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10. From State to Market

10. From State to Market

بسم الله الرحمن الرحيم وصلى الله على سيدنا محمد وعلى ءاله وصحبه أجمعين وسلّم

Title: From State to Market

Author:  Abdassamad Clarke

Publication date: 10/11/2012


Assalamu alaykum. Welcome to the Civilisation and Society Programme of the MFAS. This is the tenth of 12 sessions which make up the Politics of Power module. The lecture will last approximately 40 minutes during which time you should make a written note of any questions that may occur to you for clarification after the lecture. 

From State to Market

Unit 1: from the primal estates to classical modernity and the nation-state

To understand the transition from the state to the market, we must first understand the state and thus necessarily the nation-state. But before both we must understand the old ‘estates’ of pre-state society. For the linguistic and etymological definition of these terms see the Appendix. State comes from a root meaning ‘to stand’ and bifurcates into the meaning of ‘condition’ or ‘the political organisation of a body of people’.

The nation state is a state that self-identifies as deriving its political legitimacy from serving as a sovereign entity for a nation as a sovereign territorial unit. The state is a political and geopolitical entity; the nation is a cultural and/or ethnic entity. However, these two definitions imply that there is clarity and certainty where in fact there is none. The French Revolution is largely the beginning of the ‘nation-state’. In this first instance, the French Revolution, the French nation-state, paradoxically, will lead to the idea of the French nation and nationalism.

The 19th and 20th centuries become the centuries of the nation-state with every group on earth, including the Muslims, seeking its own nation.1 Because it is actually impossible to define a piece of land with only a single race, language, ethnicity or religion, the foundation of a nation-state is always preceded or followed by the slaughter and/or expulsion of inconvenient groups. 

The Peace of Westphalia of 1645 is regarded as the birth of the state, whereas it is really the break-up of the Holy Roman Empire of the Hapsburgs. With the Hapsburgs the First Estate comprised the seven Electors who chose the Emperor. The Second Estate comprised the other nobility who did not have the power of election. The Third Estate comprised the heads of the 80 or so cities of the Empire. 

The state shows its origins: rather than being an evolution, it was originally the consequence of the break-up of the Hapsburg Holy Roman Empire. Everywhere, smaller entities such as the German principalities and dukedoms and the Italian city-states agglomerate, but larger entities such as the Osmanlı dawlah are broken up. The colonial powers draw lines completely arbitrarily across maps dividing some peoples, such as Arabia, the Emirates, Kuwait and Iraq, and dividing Sham into Syria, Lebanon, Jordan and Israel, and uniting completely unsympathetic tribes and peoples, such as in Iraq and the Sudan. Sudan is at the same time, the break-up of a larger geographical and ethnical area known to the Arabs as Bilād as-Sūdān ‘the land of the blacks’ which extended right across Africa to present-day Nigeria. Thus a nation was carved out of a part of Bilād as-Sūdān and yet had incorporated into it the southern animists who were not naturally a part of the Sudani order.

In all of this activity, the lawyers are busy drawing up constitutions and the bankers designing a Central Bank and a national currency.

The estates and the state

Prior to the Revolution the order of society divided into Estates, the First Estate, the clergy representing knowledge, piety and banking, the Second Estate, the aristocracy representing land, genetic heritage and military power, and the Third Estate, the commoners representing the rest except that it is only the bourgeoisie who have a voice. In France, the king could and sometimes did convene a meeting of the key people of these three estates in what was the Estates General (états généraux).

Each one of these estates represents a power. The clergy represent the very real power of knowledge. The nobility represent the very real power of genetic inheritance and hereditary ownership of land. The townspeople represent the very real power of numbers of men, commerce and industry.

At the time of the revolution, the First Estate comprised 10,000 Catholic clergy and owned 5%-10% of the lands in France—the highest per capita of any other estate. All property of the First Estate was tax exempt. The Second Estate comprised the nobility, which consisted of 400,000 persons at the time, including women and children. The Third Estate comprised everyone else, both Burghers (bourgeoisie) and peasants and amounted to 97% of the population. All is presided over by the king who is there solely to hold all in balance. Everyone else is out for their own interests, the king alone looks to the interests of the whole and to the interests of each and every one. He is the fulcrum and the still centre of all the movement and activity. That is in times of peace. In times of external threat then he must unite the estates around him and lead them in war. The king is a servant. 

As in most societies, land is wealth and it is the land that bears the brunt of taxation. However, the landowners, the nobility pass that on to the commoners. The clergy as men of the cloth and as scholars have, of course, no money and thus need pay no tax, except that this is not true. The church owns very substantial amounts of land, property and money.

In this slightly idealised picture of the order of the ancien regime, there is, however, a snake and it is the money. For various reasons which no one understands, because very very few understand money, there is no money. Everyone is stretched. Therefore, the king does various things to try and resolve the issue, and because he does not understand money he employs a Scotsman called John Law, and remember that everyone is enthralled by the new British experiment in Parliamentary democracy and the new bourgeois trading culture brought about by the Glorious Revolution of 1688 and the foundation of the Bank of England in 1694, and the issuance of the first national paper money except that the Bank is not a national institution but a private corporation granted certain rights by the state. So King Louis XV’s regent, Philippe d’Orléans, appointed John Law as Controller General of Finances, and was inveigled by John Law into various unwise adventures including the foundation of a trading company called the Mississippi Company which was made liable for all the national debt. To cut a long and complex story short, John Law loved the new paper money of the British and was determined to bring it to the French. But he did what everyone has always done when given the license to print money: he printed far too much, and then suddenly everyone wanted assets back which they had exchanged for paper, there was a run on his bank and everything collapsed very badly. It was from this collapse that the French government suffered for many years, because the King had guaranteed everything. Thus, a very nasty loan that didn’t just stay still but kept growing festered and no one knew what to do with it. And there was no way that the First Estate, the clergy, or the Second Estate, the nobility, would have any part in paying anything. No, the Third Estate had to carry the burden, which understandably made them upset. All of this took many years but the outcome was almost inevitable. And thus two estates vanished along with a great number of the Third Estate who looked even remotely sympathetic to the First and Second Estates or who served their needs, tailors and perfumers for example, as well as various ethnicities which did not fit into the new ‘French’ nation-state.

The Fourth Estate

The Fourth Estate (or fourth estate) is the term for a societal or political force or institution whose influence is not consistently or officially recognized. “Fourth Estate” most commonly refers to the news media; especially print journalism or “The Press” but may also refer to the proletariat.

In another usage, in 1580 Montaigne proposed that governments should hold in check a fourth estate of lawyers selling justice to the rich and denying it to rightful litigants who do not bribe their way to a verdict:

What is more barbarous than to see a nation [...] where justice is lawfully denied him, that hath not wherewithall to pay for it; and that this merchandize hath so great credit, that in a politicall government there should be set up a fourth estate [tr. Latin: quatriesme estat] of Lawyers, breathsellers and pettifoggers [...].

—Michel de Montaigne, in the translation by John Florio, 1603

The old order had gone and so people were needed to devise a new order, and the lawyers seemed to be the logical choice, or at least they certainly chose themselves: Danton, Robespierre et al, down to our own day and Nixon, Clinton, Blair and how many more.

But the most elementary rule of law was forgotten: law needs a sword to see that its judgements are carried out, and the sword had been in the hand of the king and now there was no king. Lawyers rarely wield swords, or at least not very effectively. Thus, the lawyers inherited Louis XVI’s guillotine. Lacking the ordinary equanimity of people who know the sword, know life and death and are thus capable of some containment and restraint, the lawyers reacted hysterically. As Carlyle describes Robespierre, he was ‘the sea green incorruptible’. He was ‘incorruptible’ because he was an intellect with little interest in things that corrupt men such as wealth and women, and thus fatally lacking ordinary human sympathy for those who desire such things, i.e. the great majority of humanity. He was ‘sea-green’ because when himself under any threat or in danger he turned green from fear. This fellow then casually sent many to their deaths for very trivial matters, until one day Mr Guillotine called for him too. 

So a society run by lawyers was a bit too much and thus the times called for a strong man with a sword and Napoleon obliged. It was a great relief.

In parallel with them there was another group who came to inherit the term Fourth Estate and that was the journalists who had recorded every doing of the Revolution but who very often had incited it and provoked it. And how do we reconcile these two groups contending for the name ‘The Fourth Estate’? They are both wordsmiths. If the clergy represented thought and knowledge, the Fourth Estate represented words and debate, language as a weapon. Class with them the philosophes. More words as weapons.

The Market 

The word ‘market’ is intimately related etymologically to ‘merchant’ and ‘merchandise’. The market is a gathering and by extension the place where people gather. Who gathers? The merchants. What do they gather with? Merchandise. The images are very specific and concrete. So how do we get to the abstract and now slightly anthropomorphic concept of ‘the market’ and ‘market forces’? Carl Schmidt’s insight is useful here: Nihilism is the separation of order and location. A market was an order in a location, it was a gathering of people in a marketplace. Today it is an abstract anthropomorphic entity that governs the activities of people who never meet each other and never gather in a location. Following our dictionary definitions further we have:

Sense of “sales, as controlled by supply and demand” is from 1680s. Market value (1690s) first attested in writings of John Locke. Market economy is from 1948; market research is from 1921.

So something was happening around 1680-90 and that is borne out by the foundation of the Bank of England. There is some fundamental paradigm shift. This shift had, however, also happened long before in another society. Ivan Illich says:

Aristotle [in the Politics] observed something new and unheard-of in Athens. Some citizen merchants were using a previously unknown technique when they offered their goods in the market. Instead of selling these goods at cost plus profit, or keeping to the values established by treaty with a foreign supplier, these innovators let the price vary according to offer and demand. Aristotle was fascinated that such a transaction could take place and wondered how it worked. Polanyi was the first to recognize this.
He assembled a team of historians at Columbia University. Each studied a different society, trying to discover when prices first began to move according to supply and demand in ordinary times. All of them reported the same finding. The replacement of simple trade by this marketing technique, though practised occasionally while being generally legally proscribed, was not part of the ordinary social life in any ancient society. Further, such an arrangement only became the form of common behavior at the time of Aristotle and after.

Here I began to see the first lineaments of what is today called the economy – a system resting on scarcity.2

It is very difficult for people to grasp that their quotidian reality is a historical aberration, not, that is, until it begins to hurt. The view of trade that says “Let me see what I can get for this” is utterly different from the view that says “How much did this cost me and how much do I need to add on to that for myself?”


One of the fundamental transactions of the mu‘āmalāt of the sharī‘ah is called murābaḥah defined by Ibn Juzayy al-Kalbī thus:

As for murābaḥah it is that the owner of the goods acquaints the purchaser with  how much he bought them for and he takes a profit from him, whether in general for example, when he says, “I bought them for ten [dinars] and you will give me a dinar or two as profit,” or in detail which is that he says, “You will give me a dirham for every dinar,” etc.

The Islamic banking fraternity have falsely used this term to cover mortgages and the like in the following manner: the customer first comes to the bank saying that he wants to buy such and such a house. The banker knows that if he makes a contract with the customer to buy the house on his behalf and sell it to him at a profit, whether the payment is in instalments or just deferred to a future date, that this is considered to be two sales in one sale, which by the consensus of the people of knowledge is ḥarām and usury. Thus, they make use of the opinion of one of the Followers, Ibn Shubrumah  (d. 144AH), who held that a promise is legally enforceable, and the view of the Malikis that if someone suffers some misfortune because of trusting in a promise made him which is not fulfilled, that he can take the matter before a Qadi. From this, Islamic bankers extrapolated that if the purchaser ‘promises’ to buy a house from a bank if they will buy it from another party, that this is legally enforceable. 

This is not entirely a digression because this is the penetration of this banking mentality into the Muslim ummah.

The Bourgeoisie – Bankers

But we have gone ahead of ourselves. Another group had worked quietly in the background, as is their wont, while all around them laboured and fought. The bourgeoisie, or rather the moneyed class who had evolved out of the merchant class. These were the people who had become enriched by the natural bounty of trade, but upon achieving their wealth, like mountain climbers who have set out to ascend a mountain only to discover that what they thought was the peak was only the top of the nearest foothill, the merchants upon reaching wealth that others can ordinarily only dream about discovered the vistas of unlimited wealth extending far beyond their eyes, and that wealth was not to be acquired by simple trade of goods but by money lending. And thus bankers were born. In defiance of the prohibition of every religion of the act of lending at interest, the merchant naturally enough, in his own eyes, took to accepting a little something for the use of his capital sums, and he saw his wealth begin to grow exponentially. And perhaps he gave some away to good causes. But not too much.

And because the old Estates had sunk into mayhem because of an unmanageable debt, the new order was not going to make the same mistake, and Napoleon quickly recognised a small group of wealthy men as the Bank of France. But remember, as in all such cases, although the ‘Bank of France’ sounded rather grand and patriotic, it was no more national than the local bakery or laundry. In other words, the Bank of France, as the earlier Bank of England and the later Federal Reserve, was a private company rather than an office of state. But this private company had a very important customer: the French nation, and indeed had a monopoly on that customer’s business. 

So now France had a sword again, and everybody was glad. And the lawyers could carry on but without themselves wielding the sword. The estates were gone and everyone was now a Citoyen (citizen). Except some citoyens are much more citoyen than others, as is always the case, but now it is bad-mannered to admit to it. 

And so the age of the nation-state is born. And what a different cast of characters. What estates. In some way, the First Estate survived but stripped of religion. It is academia and in that realm people of every religion, but mostly none, all mix freely. The Second Estate, the landed nobility, survived too but the personages had changed. And there are plenty of the Third Estate but what different people they are. Yet someone decidedly new has appeared, and that is the banker. But the story has had bankers for a very long time, so this is someone more significant. This is a central banker.

Unit 2: the rise of the banker

England got its central bank in 1694, in a deal with a group of men to fund William’s war against France. France got its in 1800. “At that date, financial power was in the hands of about ten or fifteen private banking houses whose founders, in most cases, had come from Switzerland in the second half of the eighteenth century. These bankers, all Protestant, were deeply involved in the agitations leading up to the French Revolution. When the revolutionary violence got out of hand, they were the chief forces behind the rise of Napoleon, whom they regarded as the restorer of order. As a reward for this support, Napoleon in 1800 gave these bankers a monopoly over French financial life by ... [allowing] them [to] control of the new Bank of France.”3


Banks took people’s deposits, originally their gold and silver, and issued receipts for them. People began to use the receipts as money. It then became obvious to the bankers that they could write more receipts than they had gold and silver to cover and then could lend those receipts out at interest and thus earn money on nothing at all. The only risk here was that a large number of the people holding receipts would want their gold and silver back at the same time, as frequently happened, leading to financial collapse. Rather than admit to the fundamentally deceptive nature of this transaction, bankers devised the idea of the central bank which would hold a percentage of ordinary banks’ deposits for just such emergencies. This was all well and good as long as the ‘run on the bank’ was limited to one bank, but when, as happened, confidence in banking itself was shaken, then even the central banks’ deposits were not enough. Again, rather than admit to the inherent deception in the system, bankers would go on to invent global central banks. Of course, this merely delays the day of reckoning and permits the possibility of a global meltdown with horrendous possibilities, as we witness daily.

The Corporation, Bankruptcy and Limited Liability

In England, the first recognised piece of bankruptcy legislation was the Statute of Bankrupts 1542, followed by the Bankrupts Act of 1705. Because debt is now potentially unpayable since in general the grand sum of debt always exceeds the sum of wealth due to the invention of money from nothing, then it was necessary to introduce legislation that allowed people to some extent to walk away from their debts. Otherwise, business failure would incapacitate too many and that would deter many from the life of trade with catastrophic consequences.  So limited liability legislation allows the businessman only to be responsible for a specified maximum amount in the case of bankruptcy.

Although the corporation has solid foundations in Roman law and there were corporate entities throughout the mediaeval period, the modern corporation comes into being during the time of colonial expansion in the 17th century. The true progenitors of the modern corporation emerged as the “chartered company”. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company (VOC) defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company’s royal charter.

The essence of the corporation is that it is regarded as a ‘person’ with rights and liabilities, but the consequence of that is something quite opposite: the shareholders, although retaining rights, no longer have the onerous responsibilities and liabilities that ordinarily they would have had. Thus, shareholders – to some extent – can evade their actual moral responsibilities and liabilities. 

Of course among the first corporations are the state itself, municipal bodies, and universities. Note that here, we are not talking about corporations in the almost anthropomorphic form fashionable among the left-wing who denigrate HSBC, Lloyds, Microsoft or BP, because such corporations comprise the cooperation of millions of people and indirectly involve many millions more over and above the specific few capitalists who run them. When we realise that the nation-states are themselves also corporate entities and that the average person is directly or indirectly an employee of a corporation or a beneficiary of their activities and also a member of a corporate body such as the state in a wide variety of ways, then we have to accept that ‘they’ are ‘us’ for we are all members of corporate bodies for which we accept no responsibility. Banks are special cases of corporations.

Shares and bonds

When we see the evasion of responsibility by shareholders and the assumption of responsibility by abstract bodies, then we begin to get a clue to the workings of the world. People whom we do not know buy and sell the ownership of entities such as Apple and IBM on a daily basis. We see a visible form, but the actual power and wealth movers are invisible, except to students of this area.

To understand stocks and shares, we have to understand what they replaced, which was the partnership, a body of people having the ownership of a body and responsibility and liability for it. Instead, people came to buy parts of corporate entities, sometimes owning them for as little as parts of a nano-second, when the shares were purchased by algorithms, from which shares they derive benefit and for which they have no responsibility or liability.


Thus we have the collapse of an old order and the emergence of a new corporate form – the state, the bank, etc. – in which the lawyer steps to the front – he crafts the legal forms and litigation is the sine qua non of commercial life today – and the owners retreat into the shadows. And we can join our apparently opposite terms, ‘state’ and ‘bank’, when we realise that in spite of the sometimes private nature of the Central Bank, nevertheless the boundaries between state and bank are irretrievably blurred and that today the state itself is in essence a bank.

That brings us to the end of today’s lecture. I recommend Thomas Carlyle’s French Revolution. The subject of our next lecture is Contemporary Revolutions. [recommend preparatory reading, etc., if any]. Thank you for your attention. Assalamu alaykum.




state (n.1) 

early 13c., “circumstances, temporary attributes of a person or thing, conditions,” from L. status “manner of standing, position, condition,” noun of action from pp. stem of stare “to stand” from PIE root *sta- “to stand” (see stet). Some M.E. senses are via O.Fr. estat (Fr. état; see estate). The Latin word was adopted into other modern Germanic languages (e.g. Ger., Du. staat) but chiefly in the political senses only. Meaning “physical condition as regards form or structure” is attested from late 13c. Meaning “mental or emotional condition” is attested from 1530s (phrase state of mind first attested 1749); colloquial sense of “agitated or perturbed state” is from 1837.

state (n.2)

“political organization of a country, supreme civil power, government,” 1530s, from state (n.1); this sense grew out of the meaning “condition of a country” with regard to government, prosperity, etc. (late 13c.), from L. phrases such as status rei publicæ “condition of the republic.” Often in phrase church and state, which is attested from 1580s. 

The sense of “semi-independent political entity under a federal authority” (as in the United States of America) is from 1856; the British North American colonies occasionally were called states as far back as 1630s. The states has been short for “the United States of America” since 1777; hence stateside (1944), World War II U.S. military slang. State rights in U.S. political sense is attested from 1798; form states rights is first recorded 1858.

estate (n.)

early 13c., “rank, standing, condition,” from Anglo-Fr. astat, O.Fr. estat “state, position, condition, health, status, legal estate” (Mod.Fr. état), from L. status “state or condition,” from root of stare “to stand” from PIE root *sta- “to stand” (see stet). For initial e-, see especial. Sense of “property” is late 14c., from that of “worldly prosperity;” specific application to “landed property” (usually of large extent) is first recorded in American English 1620s. A native word for this was M.E. ethel (O.E. æðel) “ancestral land or estate, patrimony.” Meaning “collective assets of a dead person or debtor” is from 1830. The three estates (in Sweden and Aragon, four) conceived as orders in the body politic date from late 14c. In France, they are the clergy, nobles, and townsmen; in England, originally the clergy, barons, and commons, later Lords Spiritual, Lords Temporal, and commons.

fourth estate

“the press,” by 1824, and especially from 1831, British English. Earlier the term had been applied in various senses that did not stick, including “the mob” (1752), “the lawyers” (1825). The extension to the press is perhaps an outgrowth of the former.

Hence, through the light of letters and the liberty of the press, public opinion has risen to the rank of a fourth estate in our constitution; in times of quiet and order, silent and still, but in the collisions of the different branches of our government, deciding as an umpire with unbounded authority. [“Memoir of James Currie, M.D.,” 1831] 

[Newspapers] began to assume some degree of political importance, during the civil wars of the seventeenth century, in England; but it is not until within the last fifty years that they have become, -- as they are now justly styled, -- a Fourth Estate, exercising a more powerful influence on the public affairs of the countries in which they are permitted to circulate freely, than the other three put together. [Alexander H. Everett, “Address to the Phi Beta Kappa Society of Bowdoin College,” 1834]

market (n.)

early 12c., “a meeting at a fixed time for buying and selling livestock and provisions,” from O.N.Fr. market “marketplace, trade, commerce” (O.Fr. marchiet, Mod.Fr. marché), from L. mercatus “trading, buying and selling, trade, market” (source of It. mercato, Sp. mercado, Du. markt, Ger. Markt), from pp. of mercari “to trade, deal in, buy,” from merx (gen. mercis) “wares, merchandise,” from Italic root *merk-, possibly from Etruscan, referring to various aspects of economics. Meaning “public building or space where markets are held” first attested mid-13c. Sense of “sales, as controlled by supply and demand” is from 1680s. Market value (1690s) first attested in writings of John Locke. Market economy is from 1948; market research is from 1921.

Sense of “sales, as controlled by supply and demand” is from 1680s. Market value (1690s) first attested in writings of John Locke. Market economy is from 1948; market research is from 1921.

nation (n.)

c.1300, from O.Fr. nacion “birth, rank; descendants, relatives; country, homeland” (12c.) and directly from L. nationem (nom. natio) “birth, origin; breed, stock, kind, species; race of people, tribe,” lit. “that which has been born,” from natus, pp. of nasci “be born” (Old L. gnasci; see genus). Political sense has gradually predominated, but earliest English examples inclined toward the racial meaning “large group of people with common ancestry.” Older sense preserved in application to North American Indian peoples (1640s). Nation-building first attested 1907 (implied in nation-builder).


1645 – Peace of Westphalia, which marks the collapse of the Holy Roman Empire of the Hapsburgs and consequently the emergence of the state

1688 – The Glorious Revolution in Britain in which the commercial classes represented by parliament dethrone the king and install another who is beholden to them

1694 – foundation of the Bank of England, quickly followed by the first ‘national’ paper money. The loan that William needed was £1,200,000 which he borrowed at 8% interest, granting the lenders the right to call themselves the Bank of England and to issue banknotes. It was governed by the ‘Court of Directors’ drawn from the banks who own it.

1707 – British East India Company, a joint-stock company. This was the company that would later conquer India, whose dominions the crown would inherit after the Indian Mutiny of 1857.

1711 – South Sea Company. Created to manage the National Debt. Led to South Sea Bubble of 1720

1717-1719 – The Mississippi Company (founded 1684) becomes the “Company of the West” (1717) and is expanded as the “Company of the Indies”. It leads to a fantastic bubble which burst in 1720 and which is one of the ultimate causes of the French Revolution.

1717 – Isaac Newton, as Master of the Mint, in the “Law of Queen Anne” moved the Pound Sterling de facto from the silver standard to the gold standard by setting the bimetallic relationship between gold coins and the silver penny in favour of gold.

1763-1776 – The American Revolution culminating in the Declaration of Independence. A good case can be made that this was the attempt to get out from being controlled by the Bank of England and its domination of currency.

1789-1799 – the French Revolution and framing of the Constitution

1800 – The Bank of France. 

1871 – Unification of German states into the German Empire under Prussia.

1876 – The Reichsbank founded as the central bank of Germany from 1876 until 1945. 

1913 – Foundation of the Federal Reserve System, comprising a number of Federal Reserve banks. 

1914-1918 – The First World War otherwise known as the First Bankers’ War because of the sheer volume of finance and the equivocal role of the Morgan Bank throughout. 

1918 – The Versailles Treaty which laid both the moral and financial responsibility for the war on German shoulders would occasion the extreme poverty and humiliation which arguable gave rise to the Nazis and World War II, thus Ernst Nolte’s concept of the European Civil War 1914-1945.

1944 – The Bretton Woods Agreement established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. This means that the banknote was no longer redeemable in gold and silver; it was no longer a receipt. But all banknotes were exchangeable for dollars and the dollar was redeemable in gold and silver. This created the fantastic worldwide desire for dollars that subsequent decades saw. Contrary to agreement, the Americans did use the opportunity to manufacture as many dollars as possible and use them.

1965 – De Gaulle sought a return to the use of gold. 

1971 – On 15 August 1971, the United States unilaterally terminated convertibility of the US$ to gold. This brought the Bretton Woods system to an end and saw the dollar become fiat currency. This action is referred to as the Nixon shock. Along with the oil shock of 1973, and OPEC’s decision in the 70’s to sell oil for dollars even if not selling to the US created the situation in which the United States dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as GBP, for example) also became free floating and traded against each other, bought and sold as commodities and speculated in.

Here the dollar and other currencies become fiaفt as in the Latin ‘let there be’. There is no longer any constraint whatsoever on the production of paper money, particularly not on the dollar, and no limits on the speculation that can be entered into in. The world enters the steep part of the exponential curve, but whether it is heading up or down is the question.

1 See A Balkan Tale for an outline of this process in the breakup of the Osmanlı dawlah in the Balkans

2 Ivan Illich, Beauty & The Junkyard, Whole Earth Review Winter 1991. 

3 Quigley, Carroll: Tragedy and Hope, Chapter 34—France, p.434.