This is part of a series of articles sponsored by NIC bank. NIC are currently having a rights issue that started on 27th August. Read more about their rights issue here. See Part 1 here.

PART 2: THE FICTIVE POWER OF MONEY

What is truer than truth?

Story.

                     —Jewish Proverb

Unlike South Africa, East Africa, at the advent of the 20^th Century, was, for Britain; an incidental colony. It was incidental to the larger colonial project that was India. The British considered East Africa an annex of India, which, apart from encouraging a lot of immigration of middle-class Indians (to help with middle-management), also encouraged the use of the Indian Rupee as currency.

From that little titbit of information we learn that the first bank in Kenya was the National Bank of India (KCB today), receiving its license in 1896.

The second bank to receive a banking license was the Standard Bank of South Africa, formerly, the Standard Bank of British South Africa (today the Standard Chartered Bank of Africa).

The Standard Bank of British South Africa was incorporated in London in 1862 to finance and develop the diamond fields of Kimberly in South Africa. It expanded northwards pretty fast, through the gold mines of Witwatersrand to the rest of Africa, receiving a banking license in Kenya in 1910. It had, by then, dropped the ‘British’ from its name, but not from its makeup.

NIC Bank was born in 1959, just a few years before Kenya’s Independence. It was a joint venture between the Standard Bank of South Africa and Mercantile Credit Company Limited, another British company, whose operations were largely in India. It was formed as a non-bank financial institution whose areas of focus were hire purchase and credit finance facilities

The company went public in 1971 but retained foreign majority ownership until the ’90’s when Barclays Bank, which had acquired Mercantile Credit, fully divested its shares. First Chartered Securities Group (FCS), a wholly owned Kenyan company founded by Phillip Ndegwa, took controlling interest in 1997 when the bank merged with FCS-owned African Mercantile Bank Limited. Less than 2% of the company is held in foreign hands today—a return of sorts to its ‘rightful’ owners. ‘Rightful’ is a bit loaded, of course, but I use it in the purely colonial context, the rhetoric being that Kenya belongs to Kenya, and so do its institutions.

But Where Does All This Come From?

Regardless, our history is also, partly, the history of the UK and so I ask you to accompany me back to 17^th Century Britain to learn of the power that led to the rise of this world-gobbling empire.

It is 1640. Prominent merchants of England finance the wars and foreign policy objectives of King Charles I through the Royal Mint, which holds their gold deposits. The King, in dire straits, takes a forced loan and defaults. Oliver Cromwell wages his civil war against the crown. Chaos reigns.

Recessions today aren’t that much better but with retail bank deposits insured by governments, we feel a little secure, a little cushioned (even though in Kenya, this protection only covers the first 100,000/-). And governments around the world have shown a willingness to jump in aid of investment banks and other financial institutions when things go awry. But just imagine, and maybe this isn’t so far from what is going on in Greece (or what almost happened to the US sometime back vis-à-vis debt owed China), but just imagine a full government default. They can print money, yes, but that isn’t a solution. Robert Mugabe knows this fully well.

Monsieur Le Gendre, a prominent French merchant, would, reportedly, use the term Laissez-faire, “let them do as they will”, in 1680 when asked by Jean-Baptist Colbert, the then Minister of Finances, how the French State could be of service to business. But already we see the beginnings of the push against government interference in 1640. Merchants, disillusioned by the Royal Mint, which they once thought of as unfailing, now turned to private vaults and none were more secure than those belonging to goldsmiths.

These took gold deposits on fee, issuing promissory notes to the depositors guaranteeing the safekeeping of their imports and their return to the bearers of the notes. Ironsmiths (who had been hired by the goldsmiths to secure their vaults) joined in this burgeoning industry.

The income was supplementary at first, but the goldsmiths discovered they could use the gold however they saw fit as long as they were able to pay back claims on the money whenever this happened. The income they earned on interest from lending the money out or from financing various ventures (shipping etc) was far more than they earned from fashioning gold into trinkets and crowns and sceptres and what have you for the aristocrats of yore.

This gold depositing business was proving very profitable. The goldsmiths abandoned their goldsmithing and started soliciting for more deposits, offering interest on the deposits instead of charging fees.

The goldsmith bankers also realized that the promissory notes they issued were being used in lieu of money, were being passed from merchant to merchant to merchant. The bankers began issuing assignable promissory notes—paper money, essentially, easily transferrable.

And so another discovery was made. The goldsmiths realized that they could issue a lot more paper money than they actually had on hand. This was the birth of fractional reserve banking—money partially backed by gold and partially by public trust.

Contrary to popular belief, the Gold Standard has never referred to a currency whose notes were fully backed by and fully redeemable in gold. It has only ever been a system for exchange of value between national currencies.

(A note on FIAT Money “let it be done” AMEN—a reminder of the religious roots of money)

It would be several years though (and a century or two) before the world would really acknowledge Britain as a Super Power, and some would point to the industrial revolution as England’s ascent. But the industrial revolution, and the agrarian one before that, would have been impossible without the financial heft provided by these bankers, as would the naval wars and expeditions carried out by Europe’s powerhouses.