic democracy. These institutions are “alien” to us and they cannot be simply “islamised”. When we have our own terms and models, we do not need to import alien ones. The validity of the term State, should therefore, reflect and explain its alien nature, so that we are capable of thinking and dealing with it.
Allah is our Guide. There is no power except by Him. There is no victory except by Him. Peace and blessings from Allah on our beloved Prophet, his Family and his Companions. He is our model in this world.
A highway robber leaps from behind a tree, sword in hand, and confronts a well-dressed gentleman. “Hand over your money,” the robber cries. His intended victim says, “You fool!… I’m the mayor!” The robber lowers his sword and sticks out a hand. “…hand over MY money.”
With its foundation in twisted and skewed expectations, good humor can be a useful tool in encouraging to question previously unexamined ideas and beliefs.
Words carry that capacity too. Good poetry is about giving new meaning to the words. Poetry should provoke introspection forcing to see issues and problems from a new perspective. This is important, since most of us uncritically and subconsciously absorb our political and moral stands from parents and friends, from schools and media. As such, poetry can be profoundly disorienting…and equally threatening to fragile self-concepts. Viewing the world through new lenses requires a period of unsettling adjustment. To be effective, then, a poet must keep his audience off-balance; leave them reeling. Inducing comfort is most emphatically not the goal of good poet.
I am not claiming to be a poet, I simply trying to say, that we cannot give validity to a word simply because we are comfortable with it. For me the value of a word, is that it helps you to discern, to discriminate. In our case, a good definition of State should give us understanding of our society, it should help us to act. And because we are Muslims this implies understanding from an Islamic perspective, and acting means acting fisabilillah. It is in this light that I value my definition. Whether we like it or not, our cultural and historical values are embedded in language. When we challenge language -this is what a poet does- we are challenging our society. For us this should be done from our own Islamic understanding of life. This is important. Our language should reflect who we are.
What I call the event, defines a before and an after in terms of the nature of government: fiat currency, national debt and central banks, are not just nothing. The institution that emerged in Britain after 1694 was new. And it was destined to change the face of the Earth. Yet it has no name. Without name it cannot be thought.