A Refutation of Menger’s Theory of the “Origin of Money”

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SYNOPSIS

The paper challenges Menger on three grounds:

ON METHODOLOGICAL GROUNDS:

Though it is generally assumed that Menger’s theory is at least in part derived from historical evidence, the paper demonstrates that its derivation is entirely theoretical, by showing that all the historically based evidence cited by Menger, is 180 degrees counter to his theory. The paper points out the inappropriateness of attempting to divine an historical event or process with only deductive logic.

ON RATIONAL GROUNDS:

The paper points out that even within the framework of Menger’s scheme, there are two fatal flaws. First the circularity of his reasoning in determining his causes of liquidity, which arises from his use of the “development of the market and of speculation in a commodity” as a cause of liquidity, when in fact it is a definition of liquidity and even Menger uses it as such. Second, the paper points out that within Menger’s scheme, it is not liquidity, but volatility (or lack of it) which is much more important.

ON FACTUAL GROUNDS:

The paper shows that some of Menger’s closely held general views of the stability of gold and silver and their universal use as money, are simply false. In addition the existence of the millennia long dichotomy in the gold-silver ratio between east and west, which Menger seems to be unaware of, appears sufficient to doom his theory.

The paper presents some of the factual evidence gathered by William Ridgeway, in the ORIGIN OF METALLIC WEIGHTS AND STANDARDS; by A.H. Quiggin in A SURVEY OF PRIMITIVE MONEY; by Paul Einzig in PRIMITIVE MONEY; and by Bernard Laum in HEILEGES GELD; all as an indication that an institutional origin of money, whether religious or social, is much more likely to have occurred than Menger’s assumed market origin.

The Continuing Importance of Menger’s Theory of the Origin of Money is demonstrated in recent books by the way that Austrian/Libertarian authors supporting Free Banking usually begin by asserting Menger’s theory as accepted wisdom. Robert Nozick used Menger’s “Origin” to launch (p.18) his book, Anarchy State and Utopia, a Libertarian “bible” that put Libertarianism back on the intellectual map in 1974.

A chief failure of economics is its continuing inability to define a valid concept of money consistent with logic and history.

Since money touches every aspect of economics, this indefiniteness has spread to other aspects of the science, leading to basic moral and political questions as the proper monetary role of government and of institutions such as the Federal Reserve System.

It is still being argued whether the nature of money is a concrete power, embodied in a commodity such as gold; or whether it is an abstract social invention – an institution of the law.  Does it obtain its value from the material of which it is made, or from its acceptability in exchanges due to the sponsorship or legal requirements of the government?  Or is it some kind of hybrid “economic good” starting as a valuable commodity and evolving “in its more perfect forms” into a socially valued token?

These questions are of great practical importance, and lead directly to conclusions about the proper role of government in monetary matters; will shed light an whether the power to create and control money should be lodged, as at present in an ambiguously private issuer – the Federal Reserve Systems member banks.  An accurate concept of money will indicate whether “free banking” should be promoted, tolerated or should be strenuously blocked.

For if money is primarily a commodity; which is convenient for making trades; which obtains its value out of “intrinsic” qualities; then it can be more a creature of merchants than of governments.  It becomes possible to regard its evolution as some unconscious process, not involving human planning or institutional decision.  For example no decision would have been made that wheat, or apples were valuable as food – they simply were, and over time it would have become apparent to all, either through experience or example.

On the other hand if money in its origins and development, or even just in its most perfect forms, is properly an abstract social institution embodied in law – i.e. a legal institution, then it is more a creature of governments than of merchants.  Its evolution and possibly even its origin would have been matters of conscious decision, whether by ancient temple cults, governments, or merchants.  It would have been one of the greatest human inventions.

The three methodological approaches to these questions are:

The Theoretical Method: Using a’ priori principles held to be accurate, deductive reasoning has been applied to the questions surrounding money.  This would be embodied in what von Mises called “praxeology”, wherein “The proof of a theory is in its reasoning”[i].

This is the time honored method of mathematics, and is important in moral reasoning. It is a primary tool of the Austrian school. However it is not especially useful in discovering historic events.  Thus while it can be helpful on some aspects of money, it may not help much with the origin question.

Empirical Method: Based on observation and cataloging of data and on experimentation if possible, under controlled, repeatable conditions, where variables can be observed and their effects noted.  Logical reasoning is applied to the data to “explain” them by theoretical constructs.  More often than admitted the theoretical constructs come first, with researchers later searching out the facts.  The great advances in the physical sciences of the past three centuries are laid to the empirical approach or the scientific method.

In the study of monetary systems this approach must rely on history and in some cases on archeology and numismatics for the observed facts, for two reasons: first, only history provides mankind’s actual experience with money; secondly, as the effects of monetary systems often require several generations to become apparent, a monetary system must be observed over time for its good or bad effects to become known.  Note that we have introduced a moral criteria in the evaluation of monetary systems, to which we shall return.  Now applying the Scientific Method to historical study is limited. Experiments can’t be created where variables are controlled. Still, the historical facts contain the data to which theoretical constructs must conform. William Ridgeway, Alexander Del Mar, George Knapp, and at times Milton Friedman have been among those utilizing an historical or archeological approach.

The Anthropological Approach falls within the empirical method, and on the origin of money, is summarized by A.H. Quiggin’s work, A Survey of Primitive Money:

“If … attention is turned to what is happening at the present day (1949) among the less advanced peoples, a clearer idea can be obtained of the process of evolution, with the possible discovery of the reason why certain objects became ‘money’ while others with equal claims do not.”[ii]

Animosity Between Empirical And Theoretical Researchers

There has existed a certain animosity between practitioners of these methods:

Ludwig Von Mises:

“Knapp … as one of the standard bearers of historicism in political economy, had thought that a substitute for thinking about economic problems could be found in the publication of old documents.”[iii]

Alexander Del Mar:

“As a rule political economists … do not take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.”[iv]

George_Knapp:

“I hold the attempt to deduce (the nature of money) without the idea of a state to be not only out of date, but even absurd.”[v]

One reason for this friction is that normally historicists reach an abstract view of money, and conclude that government has an important role in monetary matters; and normally those who conclude that concrete or economic aspects put money primarily in the realm of merchants, are theoreticians.

With this introduction, we are better prepared to consider Carl Menger’s effort in THE ORIGIN OF MONEY, published in June, 1892.

Carl Menger’s Effort and Method In The Origin Of Money[vi]

While the origin of money need not necessarily answer our questions on the nature of money, it might at least provide valuable clues.  On examination however, and contrary to normal expectations from the title of the piece, Menger’s effort does not utilize an empirical approach, in any except the most superficial sense. This becomes clear when Menger makes no mention of places or times, in support of his thesis, even generally.

Indeed the only historical references are footnoted away to one of his earlier works, PRINCIPLES OF ECONOMICS[vii], and only a few pages are referenced.  Upon examining them we find brief descriptions of various commentators views on the origin of money, including Plato and Aristotle from antiquity, and Paulus from the Byzantine Roman Empire.  The list continues through the commentators of the middle ages, But these views as Menger correctly points out are based on Aristotle, and bring nothing new to the study.

In the referenced Menger work, he finally comes to what he considers historical support for his thesis, but in order to read it we are again footnoted off to yet another work, John Law’s MONEY AND TRADE CONSIDERED.  Only a few pages are indicated, but Menger assures us that law has correctly figured out the question and is therefore the originator of “the correct theory of the origin of money”, which coincides with Menger’s.

Here we observe a rhetorical device Menger has employed.  Had he plainly stated in his theory article, that John Law’s “origin” was the same as his, many readers would react negatively, because of Law’s reputation as having destroyed France’s monetary system in the 1720′s.

However, the indicated pages of Money and Trade Considered, provide no historical material on the origin of money, but give more supposition, deduction, and description of the physical properties, mainly of silver, and its suitability as money.[viii]

In fact, All of Menger’s Historical Evidence Is Against Him

There are only 4 pieces of what could be considered historical evidence presented by Menger – the first three being the commentaries of Plato, Aristotle, and Julius Paulus.  All three of these sources describe systems and concepts 180 degrees counter to Menger’s thesis.  These authorities were closer to the ‘origin’ event than we are, and we may reasonably expect them to have been aware of whatever accounts were available in the literature coming down to them regarding the possible origin of money.  Literature which may have been lost to us through the extensive censorship of Greek and Roman works by Imperial Rome, or in the sacking of Byzantium. That such censorship occurred in the monetary area appears likely.  For example, in the Athenian Constitution coming down to us, we can find out how the garbage was collected, but we will search in vain to learn how Athens state coinage system was run.

Even barring that possibility, these three observers, being from an early period (4th century BC, and the 4th century AD, their accounts of their own systems could lend valuable clues.

Plato’s description:

Money is “a token for purposes of exchange.”[ix]

Aristotle’s description:

“All goods must therefore be measured by some one thing… now this unit is in truth demand, which holds all things together … But money has become by convention a sort of representative of demand; and this is why it has the name ‘nomisma’ – because it exists not by nature, but by law (nomos) and it is in our power to change it and make it useless.” (Nicomachean Ethics,1133A)

Thus Menger is incorrect when in endnote 5, P.21 of the Origin of Money, he claims nomisma is based on the shape of the coin. The crucial nature of this “error” does strain belief.

Julius Paulus’ description:

“A substance was selected whose public evaluation exempted it from the fluctuations of the other commodities, thus giving it an always stable external (nominal) value.  A mark (of its external value) was stamped upon its substance by society.  Hence its exchange value is based, not upon the substance itself, but upon its nominal value.”[x]

This historical evidence against his position does not phase Menger in the least.

Isolating Menger’s Method

Indeed, Menger’s only historically based evidence is his assertion that:

“tested more closely, the assumption underlying (the governmental origin of money) gave room to grave doubts…(as) no historical monument gives us trustworthy tidings of any transactions either conferring distinct recognition on media of exchange already in use, or referring to their adoption by peoples of comparatively recent culture, much less testifying to an initiation of the earliest ages of economic civilization in the use of money.”(p.7, emphasis added) We aren’t told exactly who had these “grave doubts”.

Apparently then, Menger accepts the importance of factual historical evidence, and even demands it from competitive theories!  But he presents this evidence not to support his theory but to undercut his opposition.

Thus we can argue conclusively that Menger arrives at his thesis only through theoretical, not historical facts, and does so in spite of those historical indications available to him.

Menger’s Reasoning and Conclusions

Menger sets out to explain the adoption of the precious metals as money by market forces, excluding the intervention of governments to make them a “product of convention and authority.”

He starts by asserting the difficulties of barter:

“But how much more seldom does it happen that these two bodies meet!  Think, indeed, of the peculiar difficulties obstructing the immediate barter of goods in those cases, where supply and demand do not quantatively coincide.” (p.8)

Menger’s use of the “spread”

Menger points out that one usually cannot immediately resell a purchased item at the purchase price, i.e. that if one is buying or selling, rather than making a market professionally in the commodity, one normally purchases at the asked price and sells at the bid price.  The difference between these prices is called the “spread.”

Menger’s Definition of Liquidity

Menger measures liquidity by the tightness of the spread between bid and asked prices, and notes that some commodities are more liquid than others:

“If we call any good … more or less liquid according to the greater or less facility with which they can be disposed of at a market at any convenient time at current asked prices, or with less or more diminution of the same, we can say…that an obvious difference exists in this connection between commodities.”(p.11)

Its important to note that Menger qualifies this on the next page: “again, account must be taken of the quantitative factor in the liquidity of commodities.”(P.11)

He then posits that a trader would tend to barter goods for more liquid ones, even if he didn’t need the particular commodity, in an effort to eventually be able to barter the more liquid items for actually desired items, gaining “the prospect of accomplishing his purpose more surely and economically than if he had confined himself to direct exchange.”…

“Each individual would learn…to take good heed that he bartered his less liquid goods for those special commodities…qualified…to ensure to the possessor a power…over all other market goods at economic prices.”(p.13)

By this market process, according to Menger, the most liquid commodities slowly, starting with the most discerning people, achieve the status of money, without “general convention or a legal dispensation” making it so. Then once certain commodities become “money”, they become even more liquid than other goods:

“The effect produced by…goods…becoming money is widening the chasm between their liquidity and that of all other goods.  And this difference in liquidity ceases to be gradual altogether, and must be regarded in a certain aspect as something absolute.” (p.17)

According to Menger it is “only from this point that the state” intervenes:

“And the ground of this distinction we find, lies essentially in that difference in the liquidity of commodities set forth above – a difference so significant for practical life and which comes to be further emphasized by intervention of the state.”(p.17)

It should be significant for modern researchers who embrace Menger’s work; and of relevance to our initial questions, that even assuming Menger was correct, the government is involved in money at a very early period, in all likelihood, just before the actual introduction of coinage.  Menger may have been aware that there are no monuments – no identifiably merchant coins extant whatsoever in the disciplines of archeology, or numismatics.  Furthermore, the reason he postulates for government involvement, is not nefarious, but due to the great significance the money designation has upon practical life.  Champions of Menger have taken neither of these points to heart.

That is Menger’s theoretical construct.  He gives 6 causes of liquidity; 5 space or place factors affecting liquidity; and 7 time limits to a commodity’s liquidity. (see Appendix 1)

OUR CRITIQUE OF MENGER’S ORIGIN OF MONEY

Critique of Menger’s Method

For Menger to attempt to discern an historical event, or even an historical process utilizing only a’ priori reasoning must have taken some daring.  Logical reasoning alone is not a promising approach to such questions, which involve numerous specific time, place, and cultural variables, of unknown importance.

Logical reasoning can be used to explain how and why factual events are related and develop; it can point to areas where subsequent observation can establish facts; but logical reasoning in itself cannot establish or discover the fact.  That must be done by observation.

Where Menger draws upon generally accepted “facts”, they are highly selective, often inaccurate, and universally from much more modern periods, and thus have little bearing on his thesis. (see below)

The Circularity of Menger’s Reasoning

There is a degree of circularity of reasoning in Menger’s causes of liquidity and time and place factors.  Remember, he is supposed to be defining causes of liquidity of a commodity, not causes of acceptability of a money.  Of Menger’s 6 causes (see Appendix 1), points 1,2,and 6 really reduce to one point – the effective demand for the commodity.  Point number 2 furthermore should have referred to the trading power rather than purchasing power, as he is discussing a pre-monetary situation.  Cause #6 would be entirely reflected in the effective demand.

Causes #3 and #4 are reducible to the supply of the commodity.

So we are left with 3 causes of liquidity – supply, demand, and his cause #5, the development of the market and of speculation in the commodity.

The circularity arises from the fact that cause # 5 can be viewed as much as a defining element of liquidity, as a cause of it. And indeed Menger uses it in that way!  This can be seen in his use of quantity or volume of trading, as a qualification of liquidity:

“Again, account must be taken of the quantitative factor in the liquidity of commodities.”(p.11)

But the quantitative factor is a part of cause number 5 – the development of markets. Thus the tight spread and volume traded in the market (quantity) becomes his definition of liquidity.  Thus liquidity, by one defining element of it (development of market mechanisms) causes liquidity by another defining element of it (the tight spread).

So liquidity is caused by liquidity.  I stress that I’m not

referring to the increased liquidity which a money commodity would exhibit by virtue of its becoming money.  We are considering its liquidity before it would have become money.

Thus to really explain a commodity’s liquidity, he would have to explain why supply, demand, and markets develop for a commodity.  If you use only liquidity to explain them, you are in a circle.  We know why markets develop for cattle or wheat.  But has Menger really explained why markets would have developed for “These little discs… which in themselves seem to serve no useful purpose” (His words, P.6) except if they were already money?

Critique of Menger’s Choice of the Spread as the Money Determining Factor

Menger’s use of the spread as the measure of liquidity, and therefore the money determinant, because of the ability to realize ‘economic’ prices for goods traded in markets would only be one factor, and primarily a short term one.  Probably a more important factor is volatility, or rather the lack of it – stability.

Consider the two hypothetical situations as depicted in graphic form below.  Commodity A has a tight spread – high liquidity according to Menger, but a “value” in terms of another commodity – say wheat or olives – which fluctuates substantially over time. i.e. it has a high volatility.

SEE CHARTS ON POWER POINT PRESENTATION AT THE WEBSITE

COMMODITY G (perhaps gold) – solid line is bid “price”, dotted line is asked “price”

value in

wheat or

olives       _____________________________________________________________________

time, in days, weeks, months

COMMODITY C (perhaps cattle) has a wider spread, but lower volatility solid line is bid “price”,

dotted line is asked “price”

value in

wheat or

olives      ____________________________________________________________________

time, in days, weeks, months

Assume the quantities traded are “adequate” and substantial.
( SEE CHARTS ON POWER POINT PRESENTATION AT THE WEBSITE)

While commodity A is more liquid by Menger’s definition, clearly commodity C could be more convenient and suitable as a commodity money candidate for a given society, because its price is much more stable. Thus the spread alone, may not determine which commodity evolved into money, since spread alone, or liquidity alone cannot determine or cause stability, and stability can clearly be a more important factor for realizing “economic prices” than the spread.  This stability factor could then foster liquidity. Other factors than the spread would have an influence on the evolution of a money commodity.

If the objection is made that the situation depicted above could not exist for a’priori reasons, it could only be on the grounds that a tight spread must be accompanied by low volatility.

But it can be argued that in a primitive situation, locally produced and consumed goods such as cattle and grain, would tend to be less volatile especially in relation to each other, than goods such as precious metals, that are more likely to be dependent on more sophisticated, even foreign markets; more sophisticated means of transport; and more sophisticated and possibly more capricious traders/arbitrageurs.  To this must be added the extra-cultural factors, and the potential for cultural/societal conflict or even warfare in an international setting.

This could be altered if a major force or forces in the markets, price fixed the precious metals, gold in particular, against a local commodity , and then used its deep pockets and/or political power to maintain that fixed parity, whenever challenged.  This would be especially effective if the commodity against which it fixed gold’s value, were the dominant money commodity already selected by a society, such as cattle.  We’ll discuss empirical evidence below that something like this may have occurred.

Critique of Mengers views on the Stability of Precious Metals

Menger’s 2 sentence discussion of Aristotle’s and Xenophon’s observations that precious metals were steadier in price than other goods, completely misses the point that gold and silver were already being used for money.  Thus the observations do not apply to them as commodities evolving into a role as money, but to commodities which were already money.

Menger asserts that:

“This development (becoming money) was materially helped forward by the ratio of exchange between the precious metals and other commodities undergoing smaller fluctuations…than that existing between most other goods – a stability which is due to the peculiar circumstances attending the production, consumption and exchange of the precious metals, and is thus connected with the so called intrinsic grounds determining their exchange value.”

Note that Menger deals with the stability factor as separate from the liquidity factor.

The Volatility of The Precious Metals Against Menger’s Thesis

In fact, historical experience with the precious metals, in cases where they were and were not money, has demonstrated both periods of abrupt short lived changes in value in terms of other commodities, and of long drawn out changes where gold and silver lost as much as 80% of their value, and never recovered it.

For example in Greece, after Alexander’s conquests and importation of captured gold, prices are reputed to have risen over 50%.  In Italy, we read in Mommsen’s classic work of “The severe gold crisis – as about the year 600 AU…. when in consequence of the discovery of the Taurisian gold seams, gold as compared with silver fell at once in Italy by about 33%”[xi]. Later, with the plunder of precious metals from the Americas, prices in Spain rose about 300%, and prices in Holland and England rose by as much as 500 %, over about a century and a half.  William Jacob’s classic, The Precious Metals, found a 470% increase in prices in France, from 1500 to 1589; and a 400% increase in the Oxford Tables corn prices in England.[xii]

In more recent years, we have observed that the precious metals, on modern markets have been very volatile commodities.  Stanley Jevons pointed out in Money and The Mechanism of Exchange[xiii] that gold had been undergoing substantial changes in value in the 18th and 19th centuries:

1789 – 1809         fell 46%

1809 – 1849     rose 145%

1849 – 1875         fell 20%

This volatility has increased in the 20th century.

According to Milton Freidman and Anna Schwartz, from June 1914 to April 1917, the U.S. money stock rose 46%.  Eighty seven percent of this increase was from gold stock increases, and a 65% rise in wholesale prices resulted.  Gold, which was money, thus lost over half its value in a three year period, by this measure.[xiv]

1914-19                     fell 65%

For more recent periods, when for all practical purposes, gold had lost its governmental sanction as money, it became even more volatile.

From 1971 to 1974 we saw gold increase over 500% from $38 to $200 an ounce.

In 1975, we saw gold drop almost exactly 50%, from $ 200 an ounce to $103.

We then saw an increase of over 700% to over $850 an ounce, and then a multiyear decline to $232. Now its reached $570 an ounce! It’s not possible to explain these movements as just due to changes in the dollar.  Gold is volatile!

The East-West Dichotomy of the Gold Silver Ratio Contra Menger

In addition, Menger’s statement on the stability of the ratio of exchanges of the precious metals and other goods, would require a similar stability in the gold-silver ratio.  Menger is apparently unaware of the great dichotomy in the gold – silver ratio itself, between east and west.

The ratio in the west was generally around I to 10 up to I to 14 in Ancient Greece, and was later fixed by decree at I to 12 throughout the Roman Empire.  However, in the east – in India, China and Japan, as well as in Moslem Africa and Moslem Spain, the ratio was usually closer to 1 to 6 or 7. The immense importance of this fact of the ratio dichotomy, to monetary theory has gone unrecognized by both classical and modern economists, with the exception of Alexander Del Mar.[xv]

Historical Facts are Against Menger’s Assertion of the Universal Use of Gold and Silver as Money

Menger makes a typical assertion regarding money:

“The reason why the precious metals have become the generally current medium of exchange among all peoples of advanced economic civilization, is because their liquidity is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary function as money.” (p.17)

In reality, some very important societies of early and late antiquity did not utilize gold or silver in their monetary systems.  For example:

In Sparta, Lycurgus, in the eight century BC instituted a monetary system reputed to be based on the Cretan system, utilizing 600 gram (about 1.3 pounds) iron ingots, called Pelanors.  The system remained in use for approximately 3 1/2 centuries – a period during which Sparta was a premier Hellenic power. (see Plutarch’s PARALLEL LIVES , Lycurgus and Numa)

In Rome, from its founding in the 8th century BC. until about 207 BC, a copper (bronze) money system was utilized, which during the Republican period appears to have been nominally valued, by law, not by weight.  Silver coinage first introduced by the patricians as legal tender in about 221 BC, then dominated.  Though gold was minted in a Punic war emergency period, it did not become the monetary standard in Rome until after the fall of Republican Rome, and the rise of the dictatorship of the Caesar’s.  Julius Caesar placed the empire on a gold standard by decree when he assumed power, making it a legal tender, and raising its value against silver, from I to 9, to 1 to 12; where it roughly remained for the next 1200 years. See Chapters 1-3 of The Lost Science of Money.[xvi]

The rise of the Caesar’s finished off what was left of the separation of church and state.  The emperor was not only a dictator, but a deity.  His religious office was called the Pontifex Maximus, later in the eastern empire, the Basileus.  The control of money was vested in this religious office of the emperor for 12 centuries. (see Alexander Del Mar, History of Monetary Systems[xvii], and Del Mar’s Middle Ages Revisited[xviii]; also Peruzzi’s, Money in Ancient Rome[xix])

In China, Quiggin notes that “It is noteworthy that Chinese coins are, and have always been, almost exclusively of bronze,…gold and silver, the usual metals for coins elsewhere, were not current in China.”

In Peru, “The lack of any conception of money value in the vast hoards of Inca gold seems as strange to us as it did to the Spaniards 4 centuries ago.  It was all dedicated to religious service and neither external trade nor money were included in the strictly regulated state.”[xx]

Thus gold and silver were far from universally used as money among advanced nations.

Ridgeway’s Archeological Work is Against Menger’s Thesis

Perhaps not coincidentally, Menger’s Origin of Money, reworked from an earlier book, was issued in the same year that Sir William Ridgeway’s The Origin of Metallic Weights and Standards  was published.  Ridgeway’s work, making extensive use of archeology, numismatics, and historical documents, indicates an institutional origin of money rather than a market origin, and has become a classic in the field.

One of the main points developed by Ridgeway is that early gold coinage was designed to represent the ox/cow commodity money unit, already recognized in most advanced societies:

“The gold unit represented originally simply the conventional value of the cow as the immemorial unit of barter.”[xxi]

Ridgeway has catalogued a remarkable consistency in the coinages of the Mediterranean city states.  A large number of issues are consistent at 130-135 grains of gold. (8.4 grams)(see Ridgeway’s chapters 5 and 6)

Here is a partial list of 130 grain gold coins:

Croesseus’ gold stater (c.550 BC)………………………………128 grains

Darius’ Persian Daric (c.505 BC)………………………………130 grains

Rhodos gold coin (5th century BC) ………………………130-135 grains

Thasos gold coin (411 BC) ……………………………….130-135 grains

Athens gold coin (about 400 BC)………………………………130 grains

Macedonian Stater of Philip II (345 BC)……………………….130 grains

Babylonian and Phoenician coinage……………………………260 grains

A double 130, perhaps indicating that a yoke (pair)

of oxen was more normal in this advanced area.

Here then may be the historical “monuments” giving us “trustworthy tidings” of a transaction conferring distinct recognition on media of exchange. Ridgeway considered this phenomena to represent a merging of two traditions, with the gold unit being based on the ox/cow unit.  Sometimes the coins had representations of an ox on them. Why 130 grains?  Ridgeway speculated that this was about what would fit in the palm of your hand.  A coin that was not so small as to be easily dropped or lost; nor so large as to employ more gold than necessary, to be convenient.

The importance of this to Menger’s thesis is that this 130 grain standard was a “convention”, and not just of one government, but of several of them.  Menger would have to argue that the gold had already become a money commodity before the states took over.  But cattle was already there as a money unit.  If gold was in the process of supplanting the old money unit, without institutional conventions, there is no way to explain the international 130 grain consistency.  If it had already supplanted cattle, there is no reason for it to symbolize or represent a cows value.  What it may really represent is a way to give 130 grains of gold, the stable value of a cow!

Ridgeway’s work emphasizes the importance of the ancient temple cults, in both economic and monetary matters:

“The Temple shrines of Delphi and Olympia, Delos and Dodara were centers not merely of religious cult but likewise of trade and commerce… merchants and traders taking advantage of the assembling together of large bodies of worshippers from various quarters, to ply their calling and to ‘tempt’ them with their wares.  The temple authorities encouraged trade in every way; they constructed sacred roads, which gave facility for traveling at a time when roads were almost unknown … and placed those who traveled on them under the protection of their god… at the time of the sacred festivals all strife had to cease… offering a breathing space for trade and commerce – hence the probability is considerable that the art of minting money… first had its birth in the sanctuary of some god.”[xxii]

Laum’s Work on Religion is Against Menger’s Thesis

Investigating the temple cult-monetary link, Bernard Laum’s Hieleges Geld (Holy Gold) was published in 1924; an important German work. Some of its conclusions are:

“The roots of money lie in the cult, originating first out of sacrifices to the gods, then payments to the priests.”…

“The history of money is the history of the secularization of the cultic forms…”

“The Greek states became the creators of money because they were the holders of the cult.”

Then commenting directly on Menger’s theory:

“The theorist claims general validity for his deductive statements, because he has come to his results in the ‘exact’ way.  The historian is more modest.  He will not assert that Menger’s theory never and nowhere materialized in reality.  Had the ‘homo oeconomicus’ of today appeared in the world 3,000 years ago, he would have certainly invented money according to Menger’s rationalist principles.  I only claim that the historical origin of money does not correspond with this theory… according to our researches money is a creature of the religious-political legal rights system… I know very well, that mainly in the latter phases, profane (economic and fiscal) factors determined the development of money just as much as religious factors, but it is difficult to draw a line separating the two spheres.”[xxiii]

Anthropological Evidence Contra Menger

In 1949, A.H. Quiggin’s study of money in contemporary primitive societies – A Survey of Primitive Money – was published.  Her findings are universally against Menger’s thesis, she wrote:[xxiv]

“But it would be hard to find any among the simpler societies consciously troubled by the inconveniences of barter, and money is usually the introduction of the trader and troubles from outside.” (P.5) and

“The objects that are the nearest approach to money-substitutes may be seen to have acquired their functions by their use, not in barter but in social ceremony.” (p.12) and

“Where a cattle standard exists, this is adequate and discourages the growth of primitive currencies… it is noteworthy that the largest and most varied collections of primitive money come from cattle – less areas.” (p.277) and finally

“The evidence suggests that barter – in its usual sense of exchange of commodities – was not the main factor in the evolution of money.  The objects commonly exchanged in barter do not develop naturally into money and the more important objects used as money seldom appear in ordinary barter.  Moreover the inconveniences of barter do not disturb simple societies… this is the state of affairs over about half the world at the present day (1949) …

… the use of a conventional medium of exchange, originally ‘full bodied’ but developing into token money, is first noted in the almost universal customs of ‘bride price’ and ‘wer geld’ (blood money for deaths and injuries) … It is not without significance that in any collections of primitive currency the majority of the items are described as used in bride price.” (p. 321,322)

We recognize the limitations of this anthropological approach – it is not possible to establish history through such contemporary studies – but the evidence mounts up.

That ends our critique of Menger’s Origin, or perhaps it is more accurate to say our refutation of Menger’s theory.  This has deeply negative implications for the Austrian School, for the Libertarians, and for the free bankers, which they would be well advised to investigate now. Most of them begin their monetary expositions with reliance on Mengers theory.

SUMMARY

We have called Menger’s theory on the origin of money into question on methodological , rational, factual, and anthropological grounds.

We have shown that he proceeded using only deductive logic, and have noted the problems with doing so.

On rational grounds, we have shown a circularity of his reasoning in his determinations of liquidity, and have called into question his use of liquidity rather than volatility as the primary factor determining the evolving of money, even within his system.

On factual grounds, we have shown that some of his closely held general views of gold and silver money are incorrect, and we have presented and referred to factual evidence which indicates an alternative (and more probable) path to the development of money.

Stephen A. Zarlenga

Director, American Monetary Institute

V.    APPENDIX 1 The Causes of Different Degrees Of Liquidity

From Menger’s ORIGIN OF MONEY, available as monograph # 40, from the CMRE, BOX 1630, Greenwich, Conn. 06836.

The degree to which a commodity is found by experience to command a sale, at a given market, at any time, at prices corresponding to the economic situation (economic prices), depends upon the following circumstances.

1.     Upon the number of persons who are still in want of the commodity in question, and upon the extent and intensity of that want, which is un supplied, or is constantly recurring.

2.     Upon the purchasing power of those persons.

3.     Upon the available quantity of the commodity in relation to the yet unspoiled (total) want of it.

4.     Upon the divisibility of the commodity, and any other ways in which it may be adjusted to the needs of individual customers.

5.     Upon the development of the market, and of speculation in particular. And finally

6.     Upon the number and nature of the limitations imposed politically and socially upon exchange and consumption with respect to the commodity in question.

We may proceed in the same way in which we considered the liquidity of commodities at definite markets and definite points of time to set out the spatial and temporal limits of their liquidity. In these respects also we observe in our markets some commodities, the liquidity of which is almost unlimited in space or time, and others the liquidity of which is more or less limited.

The spatial limits of the liquidity of commodities are mainly conditioned-

1)     By the degree to which the want of the commodities is distributed in space.

2)     By the degree to which the goods lend themselves to transport, and the cost of transport incurred in proportion to their value.

3)     By the extent to which the means of transport and of commerce generally are developed with respect to different classes of commodities.

4)      By the local Extension of organized markets and their intercommunication through arbitrage.

5)     By the differences in the restrictions imposed upon commercial intercommunication with respect to different goods, in inter local and, in particular, in international trade.

The time-limits to the liquidity of commodities are mainly conditioned -

1)     By permanence in the need for them (their independence of fluctuation in the same).

2)     Their durability, i.e. their suitableness for preservation.

3)     The cost of preserving and storing them.

4)     The rate of interest.

5)     The periodicity of a market for the same.

6)     The development of speculation and in particular of time bargains in connection with them.

7)     The restrictions imposed politically and socially on their being transferred from one period of time to another.

Dear Reader- be sure to read our critique of Menger’s points here, where we show how they all reduce merely to supply/demand.

NOTES

---

[i] Von Mises, Ludwig. Theory of Money & Credit. 1912. Capetown: J.Cape, 1934, p.82.

[ii] Quiggin, A.H. Survey of Primitive Money. London: Metheun, 1949, p.12.

[iii] Von Mises, Ludwig. Cited above,p.478.

[iv] Del Mar, Alexander. History of Monetary Systems. 1895. Repr., NY: A.M. Kelley, 1978. p.101.

[v] Knapp, George. State Theory of Money. 1905. London: on behalf of Royal Economic Society by Macmillan, 1924, p.vii.

[vi] Menger, Carl. Origin of Money, C.M.R.E. monograph # 40, 1984. translator not noted.

[vii] Menger, Carl. Principals Of Economics. Trans. J. Dingwall; NY.; NYU Press, 1976

[viii] Law, John. Money and Trade Considered. London: W. Lewis, 2nd edit, 1720.

[ix] Republic, II, 371, Jowett trans.  The Dialogues of Plato, London, Oxford U. press, 1892 III,52.  As quoted in Principles of Economics Appendix

[x] L.I. Dig. de Contr.  EMT.IE3,1; as quoted in appendix, Menger’s PRINCIPLES OF ECONOMICS

[xi] Mommsen, Theodore; The History of Rome. Trans. W.P. Dickson. 5 vol. NY: Scribners, 1903, Vol. 4, p.495

[xii] Jacobs, William. The Precious Metals. 1831. Repr., NY: A.M. Kelley, 1968, p. 70 – 100, and p.388-391

[xiii] Jevons, Stanley W. Money and the Mechanism of Exchange. 1875. NY: Appleton, 1897, p. 313-330.

[xiv] Friedman, Milton and Anna Schwartz. A Monetary History of the U.S. 1867-1960. Natl. Bureau of Econ. Res., Princeton Univ. Press, 1971,p.195-209.

[xv] Del Mar, Cited above, Appendix A

[xvi] Zarlenga, Stephen. The Lost Science of Money. NY: American Monetary Institute, 2002, Chapters 1-3.

[xvii] Del Mar, cited above, Ch.5.

[xviii] Del Mar, Alexander. Middle Ages Revisited. NY: Cambridge Encyl., 1900, appropriate chapters.

[xix] Peruzzi, Emilio. Money in Ancient Rome. Academia Toscana Di Sciencze E Lettere, 1985.

[xx] Quiggin, cited above, p.229, p.314

[xxi] Ridgeway, William. Origin of Metallic Weights and Standards. Cambridge, 1892, p.155.

[xxii] Ridgeway, cited above, p.215

[xxiii] Laum, Bernard. Heileges Geld. Section trans. by Stephanie Watjen.Tubingen: J.C.B. Mohr, 1924.

[xxiv] Quiggin, cited above, pages noted in text.

A Brief History of Interest

This essay was originally created for the Swiss Money Museum Web site (http://www.moneymuseum.org/) in mid 1999. It appears here thanks to the gracious permission of Dr. Jurg Conzett, creator of the Money Museum Web site.

Updated and adjusted materials taking continuing research on this subject into account are found in The Lost Science of Money book, published four years after this piece (see link below).

by Stephen Zarlenga
copyright 2000, AMI

1)Early Loans And Interest Were Based On Agricultural Produce
From about 30,000 BC human existence became more refined until social and economic forms of agriculture appeared around 10,000 to 7,500 BC. This took the form of hoe gardening done mainly by women and led to matriarchal based societies.
From around 6,000 BC the horse was tamed and sheep, goats and cattle were domesticated so that by 5,000 there existed a mixed culture based on animal breeding and hoe gardening. The great plough revolution starting about 4,500 was complete by 4,000 BC. enabling the first city civilizations to arise, and the introduction of writing shortly after, led to a developing “social technology.”
Loans in the pre-urban societies were made in seed grains, animals and tools to farmers. Since one grain of seed could generate a plant with over 100 new grain seeds, after the harvest farmers could easily repay the grain with “interest” in grain. (Suggested graphics here showing 1 wheat seed, next to a sheaf of wheat with the large number of new seeds which could be generated by that 1 seed) Also since just so much seed grain could possibly be used, there were natural limits to this lending activity.
When animals were loaned interest was paid by sharing in any new animals born. (graphics – a male and female cow/sheep/goat, and the offspring) The Sumerians used the same word – mas – for both calves and interest. A similar Egyptian word meant to “give birth.” What was loaned had the power of generation, and interest was a sharing of the result. Interest on tool loans would be paid in the produce which the tools had helped to create.

2)The Oriental Usury Error On Lending Metals
The social organization taken by the developing urban communities in Egypt, Assyria, and Sumeria is known as the Ancient Oriental System. It embraced the idea of a living King as the divine representative and savior, able to organize the welfare of mankind through a powerful Royal household exercising centralized control over the economy. Compulsory labor was required for public works and Pharaohs instructed what and how much to plant and how much of the harvest would be stored. Agricultural and metallic commodities (mainly barley and silver) by weight served as the primitive money system in these societies.
The ancient orient made a momentous innovation, allowing usury to be charged on loans of metals, with the interest to be paid in more metal. This was particularly a problem with agricultural, as opposed to loans for commercial or trading purposes. The conceptual error treated inorganic materials as if they were living organisms with the means of reproduction. But metals are “barren” – they have no powers of generation and any interest paid in them must originate from some other source or process.
This structural flaw was tempered by central authority. The Royal household, the largest lender and charger of interest, took action to minimize resulting problems by setting official prices for valuing several commodities, in effect monetizing them. Thus farmers depending on their harvest to repay loans, wouldn’t be harmed by seasonal market supply changes where bringing in the harvest would normally lower the prices.
This interpretation suggests that ancient price tables, like Hammurabi’s, have been misinterpreted as price maximums and are really official exchange rates of commodities when used as money. In addition, the Royal power would periodically institute “clean slates” where agrarian (not commercial) debts were forgiven and lands returned to their traditional owners. In one culture the term “Amargi” referred to such emancipations from old debt obligations (see Heichelheim below).

3)The Oriental Usury Error Required Solon’s Reform
In the Greek city states where the prices of agricultural commodities were not monetized by central authority but valued by more individually determined markets, charging usury on loans of coinage to farmers quickly led to severe social problems. By about 600 BC the class of free small farmers was vanishing, with land becoming concentrated into the hands of the Oligarchy:
“Before the introduction of coined money the peasant farmer borrowed commodities and repaid the loan in kind,  and … was probably able to meet the obligation without great difficulty; but after the introduction of coined money the situation became decidedly more difficult…he must take a loan of money to purchase his necessary supplies at a time when money was cheap and commodities dear. When a year of plenty came and he undertook to repay the loan, commodities were cheap and money was dear”, wrote Professor Calhoun.
Unable to get out of debt, eventually bad weather or a poor harvest would bring foreclosure on their land and even bind them into slavery. This enslavement grew to crisis proportions, when Solon came to Athens rescue with his “Seisachtheia” or “shaking off” of burdens. Personal slavery was no longer allowed as security for debts. He canceled  such existing debt contracts; and gave back land which had been seized. Farmers who had been sold into slavery abroad by those to whom they owed money were “bought” back and returned to Athens.
Solon also declared a minimum monetary value for each agricultural product setting floor prices for them (see Heichelheim). He switched from the “Aeginatic” to the lighter weight “Attic” monetary standard reducing coinage weights and increased the amount of coinage in circulation.
Solon had been a merchant in his youth and understood commerce. Yet he blamed Athen’s problems mainly on the rich Oligarchy. He became known as one of the seven great wise men, presenting the Oracle of Delphi with the “wisdom gift” which became inscribed on the temple entrance there: “Know thyself” and “Nothing too much”.
(Fritz Heichelheim’s 1938 work – AN ANCIENT ECONOMIC HISTORY, is recommended for further reading on sections 1 to 3. Also see URBANIZATION AND LAND OWNERSHIP IN The ANCIENT NEAR EAST; edited by Michael Hudson and Baruch A. Levine; published by Harvard’s Peabody Museum of Archeology and Ethnology)

4)Aristotle (384-322 BC) Formulated The Classical View Against Usury
Aristotle understood that money is sterile; it doesn’t beget more money the way cows  beget more cows. He knew that “Money exists not by nature but by law”:
“The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest (tokos), which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural.” (1258b, POLITICS)
And he really disliked usurers:
“…those who ply sordid trades, pimps and all such people, and those who lend small sums at high rates. For all these take more than they ought, and from the wrong sources. What is common to them is evidently a sordid love of gain…” (1122a, ETHICS)

5)The Scholastics Differentiated Between Usury And Interest
The Scholastics (1100 -1500 AD), the Church scholars familiar with the available writings in existence, echoed Aristotle. Acquinas argued that money is a measure, and usury “diversifys the measure” placing extra demands on the money mechanism which harmed its function as a measure. Henry of Ghent wrote: “Money is medium in exchange, and not terminus.” Alexander Lombard noted: “Money should not be able to be bought and sold for it is not extremum in selling or buying, but medium.”
The Scholastics made the first attempt at a science of economics and their main concern was usury; but this was not the same as just charging interest. It was generally not forbidden to earn interest if the lender was actually taking some risk, without a guaranteed gain. Interest could also be charged when the lender suffered some loss or passed up some opportunity by extending the loan. Venice used advanced financial forms for centuries without violating the Scholastic usury bans.
Two types of loans were always exempt from bans on interest: the “Societas”, where the lender assumed some portion of the risk of the enterprise. Also exempt was the “Census” – an obligation to pay an annual return based on some “fruitful” property. At first it was paid in real produce, later in money. The Census was normally capitalized at 8 times the annual return, but the risk of the “fruitful” base was on the lender not the borrower, for if the crop were destroyed by weather, the borrower had no obligation that year. Later cities issued “census” obligations based an tax revenues, which came to be called “rents”.
Usury was much more than charging interest – it was taking unfair advantage; it was an anti-social misuse of the money mechanism.

6)  The Church’s Condemnation of Usury:

Observation of its bad effects-
Pope Innocent IV (1250-1261) noted that if usury were permitted rich people would prefer to put their money in a usurious loan rather than invest in agriculture. Only the poor would do the farming and they didn’t have the animals and tools to do it. Famine would result. Burudian (d.1358), a professor at the University of Paris wrote that: “Usury is evil …because the usurer seeks avariciously what has no finite limits”. This places its results outside of nature – often outside of the possible. St. Bernardine of Siena (1380-1444) observed that usury concentrates the money of the community into the hands of the few.

Divine and human law-
All mankind’s moral/legal codes censured usury, normally with mild limits on interest rates. But the Old Testament strictly forbade Jews from taking usury from their “brothers” (other Jews), and discouraged taking it from strangers. The Scholastics looked on all mankind as brothers. Other codes restricted usury:
*Code Of Hammurabi (2130-2088 BC) limited usury to 33%;
*Hindoo Law – Damdupat – limited interest to the full amount of the loan;
*Roman Law limited interest; Justinian’s 6th century Code reduced the 12½% limit of Constantine the Great, to 4-8%, and accumulated interest could not exceed principal.
*The Koran totally forbids usury, from the 7th century;
*Charlemagne’s laws flatly forbade usury in 806 AD.
*The Magna Carta placed limits on usury in 1215 AD.
*Most States of the United States enforced usury limits until 1981.

Action Against Usurers-
Pope Leo the Great (440-461) laid the cornerstone for later usury laws when he forbade clerics from taking usury and condemned laymen for it. In 850 the Synod of Paris excommunicated all usurers. The 2nd Lateran Council (1139) declared that unrepentant usurers were condemned by both the Old and New Testaments. Pope Urban III (1185-87) cited Christ’s words “lend freely, hoping nothing thereby” (Luke 6:35).
Judicial action was taken against those openly practicing usury and the Church never condoned Jewish usury activity. Christian usurers who used semantic tricks in making loans were worried about excommunication and being denied the sacraments, especially burial in sacred ground. They used every word trick to avoid the usury label. Goods were sold on credit at a higher price which factored interest in. “Dry Exchange” bills in foreign currency were not sent for collection but resold to the borrower for a higher amount, reflecting interest.
Usurers were required to make monetary restitution to their “victims”, and if they couldn’t be found, to the poor through the Church. Vast amounts of such moneys were involved in death bequests. The heirs of usurers were also required to make restitution.

Fall Of The Usury Prohibition-
Conrad Summenhart, of Thubingen University put aside Aristotle’s view, declaring it was OK to use something in a way that wasn’t intended. The Fuggers of Augsburg, vying with Florence to financially dominate Europe, financed Summenhart’s student John Eck to argue the permissibility of certain loans for five hours before the full assembled University of Bologna in 1515. Eck assured them that the method of charging interest had been in use for 40 years with no-one being excommunicated.
As economies became more dynamic, with real growth possibilities, it became clear that charging interest on business loans where the borrowing merchant prospered, couldn’t be condemned as greed or lack of charity and by 1516 the idea of a lending institution charging interest for its services had been overwhelming accepted.

Calvin’s Reformation-
John Calvin finished off the usury ban in 1536. But his arguments were shallow compared to the Scholastics: “When I buy a field does not money breed money?”, he asked rhetorically. For centuries the Scholastics had demonstrated the correct answer is no – it is the field not the money which grows products.
Calvin wasn’t enthusiastic about usury: “Calvin deals with usurie as the apothecaire doth with poison” wrote Roger Fenton. He considered usury sinful only if it hurt ones neighbor and that it was generally legitimate in business loans.
(Additional recommended reading for sections 4 to 6 are THE ARISTOTELIAN ANALYSIS OF USURY by Odd Langholm; and The Scholastic Analysis of Usury by John Noonan)

7) How Capitalism Viewed Interest
The justification for charging interest evolved historically in works promoting capitalism. One recurring theme was to attack Aristotle. Francis Bacon’s WORKS (1610) thrashed the Scholastics for: “almost having incorporated the contentious philosophy of Aristotle into the body of Christian religion…Aristotle…full of ostentation…so confident and dogmatical…barren of the production of works for the benefit of the life of man.” Yet Bacon’s rationale fell flat:
“Usury is a thing allowed by reason of the hardness of men’s hearts. For since there must be borrowing and lending, and men are so hard of heart as they will not lend freely, usury must be permitted…”  and Bacon was aware of usury’s problems:
“… It makes fewer merchants… (and) makes poor merchants. It bringeth the treasure of a realm or state into few hands.”
In William Petty’s 1682 QUANTULUMCUNQUE CONCERNING MONEY usury is redefined as: “A reward for forbearing the use of your own money for a term of time agreed upon, whatsoever need your self may have of it in the meanwhile.”
This ascetic rewarding of self denial, with religious overtones, is still used by some in the 20th century, but Adam Smith’s 1776 WEALTH OF NATIONS, capitalism’s “bible,” put aside these earlier rationales, and justified usury in economic terms:
“The interest or the use of money…is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit.”
This is how interest is popularly viewed today. But Smith overlooked that the lender gets his profit even when the enterprise loses; he ignored the successful business structures used by Venice for centuries, where the lender’s return was based on actual profits. Smith’s endorsement did not remove the stigma against usury; and the debate continued.
Jeremy Bentham’s  IN DEFENCE OF USURY (1787) created the present mis-definition of usury as: “The taking of a greater interest than the law allows… (or) the taking of greater interest than is usual.”
He dismissed  the harmful effects of usury on the common man: “Simple people will be robbed more in buying goods than in borrowing money.” An then he really bared his teeth: (translator: he became even more vicious)
“If our ancestors have been all along under a mistake… how came the dominion of authority over our minds?” Is he going to cite the strong Old Testament admonitions against usury? No – he ignores them and attacks Aristotle:
“Aristotle: that celebrated heathen, who … had established a despotic empire over the Christian world. …with all his industry and all his penetration, notwithstanding the great number of pieces of money that had passed through his hands … had never been able to discover in any one piece of money any organs for generating any other such piece. Emboldened by so strong a body of negative proof he ventured at last to usher into the world the results of his observation in the form of an universal proposition, that all money is in nature barren. …he didn’t consider … (from) a Daric which a man borrowed he might get a ram or an ewe … and that the ewes would probably not be barren.”
Its the same argument Calvin used. But the Scholastics had shown it was the “ewes” not the coins that create more ewes. Humanity would have been better served if these fellows had only been able (and willing) to understand Aristotle.
Despite continuous pressure and support from the financial community, the various justifications for usury proved inadequate in 1836 when John Whipple, an American lawyer wrote THE IMPORTANCE OF USURY LAWS – AN ANSWER TO JEREMY BENTHAM. Whipple proved the impossibility of sustaining long term metallic usury:
“If 5 English pennies … had been … at 5 per cent compound interest from the beginning of the Christian era until the present time, it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth.”
Whipple knew that answering the usury question required an accurate view of the nature of money, and he echoed Aristotle:
“(the purpose of money is to facilitate exchange) It was never intended as an article of trade, as an article possessing an inherent value in itself, (but) as a representative or test of the value of all other articles. It undoubtedly admits of private ownership but of an ownership that is not absolute, like the product of individual industry, but qualified and limited by the special use for which it was designed….”
One can imagine how advanced the world of finance would be today if someone like Whipple were present at the Constitutional Convention in 1787. Had his viewpoint been distilled into law many unnecessary hardships (and wars?) could have been avoided. Instead the delegates operated under a primitive commodity concept of money, similar to that of the ancient oriental system and ignored the crucial monetary questions.

8)  20th Century economists have re-opened the usury question
Modern research is re-examining the Scholastic’s work and conclusions. John Noonan writes that they “had an intuitive insight into the problem only now becoming apparent.” Noonan agreed with Pope Innocent’s arguments (see sect. 5) that usury would lead to the abandonment of industry: “Innocent’s argument…may seem naive or exaggerated at first, but the experiences of agricultural communities, such as ancient Greece, or China throughout most of its history offer considerable corroboration.”
Historian Henri Pirenne noted in MEDIEVAL CITIES that: “The scourge of debts which in Greek and Roman antiquity so sorely afflicted the people, was spared the social order of the middle ages and it may be that the Church contributed to that happy result.”
Despite the omnipresence of charging interest in our lives today, this question is not really settled. Furthermore, the modern world is now getting a taste of real usury. Up to 1981, interest limits (usually under 10%) were in effect in most of the USA. Today credit card debt is very high and growing, along with personal bankruptcy rates. Most people are paying 21 – 25% “interest” on their credit cards each year. Money they really can’t afford to pay.
Some economists actually favor letting the market charge whatever interest rates people can be forced to pay. But this should not continue – it will do so much harm to society that all the free market economists in the world chanting in unison won’t be able to hide the damage.

Money’s nature must be examined
Approaching the usury question intelligently requires a better understanding of the nature of money. The Scholastics maintained that there was a distinction between money, and productive capital. Calvin’s Reformation argued against this. But the Scholastic view has been re-affirmed, for example by Knut Wicksell, the father of modern day interest rate theory who wrote in INTEREST AND PRICES: “It is not true that money is only one form of capital; that the lending of money constitutes the lending of real capital in the form of money. Money does not enter into the process of production, it is in itself as Aristotle showed, quite sterile.”
Re-examining these questions will also require more candor (translator: honesty) from the English speaking economics profession. For example in the English translation of Wicksell’s book, that last sentence on Aristotle is significantly left out! Thus the English speaking members of the Austrian School of Economics (who view Wicksell as one of their own) are denied the full benefit of his work and thought.
Now that The Lost Science of Money by Stephen Zarlenga is finally published in English, it should become much easier for concerned citizens and scholars to examine these questions meaningfully. This book is highly recomended for those interested in usury, from both a moral and a monetary viewpoint.

We hope this brief essay makes clear that history really affects you in the present day, and that an historical understanding of monetary matters is truly essential. Start by reading our recommended works, and if you have questions, don’t hesitate to ask the American Monetary Institute.

Why the Monetary Transparency Act must require the Federal Reserve to publish an overall money supply statistic

Wednesday, May 16, 2007

In response to criticisms of the Monetary Transparency Act by economists, we have been asked to give reasons why its important for the Federal Reserve to provide an estimate of the overall money supply. Yes we also found this rather incredible, but nevertheless provide the answers

The following statements indicate the importance of knowing what the money supply is doing.

From Robert Poteat, AMI Chapter leader for Portland, Seattle and Centralia, WA; and long term monetary researcher writes:

After decades, if not centuries, of using the money supply as a near definition of inflation mantra, not needing to know the amounts is not credible.  How are they measuring inflation?  I once saw a TV segment that showed people checking prices in stores for determining CPI.   Maybe they don’t need the M numbers for that purpose, but we need the information to establish transparency of monetary operations and credibility of the system.

Economists alleging that M3 is not needed for inflation calculations strains belief. Its strange that small time deposits are published in M2, but large time deposits are not needed in M3?  The M3 addition to M2 was/is roughly one third of the total monetary aggregates.  I suspect that no honest reason has been given for dropping publishing M3.  I don’t believe that they don’t keep track of it. The Fed and Census Bureau publish scads of statistical information that is not needed for inflation purposes; they have other useful purposes.

Dropping M3 may be only be the beginning to the eventual elimination of all the M statistics as part of a long time plan to completely obfuscate and privatize the money system.  Moving the reserve rates towards zero is part of the same plan.

Cheers, Bob

From Dick Distelhorst, AMI Chapter leader in Burlington, Iowa, and long term monetary researcher Writes:

The Federal Reserve needs to know and must report the Total Money Supply on a regular basis, as required by the Monetary Transparency Act. Section 2A of the Federal Reserve Act lists the defined goals of the Federal Reserve System: “to promote effectively the goals of maximum employment, stable prices and moderate long term interest rates.”

The Fed’s Open Market Committee usually meets eight times per year and decides whether to increase or reduce our total money supply. It also decides where to set interest rates, specifically the Fed Funds Rate. These decisions determine whether our Total Money Supply will increase, decrease or remain the same. To make these decisions the Fed must know what the Total Money Supply is in relation to the total supply of goods and services available. They should report this total to us in a transparent manner – as they have done since 1945 – but, in 1998 the Fed decided to stop reporting the Total Money Supply known as L, for Total Liquidity. Since then they have only reported part of the total, M1, M2 and M3. Then, in March of 2006, the Fed decided they would no longer report M3, only M1 and M2. This is unacceptable. The Total Money Supply report is critical and, in the name of transparency, must be re-instated. Quoting from the Chicago Federal Reserve’s booklet “Modern Money Mechanics” (issued in 1961: revised 1968; 1975; 1982; 1992; 1994):

“Control of the quantity of money is essential if its value is to be kept stable. Money’s real value can be measured only in terms of what it will buy. Therefore, its value varies inversely with the general level of prices. Assuming a constant rate of use, if the volume of money grows more rapidly than the rate at which the output of real goods and services increases, prices will rise. This will happen because there will be more money than there will be goods and services to spend it on at prevailing prices. But if, on the other hand, growth in the supply of money does not keep pace with the economy’s current production, then prices will fall, the nation’s labor force, factories, and other production facilities will not be fully employed, or both.”

Deciding what the Money Supply will be is as much a part of the public business as any other decision of government, and more critical than most decisions, but relatively few people even are aware that this decision is being made. That’s why we need transparency. The decisions the Fed makes on whether to increase or decrease our Money Supply, usually through Open Market Operations, is critical to our pocketbooks, our jobs, and our economic growth (or lack of same). In general: too large a Money Supply = inflation. Too small a Money Supply = deflation, which leads to recession or depression. To say that the Total Money Supply should not be publicly reported, as the Fed has now decided, is irresponsible. This critical report must be reinstated and properly reported.

The fact that the Fed has to know the Total Money Supply figure in order to make the Open Market Committee decisions, yet they now refuse to make this information available to the Congress and the public implies they have some reason to hide the Total Money Supply figures.

Steven Walsh, Educator and Chicago AMI Chapter Coordinator, tells us that:

Frederic Mishkin, recently New York Fed Vice President and Research Director, and Associate Economist on the Fed’s Open Market Committee wrote on the lack of a definition of money:

“Because we cannot be sure which of the monetary aggregates (M1, M2, M3) is the true measure of money, it is logical to wonder if their movements closely parallel one another.  If they do, then using one monetary aggregate to predict future economic performance and to conduct policy will be the same as using another, and it does not matter much that we are not sure of the appropriate definition of money for a given policy decision.  However, if the monetary aggregates do not move together…the conflicting stories might present a confusing picture that would make it hard for policymakers to decide on the right course of action”(p.53, Mishkin’s The Economics of Money, Banking, and Financial Markets, 7^th Edition, 2002)

But when examining the growth rate of M1, M2, and M3 from 1960 to 2002 Mishkin admits the M’s don’t always move together:

“… while the growth rate of M1 actually increased from 1989 to 1992, the growth rates of M2 and M3 in this same period instead showed a downward trend.  Furthermore, from 1992 to 1998, the growth rate of M1 fell sharply while the growth rates of M2 and M3 rose substantially; from 1998 to 2002, M1 growth actually remained well below M2 and M3 growth.  Thus the different measures of money tell a very different story about the course of monetary policy in recent years…From the data in figure 1 (showing growth rate of M1, M2, and M3 from 1960 to 2002), you can see that obtaining a single precise, correct measure of money does seem to matter and that it does make a difference which monetary aggregate policymakers and economists choose as the true measure of money” (ibid, p.55, emphasis added).

Virginia Tech Economics Prof. Nic Tideman, formerly Senior Economist of the President’s Council of Economic Advisors, and Advisor to the American Monetary Institute, advises us:

My advice for your response would be to emphasize the idea (which you mention) that if the Fed is going to stop naming the things that are money, it is important to have a public dialogue about the thinking that leads to the conclusion that this is the right thing to do.

Stephen Zarlenga, Director of the American Monetary Institute and author of The Lost Science of Money, and A Refutation of Menger’s Theory of the Origin of Money comments:

When the AMI discusses the “money supply” we are including not only government created money – coinage and printed notes, but also the bank created credits which function as money in our system. Often referred to as “purchasing media,” they form most of the nation’s money supply.

For decades economists including such as Milton Friedman told us that the real government money was “high powered money” and the purchasing media credits loaned out at interest by banks were “lower powered money.” If the Fed or economists are now switching this concept and explanation of our money supply to no longer consider the bank credits as “money,” we deserve to have more public discussion of the logic of that switch. We know the Fed has had trouble with the concept of money from Greenspan’s testimony before Congress:

In the late 90’s Congressman Ron Paul asked him why the Money measure – M3 – has been
growing for the past several years. Why has the FED allowed M3 to grow unchecked since 1992?

Greenspan replied, (paraphrased comments, taken verbatim from newspaper reports)

“We have a problem trying to define exactly what
money is…the current definition of money is not sufficient to give us a
good means for controlling the Money Supply…”

Congressman Paul asked “Well, if you can’t define Money, how can you
control the Monetary System?”

Greenspan replied “That’s the problem.”

Just how serious a problem this represents is underestimated. Ideologues like Greenspan fight their battles against inflation in the realm of their pre-conceived ideas. But even in that imaginary landscape they can’t formulate valid plans or economic concepts unless they first
have a valid concept of the nature of money.

Among other important things, requiring the Fed to publish the money supply figures will encourage (actually require) them to get to a reasonable definition or concept of money. Perhaps there is a tendency not to do this because it would highlight the importance of the banking system in the “money” creation process; and the power and privilege that represents would become more apparent. Perhaps that would demonstrate how this money creation privilege is a major factor concentrating the nation’s wealth to ridiculous, levels. Perhaps that would then give a strong indication of the need to remove these special monetary privileges from the banking and financial community.

Other factors can influence inflation besides monetary supply levels; for example the availability of goods and services. But these supplies themselves are strongly influenced by the type of activity that new money creation goes into. If those activities are creating values for living then inflation is kept down because those values are then available in the society. If it goes into non-creative real estate speculation or Wall Street games and mergers and acquisitions then it can cause real estate and stock market bubbles – a form of inflation in those sectors. If it goes into warfare, destroying values instead of creating them, then it can cause a general inflation – a part of our present situation.

That is also why it’s so critically important for transparency in this Act, to know where the newly created credit money is going. The overall money supply stat demonstrates whether the monetary authorities are generally leading the country into monetary expansion or contraction. Leading it into expansion is generally a pre-requisite for good economic opportunity and fairness in an expanding economy and population. Leading it into contraction will place more importance and power onto those who already have money, or the privilege to create it.

Finally, where is any economists’ potentially career ending written public statement that the overall “money supply” is not an important statistic? The Fed says the M3 is not really measuring the money supply appropriately? Then it’s their responsibility to devise a measurement that does the job! And it is long past time for the Congress to play a more active role in overseeing the Federal Reserve System. America’s skewed distribution of wealth situation is enough proof of that.

IMF Bailout? – NO, not again – IMF Buyout? MAYBE.

1997-8, and we are presented with still another example, of the banking and exchange community’s irresponsible behaviour in loaning and investing US generated credits into unstable Asian markets. Considering the far reaching potential negative effects; and the manner in which this was done; and its chronic repitition; perhaps it should also be described as stupid, and even genocidal behavior in a frenzied search for un-earned profits.

Operating under cover of free market theories, and made confident by their experience of the gullible support or acquiescence of Ayn Rand’s delinquent children (a.k.a. the “libertarians”), the financial malefactors are up to their old game:

“Force the American taxpayers to bail us out again, (with profits of course) or the new mess we’ve created may bring down the world’s financial systems, taking the lives of hundreds of thousands in the process.”

Greenspan and Rubin, that much over-rated duo, have had their way with the U.S. financial system for years, and their policies have continued to concentrate government generated wealth, into the hands of the super rich. (Thats a fair way to describe a retroactive capital gains tax cut in which about 28 out of $32 billion in cuts, goes to persons with over $300,000 annual income)

It would be wishful thinking to expect a bailout plan promoted by these fellows to advance a just solution of the problem. From what source or tradition would they draw their ideas of justice? Concepts of Morality have been purposely removed from economic training for decades in America; and for over 2 1/2 centuries in England. Some economists are actually proud of the removal of what they consider “normative” values from their “science.”

At some desperate point, the right strategy in the quest for a decent monetary system may include letting the financial community destroy itself in one of their recurring self created crises.

Two effects would be:

First the general population of the world would suffer grievously, while the miscreant bankers/brokers were relatively insulated by their years of accumulated loot.

Second, as after the great depression (re-read Roosevelt’s 1933 innauguration speech), their free market cover theories would be widely seen for what they in large part, historically have been:

plausible sounding tools of sophistry, designed to maintain a diseased monetary order. Conclusions derived theoretically from faulty premises, in which the nature of money is always misdefined. A system of economic rules which somehow always manage to continue concentrating money and power into the hands of the plutocracy, at the expense of society in general.

It would take decades for their propaganda apparatus to rebuild the public image of their primitive form of capitalism – “savage capitalism” – as Pope John Paul II, calls it. During that hiatus, with the help of developing knowledge in this area, and the INTERNET tool, their “errors” can be exposed and defeated.

At this time however, AMI is not ready to suggest allowing the world’s economies to slide into convulsion just because the bankers deserve it. However there is no reason to save them harmless, and accept another bailout for the bankers, and other corporate miscreants.

Perhaps something more along the lines of a buyout is in order; and we put forward some ideas for discussion:

1)An accounting and general publication of which banking and corporate establishments are involved; for how much; who in those organizations approved the bad loans/investments; What has happened to them? Are their bosses influential in the IMF?

2)Rapid publication of which major speculative trading groups have contributed to the crisis, by shorting the Asian currencies. Which correspondent firms and which US clearing houses assisted their activities.

3) A consideration of ex post facto legislation to recover those billions of dollars in ill gotten gains, in order to apply them to help resolve the crisis. Thanks to computerization, this would not be difficult.

4)Benefits which US provided funds gives to banks or corporations (via the IMF or through the US Treasury) shouldn’t be a gift or loan, but a purchase of the company’s equity, at some adjusted price; perhaps the lowest price of the past 48 months. The Government should end up owning at least whatever part of the bank or company’s equity, which the buyout funds represented; with full voting rights.

Put the shares into a special Government account from which the income goes toward Social Security, medicare or to college scholarships.

Its time to stop giving the banks sweetheart deals which provide no incentive to avoid such future problems.

The crisis sheds some light on Corporate America’s international strategy. Many have watched in wonder as American workers have been fired from well paid manufacturing jobs, and pointed out that this was reducing the market among Americans for the goods produced by the corporations. The crisis shows they preferred to develop their markets outside the US, and also to invest in subsidiaries there. They thus purchased labor at the cheap rates often available in foreign countries where labor has minimal rights.

This had (they thought) the political benefit of suppressing labor in the US, reducing US wage levels, and reducing labor’s political power. But playing with underdeveloped markets, there was a greater risk of default on the moneys due to these organizations. These groups are the loudest exponents of “Laissez faire”; free market views which would dictate that they now suffer their losses.

But Laissez faire was not meant to be followed by them; but to be used as an argument for harming labor and for constricting government – the main organization capable of protecting the common good from the corporate predators.

Real world events would suggest a large upward adjustment in US wage rates, as compensation for the stable political situation which labor in large part, provides here; and for paying for the military machine which international corporate activity depends on.

The corporate attempt to be bailed out of their errors, in the same year that they have agitated to cut welfare benefits to the truly needy, is despicable. Their attempt to have the same American workers they are attacking, bail out their corporate greed and stupidity shows the complete bankruptcy of their philosophy, as well as their management methods, and the depravity of their soul-less existence. Lobbying furtively for assistance from the government they continually denigrate as impotent, attests to the unfathomable depth of their hypocrisy.

It should not be allowed.

ODDER THAN OZ

Copyright 1998 by Mr. Hugh Downs

Following is a transcript of Mr. Downs radio presentation, which he has graciously allowed us to reprint.

What do you suppose Alan Greenspan, Judy Garland, and the American Civil war have in common? Give up? They are all connected to turn-of-the-century U.S. monetary policy, of course! Not so obvious? Let me explain.

Just before the American Civil War broke out, Americans used dollar bills that had been issued by banks. The government didn’t make any money, except coins. When the war began, the government (like all governments at war,) needed a great deal of money fast. President Lincoln decided to print it just like banks did. These early government notes were called “greenbacks” and, as you might expect, printing all those greenbacks led to rampant inflation.

Eventually, about 15 years after the war was over, people who held Federal notes, the greenbacks, could redeem them for gold coin. Few people bothered to make this trade because the war was long over, gold reserves were healthy, and people had faith in the government. Money was once again backed by real gold, but this created a new problem. The government could not print any more money that was not backed by gold, and that constricted the money supply.

People who already had money, that is rich people, didn’t want any more money added to the supply because an inflated money supply, devalues savings. Inflation is always bad for people with money because their money becomes less valuable. But people without money, especially poor farmers, were clamoring for the government to print more. Inflation always helps the poor because debts can be repaid in cheaper dollars and money becomes more available for loans, investments, for everything. By 1874 a new political party called the Greenback Party demanded that the government mint unlimited amounts of coin, print more paper money and give $50 to every U.S. citizen. Poor farmers were demanding an inflationary monetary policy.

The Greenback Party dissolved in about 10 years, but a new party emerged and took up the inflationary baton. They were known as the Populist Party and legions of Midwestern and Southern farmers joined. The Populists eventually supported the Democrats because both parties were part of the Free Silver Movement. Remember the problem with the gold standard: the government couldn’t print any more without discovering more gold to back it up. The Free Silver Movement wanted the government to add silver as yet another standard, in addition to gold. Having two standards would allow the government to inflate the money supply and provide relief to farmers. The price of crops had plummeted but debts still had to be paid in gold backed currency.

On July 8, 1896, during the Democratic national convention, a young 36 year old congressman named william Jennings Bryan gave a brilliant rhetorical flourish to the crowd’s sentiments. Bryan exclaimed: “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind on a cross of gold.” The ecstatic crowd elected William Jennings Bryan as their presidential candidate.

The “cross of gold,” of course, referred to the single standard; the rigid link between gold and money. The gold standard, favored by Eastern bankers and financiers, was also known as the “hard money policy.” Bryan and his friends championed bi-metallism instead. With two standards, the government could create and back more money – a policy known as “easy money.” Farmers were burdened by bank mortgages on their farms. They were forced to borrow gold backed notes. But the price of gold continued to go up, while the price for crops continued to go down. If U.S. monetary policy eased the money supply, farmers might have a chance to survive.

William Jennings Bryan lost the 1896 election to William McKinley. He lost again to McKinley in 1900 and then, in 1908, Bryan lost yet another presidential election to William Howard Taft. But the dream of a looser money supply, and hatred of Eastern bankers lingered on. The Democratic and Progressive Parties, and others, adopted some of the economic principles forged in the Greenback and Populist Parties. Most interesting, though, is that the spirit of the Free Silver Movement and its resentment for Eastern bankers found its way into one of America’s most original fairy tales: the Wonderful Wizard of Oz.

In 1900, Frank Baum, the author of the Wizard of Oz, was a staunch supporter of the Free Silver Movement and, like many Americans at the time, he distrusted the East coast banking establishment. And now we learn a fascinating story told to us by anthropologist Jack Weatherford. Weatherford tells us, in his new book THE HISTORY OF MONEY, that Baum’s tale of Oz is a thinly disguised parable of turn-of-the-century monetary policy. The Wizard of Oz is the wizard of the gold ounce, the abbreviation of ounce is, of course, oz.

Dorothy, the lead character made famous in the screen version by Judy Garland, represented the average rural American. Dorothy, says Weatherford, was probably modeled on the populist orator Leslie Kelsey who was known as “the Kansas Tornado.” Dorothy, and Toto, are flung by the tornado to the East where they discover the Yellow Brick Road – meaning a gold road. The road leads to Oz “where the wicked witches and wizards of banking operate.”

The Scarecrow is the American farmer. The Tin Woodman is the American factory worker, and the Cowardly Lion is William Jennings Bryan. Weatherford says: “The party’s march on Oz is a re-creation of the 1894 march of Coxey’s Army, a group of unemployed men led by … Jacob S. Coxey to demand (a) public issue of 500 million greenbacks…for (the) common people.” The Wizard himself represented Marcus Hanna who controlled both the Republican Party and the McKinley administration. The Munchkins “were the simpleminded people of the East who did not understand how the wizard … pulled the levers … that controlled the money, the economy, and the government.”

The simpleminded residents of Oz were required to wear green tinted glasses fastened by gold buckles. Off to the West, the Wicked Witch of the West had enslaved the yellow Winkies, which Weatherford explains, “is a reference to the imperialist aims of the Republican administration, which had captured the Phillipines from Spain and refused to grant them independence.”

At the end of the story the Wizard and the Witches are exposed as crude fakes. This dramatic revelation makes everything better. The scarecrow, who represents the farmer, discovers that he is really intelligent and not stupid. The Cowardly Lion, who is really William Jennings Bryan, finds courage. And the Tin Woodman, actually the American factory worker, “received a new source of strength in a bimetallic tool – a golden axe with a blade of silver.”

In the original edition of The Wonderful Wizard of Oz, Dorothy returns to Kansas by clicking the heels of her silver slippers together. The moviemakers decided that red looked better on screen than silver and that’s the way most of us remember the tale. As you can see, and thanks to Jack Weatherford for pointing it out, most of us have completely forgotten the secret story behind the Wizard of Oz.

Today, the Federal Reserve Bank determines America’s monetary policy, but the Fed wasn’t created until 1913. The modern equivelent of the Wizard of Oz – or Marcus Hanna – is, of course, the ever-charming Alan Greenspan. So now you know. The Civil War, Judy Garland and Alan Greenspan, really are connected.

Zarlenga’s Talk at the House of Lords, London

THE LOST SCIENCE OF MONEY & MONETARY JUSTICE USING PUBLICLY CREATED MONEY TO FUND PUBLIC PROJECTS

TALK AT THE HOUSE OF LORDS
to Lords, British MP’s, and monetary reformers
at Parliament, London May 4, 2004

A) INTRODUCTION
I thank the Honorable MP Austin Mitchell for inviting me to speak in this historic hall. And Mrs. Sabine Kurjo Mcneill and Canon Peter Challen and the monetary reform groups for arranging it. It’s an honor to bring the research results of the American Monetary Institute on the World’s deepening monetary problems to your attention, – even when those results may sound controversial.
So many positive aspects of our political system originated in yours, nothing would please me more than to contribute to the good functioning of your money system. 2 hours indicated for this session, but since so many of you are versed on monetary matters we’ll get into questions after a brief presentation.
The World’s economic problems are rooted in the miscontrol of our money systems which have been based on an inadequate concept of the nature of money.
In America many States are broke and cutting needed programs and raising middle class taxes, while an untaxed corporate culture resembling institutionalized theft has unfortunately dominated for years. Enron, WorldCom, and Arthur Andersen are gone. Citibank and Merrill Lynch were fined over a thousand million $ for their complicity in scandals. It was New York’s Attorney General Spitzer, not the private Federal Reserve System, who levied the fines. Americans face a future of rising bankruptcies and falling job opportunities. Of course we all feel a lot safer with Martha Stewart heading into goal.
In England, thanks in part to the 1946 nationalization of the Bank of England, and other more recent advances the symptoms take on different, less virulent forms – but I’m told there’s deep concern over growing national commitments and the debt and interest costs they might bring under your present monetary arrangements. The good news for both our countries is that tried and true monetary solutions exist and could be applied.
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HALF OF THE PROBLEM IS The failure of economics from Adam Smith to the present to define or discover a concept of money consistent with both logic AND history. Economists rarely define money, assuming an understanding of it.
It’s still argued whether the nature of money is a concrete power, embodied in a commodity like gold; or whether it’s a credit/debit issued by private banks. Does its value come from the material of which it’s made? Or is it, as we have concluded, an abstract legal institution of society, having value in exchanges due to the sponsorship of government?
The correct answer – the Science of Money – leads to conclusions on the proper monetary role of government; on whether private banks should be allowed to continue creating money – or whether this powerful privilege belongs solely in public hands through government.
THE OTHER HALF OF THE PROBLEM is the Mythology of Money – that what A Lot of People Think They Know About Money, just isn’t so. A body of plausible sounding but misleading – even false ideas, repeated century after century by powerful interests, now passes for monetary wisdom. A large part of this mythology is the view that government has been the main abuser of money systems and inevitably causes inflation. This deeply entrenched viewpoint assumes that society has had better experience with privately controlled money than with government issued money. We’ll examine the evidence behind that dominant viewpoint. I doubt anyone will disagree that beliefs should rest on factual evidence to remain credible?
What if an examination of the facts shows that publicly created money has a superior record to private bank created money? Such facts are found mainly in history.
IN DEFINING MONEY, METHOD IS CRUCIAL
We have two basic approaches to understanding money: A theoretical method based on logic; and an empirical approach based on experience or history. Practitioners of the two methods normally arrive at very different conclusions. Support for commodity money or private credit money tends to be based on theory, while Historians normally want a much larger role for government.
Alexander Del Mar the great monetary historian wrote “As a rule political economists…don’t take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.”
This over-reliance on logic and downplaying of the facts has worsened with students being sidetracked into higher mathematics of questionable use.
ARISTOTLE (384-322 BC) gave the culmination of Greek thought and experiment on money around 340 BC:
“All goods must therefore be measured by some one thing…now this unit is in truth, demand, which holds all things together…but money has become by convention a sort of representative of
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demand; and this is why it has the name nomisma – because it exists not by nature, but by law (which in Greek was nomos) and it is in our power to change it and make it useless.” ([LSM] Ch. 1)
So Aristotle identifies money as a creature of the law. Not a commodity from nature but an abstract social institution. Its essence is not tangible wealth, but a power to obtain wealth.
THIS DISTINCTION BETWEEN MONEY AND WEALTH IS CRUCIAL.
PLATO Agreed With Aristotle and advocated fiat money for his Republic:
“The law enjoins that no private individual shall possess or hoard gold or silver bullion, but have money only fit for domestic use. …wherefore our citizens should have a money current among themselves but not acceptable to the rest of mankind….”(Laws) “Then they will need a market place, and a money-token for purposes of exchange.”(Republic)
Both Aristotle and Plato noted the paramount principle – the nature of money is a fiat of the law, an invention or creation of mankind. This concept is part of a lost science of money which must be relearned as we enter the 3rd millennium if mankind is to move back from the brink of nuclear disaster, to move away from a future dominated by fraud and ugliness toward a future of justice and beauty.
Significantly, Aristotle’s term “nomisma” is seldom found in early Greek texts. It’s in Herodotus in the 400s BC, but not again until Aristotle, over a hundred years later. This concept of money was probably suppressed in an ongoing struggle between oligarchic forces – a kind of “old Boy Network” relying on personal relations, arrayed against public money, and the developing, more democratic, public sphere of the Greek Polis, which introduced and controlled the nomisma payment mechanism. (LSM, Ch. 1)
THIS GREAT “PRIVATE VS. PUBLIC” BATTLE FOR THE CONTROL OF MONEY recurs throughout history to this day. It determines the outcomes that determine how well a money system works. A good one functions fairly; helping the society create values for living. A bad one obstructs the creation of values; gives special privileges to some to the disadvantage of others; promotes unfair concentrations of wealth and power, and disharmony and social strife.
Despite the prejudice against government, the historical record shows publicly controlled money functions better than private systems. Furthermore, research shows that the concept of money – how money is defined – determines whether the system will be publicly or privately controlled. If money is defined as wealth, for example gold, then the wealthy will control the monetary System. If money is defined as credit, then the bankers will control the system. If its correctly defined as an abstract legal institution then the society itself has a chance to democratically set priorities and control the money system for the common good. There’s a great deal at stake in just how a society defines money. (LSM, Ch. 16)
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HERE ARE TWO CASES OF this monetary science from ancient Greece and Rome reflecting Aristotle’s nomisma concept:
Plutarch describes Lycurgus 8th century BC monetary reform when Sparta’s wealth became overly concentrated. He banned using gold and silver and used iron slugs for money. Furthermore those iron pieces were dipped in vinegar while hot, to render them brittle and purposely destroy any commodity value that they had as iron! They received their value through legal sanction. 400 years before Plutarch, Plato confirms that Sparta’s iron money was rendered useless with the vinegar treatment. This nomisma system lasted over 3 centuries and Sparta became a premier power. Polybius tells it faltered when Sparta’s involvement in empire retrogressed her back to gold and silver money. (LSM, Ch. 1)
REPUBLICAN ROME based her money on copper, isolating herself from the East and “disenfranchising” the gold/silver hoards and therefore much of the power of the East. Gold could still be traded as merchandise; but without the monetary power, the ability of the East to control or disrupt Rome’s money was reduced and she had a better chance to control her destiny. Roman Nomisma, were bronze discs valued far above their commodity content through the law. (LSM, Ch. 2)(XXX AES GRAVE SLIDE)
(An Aside – When the US rose to become the dominant world power, we didn’t have this advantage of monetary isolation. But interestingly during the two great crises of our nation – the Revolutionary War, and the Civil War – we erected money systems completely independent of Old World Power: the Continental Currency and the Greenbacks. And though both have been criticized, they served us well.)
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XXX ROMA COIN, XXX DENARIUS, XXX OATH SCENE SLIDES
Rome won the Punic wars, but they destroyed her money system and she regressed to Eastern moneys- First to silver, and then with the imposition of Empire, Julius Caesar established a gold standard using the weight system of the ancient temples. The growth of plutocracy accelerated; wealth concentrated in its hands and the population degenerated into slavery. Adopting the East’s money caused power and even the Empire’s headquarters to shift eastward to Byzantium. (LSM, Ch. 2 & 3)
Since money is based in law, and in turn the money system supports the legal system, The breakdown of law and money operated negatively, one upon the other for centuries in a downward spiral of societal decay, especially in the West, where the city of Rome itself was temporarily overrun. The concept of money regressed to crude metallism and the science of money was lost again, especially in the West.
These two ancient cases illustrate that the system we are proposing is not new or hypothetical. Its almost three millennia old and important societies were based on it.
Several parts of the Lost Science are visible there:
Its legal not commodity basis
Importance of limitation of issue
Importance of keeping the control within national hands
SECTION END
SECTION START
UNFORTUNATELY A MYTHOLOGY OF MONEY has obscured this science and served to keep the money power in private hands. A Science of money is put forward logically and historically showing that seignorage – the profit of issuing money – and more importantly the POWER derived from it, clearly belongs to the nation, not to private banks.
A Plutocracy counters with a mythology – the slur that government – the organized expression of your society CAN’T HANDLE IT.
Since Adam Smith a three-century campaign raises the fear of inflation and abuse under government money, even though the evidence shows greater monetary abuse by private systems. In this campaign they still advertise the 600-700 year old cases of monarchs “debasing” their coinage, but NEVER give the context that this period which we call the KINGLY ABUSE PERIOD occurred after the collapse of European monetary order with the fall of Byzantium in 1204 at the hands of the 4th Crusade. Not mentioned is that much of the Kingly alterations were a necessary form of taxation, or that REPUBLICS fared much better monetarily than monarchies. Nor do they discuss the greater monetary problems caused by private bankers during those times.
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In addition to my book also consult Peter Spufford’s great study Money and its use in Medieval Europe published by Cambridge. He describes how the Anglo Saxon kings re-coined the money about every six years, issuing three pennies for every four taken in. This was a 25% tax or about 4% a year. No doubt some will paint these re-coinages as nefarious, but Spufford says this revenue provided the strength of the late Anglo Saxon and early Norman kings, who adopted their system.
ALSO – While you have been criticized for snobbishly looking down on the Continent, maybe its appropriate in this area. As an island community you’ve had monetary advantages over the Continent and your Kings did pretty well on the money question:
In 1346 Parliament tried to gain control over money but was refused. In 1414 Parliament tried to get at least a veto power in monetary matters but was again refused. Breckenridge in Legal Tender wrote:
“Why did Parliament not succeed in its attempt to assume the coinage power as it succeeded in assuming the power over taxation? One reason…was that Parliament had no other remedy to propose, no other line of conduct to suggest than that pursued by the Crown.”
Despite modern day prejudices, the English King’s long standing monetary prerogative was used responsibly. W.A. Shaw’s History of Currency, written in 1896, could identify only one case of monarchical coinage irresponsibility:
“This instance of debasement (1545-46 under Henry VIII) is the only one on record in English currency history,” he wrote, and it amounted to a grand debasement of about 15%! WHAT’S THE BIG DEAL? If your mental impression of that case is a lot worse, maybe that’s an effect of the propaganda in this battle for control of the nation’s money.
And before bringing up the stoppage of the exchequer, do read Chris Hollis interpretation of that event in The Two Nations.
CONSIDERING MORE RECENT TIMES, distinguished conservative journalist Henry Hazlitt epitomized the modern day form of this private vs public money battle. In his introduction to Andrew Dickson White’s essay, Fiat Money Inflation in France, a classic attack on government money, Hazlitt wrote:
“(The) world has failed to learn the lesson of the Assignats. Perhaps the study of the other great inflations – of John Law’s experiments with credit in France …; of the history of our own Continental currency …; of the Greenbacks of our Civil War; of the great German inflation that culminated in 1923 – would help to underscore and impress that lesson. Must we, from this appalling and repeated record, draw once more the despairing conclusion that the only thing man learns from history is that man learns nothing from history?”
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Hazlitt believed history backed up his viewpoint. He trusted the reports he read on those inflations. But they were not accurate, and to this day a literature about those events continues to grow, ranging from misleading to false, mostly just repeating earlier disingenuous accounts.
Lets take a look – First THE CONTINENTAL CURRENCY begun in May 1775, became the lifeblood of the American Revolution. $200 million were authorized and $200 million issued. They functioned well. In late 76 they were only at a 5% discount to coinage when General Howe made New York City the center for British counterfeiting. You Brits counterfeited billions of our Continentals. If you ever find out how many, please let us know for the record! Newspaper ads openly offered the forgeries; yet General Clinton complained to Lord George Germaine:
“The experiments suggested by your Lordships have been tried, no assistance that could be drawn from the power of gold or the arts of counterfeiting have been left untried; but still the currency … has not failed.”
In March 1778 after 3 years of war, it was at $2.01 Continental for $1 of coinage.
The Continentals carried us over 5½ years of Revolution to within 6 months of final victory. Thomas Paine, England’s greatest gift to America, wrote: XXX TOM PAINE slide
“Every stone in the Bridge, that has carried us over, seems to have a claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten. …But to suppose as some did, that, at the end of the war, it was to grow into gold or silver, or become equal thereto, was to suppose that we were to get 200 millions of dollars by going to war, instead of paying the cost of carrying it on.” (LSM, Ch. 14)
The Continental Currency gave us a nation. Without it there would not be a United States.
FRANCE’s MONEY SYSTEM was brought down by JOHN LAW a fugitive Scottish gambler. But Law’s operations were structured as private companies despite his recommending governmental structures.
After an initial widely hailed success, his main focus became raising the price of the private company shares. We’ve all heard of the orgies of private speculation on the Rue Quincompaix in Paris, concurrent with England’s 1720 South Sea Scandal – another private affair. Law’s system was thus largely a failure of private money. The more obvious lesson which the French should not have had to learn from John Law, is that its not a good idea to turn your nation’s money system over to a professional gambler wanted for murder in his home country! DUH.
FRANCE’S later ASSIGNATS from 1789 were government issued, but under conditions of a society and economy already so ruined by aristocratic extravagance that the people had risen in
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revolution. In the modern propaganda battle for control over society’s monetary power the Assignats described in White’s Fiat Money In France has been an important propaganda weapon against government money. Few realize that was his purpose, written in 1876 during the battles over the American Greenbacks, almost a century after the Assignats were issued. White, whose inherited fortune arose from banking, eloquently used several rhetorical methods to attack the Greenbacks. But Hazlitt’s introduction presents White’s essay as objective history on France, not as a political tract on the Greenbacks. Since a direct examination of the Greenbacks and their results would defeat Whites purpose, instead he argued from analogy, asserting that what was true for France in time of ruin, must also be true for the United States in relative calm.
Right from its publication Whites book was exposed in a lengthy essay by Stephen Dillaye, who pointed out the purpose and faults in White’s arguments including omitting to inform his readers that the Swiss and later British counterfeited far more Assignats than the French ever created. These facts became documented through English court cases in which the counterfeiters were suing each other! In the propaganda battle against government money, Whites book has somehow been continuously kept in print by conservative foundations, the latest being the Cato Institute; Dillaye’s important essay, out of print for 125 years is quite rare but we managed to find one, and will reprint it.
Well you may be thinking, no matter what Zarlenga says THE 1923 GERMAN HYPERINFLATION surely condemns all government paper money!! But in fact that occurred under a privately owned and privately controlled Reichsbank. Furthermore the hyperinflation began the very month that all German governmental influence on the bank was removed and placed in private hands at the insistence of the occupation forces. Furthermore Hjalmar Schacht tells us in his 1967 book The Magic of Money, that this private Reichsbank actually facilitated the hyperinflation by financing the speculators short sales of the mark. He didn’t mention these things in his 1928 book on the subject.
It would be asking a lot after 3 centuries of propaganda for this brief examination to convince you, but hopefully you’ll agree that a thorough examination is called for.
WHAT ABOUT THE AMERICAN GREENBACKS? Again this case doesn’t stand scrutiny. Contemporary observers called it “the Best Money that ever a nation had” and a majority wanted to keep them permanently. But they were outmaneuvered politically by a wealthy coalition of bankers, professors and Puritan ministers. Greenback Photo
Thanks to 100 years of misreporting and propaganda, the image of the Greenbacks coming down to us is inflated or worthless paper money. But in fact, $450 million were authorized and $450 million were printed. Counterfeiters couldn’t duplicate the Greenbacks. Every Greenback was eventually exchangeable one for one with gold coin.
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The Greenbacks were not promises to pay money later – they were the money. Since they were not borrowed, they did not give rise to interest payments and did not add to any national debt. The U.S. Treasury printed them and spent them into circulation.
Economists know little about the Greenbacks. Critics merely remark that they dropped to 36 cents in gold, and leave it at that. While that happened, its highly misleading. Here’s the whole picture: XXX Greenbacks Vs Gold CHART
Some claim the Greenbacks kept value because later legislation called for redeeming them in gold. But that unnecessary Resumption Act couldn’t pass til 1874 for implementation in 1879. That couldn’t have caused the Greenbacks to start rising in July 1864. What did happen was that in June 1864, Congress limited the amount of Greenbacks to $450 million. An important part of the science of money is limitation of issue.
ACTUAL PRICE MOVEMENTS DURING THE PERIOD were complex
Wesley Mitchell’s 1908 Greenback studies are watershed works. He quickly discovered that “There was no easy explanation of prices.” Many related commodities didn’t move the same, such as wool and cotton. Gunpowder prices didn’t rise much. The fastest rising commodities in one period were sometimes the fastest falling in another period.
Mitchell constructed several price indexes, as there were none in existence. Items had to be weighted for importance. Mitchell’s indexes started at 100 in 1860. His cost-of-living index median rose a maximum of 73% by 1866 in the east, 57% in the west. This is a very different picture from mere gold prices.
YES THERE WAS INFLATION BUT REMEMBER 13% OF THE POPULATION was fighting a terrible war. 625,000 died. Greenbacks performed well despite being spent on destruction as this horrific scene from Gettysburg shows. XX GETTYSBURG
THEY WERE ALSO BEING ABUSED BY THE BANKERS. FOR EVERY GREENBACK CREATED BY CONGRESS, THE BANKING SYSTEM CREATED $1.49 IN BANK NOTES.
An infuriated Treasury Secretary Chase remarked: ‘It is a struggle on the part of the banking institutions of the country to bleed the government of the U.S. to the tune of 6% on every dollar which it is necessary for the government to use in carrying on this struggle for our independence and our life.”
And Still they functioned well. Some later economists would be surprised how well:
COMMENTS ON THE WARTIME INFLATION
Unger has noted that: “It is now clear that inflation would have occurred even without the Greenback issue.”
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And comparing a wartime inflation under a government run money system (the Civil War) to wartime inflation under a private banker run system (WW1), Civil War historian Randall wrote:
“The threat of inflation was more effectively curbed during the Civil War than during the First World War. Indeed as John K. Galbraith has observed, ‘it is remarkable that without rationing, price controls, or central banking, Chase could have managed the federal economy so well during the Civil War.’”
The fact that the Greenbacks were not accepted for import duties may also have been an important negative factor against the currency:
“Hence it has been argued that the Greenback circulation issued in 1862 might have kept at par with gold if it, too, had been made receivable for all payments to the Government,” wrote financial historian Dewey. Also, if interest payments on government bonds had been paid in Greenbacks instead of gold, a large part of the demand for gold would have disappeared. Studenski and Kroos, in their authoritative Financial History of the United States, pronounced in favor of the Greenbacks:
“Some writers have ascribed the price inflation almost entirely to the issuance of greenbacks, but this is a mistaken view. Even if the greenbacks had not been issued and bonds had been sold at whatever price they would bring in the market, inflation would have taken place. It would merely have taken another form – that of the monetization of debt through the issue of bank currency or the creation of bank credit.”
AND WHAT IF??
WHAT IF instead of being spent on destruction, they went into building infrastructure, canals and roads; or more farm machinery factories? Spending such money on infrastructure or on productive capacity need not be inflationary. For example the Erie Canal lowered freight prices from $114 a ton down to $9 a ton.
THE GREAT LESSON OF THE GREENBACKS Is That In Times Of Crisis – and other times too – our nation has Power to do what is financially necessary, through our government. We dont have to beg or borrow money from the wealthy and, create an astronomical national debt. We don’t have to tax the middle class into oblivion, or cancel necessary programs. We can carefully use the nations’ sovereign money power far more than we presently have been allowed to realize. (LSM, Ch. 17)
We have gone into some detail since this is the system we advocate. Again its not a theoretical, hypothetical reform, but something we know how to do and have done, basing a third of our nations money supply on it for five decades.
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THE SOUTH’S CONFEDERATE CURRENCY BECAME WORTHLESS and we agree that a fiat currency does depend upon a continuation of the government that issues it. But also the Confederate money never reached the level of real money. It was always a promise to pay money later, notably in gold or silver form. The South was afraid of paper money likening it to “the Mark of the beast.”
IN MORE RECENT TIMES, DURING WARFARE, banks to assure their own survival, as in WWI and WWII, issued the money in large quantities. They knew the resulting production would be blown up, sunk or be useless and not become new consumer goods or production facilities or improved infrastructure, which would have lowered prices, benefited the populace, and made the people more independent of the bankers.
Warfare thus became associated with “getting the economy moving.” But it wasn’t the warfare; it was the accompanying monetary and production activity that did it.
We haven’t seen modern cases in the English speaking world where such high levels of money creation were directed into real production, and not specifically destined for destruction. The private banking system has been unable or unwilling to do that, and they have not allowed government to do it. Partial exceptions are the limited efforts undertaken by Roosevelt after the Great Depression, which gave us projects like Hoover Dam, and the water and sewer systems still used in our upstate New York area. Another exception was NASA’s all-out effort to reach the moon, which fostered much of our modern miniaturized computerization.
In short, the Plutocracy’s inflation theme is “the big lie.”
You can’t allow this mythology to dictate you actions.
SECTION START
HOW WAS THE SCIENCE OF MONEY RECOVERED AFTER ROME DECLINED?
About 800 AD CHARLEMAGNE re-instituted money in the West. But minting his pennies depended on working slaves to the death in the silver mines. XXX PENNY (LSM, Ch. 4)
When his Empire ran out of conquests and slaves, the money system faltered. This plunder/conquest/slavery basis of precious metals systems continued well into the 19th century. Modern 19th and 20th century moneys claiming to be precious metals systems, depended on an element of fraud as we’ll see.
JUST AS VENICE BEGAN EXPERIMENTING WITH FIAT COPPER COINS, Columbus found America and Europe’s precious metals money systems became more functional only after she began the plunder of the Americas. The total loot taken at gunpoint from the Indians from 1500 to 1700, was
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over 1200 tons of gold and 60,000 tons of silver! These amounts far overshadowed European supplies, and prices rose about 400 to 500% during that time.
The theft was their minor offense. Estimates place the Indian population under Spanish control at 32 million souls and in less than 40 years they killed about 15 million of them; working most to death in the mines. Near Mexico City one report states:
“For half a league round the mine, and for a great part of the road to it, you could scarcely make a step except upon dead bodies or the bones of dead men. The birds of prey coming to feed on these corpses darkened the Sun.”
Spain did the dirty work on the ground; England and Holland formed privateers to raid Spanish fleets. XXX POTOSI COIN (LSM, Ch. 8 )
This was a very rare period where the gold supply kept pace with population growth. Historically it has not, and so gold money systems have been formulas for deflation. This “blood stained money” had profound effects on Europe, forcing great structural changes, distributing wealth more broadly and creating a “Renaissance of the North” which the Reformation is usually given the credit for.
The Bank of England then Usurped England’s Money Power from the Crown in 1694, after Dutch William 3rd of Orange took over England. One of the founders William Paterson remarked:
“The very name of a bank or corporation was avoided, though the notion of both was intended, the proposers thinking it prudent that a design of this nature should have as easy and insensible a beginning as possible…But it was found convenient to put it to hazard and expose so much of the nature of the thing…as was needful to have it espoused in Parliament.” (LSM, Ch. 11)
Until then England’s monetary power was in the Monarch’s hands. But from this point, bank of England credits – its notes and book credits – would be substituted in place of public money. This has promoted a confusion between credit, and money, to this day. But they are different things. Credit depends on the creditor remaining solvent. REAL MONEY DOES NOT PROMISE TO PAY SOMETHING ELSE.
Credit can legally be made into money, but it’s not itself money. Money is on a higher order than Credit. It is unconditionally accepted as payment. “Credit expands when there is a tendency to speculation, and sharply contracts just when most needed to assure confidence…,” wrote Henry George.
Those behind the Bank of England obscured the real source of the Bank’s power – ITS LEGAL PRIVILEGE – its notes were accepted in payments to the government.
It recovered the science of money, but for the private profit of a small group not the whole nation. Using the principles of money for private purposes produced harmful results: 120 years of near continuous warfare spawned an unpayable national debt leading to excessive taxation which led directly
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to horrors such as the Irish Potato Famine. Before then, when a nation’s money system was used for taxation, the revenue generally aided the society at least in terms of what a Republic or King thought was needed. But private moneys like the Bank of England’s concentrated society’s resources into a few hands, crippling the possibility for government to function properly, leading to a growing contempt of government.
REGRESSION OF MONETARY THOUGHT
The inflow of blood stained metal from America held back monetary thought in metallism. Even so, the principles of the science of money re-emerged from time to time as in England’s 1601 Mixt Moneys case, or the writings in Bishop George Berkeley’s Querest in 1735.
BUT THEN IN 1776, THE FATHER OF ECONOMICS, ADAM SMITH, In 1776 in his Wealth Of Nations book took a giant leap backward and obliterated any concept of money in the law, by defining money this way:
“By the money price of goods it is to be observed, I understand always, the quantity of pure gold or silver for which they are sold, without any regard to denomination of the coin.”
Smith regressed the concept of money backwards from being based in law, not just back to a level of unlimited coinage, but all the way back to pure metal by weight, where the concept of money was before the Romans arrived in England!
The Bank of England had advanced to abstract paper money 80 years earlier; not in theory, but in practice. Adam Smith regressed to commodity money, not in practice, but in theory. His theory applied to their practice caused confusion and created mystery to this day. (LSM, Ch. 12) Interestingly, Marx did no better.
We find that the modern 250 year attack on government originated largely in Adam Smith’s efforts to keep the monetary power within the Bank of England. Smith glorified the Bank and obscured its private ownership saying it functioned as “a great engine of state.” He attacked government issued money.
“A revenue of this kind has even by some people been thought not below the attention of so great an Empire as that of Great Britain…But whether such a Government as that of England – which, whatever may be its virtues, has never been famous for good economy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into – could be safely trusted with the management of such a project,
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must at least be a good deal more doubtful.” (Adam Smith, Wealth of Nations; p.358 – in the Great Books collection, vol. 39)
Smith’s insulting attacks on the English Government marks the modern beginning of a relentless attack on society – the belittling and smearing of its organizational form – government. The single organization potentially able to block plutocracy’s encroachments. Smith also inadvertently illuminates the major purpose of this attack: – to keep the money power in private hands.
Every day we see examples of how this disease has reached epidemic proportions. It has spread from Hayek and Ayn Rand to their intellectual heir Rush Limbaugh and his propaganda radio. Its not entertainment. Its gone beyond politics and into treason.
The attack on government is serious enough, but it becomes really obnoxious when combined with THE ATTACK ON HUMANITY, as seen in
ADAM SMITH’S SELFISHISHNESS “ERROR”
Following Buckles lead, George identified the false axiom on which Smith’s Wealth of Nations is based:
“Buckles understanding of Political Economy was that it eliminated every other feeling than selfishness.” Wherein Smith ‘generalizes the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness; thus making a deductive application of one set of mental principles to the whole set of economical facts. He everywhere assumes that the great moving power of all men, all interests and all classes, in all ages and in all countries is selfishness…indeed Adam Smith will hardly admit common humanity into his theory of motives.’” (SPE, 89, 90)
Consider the negative impact on humanity of Smith’s selfishness assumption: Supporters of his doctrine argue that it is merely in harmony with human nature. But clearly, if Man is defined in such a base manner and systems of laws with their rewards and punishments are enforced along those lines, then over time, they will tend to create a form of humanity in “harmony” with their false conception of an economic mankind.
This de-evolutionary process, encouraging a lower form of humanity has been ongoing especially in the English speaking world for well over 2 centuries. The work of great English novelists
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such as Charles Dickens or great philosophers like Bishop George Berkeley may have slowed it, but didn’t stop it. Henry George saw exactly where it would lead:
“Nor can we abstract from man all but selfish qualities in order to make as the object of our thought…what has been called ‘economic man’, without getting what is really a monster, not a man.” (SPE, 99) Ecco Homo – circa 2000!
OUR AMERICAN EXPERIENCE contains many of the best “case studies” for understanding money. We have been a great monetary laboratory – every conceivable solution was tried at some time, and we’ve been a paper money nation from Colonial days. Our development was inseparable from it – without it there’d be no United States.
English and Dutch laws forbade sending coinage to the colonies, placing them in continual distress. The intent was to extract raw materials, not for the colonists to trade with each other. An early form of globalization. The Colonies had to devise monetary innovations. (LSM, Ch. 14 & 15)
In the country pay period (1632 – 92) 17 different commodities were monetized by law at specified prices. It didn’t work – everyone wanted to pay with the least desirable commodity, in the worst condition.
1633 – Virginia and Maryland monetized tobacco, issuing warehouse receipts for it. A bumper crop in 1639. Half crop was burned; debts were reduced 60%
XXX Pine Tree COINS
1652 – Hull’s mint in Massachusetts stamped the gold and silver “tree coinage.” But it quickly flowed to England and was melted down.
Private land banks were set up but were shunned by the colonists, who considered money a prerogative of government, as it was in England until 1694.
XXX Mass bill of Credit
Then in 1690, 4 years before the Bank of England, Massachusetts embarked on a radical course and issued paper bills of credit, spending them into circulation. Rather than a promise to pay anything, they were a promise to receive them back for all payments to the commonwealth. The colony thrived. Other colonies copied them and INFRASTRUCTURE arose.
XXX Franklin
In 1723 Pennsylvania’s system loaned the bills into circulation, charging interest on them and using it to pay colonial expenses. Ben Franklin wrote:
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“Experience, more prevalent than all the logic in the World, has fully convinced us all, that paper money has been, and is now of the greatest advantages to the country.”
In Franklins’s words, one detects a tension even then, between theoretical argument and practical experience, a continuing battleground in economics today.
SOME LONG LOST PRINCIPLES OF THE SCIENCE OF MONEY QUICKLY RESURFACED:
* Money need not have intrinsic value; its nature is more of an abstract legal power than a commodity.
* Accepting the government paper back in taxes was the key feature needed to give it circulating value.
* The quantity of money in circulation had to be regulated to maintain its value.
* They observed that paper money helped build real infrastructure.
* Most importantly, the colonies did not issue more money than their legislatures authorized. They have an outstanding record issuing currency.
Of over a hundred colonial issues I found only one case of fraud. In Virginia, a Mr. Robertson who was supposed to be burning the old notes as new ones were printed, was giving them to friends instead.
BUT IN THE BATTLE FOR MONETARY DOMINANCE THE COLONIAL MONETARY experience has been miscast as irresponsible inflation money. This was the result of 18th century Boston’s medical Dr. William Douglas’ inaccurate writings. The error was corrected by Alexander Del Mar in 1900 in The History of Money in America, but was ignored. It was authoritatively cleared up again by Professor Leslie Brock in 1976 and again ignored. Many economists, and especially the libertarians still haven’t got the message that colonial government paper money was crucial in building the colonies.
In 1764, England’s Lords of Trade and Plantations prohibited all colonial legal tender issues, and that became the underlying cause of the American Revolution, not some tax on tea.
XXX Continental Currency
We have already discussed how CONTINENTAL CURRENCY became the lifeblood of the revolution.
OUR CONSTITUTIONAL CONVENTION CONSIDERED TWO GRAND THEMES OF HUMANITY.
First whether mankind could be self-governing or had to be ruled by authority. Often referred to as the American experiment. We are still learning the outcome, and one of the reasons it’s still in doubt is because of the way the Convention mishandled the other grand theme – which was over the nature money.
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By the time of the Convention, the great benefits of the Continentals was nearly ignored; along with much of the rest of our hard won monetary experiences. Some wanted to emphasize that the Continentals became worthless and rejected the idea of paper money altogether.
They ignored that paper money was crucial in giving us a nation; that abstract money requires an advanced legal system in place; that the normal method of assuring its acceptability is to allow the taxes to be paid in it. Then there was the matter of a WAR against the world’s strongest power.
The convention met from May to September 1787 but the money subject didn’t come up until August 16. Remember, Jefferson and Paine were not there. Franklin was too old to speak.
XXX Witherspoon
A curious book on money appeared just then, written anonymously by Calvinist Minister John Witherspoon, – the only clergyman signer of the declaration of Independence. The book attacked Government money and promoted Adam Smith’s view that only gold and silver are money. He stonewalled our hard won colonial monetary experience.
The power for government to properly create money, long considered as a necessary part of sovereignty, was contained in 5 magic words – to emit bills of credit. This provision was already in the articles of Confederation, but the Federalists – the merchant/commercial interest, largely responsible for calling the Constitutional Convention in order to strengthen the national government, fought to exclude this monetary power, from the new government, arguing that it could not be trusted with it! Some of them intended to get hold of the power privately as had been done in England.
THE SUPREME IMPORTANCE of the concept of money now becomes evident: For if money is primarily a commodity, convenient for making trades, which obtains its value out of “intrinsic” qualities, then it could be viewed more as a creature of merchants and bankers than of governments.
But if the true nature of money is an abstract social institution embodied in law – obtaining its value largely through legal sanctions, then its more a creature of governments, and the Constitution had better deal with it adequately. Describing how a uniform currency is to be provided, controlled and kept reasonably stable, in a just manner. It was on this crucial question that the Constitutional Convention faltered.
The delegates accepted Adam Smith’s primitive commodity definition of money as gold and silver and didn’t firmly place the monetary power into government, leaving it ambiguous. Later they’d argue over what they had done.
But the power would still exist, since it is as important as the legislative, judicial and executive powers.
I am suggesting that the nature of human affairs requires government to have four branches, not three; the fourth branch to embody and administer the monetary power.
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The Constitution trusted the people with the political power; but didn’t firmly place the monetary power in their government. This (along with slavery) is the Original Sin of American Politics!
As a result the power was left up for grabs. Alexander Hamilton wasted no time in “grabbing.”
My neighbor Martin Van Buren 8th US President wrote a great book on the Convention – The Origin of Political Parties in the US. He spent time with Jefferson – discuss.
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SECTION START
HOW PRIVATE CENTRAL BANKING BEGAN IN AMERICA
Hamilton And The Money Power Attack – First The Bond Theft as related by Van Buren.
The Constitution went into effect in late 1789; Van Buren described Hamilton’s first move as Secretary of the Treasury, in 1790:
“Hamilton assumed some $15 million of the state debts…an act…neither asked nor desired by the states, unconstitutional and inexpedient…”
What was so bad about it?
“A large proportiion of the domestic debt (was held by) the soldiers who fought our battles, and the farmers, manufacturers and merchants who furnished supplies for their support….When it became known to members of Congress, which sat behind closed doors, that the bill would pass…every part of the country was overrun by speculators, by horse, and boat, buying up large portions of the certificates for (pennies on the dollar).” (LSM, Ch. 15)
Madison, attempted to have the law pay speculators less than the original holders, but was voted down.
NEXT HAMILTON AND ASSOCIATES, HAVING KEPT THE MONETARY POWER Out of government hands, moved to assume it themselves. The Bank of North America was the only bank in the US, formed in Pennsylvania on Tom Paines initiative to assist the revolution. Arguing that it was only a state bank, Hamilton suggested it come forward if it wanted to alter itself for the national purpose. Curiously, the Bank took no steps toward this obvious increase in profit and power.
Hamilton’s Federalists quickly put through legislation to charter the First Bank of The United States, as a privately owned central bank on the Bank of England model. The Bank would be issuing paper notes not really backed by metal, but pretending to be redeemable in coinage, on the one condition that not a lot of people asked for redemption! They really did not have the coinage. The bank would do what they had blocked the government from doing! Print paper money.
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Thus the real question in practice was whether it would be private banks or the government that would create paper money. Will the immense power and profit of issuing currency go to the benefit of the whole nation, or to the private bankers? That’s always been the real monetary question in this country.
XXX BANK OF US NOTE
While gold and silver served as a smoke-screen what the bankers really counted on, were the legal considerations of the money. They knew that all that was needed to give their paper notes value, was for the government to accept them in payment for taxes. That, and not issuing too excessive a quantity of them. Under those conditions, the paper notes they printed out of thin air, would be a claim on any wealth existing in the society.
And we see why the Bank of North America was not put forward for this purpose: the U.S. Government had owned 60% of it. Thomas Willing resigned the Presidency of the Bank of North America, to become President of the first Bank of The U.S. The government would only own 20% of the new bank. JUST WHERE DID THE MONEY FOR FIRST BANK OF THE U.S. CAME FROM?
The $10 million share subscription for the banks shares, was oversubscribed within 2 hours. Less than 1/10 of it was ever paid in gold. The rest of the payment was accepted in the form of bonds – the very government bonds that Hamilton had turned from pennies on the dollar to full value. So you see where the money for the bank actually came from – from the American people! THAT’S HOW PRIVATE CENTRAL BANKING STARTED IN AMERICA!
Even if the bank had “faithfully” stuck to gold and silver, the nation’s monetary power would still have been alienated to the east – to the European holders of those commodities. Same people we’d just fought the revolution against!
Thanks to Jefferson’s efforts, the bank was liquidated in 1811. Three quarters of it was found to be owned by Europeans – English and Dutch. (LSM, Ch. 15)
THE 2ND BANK OF THE U.S. – THE BANK FROM HELL Operated illegally from inception, accepting IOU’s instead of the required gold in payment for its shares. So again the banker’s gold “requirement” turned out to be a masquerade.
This private central bank immediately embarked on a wild monetary expansion. Beginning operations in April 1817, by July it had 19 branch offices and had created $52 million in loans on its books and an additional 9 million in circulating currency, based on gold and silver coin reserves of only $2.5 million. This tremendous expansion caused a wild speculative boom.
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Then in August 1818, the bank turned abruptly and began an insane contraction, causing the panic of 1819. It cut its outstanding loans and advances from a high of $52 million, down to $12 million in I819. Its circulating notes dropped from $10 million to $3.5 million in 1820. A massive wave of bankruptcies swept the nation.
The subsequent history of this bank and its fight to the death with President Jackson reads like a financial soap opera. The story of various state chartered banks is similar.
MEANWHILE THE US GOVERNMENT ACTED RESPONSIBLY
In the aftermath of liquidation of the first and second Banks, the US Treasury notes were responsibly substituted in place of banknotes. About $65 million were authorized and only $37 million actually issued. The U.S. Treasury spent them into circulation. Initially they were all large denomination, paid interest; were redeemable in gold and required formalities to transfer. By 1815 they became bearer certificates with no redemption date, paid no interest and were in smaller denominations. Thus they were nearly a true money form. The fact is that the US government has always acted responsibly in creating money. Not so the private banks!
SECTION END
SECTION START
APPLYING THESE CONCEPTS TO MONETARY REFORM NOW
The definitional problem continues – gold is not much discussed and bank credits are openly substituted for money.
Economists are now confusing credit with money. They call money “high powered money” and they are calling credit “Lower powered money.”
They should be more forcefully distinguishing between credit, and money. Blurring the difference empowers the bankers.
They should be examining the unfair privilege this system places in the bankers hands and
They should be examining the results. For example The deteriorating infrastructure situation – see Engineers report in the Lost Science of Money, ch. 24
A GREAT DANGER: THE PURPOSEFUL DE-FUNDING OF GOVERNMENT at the local, state and federal levels, arises out of this disease of attacking government as the enemy. Carl Rove said that he wants to shrink government to a small enough size to be able to drown it in a bathtub! He’s one of Mr. Bushes religiously oriented advisors. Unfortunately the athiestically oriented Libertarians hold a similar view. My friend Douglas Casey while recently co-chairman of the Libertarian Party Presidential Committee remarked that he didn’t see any need for government at all.
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ACHIEVING MONETARY REFORM NOW? It’s a bit different For America and England. In broad terms
America needs to:
First: Nationalize the Federal Reserve, place it within the Treasury. Long term it becomes an independent fourth branch of Government. We use the greenback mechanism initially to fund infrastructure improvement and repair. The American Society of Civil Engineers 1998 Report estimates that $2 trillion will be needed. Much more is required to assure water supplies. This immediately starts solving all sorts of economic problems including unemployment.
Second: Remove the privilege banks have to create money. Only government should have this power. This means much more than requiring banks to have 100% reserves. A special 100% reserve solution elegantly transforms all previously bank created money into U.S. created money. This does not cause deflation or inflation.
Third: Institute anti-deflationary programs to assure that sufficient money is introduced by government into the system.
Your job in England is much easier – you have already nationalized the central bank BUT CLEARLY
YOU MUST NOW COMPLETE THE 1942 INITIATIVE OF ARCHBISHOP WILLIAM TEMPLE, which led to that nationalization. Here’s what he said: QUOTE FROM BOOK
“In the case of money, we are dealing with something which is handled in our generation by methods that are extremely different from those in vogue a century or half century ago. When there was a multitude of private banks, the system by which credit was issued may have perhaps been appropriate, but with the amalgamation of the banks we have now reached a stage where something universally needed – namely money, or credit which does duty for money – has become in effect a monopoly…
The private issue of new credit should be regarded in the modern world in just the same way in which the private minting of money was regarded in earlier times. The banks should be limited in their lending power to the amount deposited by their clients, while the issue of newer credit should be the function of public authority.
This is not in any way to censure the banks or bankers. They have administered the system entrusted to them with singular uprightness and ability and public spirit. But the system has become anomalous, and, as so often happens when anomaly has persisted through a long period of time, the result is to make into the master what ought to be the servant.” Reverend William Temple, Archbishop of Canterbury, September 26, 1942
The Bank of England was nationalized in 1946, but the Archbishops intent was sidestepped:
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If you want your banking system to be the servant of your society instead of its master, then “The banks should be limited in their lending power to the amount deposited by their clients, while the issue of newer credit should be the function of public authority.”
How do you go about this? You can:
Wait for another crisis while having the legislation ready to go
Educate the populace on why this is important
Inform your leadership on the necessity for this through the early day motion – do a world class independent study which gets the facts regarding public vs private money on the table. Place the pressure on the banking establishment to justify this fantastic privilege which they enjoy, to the detriment of the entire nation.
WHAT WAS THE MORAL EFFECT OF BANKING ON THE EARLY US?
Here is what William Gouge, a banking expert wrote in 1833:
“Without clearly distinguishing the causes, men have come to see clearly the wealth passing continually out of the hands of those whose labor produced it, or whose economy saved it, into the hands of those who neither work nor save. They do not clearly see how the transfer takes place, but they are certain of the fact. In the general scramble they think themselves entitled to some portion of the spoil, and if they cannot obtain it by fair means, they take it by foul.” “The Banking system is the principal cause of social evil in the United States.” (It still is, in 2004!)
To summarize the argument: The nature of the money power is societally derived, not one originating in the activities of private corporations. Because of its great importance to all, control over the process belongs under public authority. Both logic and history show that its not safe to delegate this power, and certainly not acceptable to allow its usurpation.

Henry George’s Concept of Money (Full Text)

And Its Implications For 21st Century Reform

by Stephen Zarlenga
Copyright 2001, American Monetary Institute

About the Author: Stephen Zarlenga is a 1st generation American, his parents immigrating from Italy during the Great Depression from near Roman philosopher Cicero’s home town. He received a diverse education at the University of Chicago, with a degree in psychology. His working life has been in the investment world of mutual funds, real estate, insurance, and professional commodity trading. He has published 20 books on banking, politics and philosophy. In 1990 he began focused research into monetary questions and in 1996 helped form the American Monetary Institute dedicated to the independent study of monetary history, theory and reform. In mid 1999 the German language edition of his book The Lost Science Of Money was published by Conzett Verlag of Zurich under the title Der Mythos Vom Geld – Die Geschichte Der Macht (The Mythology Of Money – The Story Of Power). The English edition has just been released by the American Monetary Institute.

ACKNOWLEDGMENTS
Dedicated to the memory of Robert de Fremery (1916 – 2000)
Special thanks go to
Nic Tideman
Mason Gaffney
Ken Wenzer
Ted Gwartney
Chuck Metalitz
Michael Hudson
Vesa Nelson
Mark Sullivan
Clifford Cobb

for their valuable assistance in doing this study; any errors in which are mine alone.
Thanks also to the Robert Schalkenbach Foundation for making it possible, and to Fred Harwood of AIER for first mentioning George’s work to me.
ABBREVIATIONS AND NOTATIONS
Citations are fully footnoted at the end of this paper. However, when the source is one of Henry George’s primary works listed below it is generally identified at the end of the quotation. When appropriate, related or similar sources are also noted there as “also see” items. All italics and emphasis in quotations have been added. The following abbreviations are used:
P&P – Progress And Poverty (1880) – by Henry George, R. Schalkenbach Foundation, 1997.
Soc Pr – Social Problems (1884) – by Henry George, R. Schalkenbach Foundation, 1992.
SPE – The Science Of Political Economy (1898) – by Henry George, R. Schalkenbach Foundation, 1992.
Standard – Henry Georges weekly newspaper, The Standard.

Preface and Synopsis:
Attesting to the importance of Henry George’s life and work are his 5 million books in print; the active Henry George organizations and schools around the globe with thousands of supporters and uncountable others who still respond to his name with “Oh yes – the single tax”. A man considered important enough to require the attention of one of the political establishment’s most potent operators to derail his 1886 campaign for Mayor of New York City. George was influential enough to merit that POPE LEO XIII direct a section of a Papal encyclical at his work in 1891.

This kind of effect, I’d suggest, was not generated by the economic theorizing or theoretical observations of any individual or school, but has resulted from what was really a great moral crusade for economic justice.
To George, the land question was the key means to that end, and his name is rightfully associated with land tax reform -  with the “single tax”, described below. But although that was his main focus, there was a lot more to George than that. As Ken Wenzer pointed out “An important element of Georgism was reform of the banking and monetary system”  That’s the main focus of this paper.

My task has been to find and present George’s monetary views, within the context of his own times and values; and to evaluate their relevance to present day questions. A task made more complex by the confusion and misinformation in which the monetary subject has traditionally been shrouded. For this reason it was necessary to organize the paper into several steps. Step one describes George’s major views and values; step two describes the real monetary context of his time, separating out the monetary myths. George’s explicit monetary views are presented in step three. Step four draws some “Georgist” conclusions on monetary reform today and offers suggestions for consideration.

This study was proposed because several years ago on first reading George, I found indications that his monetary views might have been quite advanced and potentially relevant to present day arguments over the proper monetary role of government. This research has confirmed that – to a much larger and clearer extent than I had imagined.

His monetary viewpoint may be especially important to the divergent monetary prescriptions advocated from participants within the present day Georgist movement. Some prominent Georgists advocate a move to “free banking”; a quite radical change from our present monetary system. Other prominent Georgists advocate the establishment of a gold standard. Some support establishing forms of locally circulating moneys often referred to as LETS (Local Exchange Trading Systems). An awareness of George’s viewpoint could be an important factor in such discussions.

The conclusion of AMI’s monetary research to date is that such monetary systems cannot be reconciled with two of George’s overriding requirements: that social institutions be consistent with individual self-determination; and with the principal of equal rights.

True monetary reform must take a better path. AMI’s research indicates that money, properly defined, is a legal institution of society and government; not a commodity or economic good of the markets; that if money is a legal institution, then the control of monetary systems can be rightfully viewed as a proper function of government; much as the law courts are. This broad definition or attribute of money leads directly to conclusions on what is needed for a monetary system to operate justly; not favoring one or another group through the establishment of special monetary privileges. This study finds (repeatedly in his own words) that Henry George in large part shared this view.

This viewpoint does go counter to the current idolization of free markets, and the faith being placed in them to automatically create optimum results for mankind. But the overwhelming body of historical evidence that we’ve studied indicates that while some things can and should be left to free markets; a society’s monetary system is emphatically not one of them.

This was the reason suggested by AMI to the Schalkenbach Foundation, that we do this study rather than just requesting others much better versed in Henry George’s work to simply look up what he wrote about money. His monetary views need to be examined in the light of their implications for present day questions. The local currency advocates would find some very limited support from George’s actions. The free bankers and the gold advocates would probably both tend to characterize George’s monetary position as primitive. But according to AMI’s research, this is a misreading – perhaps not so much of George’s views, but of monetary theory – of the nature of money.

GEORGE’S WORLD VIEW
We now step back a bit from our monetary topic to note the major aspects of George’s work which will later help place his monetary ideas into context. Bear with me – those of you who know George like the back of your hand. This paper does not assume the reader is well versed in his work.

THE MORAL CRUSADER
“(Political Economy) may be argued in a great many different ways, but I prefer the ground that its opponents have taken, the ground of justice. I believe that justice is the supreme law of the universe”, wrote Henry George

One of George’s important accomplishments was the re-introduction of moral issues into economic thought. From Adam Smith’s Wealth Of Nations (1776) and earlier, there had been a tendency for moral questions – evaluation of the right or wrong – the good or evil of economic policies to be largely ignored or shunted aside and replaced by a questionable utilitarianism which generally ended up supporting the status quo of the power structure.

Thus Ingram wrote of Adam Smith that “He does not keep in view the moral destination of our race, nor regard wealth as a means to the higher ends of life.”
One of Smith’s contemporaries – economist Reverend Thomas Malthus – twisted morality to preach that the poor must choose between what he called “vice” – having children and therefore engaging in sex – or starvation. Economics rightly earned the title of “the dismal science”.

In The Scholastic Tradition
But there is nothing dismal about George’s writings, which can be seen as in the much older tradition of the Catholic “Scholastics” or “Bookmen” – the church scholars of about 1100 to 1500 AD who were very familiar with the existing written works available in the west. The Scholastics made the first attempt at a science of economics to build a rationally based moral code of business behavior and determine what should be, rather than what was. To their credit, they were much more influenced by Aristotle than by the bible, and many of them such as Albert the Great of Cologne and his student Thomas Acquinas were later canonized as saints.

Though George was generally well read, I didn’t find indications that he was aware of this body of work which has become better known in the English speaking world since the 1940’s.  When George uses the term “Scholastic” it is to refer negatively to the university economists of his day.

While the content of George’s work differed greatly from that of the Scholastics; their form was very similar. George did not focus on the issues of concern to the Scholastics – mainly usury, and the “just price”- but he would have probably felt very much at home with their method, and especially with their deep concern for justice. Their method – a reliance largely on theoretical reasoning – is useful for investigating questions of morality, but not as useful in determining questions of fact or of utility. Interestingly, most 19th and 20th century economists continued using the Scholastics theoretical method, but ignored the moral questions and inappropriately applied it to other matters. George, concentrating on moral issues, generally avoided this error.

GEORGE’S GUIDING PRINCIPLES
Also diverging from the Scholastics was the manner in which George’s guiding principles were framed. The great goal of justice was shared by both, but the Scholastic’s aims were more socially oriented – a just order of society, in conformity with reason, observation, tradition and law – natural, human, and sacred law. George’s primary guidelines on the other hand, are framed in a much more individualistic fashion.

The two core principles which are George’s anchors, are evident – and explicit – throughout his writings:  The principle of equal rights, and of individual self determination. George expresses this as “The law of human progress…the moral law…the equality of right between man and man …(and) the perfect liberty which is bounded only by the liberty of  every other…” (P&P, 526)

THE RELIGIOUS FACTOR
Though religion was important to George, in today’s terminology it would be more accurate to regard him as a highly spiritual man rather than an overly religious one. Barker’s Biography of George informs us that he went through an adolescent period of atheism, before returning to his Anglican roots. Much can be seen in George’s powerful answer to a wrathful God:

“…Little children are dying every day…because having come into this world- those children of god … find that there is not space on the earth sufficient for them to live; and are driven out of gods world because they can’t get room enough, cannot get air enough, cannot get sustenance enough. I believe in no such god. If I did, though I might bend before him in fear, I would hate him in my heart. Not room enough for little children here!” (Standard, June 22, 1889)

In other words, not only the plutocrats, but God too, can be made morally accountable to the requirements of Man’s justice – God is not really “allowed” to be capricious and arbitrary.

Thus George was far from a bible thumper and recognized the danger of bibliolatry – deifying the Bible by regarding its writings as the absolute word of God. He explicitly addressed this problem:

“Here in New York, for instance, the spirit of our institutions and of religious fairness is violated by the rule which requires the reading of a chapter from the bible at the opening of the public schools. This is a relic of Protestant bibliolatry that ought to be suppressed. The bible has no more business in our schools than has the Koran or the Book of Mormon.” (Standard, June 22, 1889)

One can guess George’s reaction to the backward tide of bibliolatry which has swept over our nation in the past several decades.

George was also sensitive to the dangers of sectarianism:

“I care nothing whatever for creeds – religion lies beneath creeds….But the essence of religion is the desire to do something for others than oneself, is the feeling that in working for the good of mankind one is working on the side of that great power that is all good…the men who are with us… are in their hearts religious men…” (Standard, August 3, 1889)

Consistent with his spiritualism, George harbored no racism. Belittling the idea of the hereditary transmission of social habits he wrote:

“In any large community we may see, as between different classes and groups, differences of the same kind as those which exist between communities which we speak of differing in civilization – differences of knowledge, beliefs, customs, tastes, and speech, which in their extremes show among people of the same race, living in the same country, almost as great as those between civilized and savage communities” (P&P, 492)

George admired many aspects of Judaic law but not in a superstitious way:

“This very day the only thing that stands between our working classes and ceaseless toil is one of these mosaic institutions….(given the state of political economy, it is certain that) the working classes would get no more for seven days’ labor than they now get for six…That there is one day in the week that the working man may call his own… is due through Christianity, to Judaism…”

And he described the Jews as:
“…a people who, though they never founded a great empire nor built a great metropolis, have exercised upon a large portion of mankind, an influence, widespread, potent, and continuous, … two thousand years been without country or nationality, yet have preserved their identity … – a people who unite the strangest contradictions; whose annals now blaze with glory, now sound the depths of shame and woe”  (also see P&P, 498)

GEORGE’S MIXED METHODOLOGY
George used both of the two main methods available to serious researchers – the theoretical/deductive method, and the empirical/inductive method.
Using the Theoretical Method, one starts with axioms or principles thought to be true or accurate. Then logical deductions or conclusions are carefully drawn from those hypotheses.

The Empirical Method is based more on actual experience – on observation and cataloging of data, and on experimentation if possible, under controlled, repeatable conditions where variables can be observed and their effects noted.  Logical reasoning is then applied to the observed data to consistently “explain” them by theoretical constructions.  More often than admitted the theoretical constructs come first, with researchers later searching out the facts.  The great advances in the physical sciences of the past three centuries are laid to the empirical approach, and the scientific method.

Henry George’s mixed approach was largely deductive, and one often observes in Progress and Poverty the evident pleasure he derived from taking his readers through several deductive steps in clinching his arguments.

In several works he relates his use of what he called “mental experiments”:

“Its processes…consist chiefly in analysis…And, although…we can not use… experiment by artificially produced conditions… we (may) find …experiments already worked out for us (in the diversity of human experience). …There is at our command a method …what may be called mental experiment. You may separate, combine or eliminate conditions in your own imagination, and test in this way the working of known principles.”

“Now, just such mental operations as this are all that is required in the study of political economy. Nothing more is needed (but this is needed) than the habit of careful thought – the making sure of every step without jumping to conclusions. This habit of jumping to conclusions – of considering essentially different things as the same because of some superficial resemblance – is the source of the manifold and mischievous errors which political economy has to combat.”
And:
“Thus in the main the science of political economy resorts to the deductive method, using induction for its tests…its most useful instrument is a form of hypothesis which may be called that of mental or imaginative experiments by which we may separate, combine or eliminate conditions in our own imaginations, and thus test the workings of known principles… we have only to be careful as to the validity of what we assume as principles.” (SPE, 100; also see SPE, 29, 30, 98)

But one can sense a bit of over-confidence in his method when George writes “nothing more is needed”. Because the key – and problem – is the amount of surety and confidence which can be placed in those necessary starting points – the “known principles”. Its a bit like aiming a long range rifle. If the sights are only just slightly off, or even near perfect, the further one gets from the barrel, the easier for the aim or trajectory to be off the mark.

Another big risk of overly relying on the deductive method, is that once a falsehood enters the hypothesis it will muck up the whole works. And especially in political economy, which has been abused for centuries, intuitive certainty in a hypothesis is no guarantee of its validity, for the “intuition” may have resulted simply from exposure to the endless repetition and even the promotion of error by special interests.

One good example of this is Adam Smith’s primary hypothesis and view that selfishness is at the base of all human activity, discussed below.
George was sufficiently aware of these problems to normally exercise great care in his definitions, attempting to discern carefully in the use and meanings of his terminology to get to bedrock; much more so than the typical political economist.

GEORGE RESPECTED THE FACTS
However, there are limits to such care, and what usually kept George on track and relevant, was something even more basic: While he clearly came to enjoy economic theorizing, he had an ingrained respect for observation – an overriding respect for the facts.

“Bring the question to the test of facts” wrote George in Progress and Poverty in considering whether wages were drawn from capital or not. (P&P, 60)

In considering Malthus ideas on population, George noted:

“To the supreme and final test of facts we can easily bring this theory.” (P&P, 140)

Supreme and final test conveys that however appealing or seductive a theory may sound, the final arbiter of theories for Henry George, is the reality of the facts. This may seem obvious, but it is especially important in monetary thought, and is quite often ignored by political economists.

For example, regarding Malthus’ population pressure theory George observed:

“What I say is this: that nowhere is there any instance which will support this theory; that nowhere can be properly attributed to the pressure of population …that everywhere the vice and misery attributed to overpopulation can be traced to the warfare, tyranny, and oppression which prevent knowledge from being utilized and deny the security essential to production.” (P&P,  122)

A negative example: the political economists intuitively assumed or jumped to the conclusion that the value of gold and silver as money, was determined by the cost of mining and the available supplies of the two metals. However Alexander Del Mar points out that there is no evidence that they ever bothered to check on the costs of production.  His research for the 1876 US Monetary Commission found that such mining was often done at a loss. Nor do I believe that the political economists examined the available evidence (the facts) on the metal’s supplies. For these facts do not support their assumptions either.  George specifically warned about such jumping to conclusions.

GEORGE’S MAJOR THEMES
Henry George’s primary discovery, that poverty amidst plenty resulted from treating the land as private property was sparked not by theory, but arose from his direct observation of the existence of the most abject poverty and hopelessness side by side with the greatest concentrations of wealth.

“Where population is densest, wealth greatest, and the machinery of production and exchange most highly developed – we find the deepest poverty, the sharpest struggle for existence and the most enforced idleness.”
“In the progress of new settlements to the conditions of older communities it may clearly be seen that material progress does not merely fail to relieve poverty – it actually produces it.” (P&P, 6, 9; also see 224; also see The Crime Of Poverty )

In 1790 – US cities contained 3.3% of the nation’s population. By 1880 it was 22.5%. George had directly observed this process in its early stages in San Francisco when the city was only 30 years old, where the underlying elements were perhaps more clearly distinguishable. He had also observed its later stages more fully developed in New York City. Add one insightful flash or vision (not yet an “official” ingredient of  the “Scientific Method”) and he was able to make the logical linkages which explained the observations from his experience:

“I well recall the day when checking my horse on a rise that overlooks San Francisco Bay, the commonplace reply of a passing teamster to a common place question, crystallized, as by lightning-flash my brooding thoughts into coherency, and I there and then recognized the natural order – one of those experiences that make those who have had them feel thereafter that they can vaguely appreciate what mystics and poets have called the ‘‘ecstatic vision’”. (SPE, 163)

Later using theoretical reasoning, his further analysis was able to conclude (or deduce) that rent would automatically rise to levels that kept labor on the edge of subsistence.

GEORGE’S CONCLUSION AND SOLUTION
George’s inescapable conclusion was plainly stated:

“Our boasted freedom necessarily involves slavery so long as we recognize private property in land. Until that is abolished, Declarations of Independence and Acts of Emancipation are in vain.” (P&P, 357)

But he also offered a solution:
“… it is not necessary to confiscate land; it is only necessary to confiscate rent…the simple yet sovereign remedy, which…(will) afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is – to appropriate rent by taxation… (and) to abolish all taxation save that upon land values.” (P&P, 404-406)
This became known as George’s Single tax proposal; considered a fair and  painless tax since the increasing value of land itself (not including improvements) results from social causes such as population increase, and not from the work of the “owner”.

ADAM SMITH’S “SELFISH” ERROR
George’s analysis of Smith’s great error is a refreshing change from the continued lionization of Adam Smith, with its centuries of negative impact on mankind. Frederich Liszt informs us that the British Prime Minister William Pitt used to promote Smith’s book and usually carried a copy under his arm.  But George’s moral approach is in stark contrast to Smith’s system. Following Buckles lead, George identified the underlying false axiom on which Adam Smith’s Wealth of Nation’s thesis is based:

“Buckles understanding of Political Economy was that it eliminated every other feeling than selfishness.”  Wherein Smith ‘generalizes the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness; thus making a deductive application of one set of mental principles to the whole set of economical facts. He everywhere assumes that the great moving power of all men, all interests and all classes, in all ages and in all countries is selfishness… here (in the Wealth Of Nations) he makes men naturally selfish; formerly, he made them naturally sympathetic…indeed Adam Smith will hardly admit common humanity into his theory of motives.’” (SPE, 89, 90)
When Buckle says formerly he made them “sympathetic”, he is referring to Smith’s only other book, published earlier, the Theory of Moral Sentiments in which Buckle concluded that Smith had done the opposite – there he excluded selfishness!

GEORGE’S “FORCE OF FORCES”
George substituted a very different concept for Smith’s destructive error:

“The fundamental principle of human action … is that men seek to gratify their desires with the least exertion.”(P&P, 203)
and

“It is not selfishness that enriches the annals of every people with heroes and saints… that on every page of the world’s history bursts out in sudden splendor…that turned Gautama’s back to his royal home or bade the Maid of Orleans lift the sword from the altar; that held the Three Hundred in the Pass of Thermopylae, or gathered into Winkelreid’s bosom the sheaf of spears…Call it religion, patriotism, or the love of God – give it what name you will; there is yet a force which overcomes and drives out selfishness; a force which is the electricity of the moral universe; a force beside which all others are weak…I call this force destiny toward human nature – a higher, nobler nature than we generally manifest…And this force of forces – that now goes to waste or assumes perverted forms – we may use for the strengthening, and building up, and ennobling of society, if we but will…”(P&P, 463)

Consider the negative impact on humanity of Smith’s selfishness assumption: Supporters of his doctrine argue that it is merely in harmony with the nature of humanity. But clearly, if Man is defined in such a base manner and systems of laws with their rewards and punishments are enforced along those lines, then over time, they will tend to create a form of humanity in “harmony” with their initial false conception of an economic mankind.

Finally, even Max Weber’s harsh judgment will apply:

“Specialists without spirit, sensualists without heart; this nullity imagines
that it has attained a level of civilization never before attained.”
This de-evolutionary process, encouraging a lower form of humanity has been ongoing especially in the English speaking world for well over 2 centuries. The work of great English novelists such as Charles Dickens may have slowed it, but couldn’t stop it. Henry George saw exactly where it would lead:
“nor can we abstract from man all but selfish qualities in order to make as the object of our thought on economic matters what has been called ‘economic man’, without getting what is really a monster, not a man.” (SPE, 99)
Ecco Homo – circa 2000!

THE IDENTIFICATION OF EVIL
George takes the unusual step of identifying evil in his early work. First he
identified the law of progress:
“Thus association in equality is the law of progress. Association frees mental power for expenditure in improvement, and equality, or justice or freedom – for the terms here signify the same thing, the recognition of the moral law” (P&P, 508)
And evil is that which acts to block such progress:

“…to trace the force which stops progress, would…go far to the solution of …the problem of the genesis of evil” (P&P, 515)

Interfering with human progress is evil, because:
“The law of human progress, what is it but the moral law?” (P&P, 526)
George addresses the question of evil again in his last work:
“Both good and evil pass on as waves pass on. Yet I cannot but think that in the long run, good outlives evil. For as to the normal constitution of the human mind, evil must bring the wider and more permanent pain, the impulse to its perpetuation must meet the greater friction.” (SPE, 510)

THE CORRUPTION OF ECONOMICS
An important recurring theme in George is the purposeful corruption of the science of economics in order to serve and apologize for wealthy special interests. As a self trained economist, the academics preferred to ignore the uncomfortable realities George’s work exposed. But he did not ignore them.

One of the great enjoyments of reading George is his use of plain, powerful language. He didn’t allow the several forms of economic oppression to hide behind obtuse theories and never hesitated to openly identify them as slavery. He regularly stripped away the veneer of academic respectability from those serving injustice:

“Even the intellectually courageous have shrunk from laying stress upon principles which might threaten great vested interests; while others, less scrupulous, have exercised their ingenuity in eliminating from the science everything which could offend those interests. …a science which…seems but to justify injustice, to canonize selfishness by throwing around it the halo of utility…”

“…colleges and universities and similar institutions …are especially precluded under present conditions from faithful and adequate treatment of (political economy)…

…whoever accepts from them a chair of political economy must do so under the implied stipulation that he shall not really find what it is his professional business to look for.” (SPE, xl, xli)

“It is evident that…a powerful class whose incomes could not fail to be endangered by a recognition…that what makes them…wealthy is not any part of the wealth of society, but only robbery, must from the beginning …have beset (political Economy’s) primary step, the determination of what the wealth of society consists of…especially after it had been taken charge of by the colleges and universities, which…must be peculiarly susceptible to the influence of the wealthy classes.” (SPE, 140; also see SPE: xxxviii; xxxix; 134, and 138)

In the four major themes above, George was able to bring a substantial degree of observation and factual back-up to his conceptualizations. His three important themes described below were more theoretically based.

LABOR CREATES ITS OWN VALUE
One of the most remarkable concepts pioneered in Progress and Poverty is that labor always pays its own way, creating its own value.

“That wages, instead of being drawn from Capital, are in reality drawn from the product of the labor for which they are paid.” (P&P, 23)

And:
“…in every case in which labor is exchanged for commodities, production really preceded enjoyment; that wages are the earnings – that is to say, the makings of labor – not the advances of capital, and that the laborer who receives his wages in money (coined or printed, it may be, before his labor commenced) really receives in return for the addition his labor has made to the general stock of wealth, a draft upon that general stock, which he may utilize in any particular form of wealth what will best satisfy his desires; and that neither the money, which is but the draft, nor the particular form of wealth which he uses it to call for, represents advances of capital for his maintenance, but on the contrary represents the wealth, or a portion of the wealth, his labor has already added to the general stock.” (P&P, 28-29)

This theme holds great unrecognized latent power, should it ever be wisely combined with the realization of money’s nature as an abstract legal institution of society.

THE INTEREST THEME
For George, interest is the share of production that goes to the owner of capital. George thought the “reason and justification of Interest” arose from “the active power of nature; the principle of growth, of reproduction, which everywhere characterizes (life)…is the cause of interest…” (P&P, 181)

Thus a loan would help employ nature to gain a surplus yield to the farmer and interest was the lenders share. Then George used this natural growth phenomena to justify interest in non productive lending:

“Now the interchangeability of wealth necessarily involves an average between all the species of wealth…And so in any circle of exchange, the power of increase which the productive or vital force of nature gives to some species of capital must average with all….” (P&P, 182)
And
“It is this general averaging, or as we may say, ‘pooling’ of advantages, which necessarily takes place…which gives to the possession of wealth incapable in itself of increase an advantage similar to that which attaches to wealth used in such a way as to gain from the element of time.” (P&P,185)

But it can be questioned whether George was too easy in extending this “justification” to all forms of taking interest. Rather than his usual approach of carefully discerning between economic activities, in this case he lumped them together. For example the Scholastics carefully distinguished between different forms of earning interest, which were always permissible, and usury, which was not. In effect properly charging interest on some loans becomes a cover for improper loan sharking, for example as practiced today by credit card companies, or the IMF, to take an extreme case.

In all George’s works read for this study,  the word usury came up only once . George’s avoiding the usury issue, in a morally based work, may have stemmed from his faith in freedom of trade; in this case emphasizing the freedom portion of his two part formula; and de-emphasizing the responsibility portion of it as regards the kind of lending activities that are permissible within a framework of justice. It seems the moral work of the Scholastics had been as much censored from George’s view, as his ideas have now been kept from present day students of economics.

THE FREE TRADE THEME
Unfortunately following this theme nearly destroyed Georgism, and that is the main reason it is discussed here. This time the pendulum swung far over to the freedom portion of the formula in George’s most theoretical work, Protection Or Free Trade, published in 1886. The stated purpose of the book on page xiii, is to demonstrate that “free trade better accords with the interests of labor.” But it turned out just as futile to make that case for implementing free trade in 1886, as it would be today. The problems stem primarily from methodological and judgment factors; determining how and when logic may validly be applied to particular circumstances; working with weak analogies, and not fully appreciating there can be a difference between what happens between the axioms and propositions of a theory, and what happens in the reality that those propositions are only imperfectly describing.

For example on page 30:
“I began to realize that these propositions, if true, must be universally true, and that not only should every nation shut itself out from every other nation; not only should the various sections of  every large country institute tariffs of their own to shelter their industries…(but that it) must apply as well to the family.”
The ideological side of George’s personality, (not the same thing as his high ideals) got the best of him here, and he makes the political economist’s error of equating nation, with business interests, with family. Another example is on page 44 where he accords to sociology the exactness, one could say perfection, then thought to exist in the physical sciences:

“Social laws, like physical laws, must apply to the molecule as well as to the aggregate.”

Today its easy to realize that even the physical sciences as presently developed, don’t offer such universality. Perhaps just a tiny bit of modesty regarding the effective power of his thought processes and methods, would have served George well in this book. His old habit of bringing it to a test of the facts, might also have been helpful, had he done more of that in this largely theoretical work.

The free trade theme is a potential danger for Georgists; in my view continuing to test whether their concern will be more with ideologically advancing a lifeless theory, or with heeding the glaring need for economic justice for a financially besieged people. For the concern for “free trade” comes from a different part of the person or soul, than the concern for justice in land (and monetary) reform.  Please see Appendix 2

THE IRISH FAMINE
Much of George’s American support arose out of the problem of Irish – English relations; especially the famine which was mercilessly inflicted on Ireland. A part of the early support which launched George at his triumphal “Return from Ireland  Dinner” in New York resulted from his having been arrested in England, and the mistaken perception that he was Irish.

The horrific 1845 famine where out of an 8 million population, 1,029,000 children, women and men starved to death, would forever define English/Irish relations. George showed that the starvation was unnecessary and a direct result of the land question:

“Even during the famine, grain and meat and butter and cheese were carted for exportation along roads lined with the starving and past trenches into which the dead were piled.” (P&P, 125)

George responded to the smear that the Irish starved because they were stupid:
“For it was not the imprudence ‘of Irish peasants’ as English economists coldly say, which induced them to make the potato the staple of their food…They lived on the potato because rackrents stripped everything else from them.” (P&P, 125)

There was also an underlying monetary system cause of the famine, traceable to the way the Bank of England, rather than the English nation, had created money of thin air for warfare, since the Bank’s founding in 1694. George may not have been fully aware of this but it is of interest to this study. As described by Christopher Hollis in his book The Two Nations:

“These exports of food (enough to feed for a year four times the number who starved)…went out to some extent, to pay the rents to absentee landlords, but, mainly, to pay the interest on the mortgages in English bank-manufactured money, which the Irish landlords, like the English landlords, had raised in order to pay the taxation required to meet the interest on the Napoleonic War Debt.”
and
“…(In Ireland) the capital wealth was in the hands of people, whose cultural and political sympathies were with their creditors rather than with the country in which they lived.”

Had the English Government created its own money, or had the Bank of England been government owned, the money that was created for a century of warfare would not have been a government debt, and there would have been no interest payments for it. (This historic example points out a conflict between the money power, which has generally benefited from warfare finance; and the landlords, who were easier to tax to pay the interest on it.)

GEORGE AND FATHER McGLYNN
George made a strong alliance with Father McGlynn, pastor of St. Stephens in New York, the most important Catholic Parish in the United States. Like George, McGlynn was a powerful orator, and also shared George’s concern for two moral imperatives. (“Economics being a matter of human relations, it was necessary that these relations be established on a basis of justice and freedom” wrote McGlynn )

Stephen Bell informs us in Rebel Priest And Prophet that the two re-enforced one another and that their average follower was probably more impressed by their oratory skills and calls for justice than by the economic arguments:
“(Many) had been won by the eloquence and personal magnetism of the two men but had imbibed little real understanding of what it was all about….”

GEORGE’S POLITICAL MOVES
George normally kept a single-minded focus in promoting his ideas for land reform. He had run for Mayor of New York City more to spread those ideas than to actually become Mayor:

“To (George) a political campaign was merely an opportunity to center the public mind on his proposal and induce study of it. He was glad he had not been elected Mayor of New York…” wrote Stephen Bell.

In George’s view:
“Social reform is not to be secured by noise and shouting; by complaints and denunciation; by the formation of parties, or the making of revolutions; but by the awakening of thought and progress of ideas.”

and
“The great work of the present for every man, and every organization of men, who would improve social conditions, is the work of education – the propagation of ideas. It is only as it aids this that anything else can avail. And in this work every one who can think may aid – first by forming clear ideas himself, and then by endeavoring to arouse the thought of those with whom he comes in contact.” (Soc Pr, 242, 243)

Yet the political establishment was so concerned with his candidacy that a high powered opponent, Abram S. Hewitt was drafted to oppose him. Mason Gaffney wrote:

“In 1876, Hewitt was Tilden’s campaign manager, at the very center of the deal that let Hayes steal the election…. Hewitt was the majority leader. He was Presidential timber himself. The plutocracy threw a crack general into the fight against George, and his mission was clear. He said, ‘I am a candidate for Mayor for only one purpose. I regard the election of Henry George as Mayor of New York as the greatest possible calamity … . For that reason and that only did I take this nomination.’ Academic historians and economists have gone far towards wiping out our collective memory of the Georgist phenomenon, so even most Georgists have little idea of its force. We may measure that by the force that was marshaled against it.”

Hewitt won with 41% of the vote to George’s 31%; and Teddy Roosevelt got 28%.  Louis Post thought George might actually have won; but he was apparently above the fray and relieved at not having to serve as Mayor.

George would say that “What I care for is not how men vote, but how they think.”

But a more balanced approach would have been useful to Henry George, to help him to later demonstrate more adequate political skills and judgment, which were needed to protect his movement.

In 1886, McGlynn and George had formed the new United Labor Party, specifically to focus on the land question. The party grew dynamically until early 1888; what would prove to be the fateful pivot year for Georgism.

To try to understand what he did next, consider that at age 49, George’s economics books were undoubtedly among the most widely read and loved works of his day, but that he and his ideas were never openly mentioned by the educational, economic or political establishments; That he received no credit or recognition for his important accomplishments was clearly painful to him, perhaps more so since he was a self made economist without the psychological comfort that academic degrees might have afforded.

The hurt is evident in George’s discussion of the 1886 change in the way Encyclopedia Britannica handled Political Economy:

“(The article) undertook to review all that had been written about (political economy) …of the writers…from the most ancient times, through a first, a second and a third modern phase…writers of France, Spain, Germany, Italy and northern nations are referred to in utmost profusion, but there is no reference whatever to the man or the book that was then exerting more influence upon thought and finding more purchasers than all the rest of them combined…”(SPE, 205, 206)

Furthermore, the piece was immediately reprinted in book form  under the direction of Professor E. J. James, of the University of Pennsylvania; the person and institution that George considered to be at the heart of protectionism philosophy in America. For George, it was too much.

FIRST THE TRAP
In Dec. 87 President Grover Cleveland proposed eliminating import tariffs, to the delight of both McGlynn  and George. George’s book Protection Or Free Trade had been published in early 1886. He interpreted Cleveland’s statement as an important move toward his cherished ideal of free trade and thought it deserved his full support. Perhaps in Cleveland’s move he also saw an opportunity to quickly affect a major national issue. At the time such taxes were the main source of government revenues, but since they often created lucrative privileges for wealthy owners of protected industries, there was a resentment of them.

I suspect that a well thought through trap was laid for Henry George in late 1887, early 88. First a false interview appeared widely in newspapers where George said he wouldn’t run for President and wanted their new United Labor Party to stay out of the fray. He quickly repudiated the interview, but still toyed with the idea of supporting Cleveland.

But McGlynn refused to “be led off the trail of ‘the land for the people’ by any call from Grover Cleveland for tariff reform. He quoted what George himself had said in his book about the inadequacy of free trade, and its benefits being absorbed ultimately by the landed interests unless the land question itself were settled, and settled right. This he said was sufficient reason for refusing to abandon the land reform for a fight on the tariff that promised little result”, wrote Bell.

Father McGlynn shared George’s support for free trade, but he and many other supporters passionately warned that the land issue must be their first and foremost concern, Otherwise, as George himself had warned in Protection Or Free Trade, whatever benefits that might possibly be derived from free trade, would soon wind up in the landlords pockets.

THEN THE POLITICAL QUICKSAND
George doggedly resisted, confusing his stubbornness with a stand for principle, and ignored the impassioned pleas of much of the membership. He split with McGlynn, sending him a curt letter of resignation as Vice President of their Anti Poverty Society on February 25, 1888. McGlynn replied with a gracious 2 page letter praising Henry George and expressing deep gratitude for his services. The movement quickly divided. The party floundered and the circulation of The Standard, George’s weekly newspaper, soon fell off, placing George under pressure of constantly worrisome financial straits.

Reading George’s sparse 1888 correspondence , almost all with British supporters, George always placed an optimistic face on events:
4 Letters to Mr. Briggs in London:

Feb. 29, 1888:
“We are going to have the free trade fight here at last in spite of the cowardly politicians and the ignorance of our people…”

March 24, 1888:
“The truth is that these half way people who call themselves tariff reformers in our country and free traders in yours, are afraid of radical men like you and me.”

August 31, 1888:
“…the fight is getting hot here but I think we shall win and make a great advance toward the free trade you want.”

October 15, 1888:
“The good fight is going on wonderfully well…and the free trade idea is making wonderful advances…a free trade party after your own heart will be making the fight in the United States…”

Letters to Mr. Walker
March 17, 1888:
“9/10 of our really intelligent friends…are with us…the Standard is not doing as well as I would like…but it is certain to do better.”
Letter to Wm. Loyd Garrison

March 19, 1888:
“…I am very much pleased with the response of the readers of the Standard to the free trade question. I think fully nine-tenths of the single tax people are with us in believing that our energies ought to be thrown this summer into the free trade fight.”

However the direction was generally downhill after the split with McGlynn. (And McGlynn had problems of his own – being temporarily excommunicated by the Vatican.)

AND FINALLY THE INSULT
That George was treading on political quicksand soon became evident from Cleveland’s campaign slogan, which was clearly a disavowal of George:
“Dont-dont-dont be afraid! Tariff reform is NOT free trade.”

Cleveland lost, but ran again 4 years later. Like a bulldog, George supported him again in the Standard for June 29, 1892:

“At last, quicker even than we had dared to hope, what we have struggled for and waited for has come to pass, and the two great political parties of the United States stand fronting each other on the naked question of Protection or Free Trade (note – that’s the exact title of his book).”

However, as Louis Post, editor of The Standard (from 1891) later noted:
“Cleveland was elected. But… he sidetracked the free trade policy and plunged the country into the free silver contest of 1896 by taking a defiant stand on the gold standard side. In doing that, he “lined up” with the same plutocratic interests which on the tariff issue were devoted to protection.”

Finally George and his friend Tom Johnson, a delegate to the 1896 Democratic convention, both supported William Jennings Bryan’s campaign, having concluded that “a free silver platform…would be the better choice as compared with the ‘gold bug’ policy” wrote Post.

With the benefit of hindsight, supporting free trade in this way must be viewed as a disaster for Georgism. In retrospect Louis Post would write:

“When we prove that protection lessens the supply of goods by increasing the work necessary to produce them, what have we proved to men whose greatest anxiety is to get work? …in civilized countries the majority of the people are helpless unless they find someone to give them work.”

Years later Michael Flurscheim, one of George’s earlier protégé’s who emigrated to New Zealand helping to raise the land question there and in Australia, noted :

“The intermixture of tariff legislation and land reform has thus done a great deal of harm, especially in the United States and the British colonies.”

And Flurscheim perhaps unfairly, but vividly expressed the free trade issue in this way:

“It is all very well for the wolf to preach to the sheep that the free right of mutually devouring each other is one of the most sacred adjuncts of free individualism among animals, so long as the case only lies between him and the sheep…”

Flurscheim’s last word on Henry George was to call him:

“A great Genius who unfortunately fell into the Smithian trap” in free trade.

And Flursheim’s judgment was not just hindsight. In an October 19, 1888 letter, he expressed his high esteem for George and wrote:
“You still continue attacking at the wrong place…the cause of my irritation. You are the general and I am forced to follow. How happy you would make me if you would allow me to point out the best point of attack for your splendid sword – Single Tax!”.

McGlynn too had shown this foresight, and many other supporters as well.
For Georgism to move forward meaningfully, Georgists must learn from both their successes and their mistakes; this error of leadership and its origin in applying an overly theoretical methodology to political activity has to be faced, understood and corrected. And that’s why I’ve discussed it at such length.

GEORGE VISUALIZED A UNION OF ENGLISH SPEAKING PEOPLES
Having received a warm and in some ways more respectful reception in England (even if sometimes in the form of serious criticism) and perhaps because of his ancestry, George seemed to have had a special place in his heart for his British followers. He even entertained a generalized concept of the eventual establishment of a union of the English speaking peoples:

“…we see in the future…that great republic that some day is to confederate the English speaking people everywhere that is to bring a grander ‘Roman Peace’ to the world….in meetings such as this…I feel an earnest (presentiment) of the coming time when we of one blood and one speech are also to be one…What we want today is to bring us all together is , not union under one government that shall assume to govern, but that absolute freedom of intercourse that shall entwine all interests, that absolute freedom of intercourse that shall establish a daily ferry from this side of the Atlantic to the other …” (Standard, August 10, 1889)

POPE LEO’S RERUM NOVARUM
As the Standard went into decline, the first serious attack on George from the Catholic Church came in 1889, when Father Victor Cathrein labeled George an agrarian socialist. Professor Gaffney has characterized Cathrein as not really wanting to solve the problem of poverty, because he thought the rich need the poor in order to test their character by giving them chances to perform Christian charity!

In 1891 much larger troubles came in the form of Pope Leo XIII’s encyclical, Rerum Novarum, On The Condition Of Workers, the Catholic Church’s initial effort at spiritual guidance in modern (industrial) socio/economic matters. While much of the encyclical calls for a better treatment of working people by both employers and the state, without directly naming him a section of Rerum is aimed at George and other reformers, and workers are warned “not to associate with vicious men who craftily hold out exaggerated hopes (#30)”.

Without clearly presenting George’s viewpoint, it is erroneously lumped together with socialism and even the negation of private property altogether.
Prof. Gaffney points out that the Vatican was careful not to draw attention to George’s works by mentioning him or openly banning them; and they never put Progress And Poverty on the list of banned books. Although the Church’s error was evident to Catholics familiar with George, still the Encyclical further pressured him.

While Rerum Novarum called for justice to workers, certainly a goal shared by Henry George, it gave the matter no teeth and its tone ended up more concerned with protecting the status quo of property rights and the social order. Remedies were to be left mainly to charity. But Quadragesimo Anno issued by Pius XI in 1931 after the great stock market crash (on Rerum’s 40th anniversary), was another matter. Though it profusely praised Leo XIII and “re-affirmed” Rerum, when one reads its language, very significant changes are apparent. First the category of “reformers” is enlarged beyond the universally vicious:
“Some were seeking the overturn of everything, while others, whom Christian training restrained from such evil designs, stood firm in the judgment that much of this had to be wholly and speedily changed (sect. 4).”

Again, George is not named, leaving the possibility he is to be included among such Christians. Quadragessimo also made significant advances in other areas. While it noted the importance of charity and of changing the moral attitude of men, it significantly recognized the importance of juridical actions and reforms; how the state must regard among its duties the economic protection of citizens, especially the poor and weak  (e.g. sections 25, 28, 30, 49, 62, and 77-80).

Quadragesimo also attacked the concentration of wealth as an “unanswerable argument” on the unjust distribution of the products of industry (e.g. sections 58-62). But its strongest language is reserved for condemnation of the emergence of an economic “dictatorship”:

“(105, 106) …It is obvious that not only is wealth concentrated…but an immense power and despotic economic dictatorship is consolidated in the hands of the few…This dictatorship …since they hold the money and completely control it, control credit also and rule the lending of money…and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.”

Remember this was just two years after the Great Crash, and a year or two before the worst of the Depression. Perhaps Quadragesimo encouraged Cardinal Mundelein of Chicago to write in 1938:

“The trouble with us in the past has been that we were too often allied or drawn into an alliance with the wrong side. Selfish employers of labor have flattered the Church by calling it the great conservative force, and then called upon it to act as a police force while they paid but a pittance of wage to those who worked for them. I hope that day is gone by. Our place is beside the working men. They are our people, they build our churches, our priests come from their sons.”

Thus while the Church moves very slowly; in my view it would be an error to write it off as a potential force for reform, and to ignore efforts in that direction; and that is why I’ve devoted a full page to these encyclicals.

THE SCIENCE OF POLITICAL ECONOMY AND GEORGE’S EARLY DEMISE
It was at this low point in 1891 that George began a long and arduous project, which may have  been ultimately responsible for his early death in 1897 at only age 58. This grand task which he felt compelled to selflessly devote himself to was to research and write his last book, THE SCIENCE OF POLITICAL ECONOMY. If we but listen carefully to what George tells us about this process, you will see why I suggest that “economics” killed him:

“In all the dreary waste of economic treatises that I have plodded through, this (by J. S. Mill)… is the best attempt I know of to explain…the laws of distribution.” (SPE, 432)
And:
“…Schopenhauer speaks of the destruction of the capacity for thinking which results from the industrious study of a logomachy made up by monstrous piecing together of words which abolish and contradict one another. But of this very thing, Schopenhauer himself with all his strength and brilliancy is a notable example…His industrious study of Kant had evidently reduced him to that state of mind which he speaks where ‘hollow phrases count with it for thoughts’”. (SPE, 346)

And I am suggesting that George too became such a victim; not of Kant but of “Political Economy”.

An example of this process, in Book V (SPE, 497-503), where George faithfully tries to make sense of Adam Smith’s obfuscation regarding labor determining the value of money, but it is in vain, as it must be. A century earlier, Smith’s contemporary, Thomas Malthus had noted that Smith’s assertions on the constant value of labor:

“haven’t convinced anyone, so in no works of political economy is it considered the measure of value”, and Malthus pointed out that Smith himself had used corn prices, not labor, as a measure of silver’s value.

Finally in this weakened state, when Tom Johnson warned Henry George that the pressures of running for Mayor of New York City again in 1896 might prove fatal, his almost wistful reply was:

“Wouldn’t it be glorious to die that way”.

George passed away on October 29, 1897; his longtime friend and supporter Tom Johnson at his side. His old ally Father McGlynn delivered the funeral oration to a vast throng gathered at Greenwood Cemetery in Brooklyn:

“As truly as there was a man sent of God whose name was John, there was a man sent of God whose name was Henry George. …God…took this lad Henry George, a lad with so little schooling…and made him the instrument for good which he became, the messenger of a great truth”
This is from one who knew and understood him; fought with him, yet loved him dearly. McGlynn continued:

“Why is this vast gathering assembled here today… why is it that vast multitudes have come from early morn…to gaze mournfully and lovingly on his face, and to contemplate again the noble character of the man? It is because he was a man sent of god, – and his name was Henry George.”

The “killer” book was finally published posthumously by his son. It offers some excellent and important clarifications and expansions, such as on Adam Smith’s selfishness assumption. At great personal cost, George fulfilled what he considered a solemn duty, to cover the whole field of political economy. That it did not result in new ground breaking advances as he had made in Progress And Poverty,  at age 40, is not really a criticism  – that would be expecting too much. The last section of the new book dealing specifically with money, discusses credit in important ways foreshadowing some present day developments. But these discussions don’t rise to the great political clarity evident in George’s monetary and banking discussions in Social Problems, written at age 44.

With this abbreviated background of Henry George’s thought, values and method, we are now better prepared to examine his monetary views.

THE MONETARY CONTEXT IN WHICH GEORGE LIVED AND WROTE
It is a thesis of the American Monetary Institute that by mis-defining the nature of money, special interests have often been able to control a society’s monetary system, and in turn the society itself. Therefore before our readers can fully evaluate George’s monetary views, they need to know their context and first get a clearer picture of US monetary history than the economists have been willing or able to provide. For this purpose I present here brief excerpts from chapters 16 to 19 of my book, The Lost Science Of Money. This is not to say that George was aware of all of this history; more certainly, he was not. Yet he saw or was aware of enough of it, and with his overriding moral viewpoint, he was still able to come to the correct conclusions on how the US monetary system should operate.

A (very) ABBREVIATED MONETARY HISTORY OF
THE US – Part 1
THE MONEY POWER VS THE CONSTITUTION
(These sections on American Monetary History are highly edited excerpts from 4 chapters of the Lost Science Of Money (total 24 chapters) by Stephen Zarlenga. They appear here by permission of the American Monetary Institute, which owns the copyright on  that work, and may not be re-produced in any way, without the express written permission of The American Monetary Institute. Please see the Institute’s web site at www.monetary.org  or write to PO Box 601, Valatie, NY, 12184.)

Dear Reader, for these sections you should consult my book, The Lost Science of Money. There is an order form at http://www.monetary.org/lostscienceofmoney
For purposes of Understanding Henry George’s monetary viewpoint and positions, please continue to read below.

***************************

HENRY GEORGE’S MONETARY VIEWS
George’s son, Henry Jr., tells us that his father thought that “money is a sibling of language” (SPE, x), referring partly to its universal significance and inseparability from the advance of mankind, but also to the way he thought it had developed:

“Money is not an invention, but rather a natural growth or development, arising in the progress of civilization from common perceptions and common needs.” (SPE, 512)
In this vein, one could also call the law a development rather than an invention.

THE DIFFERENCE BETWEEN WEALTH AND MONEY
George was well aware of a special confusion between the definition of money and of wealth. While wealth is tangible, he repeatedly identified the abstract nature of money:

“It is important that this purely representative character of money should be thoroughly understood and constantly kept in mind, for from the confusion resulting from the confounding of money with wealth have flown the largest and most pernicious results. (SPE, 493-4)
And he cited Archbishop Whately on the harmful effects of this peculiar confusion:

“It has for centuries done more and perhaps for centuries to come will do more, to retard the improvement of Europe than all other causes put together.” (SPE, 141)

We’ve just related how this confusion helped enable financial interests to keep the monetary power from being properly defined in the U.S. Constitution.
George accurately noted that:

“These are not the effects of the confusion of a term. The confusion of the term is one of the effects of the influence upon thought of the same special interest…”(SPE, 141, 142)

And he thought that to eliminate such thought control required eliminating the source of the controller’s power.

Thus in both Progress and Poverty and the Science Of Political Economy, George devotes considerable attention to various definitions of wealth; finally settling on: “Natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the gratification of human desires.” (SPE, 147) However, he did not formulate such a careful definition of money. One wonders how his work would have developed had he concentrated earlier on finding the definition of money; perhaps starting with Aristotle’s essential definition of Nomisma: “Money exists not by nature but by law” (Ethics, 1133)

Its significant that while Adam Smith dealt with the topic of money among the very first subjects, and thoroughly obscured it in his only book on economics, The Wealth Of Nations; Henry George put money off to the very last thing to be considered in his last book, indeed posthumously. George thought he had to clear up the concepts of wealth and value before he could undertake the concept of money. But I’d suggest that really was not necessary and perhaps even the other way around, since both value and wealth are generally measured or expressed in terms of money.

EARLY INDICATIONS IN PROGRESS AND POVERTY
There are early indications in Progress and Poverty of George’s advanced monetary awareness at age 40:

“The laborer who receives his wages in money (coined or printed it may be) really receives in return for the addition his labour has made to the general stock of wealth, a draft on that general stock, which he may utilize… and that neither the money, which is but the draft, nor the particular form of wealth which he uses it to call for, represents advances of capital for his maintenance, but on the contrary represents the wealth or a portion of the wealth his labour has already added to the general stock.” (P&P, 29)

Making this distinction between wealth and money, is usually a key step on the road to a fuller monetary awareness. It’s not an obvious step, for it requires abandoning a more comfortable concrete view of money as a tangible physical thing and adopting a view of money as an abstract power. For example, those insisting on gold backing for “money” have usually not yet taken this step.

George continues the same thought:
“That this universal truth is so often obscured, is largely due to that fruitful source of economic obscurity, the confounding of wealth with money…since Dr. Adam Smith made the egg stand on its head…” (P&P, 62)

Indeed one can trace much of the regression to metallism of professional monetary thought in the 19th and 20th centuries back to Adam Smith’s monetary errors, inconsistencies and contradictions. The greenback supporters later overcame this, as did Henry George.

Another indication of George’s monetary awareness is in his son’s biography describing how George helped Mr. Moxham set up an emergency money system for the Johnson Company (see below):

“Mr. George regarded this as an illustration of what the United States could do to clear up the currency difficulties – issue from its own treasury a paper currency based upon its credit and interchangeable with its bonds.”
Contrary to most economic opinion, this type of “greenback” monetary proposal, has never really been discredited, but has merely been smeared and ignored, as have George’s views on land. In fact the present Federal Reserve System can be viewed as a form of such a proposal; although with the critical flaw added that the Fed is privately owned and privately managed, opening the door to conflicts of interests, and establishing special monetary privileges.

These and other early indications were interesting, but not really conclusive, and not always consistent.

GEORGE WAS A GREENBACKER
However by age 44, in Social Problems (1884), George demonstrated a fully developed concept for how an advanced monetary system ought to operate:

“It is not the business of government to direct the employment of labor and capital, and to foster certain industries at the expense of other industries; and the attempt to do so leads to all the waste, loss and corruption due to protective tariffs.

“On the other hand it is the business of government to issue money. This is perceived as soon as the great labor saving invention of money supplants barter. To leave it to every one who chose to do so to issue money would be to entail general inconvenience and loss, to offer many temptations to roguery, and to put the poorer classes of society at a great disadvantage. These obvious considerations have everywhere, as society became well organized, led to the recognition of the coinage of money as an exclusive function of government. When in the progress of society, a further labor-saving improvement becomes possible by the substitution of paper for the precious metals as the material for money, the reasons why the issuance of this money should be made a government function become still stronger. The evils entailed by wildcat banking in the United States are too well remembered to need reference. The loss and inconvenience, the swindling and corruption that flowed from the assumption by each State of the Union of the power to license banks of issue ended with the war, and no -one would now go back to them. Yet instead of doing what every public consideration impels us to, and assuming wholly and fully as the exclusive function of the General Government the power to issue money, the private interests of bankers have, up to this, compelled us to the use of a hybrid currency, of which a large part, though guaranteed by the General Government, is issued and made profitable to corporations. The legitimate business of banking – the safekeeping and loaning of money, and the making and exchange of credits, is properly left to individuals and associations; but by leaving to them, even in part and under restrictions and guarantees, the issuance of money, the people of the United States suffer an annual loss of millions of dollars, and sensible increase the influences which exert a corrupting effect upon their government.” (Soc Pr, 178-9)

It is normally very difficult to write about monetary systems as concisely as George does here and still remain accurate. That he has done so indicates he put study and effort into it. George continued to express this view for about 15 years until his death. He repeated the position in 1886, when 46 years old, in Protection Or Free Trade (page 12), stating that government currency is preferable to private bank currency, based on the bank holding government bonds as reserves:

“What can be clearer than that a note directly issued by the government is at least as good as a note based on a government bond? Yet special interests have sufficed with us to institute and maintain a hybrid currency for which no valid reason can be assigned than private profit.”

We see this theme repeated again in the Standard in 1888, where George at age 48, focused on how the fractional reserve feature of the banking system placed the bankers in a specially privileged position – able to have both the interest on the money they loaned to the Government, and still have nearly the full use of that money to make further loans(!):

“… by means of the national banking system we have permitted the holders of a large part of the public debt to enjoy the principle while they draw the interest. Through the national banking system the banker was allowed to draw from the government $80,000 in money for every $100,000 in bonds he deposited, and then to draw interest on the whole $100,000. This proportion was subsequently increased to 90%, and now a bill is pending in Congress to allow the national banks a dollar in money for every dollar in bonds they deposit, while paying them full interest on the dollar.”

The article continues with George pointing out the “absurdity” of backing the currency with silver, or another commodity. Remember the great discovery demonstrated by the Massachusetts bills of credit in 1690 was that a “promise to receive” rather than a “promise to pay” was sufficient to empower a properly issued government paper currency:

“And not content with this, as though from the mere desire of paying as much interest as possible, and making the redemption of our public debt as slow as possible, we are actually buying up enormous amounts of silver, for which we have no more use than for so many tons of cobblestones, and storing them away in vaults. Secretary Fairchild sees the absurdity of coining the silver and proposes instead that it shall be stowed away in bars. But why not leave the silver in the ore and the ore in the ground? That would be a far greater economy. As for the silver notes, they would be just as useful and just as readily taken if they promised to pay silver yet to be mined and refined, or if instead of promising to pay anything at all, they were simply made receivable for public dues.” (Standard, Feb 11 1888)

As Kenneth Wenzer has pointed out in his Anthology Of Henry George’s Thought:

“A condemnation of banks and a call for monetary reform were part of the Georgist agenda for improving America”

The Standard articles which we cite in this study are quoted from Wenzer’s pioneering work. Since the focus has rarely been placed on George’s monetary views, we’ll use this opportunity to present more of them:

“There never was any good reason for the institution of the national banking system, and there is not today any good reason for its continuance. Like all special privileges it is but a taxation of the many for the benefit of the few, and like all use of governmental power for private advantage, it has resulted in governmental extravagance and political demoralization. The pretense that there is some mystery about currency and banking that common people cannot understand, is like the pretense that no one but the members of the protected rings and trusts are competent to say what tariff taxes shall be levied on the people…The national bank notes current in the united states fulfill the functions of generally accepted money, not because they have the name of a bank printed on them, not because bonds …are deposited for their redemption, but because they are issued by the general government, bear its stamp, and rest upon its credit. They are in no wise better than the notes directly  issued by the government, but derive their security and usefulness from the same source that gives the greenback its security and usefulness – the fact that they are issued by the government and are receivable for its dues…. The proper business of banking is the receiving, the keeping and the loaning out of money, and the facilitation of exchanges by the extension , interchange, and cancellation of private credits. With the issuance of money the proper business of banking has nothing whatever to do.” (Standard, Apr 28, 1888)

And more:
“To withdraw the national bank currency and to substitute for it notes directly issued by the government would be to save annually for the people millions directly, and still more millions indirectly, but it would not in the least interfere with the proper business of banking.”
(Standard, Apr 28, 1888)

GEORGE WAS A GREENBACKER “BUT NOT A FOOL”
George’s call for monetary reform is well known as the “Greenback” position.
The Plutocracy’s answer has been to continuously finance a two centuries smear campaign against government to raise the fear of inflation under such a system. A fear not really justified by historical evidence, where one finds much greater monetary abuse by privately controlled monetary systems, than by public, governmentally controlled ones. And that is why the study of economics is steered away from the study of history.

In this propaganda campaign the Plutocracy still advertises the 6 – 700 year old cases of monarchs “debasing” their coinage, but never gives the context – that this period of “Kingly Abuse”, took place on the continent after the collapse of monetary order with the fall of Byzantium in 1204 AD. Nor do they point out that much of the alteration in coinage was an accepted form of taxation. Nor will you ever hear that virtually no irresponsible currency changes (save one brief incident with Henry VIII) took place in England during those times. Nor will you learn that Republics generally fared much better monetarily than monarchies; nor do they advertise the much greater monetary disasters created by private bankers during these same times.

In the more modern period, during times of war, the money power, partly to assure their own survival has stood aside and acquiesced in government issuing money (as in the Revolution, and the Civil War); or issued it in large quantities themselves, if allowed to get away with it (as in WW1 and WW2). In doing this, they could be sure that the resulting production would be blown up or sunk, or be useless, rather than end up as new consumer goods or new production facilities, or improved infrastructure, which would have tended to lower prices, and to have made the population more independent of the monetary miscreants.

This is why warfare has become associated with “getting the economy moving”. But it wasn’t the warfare but the accompanying monetary and production activity that were responsible. We have not seen modern historical situations in the English speaking world where such high levels of monetary activity was directed into real economic production, and not specifically designed for destruction. Partial exceptions are the limited efforts undertaken by Roosevelt after the Great Depression (which gave us projects like Hoover Dam, and the water and sewer systems still in use in our upstate NY home town); and the original all-out NASA effort to reach the moon (which gave us our modern computerization).

In short, the Plutocracy’s inflation theme is mostly propaganda. Consider it for example in light of what you have just read in our (very) brief monetary history of the US. For an extensive description of these historical realities, please see my book The Lost Science Of Money.

Louis Post tells how George once answered a question related to this charge – on whether he’d support the government issuing money too freely, with the statement:

“(‘ecclesiastical expletive!’) I am a Greenbacker, but I am not a fool.”

Post lets us guess exactly what the expletive was.

GEORGE’S MONEY DISCUSSIONS IN THE SCIENCE OF POLITICAL ECONOMY
At age 58, while still embracing the correct policy for money to be governmentally issued, George’s unfinished attempts to theoretically define money in his Science Of Political Economy were not as advanced as his practical conclusions, perhaps because the latter had been empirically nourished.

Remember, in this posthumously published book the final section on money was not complete. George Junior relates that: “if entirely finished as planned…(it) would have shown Book V on Money, extended…but the work as left was, in the opinion of its  author, in its main essentials completed, the broken parts, to quote his own words a few days before his death ‘indicating the direction in which my thought was tending.” (SPE, vii)

But such imprecision is very problematic for monetary questions. They have been for too long, purposely confused and shrouded in mystery. Thus George’s unfinished exposition on money tended to accentuate or reflect the political economists patterns of what he was reading rather than his own final synthesis.

Thus in the first section of Book 5 he describes three concepts of money: First the idea of commodity money deriving its value from the metal; second fiat money empowered by the edict or fiat of government; and third credit money, used in place of barter.

But by Chapter 6 of Book V, it has been reduced to just two kinds – commodity money and credit; with fiat money being placed under the heading of credit. This disparity in organization is clearly more an indication of the incomplete status of Book 5, rather than loose thought on George’s part. And while he gives examples of different kinds of money, and the functions of money he does not really get to a meaningful definition of the essential nature of money, but instead arrives at the following over generalized statement:

“Whatever in any time and place is used as the common medium of exchange is money in that time and place.” (SPE, 494)

But the “time and place” qualifications are really superfluous. So of his 21 word definition, 9 words are unnecessary, and his definition of money reduces to “the common medium of exchange.”

A few pages later the definition becomes
“…we may define money with regard to its functions as that which in any time and place serves as the common medium of exchange and the common measure of value.” (SPE, 502)

Such “time and space” language comes from the “pseudo” monetary arguments he had been reading, such as Menger’s ideas on the origin of money, which strive for status by cloaking themselves in the terminology of the physical sciences. George didn’t care much for the Austrian School:

“What has succeeded (in place of the classical school) is usually denominated the Austrian School…If it has any principles, I have been utterly unable to find them…This pseudo science gets its name from a foreign language, and uses for its terms words adapted from the German – words that have no place and no meaning in an English work. It is indeed admirably calculated to serve the purpose of those powerful interests dominant in the colleges…that must fear a simple and understandable Political Economy, and who vaguely wish to have the poor boys who are subjected to it by their professors  rendered incapable of thought on economic subjects…the volumes for mutual admiration which they publish…”. (SPE, 208)

Later, Colonel E.C. Harwood, a twentieth century Georgist, and founder of the American Institute For Economic Research, carried forward this criticism of the Austrian School method, calling it

“A LEAP BACKWARD” (headline). “Dr. Von Mises denies not once but several times that his theories can ever be disproved by facts. This point of view represents a leap backward to Platonic Idealism or one of its offspring in various disguises.”

George’s “mutual admiration” comment is amusing as this “incestuous” promotion visibly continues through the 20th century. Yet George still couldn’t stop Austrian School founder Menger’s arguments on money from seeping into his consciousness, for example when George writes:

“…money is the most readily exchangeable (thing)…this ready exchangeability is the essential characteristic of money.”  (SPE, 487)

But to get to the real essential characteristic, George would have had to determine just what it is that makes money so readily exchangeable, and this was not likely to be found by reading the Austrians, or other economic works. Most of them had little or no idea, and those who did obfuscated it.

Still, George’s thought processes remained far superior to those he was reading, and he produced some excellent observations in Book V on money.  For example:

ON INTRINSIC VALUE BEING UNNECESSARY IN MONEY
Related to distinguishing money from wealth, George saw through the argument that money had to have “intrinsic” value:

“The reason …the element of intrinsic value may be partially or entirely eliminated without loss of usefulness is to be found in the peculiar use of money. The use of other commodities is in consumption. The use of money is in exchange. Thus the intrinsic character of money is of no moment to him who receives it to circulate again.”(SPE, 520; also see SPE, 496)

And:
“…that the circulating value of money need not necessarily depend on its intrinsic value, must have been clear to discerning men…The fact that coins that had lost something of their intrinsic value by abrasion continued to pass current …of itself would show that the circulating value of a coin did not…depend on the value of the material it contained.” (SPE, 522-3; also see SPE, 528)

And George understood the broad importance of the quantity factor, for maintaining the value of money:

“What has everywhere caused the failure of innumerable attempts to reduce the intrinsic value of the principal and important coin without reducing its circulating value…(is) that the sovereigns who have attempted it did not, and perhaps could not, observe the necessary condition of its success, the strict limitation of supply.” (SPE, 525)

Georgists should be better able to understand that intrinsic value is superfluous, even a hindrance, in light of George’s accurate distinction between money and wealth. To insist on “commodity money” is to insist on re-defining money as tangible wealth; which is really to do away with the concept of money; and therefore to do away with the institution of money, substituting some convoluted form of hybrid wealth. Highly “inconvenient” to say the least.

ON THE ORIGINS OF MONEY NOT BEING AS ADVERTISED BY ECONOMISTS
Another important example is George’s perception that the economists were generally “ridiculous” in their endlessly repeated mantra on the origin of money:

“In explaining the origin and use of money, Adam Smith much overrated the difficulties of barter, and in this he has been followed by nearly all writers who have succeeded him…
“Though this explanation of the difficulties attending barter has been paraphrased by writer after writer since Adam Smith, it is an exaggeration so gross as to be ridiculous…The butcher with meat that he wanted to dispose of would not have refused the exchange offered by the brewer and baker because he himself was already provided with all the bread and beer that he had immediate occasion for. …He would say …I will give you the meat you want on your promise to give me the equivalent in bread and beer when I call for them” (SPE, 508)

Thus George seems to have independently figured out that the development of credit probably preceded the development of money.

ON THE IMPORTANCE OF CREDIT USED AS MONEY
George’s discussions of credit in Book V are noteworthy and well ahead of his time. In addition to understanding how credit could function in a primitive situation he understood how important it was to the monetary functioning of his own day:

“If the use of money supersedes the use of credit in some exchanges, it is only where the use of credit is difficult and inconvenient…” (SPE, 517)
And
“…the great volume of domestic exchange is carried on by the giving and cancellation of credits…the most important use of money today…is that of a common measure of value, its secondary use.” (SPE, 511)

Though I didn’t find George discussing this in detail, his referral to the “giving and cancellation” of credits indicates an awareness of the process that would come to be called the “real bills” doctrine, where a bank issues a credit (makes a loan) to a party based upon a commercial bill which the party has received in the course of selling a product. When the buyer of the product eventually makes his deferred payment, the bank’s credit is extinguished or canceled. The producer has been paid, the buyer has been assisted to make his purchase, and the bank receives its fee or interest, for facilitating the exchange between buyer and seller. In fact an example of a wholesome banking activity.

But this is quite different from a bank extending a long term loan for the purchase of an asset such as land. That process becomes an unstable one, if it becomes a generally accepted banking practice.

But unlike the bankers, George publicly – and forcefully – distinguished credit from money:

“Credit as a facilitator of exchange is older than money and perhaps is even now more important than money…But though it may be made into money it is not itself money…”      (SPE, 493)
And:
“…a real and very important distinction – the distinction between money and credit. …checks, drafts, negotiable notes and other transferable obligations…(pass for money) only when accompanied by…trust or credit.” (SPE, 491)
And:
“Thus there is a quality attaching to money…which clearly distinguishes it from all forms of credit.” (SPE, 492)
George well understood one of the main effects of that distinction, which has been “forgotten” by modern economists but which will soon enough be of great concern to our economy once again:

“The curse of credit as a flux of exchanges is that it expands when there is a tendency to speculation, and sharply contracts just when most needed to assure confidence and prevent industrial waste.” (Standard, Feb 11, 1888)

ON THE EXTENSION OF CREDIT TO LAND BEING UNSTABLE
In the pamphlet Causes Of Business Depression, George’s view, at age 55, was:
“…business depression comes from scarcity of employment.”… “land is the source of all employment, the natural element indispensable to all work…. The monopoly of land – the exclusion of labor from land by the high price demanded for it – is the cause of scarcity of employment and business depressions is … clear…”

Thus bank loans to purchase land, within George’s viewpoint, would be an important factor for business instability, since they would facilitate that monopolization process.

ON MONEY’S ESSENTIAL CHARACTERISTIC
This is the defining primary feature of money; the one which ultimately assures its value. Over and again, history shows this to be money’s legal status, not its material. This doesn’t necessarily mean legal tender declarations, but that a viable government, with taxation powers in a viable economy, will accept the money for payment of all taxes, dues, fees, fines, etc. Time and again we see that this is the minimum necessary legal provision insisted upon by bankers to be certain their privately created credits would indeed circulate as money. (for example the Bank of England; the 1st and 2nd Banks Of The U.S.; the 1864 National Banking System and the Federal Reserve System)

George fully understood this in practice, if not in theory, when he wrote that government  certificates would circulate just fine “if instead of promising to pay anything at all, they were simply made receivable for public dues.” (Standard, Feb 11 1888). George came close to also achieving this awareness in theoretical terms; the disjointed indications from unfinished Book V indicating he was close when he wrote:

that the key is “the disposition to receive (money) as a medium of exchange.” (SPE, 491)

And he acknowledged that:
“…the coining of money has from the earliest times been deemed a function of the sovereign – the seignior or lord – as representative of organized society or the state.” (SPE, 518)

George almost arrives at the answer in the following excerpt. Reading it for the first time, I thought he was describing a possible factual exception to the essential principle of money stated above; but by the end, the specific facts he relates became more a confirmation of the principle than a contravention of it:

“Is money therefore  a matter of mere governmental regulation?…can government statute or fiat…prescribe what money shall be used and at what rate…? (SPE, 488) …those of us who lived in…California (from)1862 to 1879…(saw) that it cannot. During those years, while the money of the rest of the country was a more or less depreciated paper, the money of that State, and of the Pacific coast generally, was gold and silver. The paper money of the general government was used for the purchase of postage stamps, and the payment of internal revenue dues, the satisfaction of judgments of the Federal courts, and those of the State courts…and for remittances to the East. But between man and man, and in ordinary transactions it passed only as a commodity.”

“If it can be said that the government was not fully exerted in this case; that the United States government dishonored its own currency in making bonds payable and custom-House dues receivable only in gold, and that the California specific contract law virtually gave the recognition of the State courts ONLY to gold and silver, we may turn to such examples as that of the Confederate Currency; as that of the Continental Currency; as that afforded by the Colonial currencies prior to the Revolution; as that of the French Assignats; or to that (example in Ireland).” (SPE, 489)

Today, over a hundred years later, these examples, with the addition of the German hyper-inflation, still constitute the economists full arsenal against legally based money. But our discussion of the colonial moneys, the Continental Currency, the Greenbacks and the Confederate Currency demonstrate that these events have not been fully reported to us (we discuss the German Hyperinflation in my book, and the French Assignats in a special report). Contrary to the typical economist’s training, these events were more complex than generally presented and certainly do not constitute an unanswerable argument for placing the control of monetary systems into the hands of private bankers. George cites them because of their endless repetition in the economics books he was reading for so many years.

Henry George continues:
“Shall we say then, as do many who point out this impotency of mere government fiat, that the exchange value of any money depends ultimately upon its intrinsic value; that the real money in the world, the only true and natural money, is gold and silver, one or both – for the metal-moneyists differ as to this, being divided into two opposing camps – the monometalists and the bimetallists? This notion is even more widely opposed to the facts than is that of the fiatists. …But gold and silver are not the money of the world… As for intrinsic value, it is clear that our paper money which has no intrinsic value, performs every office of money – is in every sense as truly money as our coins, which have intrinsic value; and that even of our coins, their circulating or money value has for the most part no more relation to intrinsic value than it has in the case of our paper money. And this is the case to-day all over the civilized world.” (SPE, 491)

Clearly George was still wrestling with these questions in his own mind. While he accurately identified the monetary system that was needed in practice, he died before fully identifying its theoretical basis. He was close to figuring it out as indicated by his statement that the notion of intrinsically valued money “is even more widely opposed to the facts than is that of the fiatists”, and his realization of the great importance of the “disposition to receive (money)”; the ultimate receiver being the government.

The legal nature of money had been identified by George’s contemporary, the great monetary historian Alexander Del Mar, but unfortunately he and George were at odds, having squabbled over which of them had conceived the idea that interest arose out of nature’s creative forces (Actually the Scholastics had incorporated this concept in their work hundreds of years earlier, and Del Mar too, though exceedingly well read, appears largely unaware of the Scholastics work). The legal theory of money was at that very time being fully developed by George Knapp in his classic State Theory Of Money, first published in 1905, after George died.

Had George let the clues lead him to better grasp the legal basis of money, then he would have been in a position to make another truly great discovery which comes from combining that concept of money with his concept on how labor pays its own way. This great potential process would later be understood by John Maynard Keynes, but it has again slipped (or been pushed) out of the national consciousness.

GEORGE WAS MONETARILY CONSISTENT TO THE END
Demonstrating that George always retained his position favoring a governmentally issued and controlled monetary system, is his Shall The Republic Live? article published in the New York Journal, the day before the 1896 Presidential election:

“…Gold and silver are merely the banners under which the rival contestants in this election have ranged themselves. The banks are not really concerned about their legitimate business under any currency. They are struggling for the power of profiting by the issuance of paper money, a function properly and constitutionally belonging to the nation.”

Henry George Jr., when presenting the article informs us that:

“Since a young man, Henry George had advocated as the best possible money, paper issued by the general government – paper based on the public credit.”

Dear Readers, that is still the monetary key today; it has always been the essential monetary issue facing our nation. All Georgists can be proud that he so strongly and consistently embraced it.

GEORGIST IMPLICATIONS FOR 21 st CENTURY MONETARY REFORM
What are the implications of George’s thought for present day monetary reform proposals? Lets consider the four main reforms being discussed:

A GOLD STANDARD REFORM – HAVING MONEY FULLY OR PARTLY BACKED BY GOLD OR OTHER COMMODITIES
George derided the idea of digging up ore from one hole in the ground (called a mine) in order to refine and deposit metal into another hole in the ground (called a bank vault):

“We have deliberately substituted a costly currency for a cheap currency; we have deliberately added to the cost of paying off the public debt… We are digging silver out of certain holes in the ground in Nevada and Colorado and poking it down other holes in the ground in Washington, New York, and San Francisco.” (Soc Pr, 168)

And
“The reason …the element of intrinsic value may be partially or entirely eliminated without loss of usefulness is to be found in the peculiar use of money. The use of other commodities is in consumption. The use of money is in exchange. Thus the intrinsic character of money is of no moment to him who receives it to circulate again.” (SPE, 520)

These are reasons enough, but there are additional ones to avoid a gold standard. Historically over and again it has been a method of concentrating a special monetary privilege into the hands of a plutocracy. The misinformation being spread today that a gold standard helps the common man because it stops inflation, misses the point. For labor has suffered far more from deflation or restriction of the monetary system than from inflation, and a metallic based monetary system is essentially a formula for deflation. Under a deflation, it’s not labor, but those with money or to whom money is owed, who automatically benefit without giving anything in return. Those in debt are harmed because they must repay it in more valuable money. As the industrialists in a society are often large debtors; industry is thus harmed and this harm is passed through very quickly against labor.

George’s early protégé, Michael Flurscheim in 1902 sarcastically observed that “(Gold) – a nice standard of value indeed, which has appreciated almost 100% in the last thirty years!”

Historical experience shows this tends to happen under a gold standard, because gold production has almost never kept pace with population growth, let alone industrial and commercial needs. That is even true of the 1500-1650 period when gold and silver were being plundered by the fleet load from the Americas.  Thus the only way to avoid deflation with a gold standard, is by not really having a gold standard and creating leveraged amounts of paper money credits, based on smaller amounts of gold; making the promise of convertibility a fraud, instituting special privileges for bankers and subjecting the monetary system to panics and crashes. But one of the things we learned from the Great Depression, is not to do that again! And of course, it is inconsistent with George’s requirements for justice.

A 20th century Georgist, Robert de Fremery made these salient comments on a gold standard in his 1992 book Rights Vs Privileges. De Fremery writes:

“The question arises: Would it be wise to have such a currency convertible into gold? Certainly not. That would make it a credit currency – the very thing that has caused so much trouble. There are people who look with distrust upon ‘printing press’ or ‘fiat’ money. But they overlook one of the basic facts about money. It is true that we need a ’hard’ money. But we should not make the mistake of associating ‘hardness’ with convertibility into gold. The essence of a hard money is not determined by the material of which it is composed – or the material into which it is convertible. The essence of a hard money is that its supply is fairly stable and there are precise limits to it… And a purely paper or ‘fiat’ money can be a hard money if we set precise limits to its supply, or it can be a soft money if we set no precise limits to its supply. A population standard (as he described), would obviously give us a much harder money than the orthodox gold-credit system gave us prior to 1933 – and certainly a much harder currency than the money-managers are giving us today.”

And remember, to advocate that money must be a commodity or backed by a commodity is to destroy the distinction between money and wealth. The control of such a money system remains only in the hands of those with the wealth – by definition, the plutocracy. The very concept of money, and its societal basis in law is undermined.

A “FREE BANKING” MONETARY REFORM
The term “free banking” is vague, because its supporters have not uniformly defined it. We take it to mean a system where bankers are allowed to create the money supply in the form of their credits, or notes, which are allowed to circulate without restriction or regulation, to the extent that the markets will allow. But isn’t it really up to these advocates to define their own terms?

The present day call for free banking is among the least informed of monetary proposals yet to be put forward in our nation. It seems that to promote an idea without real examination today all one has to do is put the word “free” into its name.  This has even enabled them to ensnare Milton Friedman (who had been resisting) among their tentative supporters.

The strident anti government attitude of many of those promoting free banking has created a prejudice in them to view all regulation as bad and, contrary to our experience and our history, to place their trust in the bankers to act honorably!

George was strongly against granting special privileges to bankers. His direct experience with free banking, which he referred to as wildcat banking, was dismal. For him, and other contemporary professional observers of various backgrounds (Gouge, Knox, Bullock, Sumner) the facts were self evident and universally against the bankers: “The evils entailed by wildcat banking in the United States are too well remembered to need reference… and no-one would now go back to them.” (cited above) Now 150 years later along come the free bankers and say he and the other observers were wrong. Why? Because their theory tells them so. If it seems this section has treated the Free banking concept lightly, that’s as much as their arguments presented to date deserve. For a summary of the problems with the argument, please see Appendix 1.

USING LOCAL EXCHANGE  TRADING SYSTEMS (“LETS”)
This alternative is superior to the two reforms above because it does not promote or require injustice as the two above “reforms” do. These systems vary from locale to locale, and are not always as well defined as one could ask. They are normally well meaning attempts to remedy the shortage of national currency that exists in many localities. Mainly they enable participants to trade their labor, and some other items, with each other, without using the national currency.

These systems can be traced back to Josiah Warren, the originator of the Labour Exchange idea, put into practice by Robert Owen in London in 1832 after a very tight money period. In fact, Henry George was associated with organizing a variant of such a system for Tom Johnson’s company in Johnstown. Johnson wrote:

“It was at our Johnstown plant during the panic of the early (eighteen) nineties that we hit upon a device for supplying the shortage of currency…There were plenty of orders for our product – street railroad rails – but the buyers couldn’t pay cash. We called our employees together and explained… that we were unable to command enough currency to pay the full amount of their wages, but that if they were willing to accept a small percentage in cash and the remainder in certificates that we should be able to continue to operate the mill…we were selling rails for such cash payments as we could get and accepting the purchaser’s bonds for the remainder….The bonds were to be held by a joint committee of company representatives and working men and against these bonds the certificates were issued….The certificates passed nearly at par and we experienced no serious legal embarrassment… ”

In a separate case, Michael Flursheim formed the Commercial Exchange Company in New Zealand in 1898, which created its own money form, substituting debts between member merchants for cash. They accepted script from one another which had been printed by the trustees. The trustees loaned out the scrip, based on the credit of the participants, with the interest going to cover administrative costs.

The problem is that while these local systems do no harm and can alleviate local cash shortages, they have been of very limited benefit, and generally soon end. For example Johnson’s system went out of existence when the emergency faded, and Flurscheim’s quickly faltered. They will continue to be so limited unless they can qualify as a more true money form. That is, in order for them to really work, taxes (at least local taxes) have to become payable in such currencies. But then one would expect that such currencies would have to be issued by the taxing body. At present this is not possible, except in emergencies. Even State governments are forbidden from issuing their own currencies.

Furthermore such local currencies do not stop the continued mismanagement of the monetary system at the national level – they can’t stop the continued dispensation of monetary injustice from above through the privately owned and controlled Federal Reserve monetary system. And ending that injustice should really be our monetary priority.

REFORMING THE FEDERAL RESERVE SYSTEM
Fortunately this is a monetary reform that can reach George’s goal for the nation to control its own money system. This is our best and most direct course of action – the real thing – and it could happen this way:

In the next, (or the next) crisis created by the banking system, instead of  bailing them out as usual at public expense, if there was enough awareness and public support, our government could nationalize the Federal Reserve; as England nationalized the Bank of England in 1946. Several past Chairmen of the House Banking Committee, including Rep. Henry B. Gonzales, introduced similar legislation over the years.

Reform can begin, even without a complete and detailed blueprint of the ideal money system to be ultimately reached; so long as reform is consistent with the nature of money, and considerations of justice play the major role.

Short term it is crucial to institute enough monetary reform to place time on the side of Justice, instead of against it as at present. Once in charge of the money system, our government could start to carefully use real, and honest money – modern American Greenbacks – debt free US money to break the near subsistence levels so much of the population is still mired in. For example to re-build the nations decaying roads and bridges; and its deteriorating water and sewer systems; and dilapidated schools and inadequate air traffic control systems; quality low cost housing, and the Internet freeways.  In other words the current policies where much of the  new money goes into activities that create financial bubbles would be ended. Requiring the commercial banking system to re-adopt the real bills doctrine, as described above, would go a very long way toward improving the nation’s financial structure.

Longer term, it would become recognized that the monetary power is stronger and more pervasive  than the three other branches of government. In keeping with its actual power and importance in the daily lives of the citizenship, the monetary department would probably evolve into a fourth branch of government. In fact that’s what it is now, but run for private gain, instead of the common good.

This Fourth Branch would refine and codify its protocols in ever-increasing accuracy; starting from a point of the considerable knowledge and expertise already embodied in the Federal Reserve apparatus. The overall objective however, would be changed. Instead of managing the monetary system for the bankers interests, the goal would be to promote the general welfare, to borrow a phrase from our constitution. Our nation could move  into the 3rd millennium in a manner befitting the human race; once again setting an example to the world.

DEFINING THE PROPER RELATION OF THE INDIVIDUAL TO SOCIETY
But in order to effect any meaningful reform, a much needed attitude change is called for. The key is recognizing the proper relation of the individual to society. No doubt some readers are wincing at the thought of instituting the monetary power in our government. Since at least Adam Smith’s Wealth Of Nations, for over 2 centuries, a poisoning of our attitude toward government has been underway. The stealthy promotion of this self destructive childishness has to be stopped.

In years of monetary research, it is noteworthy that such anti governmental propaganda is intimately connected with monetary proposals. I found it first introduced from England in Smith’s writings, and later in cruder attempts from lesser lights like Walter Bagehot with his 1869 proposal for a union of American and British currencies. And even from crackpots like Oxford’s Bonamy Price – another English “expert” sent on tour to befuddle American minds. Price, who had been mentally ill, was given Thorold Roger’s political economy professorship after Rogers had demonstrated that the economic condition of Englishmen had been declining for over 300 years!
Bagehot condemned the Greenbacks and the United States:

“So far from its being an economic act which governments do for the benefit of their subjects it has been a political act which they have done for their own sake.”

This anthropomorphic view of government – pretending the government has desires and attributes like a person, is an essential element of the financiers attack on their main potential opponent – our government. While this anthropomorphism is nonsense, it serves to smear government as being “motivated” to abuse the monetary system, the way for example that private bankers are.

George had only the very mildest case of “anti-governmentitis”. He saw that the problem was not government, but the abuse of government, and he knew that government had to be a big part of the solution. This disease has now become virulent, especially in the English speaking world. It has reached epidemic proportions in America, requiring as an antidote some of George’s soothing and therapeutic comments on the subject:

GEORGE ON THE PURPOSE OF GOVERNMENT
“The primary purpose and end of government being to secure the natural rights and equal liberty of each, all businesses that involve monopoly are within the necessary province of governmental regulation, and businesses that are in their nature complete monopolies become properly functions of the state. As society develops, the state must assume these functions in their nature co-operative, in order to secure the equal rights and liberty of all. That is to say in the process of integration, the individual becomes more and more dependent upon and subordinate to the all, it becomes necessary for government, which is properly that social organ by which alone the whole body of individuals can act, to take upon itself, in the interest of all, certain functions which cannot safely be left to individuals. Thus out of the principle that it is the proper end and purpose of government to secure the natural rights and equal liberty of the individual, grows the principle that it is the business of government to do for the mass of individuals those things which cannot be done, or cannot be so well done, by individual action. As in the development of species, the power of conscious, coordinated action of the whole being must assume greater  and greater relative importance to the automatic action of parts, so it is in the development of society. This is the truth in socialism, which although it is being forced upon us by industrial progress and social development, we are so slow to recognize.” (Soc Pr, 177)

… ON THE PROBLEM OF CORRUPTION
“(Corruption)  is no reason why we should shrink from political action, for it is only through political action that we can improve conditions which produce corruption.”(Standard, Jan 7 1888)

… ON THE ABUSE OF GOVERNMENT
“The government when formed was a great advance over what then existed in Europe, but with that advance we stopped….but beneath everything…there lies as the vital danger to the Republic the increasing inequality in the distribution of wealth….but consider what is the cause of the growing disparity in the distribution of wealth that we see in this country? First and foremost , the power of government has been deliberately and continuously prostituted to make the rich richer and the poor poorer.” (Standard, Sept 14, 1889)

… ON WHY WE CANNOT AVOID THE ROLE OF GOVERNMENT
“But it will be said: “if the railroads are even now a corrupting element in our politics, what would they be if the government were to own and to attempt to run them? Is not governmental management notoriously corrupt and inefficient? Would not the effect of adding such a vast army to the already great number of government employees, of increasing so enormously the revenues and expenditures of government, be to enable those who got control of government to defy opposition and perpetuate their power indefinitely; and would it not be, finally to sink the whole political organization in a hopeless slough of corruption?

“My reply is that great as these dangers may be, they must be faced, lest worse befalls us…Instead of belittling the dangers of adding to the functions of government as it is at present, what I am endeavoring to point out is the urgent necessity of simplifying and improving government, that it may safely assume the additional functions that social development forces upon it. It is not merely necessary to prevent government from getting more corrupt and more inefficient, though we can no more do that by a negative policy than the seaman can lay to in a gale without drifting; it is necessary to make government much more efficient and much less corrupt. The dangers that menace us are not accidental. They spring from a universal law which we cannot escape. That law is the one I pointed out in the first chapter of this book – that every advance brings new dangers and requires higher and more  alert intelligence.” (Soc Pr,184)

… ON SOME FORGOTTEN PRINCIPLES OF GOVERNMENT
“(I shall briefly) call attention to some principles that should not be forgotten in thinking of the assumption by the state of such functions as the running of railroads…

(*) any considerable interest having necessary relations with government is more corruptive of government when acting upon government from without then when assumed by government….

(*) A standing army is a corrupting influence, and a danger to popular liberties; but who would maintain that on this ground it were wiser, if a standing army must be kept, that it should be enlisted and paid by private parties, and hired of them by the state? Such an army would be far more corrupting and far more dangerous than one maintained directly by the state, and would soon make its leaders masters of the state.

(*) I do not think the postal department of the government, with its extensive ramifications and its numerous employees, begins to be as important a factor in our politics, or exerts so corrupting an influence, as would be a private corporation carrying on this business, and which would be constantly tempted or forced into politics to procure favorable or prevent unfavorable legislation.

(*) Where individual States and the General Government have substituted public printing offices for Public Printers, who themselves furnished material and hired labor, I think the result has been to lessen, not to increase, corruptive influences…

(*) The inefficiency, extravagance and corruption which we commonly attribute to governmental management are mostly in those departments which do not come under the public eye, and little concern, if they concern at all, public convenience … let the mails go astray or the postman fail in his rounds, and there is at once an outcry. The post office department is managed with greater efficiency than any other department of the National Government, because it comes close to the people. To say the very least, it is managed as efficiently as any private company could manage such a vast business, and I think on the whole, as economically.” (Soc Pr, 185-6)

… ON GOVERNMENT EFFICIENCY
“It seems to me that in regard to public affairs we too easily accept the dictum that faithful and efficient work can be secured only by the hopes of pecuniary profit, or the fear of pecuniary loss.”

“All that I have said of the railroad applies , of course, to the telegraph, the telephone, the supplying of cities with gas, water, heat and electricity, – in short to all businesses which are in their nature monopolies. I speak of the railroad only because the magnitude of the business makes its assumption by the state the most formidable of such undertakings.

Businesses that are in their nature monopolies are properly functions of the state. The state must control or assume them, in self defense, for the protection of the equal rights of citizens. But beyond this, the field in which the state  may operate beneficially as the executive of the great cooperative association, into which it is the tendency of true civilization to blend society, will widen with the improvement of government and the growth of public spirit.” (Soc Pr, 188-9)

… ON WHY INDUSTRIAL DEVELOPMENT REQUIRES
MORE GOVERNMENTAL FUNCTIONS
“I have in this chapter touched briefly upon subjects that for thorough treatment would require much more space. My purpose has been to show that the simplification and purification of government are rendered the more necessary, on account of the functions which industrial development is forcing upon government, and the further functions which it is becoming more and more evident that it would be advantageous to assume. (Soc Pr, 192)

“There is this truth-and it is a very important one- in socialism, that as civilization advances the functions which pass into the proper sphere of governmental control become more and more numerous, as we see in the case of the railroad, the telegraph, the supplying of gas, water, etc. But this is all the more reason why we should be careful to guard against governmental interference with what can safely be left to individual action. In some things our existing system is too socialistic and in others too anarchistic. The proper line between governmental control and individualism is that where free competition fails to secure liberty of action and freedom of development. The great thing which we should act to secure is freedom – that full freedom of each which is bounded by the equal freedom of others.” (Standard, July 30, 1887; also see P&P, 412; Standard, Sept. 24, 1890)

One additional thought – it was a government job as a state inspector of gas meters that allowed George to write Progress And Poverty.
There! Does everyone feel better now? Take 2 aspirin, and re-read this section as needed. Lest this study be accused of unfairly quoting George, here is one more sentence on this subject that should be noted:
“If it were absolutely necessary to make a choice between full state socialism and anarchism, I for one would be inclined to choose anarchism, preferring no government at all, bad and inconvenient as that might be.” (Standard, July 30 1887)

Fortunately it never was, and never will be necessary to make that choice.

INTEGRATING GEORGE’S MONETARY VIEWS INTO “GEORGISM”
How to do this can fortunately be found from within the Georgist movement. His early protégé Michael Flursheim came to these conclusions in 1902:

“Money not land the principle villain -  Henry George, his predecessors and disciples, have rendered an invaluable service to the world by clearly demonstrating the part played by land in the process of distribution..(But)…they have not even dreamt (that) Money might (be) the principle villain.…doubtless no permanent reform can be accomplished without a through reform of our land laws…Enthusiastic as I …am for land reform, I have gradually come to see that currency reform is more urgent still…that , in fact land reform could be reached much quicker and easier if money reform preceded, or anyhow were carried parallel with it.”

So we see that our readers are now more familiar with George’s monetary realizations than Flursheim was. Almost a century later Georgist Robert de Fremery, without benefit of reading Flursheim, reached a similar conclusion, and called for both land and monetary reform in Rights Vs Privileges. He combined these two themes because of his view that reform of either the monetary system, or the land taxation system alone, is not sufficient to place human society on the road to justice; that unless special privileges are replaced by fundamental rights in both these areas, the injustice and concentration of wealth spawned in either one, would soon re-establish a corrupt system of privilege in the other.

“Our rights are interdependent. They stand or fall together.” he wrote.
Bob de Fremery also had substantial practical experience integrating monetary and land reform ideas. For several years he taught a course on the monetary side of this at Robert Tideman’s Henry George School in San Francisco. This was well known as the most successful Henry George school in the country. Reportedly more students were annually trained there than at all the other Henry George schools combined! Bob Tideman told de Fremery that he thought one of the big reasons for the school’s success was by offering the monetary course, they were giving the students “twice as much” as the other schools.

Combining monetary reform with land reform will no doubt be considered an extra headache by both Georgists and monetary reformers. But then can either say that they have been happy with their isolated results?

Certainly Henry George deserves the last word here, and if asked, he would probably say: “Our fundamental mistake is in treating land as private property” (Soc Pr, 195)

But he also wrote unequivocally that: “it is the business of government to issue money.”

I want to thank the reader for finishing this report. Your comments and suggestions are very welcome. I invite you to keep in contact through AMI’s web site http://www.monetary.org
and to explore how we can move forward together. And finally be sure to read my book The Lost Science of Money for a much more complete picture of the money problem and its solution. (see  http://www.monetary.org/lostscienceofmoney

APPENDIX 1 – SOME PROBLEMS WITH FREE BANKING (excerpted from The Lost Science of Money)
Here are some of the problems with the “free banking” arguments:

Problem # 1: They have not carefully defined their terms. They have not accurately and uniformly defined money. Some use a primitive commodity concept of money, others not. Their definition of “free banking” is not uniform, but varies greatly from writer to writer.

Problem # 2: They have miss-classified the period from 1836 to 1862 as the free banking period. The correct free banking period is pre 1836, before the state regulations on banking were increased. Naturally the post 1836 period gives better banking results, but anyone can see that its a period of increased government regulation:

A)  Bank note issues by banks were restricted to specific percentages of the bank’s real capital.
B)  The bank’s capital reserves were improved, moving toward government bonds rather than the worthless personal notes of the banks stockholders.
C)  A double liability was imposed on Bank stockholders, where they were liable to be called to pay an additional twice the par value of their stock, if their bank got into trouble.
E)  More efficient systems of bank examination and reporting were established.

Problem #3: Partly because statistics on the banks are very patchy, the free banking advocates have focused on certain measures which cannot convey a full and accurate picture of banking. For example, they try to evaluate banking performance by the percentage of depositors money that was lost. But that treats the banks as deposit institutions, when they were in fact banks of issue, creating new money in amounts approaching 10 times their deposits.

The free bankers work thus ignores the bank stock frauds which observers tell us was an important part of banking. Recent history of the crash of 1929 indicates losses through stock markets, from a banking created crisis was about 40 times as much as the direct losses in bank deposits(see chapter 20). It also ignores the effect of the banks activities on the rest of the community.

Problem # 4: They think that they have  theoretically “proven” that bankers can be trusted to act honestly, because they say in the long term, it will build banker’s reputations and therefore be profitable. They don’t consider that often in the short term, the potential for loot is so great that it will be taken without regard to honesty. They also ignore that reputation can be influenced by public relations expenditures and advertising. That is in fact the history of business immorality. Men don’t always do the right thing when they are tempted by the opportunity to grab a great amount quickly.

Problem # 5: Starting with this a’priori position, they have briefly looked through history for empirical support for their theory. But using history in that manner was not likely to yield accurate results. The lessons of history have to be viewed more dispassionately within their own context to see what picture emerges from several sources. It doesn’t work to force a modern day template onto the facts; to attempt to force a “fit” with favorite theories.

Nor is it acceptable to use a modern created filter through which agreeable facts are retained and disagreeable facts are ignored. One cannot ignore the universal condemnations of the banks from qualified observers of many different persuasions: Knox, Gouge, Condy Raguet, Bullock, and Sumner quickly come to mind.

John Jay Knox, a Controller of the Currency and generally friendly to banker interests wrote in his 1876 Treasury report:

“The history of banking in the various states before the (civil) war will make plain to anyone that the note issuing privilege was much abused to the great detriment of individuals and the public. Banks were started for the sole purpose of foisting worthless notes upon a trusting public….”
and:
“The idea that the government should issue the paper money, as well as coin the gold and silver has taken a firm hold of the American mind” Knox wrote.

APPENDIX 2 – THE FREE TRADE QUESTION
Considering the effect that the free trade ideology had on Georgism from 1888, perhaps some burdens necessarily fall on those who still want to promote this theme, before a modicum of justice and more equitable distribution of wealth has been achieved through land reform and/or monetary reform.

For example, tell us – what does free trade mean, when George would have most utilities, and transports; the largest companies in the country, as government entities? I am told by Georgists that George would never have supported NAFTA – the plutocracy’s version of free trade. Perhaps those who want Georgism to move first and foremost on free trade, should be asked to demonstrate empirically, not just theoretically, that this theory deserves front burner promotion, even before meaningful land reform has been achieved. In other words to please “force it to a test of the facts”; examine the record of the past 114 years since George expressed these views, and give examples of how the theory is borne out by the facts since then.

In the US the wealthiest 1% owns over 50% of the wealth, and it’s rising. George considered such a situation as highly dangerous and requiring radical solutions:

“A civilization which tends to concentrate wealth and power in the hands of a fortunate few, and to make of others  mere human machines, must inevitably evolve anarchy and bring destruction.” (Soc Pr, 8 )
And:

“…the political and social problems that confront us…center in the problem of the distribution of wealth, and …that their solution may be simple, (but) it must be radical.” (Soc Pr, 81; see also 15, 83, 194)

Wouldn’t free trade amplify this problem where well under 1% of the population have the economic means to engage in it? George understood, but then for some reason ignored that before free trade could be beneficial, land reform was needed. I’d also suggest that monetary reform comes before free trade; and that if there were both land reform and monetary reform, free trade reform would be almost automatic. And if not, well won’t the next generation need something to do?

Henry George’s Concept of Money

(A speech delivered by Stephen Zarlenga on 8/24/02 at the Economic Justice & Green Movement Conference; Council of Georgist Organizations, London, Ontario, Canada.

Note: This short speech was excerpted from the research paper of the same title, written in 2001. To view the 80 page paper: Click Here To Link To The Full Text of HENRY GEORGE’S CONCEPT OF MONEY

I thank the Council of Georgist Organizations for inviting me.
Reading Progress and Poverty I found strong indications that Henry George, at age 40, held an advanced view of money. One line stood out:
“The laborer who receives his wages in money (coined or printed it may be) really receives in return for the addition his labour has made to the general stock of wealth, a draft on that general stock, which he may utilize… and that neither the money, which is but the draft, nor the particular form of wealth which he uses it to call for, represents advances of capital for his maintenance…” (P&P, 29)

This distinguishing between wealth and money is usually the first key step on the road to monetary awareness. It’s not an obvious step. It requires abandoning a more comfortable view of money as a tangible physical thing and adopting a view of money as an abstract social power embedded in law. For example, those insisting on gold backing for “money” have not yet taken this step.
Why is this so important? Because all that is necessary to plutocratically undermine and eventually destroy a society is for the monetary power to be in private hands; and the mechanism used to place that power into private hands has been to misdefine the nature of money.
George identifies the modern source of this problem:

“That this universal truth is so often obscured, is largely due to that fruitful source of economic obscurity, the confounding of wealth with money…since Dr. Adam Smith made the egg stand on its head…” (P&P, 62)

The regression to metallism in the 19th and 20th centuries is traceable back to Adam Smith’s monetary errors. The Greenbackers of the mid-1800s, including Henry George, overcame this. But “hard money” advocates have regressed back to Adam Smith’s primitive notions.

Research graciously funded by Schalkenbach more than confirmed George’s high monetary awareness especially in his book Social Problems. Compared to Adam Smith, Karl Marx, Von Mises, and Keynes, George was a highly accurate writer on money.

What led to that? – HIS METHODOLOGY AND ORIENTATION!
George used both logic and deduction in what he called “mental experiments”:
“There is at our command a method …what may be called mental experiment. You may separate, combine or eliminate conditions in your own imagination, and test in this way the working of known principles.”

But the problem with that method is that the tiniest error gets magnified, the further one gets from the initial definitions and assumptions. Like firing a long-range rifle – the smallest deviation at the rifle sight gets magnified the further the bullet goes.

George usually controlled this problem through a healthy respect for the facts: “Bring it to a test of the Facts,” he wrote, and
“To the supreme and final test of facts we can easily bring this theory.” (P&P, 140)
The phrase “supreme and final test” is very telling. If the facts contradict theory, the theory falls.

GEORGE’s OUTLOOK  WAS HUMANISTIC, and SEEKING JUSTICE. He saw Mankind on a path of Progress and he used two core principles to evaluate that path: equal rights and self-determination. Yet Progress is his great value, defined this way:
“Association in equality is the law of progress. Association frees mental power for expenditure in improvement…” “The law of human progress, what is it but the moral law?” (P&P, 508, 526)
Evil is that which acts to block such progress:
“…To trace the force which stops progress, would…go far to the solution of …the problem of the genesis of evil” (P&P, 515)
To George, good or evil is not determined by an old thunder god, but by considerations of human justice.

Thus the Georgist movement’s wide appeal was not so much about economics as it was a great moral crusade for economic justice.

GEORGE MADE EXCELLENT MONETARY DISTINCTIONS. Over decades his monetary views were consistently accurate.
First he distinguished between MONEY AND WEALTH:
While wealth is tangible, George repeatedly identified the abstract nature of money:
“It is important that this purely representative character of money should be thoroughly understood and constantly kept in mind, for from the confusion resulting from the confounding of money with wealth have flown the largest and most pernicious results.” (SPE, 493-4)
He observed that:
“These are not the effects of the confusion of a term. The confusion of the term is one of the effects of the influence upon thought of the same special interest…”(SPE, 141, 142)
To George it was self evident that such conspiracies against accurate thought were operating, and he felt that to eliminate such thought control required eliminating the financial source of the controller’s power.

Second, George distinguished between MONEY AND CREDIT:
He understood how credit could function as money:
“…the great volume of domestic exchange is carried on by the giving and cancellation of credits…”

But unlike the bankers and most economists, George forcefully distinguished credit from money:
“…though (Credit) may be made into money, it is not itself money…a real and very important distinction – the distinction between money and credit. …checks, drafts, negotiable notes and other transferable obligations…(pass for money) only when accompanied by…trust or credit… Thus there is a quality attaching to money…which clearly distinguishes it from all forms of credit.” (SPE, 491-3)
George realized that Money is on a higher order than Credit. It is unconditionally accepted as payment:

“The curse of credit as a flux of exchanges is that it expands when there is a tendency to speculation, and sharply contracts just when most needed to assure confidence…”(Standard, 2/11/88)

Third, He distinguished between PRIVATELY CREATED CREDIT used in place of money for private profit, and GOVERNMENT or publicly created money for the common good:

Writing on money and government, At age 44, in Social Problems (1884), he had an advanced concept of how a money system should operate:
“It is not the business of government to direct the employment of labor and capital…
“On the other hand it is the business of government to issue money…. To leave it to every one who chose to do so to issue money would be to entail general inconvenience and loss, to offer many temptations to roguery, and to put the poorer classes of society at a great disadvantage. These obvious considerations have everywhere…led to the recognition of the coinage of money as an exclusive function of government.
“…The evils entailed by wildcat banking in the United States are too well remembered to need reference. The loss and inconvenience, the swindling and corruption that flowed from this…ended with the war, and no-one would now go back to them.
Yet instead of doing what every public consideration impels us to, and assuming…as the exclusive function of the General Government the power to issue money, the private interests of bankers have, up to [now], compelled us to the use of a hybrid currency…” (Soc Pr, 178-9)

At age 46, he repeated that theme in Protection or Free Trade, stating why government created currency is preferable to private bank currency:
“What can be clearer than that a note directly issued by the government is at least as good as a note based on a government bond?” (PFT, p. 12)

At age 48 George repeated this in the Standard in 1888, focusing on how the fractional reserve banking system gave the bankers special privileges.
And the year before he died he wrote a newspaper article on excatly the same lines.

WHY DID GEORGE UNDERSTAND THE NATURE OF MONEY better than most economists? Because the private money creation process is so clearly immoral. It is not rocket science. It requires:
1) Access to enough of the historical facts
2) Independence of mind and Honesty of purpose to evaluate the facts within a structure of fairness.
Also the Greenback movement, which grew out of our good experience with government Greenbacks during the Civil War, had a literature and understanding of this concept in the 1860’s through 1880’s that is unknown today.
The question seems more complex now, because students and economists don’t have the facts, or the moral approach, and because a lot of money and energy has gone into whitewashing the existing money system, to keep it from being identified as theft and fraud.

George didn’t allow ECONOMISTS to SUBSTITUTE A QUESTIONABLE UTILITARIANISM in place of morality.
A great enjoyment of reading George is he never let the forms of economic oppression hide behind obtuse theories. He openly identified them as slavery, stripping away the veneer of academic respectability from those serving injustice:
“Even the intellectually courageous have shrunk from laying stress upon principles which might threaten great vested interests; while others…have exercised their ingenuity in eliminating from the science everything which could offend those interests. …a science which…seems but to justify injustice, to canonize selfishness by throwing around it the halo of utility…” Thus George destroys utilitarianism in one sentence. (Study of Political Economy, Lecture, p. 6)
And he tells us why economics has always been purposely corrupted:
“…a powerful class whose incomes could not fail to be endangered by a recognition…that what makes them…wealthy is…only robbery, must from the beginning …have beset (political Economy’s) primary step…” (SPE, 140; also see SPE: xxxviii; xxxix; 134, and 138)
Why is this attitude toward economics so important? Because much of that  “science” has a strong class warfare element deeply embedded in it.

This class warfare has spawned a  250 YEAR ATTACK ON GOVERNMENT
Every day we see examples of how this disease has reached epidemic proportions. It has spread from Hayek and Ayn Rand to their intellectual heir Rush Limbaugh and his propaganda radio. Its not entertainment.
The American Monetary Institute’s research finds that this attack on government originated largely in Adam Smith – the arch-enemy of government issued money, in his efforts to keep government from exercising its proper monetary role in issuing currency. Smith glorified the private Bank of England with high praise, and by rhetorically downplaying its failures. He attacked government issued money.
Only once does Smith refer to the main question: why he wants the central bank to be private and not publicly owned and controlled. But he didn’t want to clearly frame the question so he obscured it as whether the English Government should be in the banking business for profit. He should have asked why the bank was trespassing in the government’s sphere by issuing currency!
“A revenue of this kind has even by some people been thought not below the attention of so great an Empire as that of Great Britain…But whether such a Government as that of England – which, whatever may be its virtues, has never been famous for good economy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into – could be safely trusted with the management of such a project, must at least be a good deal more doubtful.” (Adam Smith, Wealth of Nations; p.358 – in the Great Books collection, vol. 39)
Smith’s insulting the English Government marks the modern beginning of a relentless attack on society – the belittling and smearing of its organizational form – government. The single organization potentially able to block plutocracy’s evil encroachments. (Evil, by George’s definitions.) Smith also inadvertently illuminates the major purpose of this attack: – to keep the money power in private hands.

George Offers A Cure For This Anti-Government Malaise, especially in Social Problems, and the Standard. Some brief excerpts:
On The Purpose of Government he wrote:
“As society develops… it becomes necessary for government, which is properly that social organ by which alone the whole body of individuals can act, to take upon itself… certain functions which cannot safely be left to individuals…” (Soc Pr, 177)

On The Problem of Corruption:
“(Corruption)  is no reason why we should shrink from political action, for it is only through political action that we can improve conditions which produce corruption.”(Standard, Jan 7, 1888)

On The Abuse of Government:
“But beneath everything…there lies as the vital danger to the Republic, the increasing inequality in the distribution of wealth….but consider what is the cause?…the power of government has been deliberately and continuously prostituted to make the rich richer and the poor poorer.” (Standard, Sept 14, 1889)

A Forgotten Principle of Government:
(*)“…Any considerable interest having necessary relations with government is more corruptive of government when acting upon government from without then when assumed by government….” (Soc Pr, 185-6)

On Government Efficiency
“…In regard to public affairs we too easily accept the dictum that faithful and efficient work can be secured only by the hopes of…profit, or the fear of…loss.”

Remember – it was a government job as a state inspector of gas meters that allowed George to write Progress and Poverty in the first place.

The attack on government is serious enough, but it becomes really obnoxious when combined  with THE ATTACK ON HUMANITY, as seen in ADAM SMITH’S SELFISHISHNESS “ERROR”
Following Buckles lead, George identified the false axiom on which Smith’s Wealth of Nations is based:
“Buckles understanding of Political Economy was that it eliminated every other feeling than selfishness.”  Wherein Smith ‘generalizes the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness; thus making a deductive application of one set of mental principles to the whole set of economical facts. He everywhere assumes that the great moving power of all men, all interests and all classes, in all ages and in all countries is selfishness…indeed Adam Smith will hardly admit common humanity into his theory of motives.’” (SPE, 89, 90)

Consider the negative impact on humanity of Smith’s selfishness assumption: Supporters of his doctrine argue that it is merely in harmony with human nature. But clearly, if Man is defined in such a base manner and systems of laws with their rewards and punishments are enforced along those lines, then over time, they will tend to create a form of humanity in “harmony” with their false conception of an economic mankind.

This de-evolutionary process, encouraging a lower form of humanity has been ongoing especially in the English speaking world for well over 2 centuries. The work of great English novelists such as Charles Dickens may have slowed it, but didn’t stop it. Henry George saw exactly where it would lead:

“Nor can we abstract from man all but selfish qualities in order to make as the object of our thought…what has been called ‘economic man’, without getting what is really a monster, not a man.” (SPE, 99) Ecco Homo – circa 2000!

George substituted a different concept for Smith’s destructive error:
“The fundamental principle of human action … is that men seek to gratify their desires with the least exertion.”(P&P, 203)
Then taking a giant step, he poetically described the essence of humanity-

THE “FORCE OF FORCES”:
“It is not selfishness that enriches the annals of every people with heroes and saints… that on every page of the world’s history bursts out in sudden splendor…that turned Gautama’s back to his royal home or bade the Maid of Orleans lift the sword from the altar; that held the Three Hundred in the Pass of Thermopylae, or gathered into Winkelreid’s bosom the sheaf of spears…Call it religion, patriotism, or the love of God – give it what name you will; there is yet a force which overcomes and drives out selfishness; a force which is the electricity of the moral universe; a force beside which all others are weak…I call this force destiny toward human nature – a higher, nobler nature than we generally manifest…And this force of forces – that now goes to waste or assumes perverted forms – we may use for the strengthening, and building up, and ennobling of society, if we but will…”(P&P, 463)

GEORGE’S IDEAS Are HIGHLY RELEVANT to AMERICAN MONETARY REFORM:
Lets Look at the four major groupings advocating reform:
The Gold standard faction
Composed largely of people involved in gold mining or coin investments, conservatives, and some fundamentalist religious folk, they have been unable to comprehend the abstract nature of money. Are all “stuck in the metaphor,” to borrow Joseph Campbell’s phrase. Succumbing to centuries of propaganda, they have confused money with wealth.
But History shows the so-called gold standard has been a shell game and a ruse and a tool of plutocracy. They get no sympathy from George, who wrote “we are digging ore out of holes in the ground in Nevada and California, refining it and poking it back into holes in the ground in New York and Washington.” And if anything, George understated this problem with precious metals money.

The Free banking faction
This movement was spawned by Hayek’s Denationalization of Money essay, which was mainly an attempt to throw a monkey wrench into the early plans for the Euro. It is Mostly composed of Libertarians who mistake Ayn Rand novels as historical evidence! They are making the historical claim that the old free banking period was not really all that bad!

They use poorly defined or undefined concepts, and have not even uniformly defined “free banking,” or money. I take it to mean that bankers would be allowed to create as much “money” as their clients will accept. But it’s really up to them to give their definitions. Some problems with them:
1) That they have misread history as is clear from George’s utter condemnation of free banking. They have mislabeled the “free banking” period as 1836 to 1864, when it was mainly pre-1836. They make this huge mistake because the New York law in 1836 which imposed much greater legal restrictions on banking, was called a “Free Banking Law.”
2) They have disregarded as “anecdotal,” the universal condemnations of free banking by expert witnesses of various persuasions, including Henry George.
3) They use extremely poor, actually silly logic. For example they think they have logically “proved” that bankers will be honest, because in the long run it would be good for business!
4) They treat the banks statistically as if they were deposit institutions, but they were always banks of issue.
5) They totally ignore the stock fraud, mostly in bank shares, that always accompanied banking, etc,etc.

The “L.E.T.S.” groups
Local currency advocates. Henry George did help set up such a temporary system for his friend Tom Johnson’s company during a tight money period. But while L.E.T.S. are well meaning and not harmful, they usually end quickly. Its hard to make them work without the taxation power. They don’t stop the continued dispensation of monetary injustice from above, through the privately owned and controlled Federal Reserve System. My main concern is that potential activists are being drawn away from the real battle, of reforming the Federal Reserve System, into futile side shows.

REFORM OF THE FEDERAL RESERVE SYSTEM IS WHAT GEORGE’S IDEAS IMPLY
This is the real solution, but also the tough one. Best to face it head on:
A) Nationalize the Fed, as the Bank of England was nationalized after WW2.
B) Institute the 100% Reserve Solution (Not just 100% reserves!) It works like this:
(Here please refer the reader to my website, to Robert De Fremery’s “Rights vs. Privileges” review, which goes into all the details, that I did not cover in the talk)
C) Institute mandatory monetary expansion rules, or there would be deflation.
D) Ultimately this becomes constituted as a fourth branch of government – a monetary branch. The nature of society requires four branches of government, not three.
From this point on, a true science of money, and then a much altered science of economics will emerge and develop. We still have to learn much of that part, and society will use Aristotle’s method – we will learn by doing.

(This talk highlights my 79 page paper, of the same title, which resulted from a Schalkenbach Foundation grant in mid year 2000. Abbreviations: P&P – Progress and Poverty; SPE – Science of Political Economy; Soc. Pr. – Social Problems, PFT – Protection or Free trade, all by Henry George, and available from Schalkenbach.)

Economic Free Fall? By William Greider

July 30, 2008/August 18, 2008 edition of The Nation Magazine

Washington can act with breathtaking urgency when the right people want
something done. In this case, the people are Wall Street’s titans, who
are scared witless at the prospect of their historic implosion. Congress
quickly agreed to enact a gargantuan bailout, with more to come, to calm
the anxieties and halt the deflation of Wall Street giants. Put aside
partisan bickering, no time for hearings, no need to think through the
deeper implications. We haven’t seen “bipartisan cooperation” like this
since Washington decided to invade Iraq.

In their haste to do anything the financial guys seem to want, Congress
and the lame-duck President are, I fear, sowing far more profound
troubles for the country. First, while throwing our money at Wall
Street, government is neglecting the grave risk of a deeper catastrophe
for the real economy of producers and consumers. Second, Washington’s
selective generosity for influential financial losers is deforming
democracy and opening the path to an awesomely powerful corporate state.
Third, the rescue has not succeeded, not yet. Banking faces huge losses
ahead, and informed insiders assume a far larger federal bailout will be
needed–after the election. No one wants to upset voters by talking
about it now. The next President, once in office, can break the bad
news. It’s not only about the money–with debate silenced, a dangerous
line has been crossed. Hundreds of billions in open-ended relief has
been delivered to the largest and most powerful mega-banks and
investment firms, while government offers only weak gestures of sympathy
for struggling producers, workers and consumers.

The bailouts are rewarding the very people and institutions whose
reckless behavior caused this financial mess. Yet government demands
nothing from them in return–like new rules for prudent behavior and
explicit obligations to serve the national interest. Washington ought to
compel the financial players to rein in their appetite for profit in
order to help save the country from a far worse fate: a depressed
economy that cannot regain its normal energies. Instead, the Federal
Reserve, the Treasury, the Democratic Congress and of course the
Republicans meekly defer to the wise men of high finance, who no longer
seem so all-knowing.

Let’s review the bidding to date. After panic swept through the global
financial community this spring, the Federal Reserve and Treasury rushed
in to arrange a sweetheart rescue for Bear Stearns, expending $29
billion to take over the brokerage’s ruined assets so JPMorgan Chase,
the prestigious banking conglomerate, would agree to buy what was left.
At the same time, the Fed and Treasury provided a series of emergency
loans and liquidity for endangered investment firms and major banks.
Investors were not persuaded. Their panic was not “mental,” as former
McCain adviser Phil Gramm recently complained. The collapse of the
housing bubble had revealed the deep rot and duplicity within the
financial system. When investors tried to sell off huge portfolios of
spoiled financial assets like mortgage bonds, nobody would buy them. In
fact, no one can yet say how much these once esteemed “safe” investments
are really worth.

The big banks and investment houses are also stuck with lots of bad
paper, and some have dumped it on their unwitting customers. The largest
banks and brokerages have already lost enormously, but lending
portfolios must shrink a lot more–at least $1 trillion, some estimate.
So wary shareholders are naturally dumping financial-sector stocks.

Most recently, the investors’ fears were turned on Fannie Mae and
Freddie Mac, the huge quasi-private corporations that package and
circulate trillions in debt securities with implicit federal backing.
Treasury Secretary Henry Paulson (formerly of Goldman Sachs) boldly
proposed a $300 billion commitment to buy up Fannie Mae stock and save
the plunging share price–that is, save the shareholders from their
mistakes. So much for market discipline. For everyone else, Washington
recommends a cold shower.

Talk about warped priorities! The government puts up $29 billion as a
“sweetener” for JP Morgan but can only come up with $4 billion for
Cleveland, Detroit and other urban ruins. Even the mortgage-relief bill
is a tepid gesture. It basically asks, but does not compel, the bankers
to act kindlier toward millions of defaulting families.

A generation of conservative propaganda, arguing that markets make wiser
decisions than government, has been destroyed by these events. The
interventions amount to socialism, American style, in which the
government decides which private enterprises are “too big to fail.”
Trouble is, it was the government itself that created most of these
mastodons–including the all-purpose banking conglomerates. The
mega-banks arose in the 1990s, when a Democratic President and
Republican Congress repealed the New Deal-era Glass-Steagall Act, which
prevented commercial banks from blending their business with investment
banking. That combination was the source of incestuous self-dealing and
fraudulent stock valuations that led directly to the Crash of 1929 and
the Great Depression that followed.

Even before Congress and Bill Clinton repealed the law, the Federal
Reserve had aggressively cleared the way by unilaterally authorizing
Citigroup to cross the line. Wall Street proceeded, with accounting
tricks described as “modernization,” to re-create the same scandals from
the 1920s in more sophisticated fashion. The financial crisis began when
these gimmicky innovations blew up.

Democrats who imagine they can reap partisan advantage from this crisis
don’t know the history. The blame is bipartisan; so also is the
disgrace. In 1980, before Ronald Reagan even came to town, Democrats
deregulated the financial system by repealing federal interest-rate
ceilings and other regulatory restraints–a step that doomed the savings
and loan industry and eliminated a major competitor for the bankers.
Democrats have collaborated with Republicans on behalf of their
financial patrons every step of the way.

The same legislation also repealed the federal law prohibiting
usury–the predatory practices that ruin debtors of modest means by
lending on terms that ensure borrowers will fail. Usurious lending is
now commonplace in America, from credit cards and “payday loans” to the
notorious subprime mortgages. The prohibition on usury really involves
an ancient moral principle, one common to Judaism, Christianity and
Islam: people of great wealth must not be allowed to use it to ruin
others who lack the same advantages. A decent society cannot endure it.

The fast-acting politicians may hope to cover over their past mistakes
before the public figures out what’s happening (that is, who is screwing
whom). But the Federal Reserve has a similar reason to move
aggressively: the Fed was a central architect and agitator in creating
the circumstances that led to the collapse in Wall Street’s financial
worth. The central bank tipped its monetary policy hard in one
direction–favoring capital over labor, creditors over debtors, finance
over the real economy–and held it there for roughly twenty-five years.
On one side, it targeted wages and restrained economic growth to make
sure workers could not bargain for higher compensation in slack labor
markets. On the other side, it stripped away or refused to enforce
prudential regulations that restrained the excesses of banking and
finance. In The Nation a few years back, I referred to Alan Greenspan as
the “one-eyed chairman” [September 19, 2005] who could see inflation in
the real economy–even when it didn’t exist–but was blind to the
roaring inflation in the financial system.

The Fed’s lopsided focus on behalf of the monied interests, combined
with its refusal to apply regulatory laws with due diligence, eventually
destabilized the overall economy. Trying to correct for previous errors,
the Fed, with its overzealous free-market ideology, swung monetary
policy back and forth to extremes, first tightening credit without good
reason, then rapidly cutting interest rates to nearly zero. This erratic
behavior encouraged a series of financial bubbles in interest-sensitive
assets–first the stock market, during the late 1990s tech-stock boom,
then housing–but the Fed declined to do anything or even admit the
bubbles existed. The nation is now stuck with the consequences of its
blindness.

The Federal Reserve’s dereliction of duty is central to the financial
failures. It betrayed the purpose for which the central bank was first
created, in 1913, abandoning the sense of balance the Fed had long
pursued and that Congress requires. Most politicians, not to mention the
press, are too intimidated to question the Fed’s daunting power, but
their ignorance is about to compound the problem. Instead of demanding
answers, the political system is about to expand the Fed’s governing
powers–despite its failure to protect us. Treasury Secretary Paulson
proposed and Democratic leaders have agreed to make the insulated Fed
the “supercop” that oversees not only commercial banks and banking
conglomerates but also the largest investment houses or anyone else big
enough to destabilize the system. This “reform” would definitely
reassure club members who are already too cozy with the central bankers.
Everyone else would be left deeper in the dark.

The political system, once again, is rewarding failure. The Fed is an
unreliable watchdog, ideologically biased and compromised by its
conflicting obligations. Is it supposed to discipline the big money
players or keep them afloat? Putting the secretive central bank in
charge, with its unlimited powers to prop up troubled firms, would
further eviscerate democracy, not to mention economic justice.

If Congress enacts this concept early next year, the privileged group of
protected financial interests is sure to grow larger, because other
nonfinancial firms could devise ways to reconfigure themselves so they
too would qualify for club membership. A very large manufacturing
conglomerate–General Electric, for instance–might absorb elements of
banking in order to be covered by the Fed’s umbrella (GE Capital is
already among the largest pools of investment capital). Private-equity
firms, with their buccaneer style of corporate management, are already
trying to buy into banking, with encouragement from the Fed (the Service
Employees International Union has mounted a campaign to stop them). A
new President could stop the whole deal, of course, but John McCain has
surrounded himself with influential advisers who were co-architects of
this financial disaster. For that matter, so has Barack Obama.

The nation, meanwhile, is flirting with historic catastrophe. Nobody yet
knows how bad it is, but the peril is vastly larger than previous
episodes, like the savings and loan bailout of the late 1980s. The
dangers are compounded by the fact that the United States is now utterly
dependent on foreign creditors–Japan and China lead the list–who have
been propping us up with their lending. Thanks to growing trade deficits
and debt, foreign portfolio holdings of US long-term debt securities
have more than doubled since 1994, from 7.9 percent to 18.8 percent as
of June 2007. If these countries get fed up with their losses and pull
the plug, the US economy will be a long, long time coming back. The
gravest danger is that the national economy will weaken further and
spiral downward into a negative cycle that feeds on itself: as
conditions darken, people hunker down and wait for the storm to
pass–consumers stop buying, banks stop lending, producing companies cut
their workforces. That feeds more defaulted loan losses back into the
banking system’s balance sheets. This vicious cycle is essentially what
led to the Great Depression after the stock market crash of 1929. I
offer not a prediction but a warning. The comparison may sound
farfetched now, but US policy-makers and politicians are putting us at
risk of historic deflationary forces that, once they take hold, are very
difficult to reverse.

A more aggressive response from Washington would address the real
economy’s troubles as seriously as it does Wall Street’s. Financial
firms have lost capital on a huge scale–more of them will fail or be
bought by foreign investors. But Wall Street cannot get well this time
if the economy remains stuck in the ditch. Washington needs to revive
the “animal spirits” of the nation at large. The $152 billion stimulus
package enacted so far is piddling and ought to be three or four times
larger. Instead of sending the money to Iraq, we should be spending it
here on getting people back to work, building and repairing our tattered
infrastructure, investing in worthwhile projects that can help stimulate
the economy in rough weather.

An agenda of deeper reforms can boost public confidence even as it
undoes a lot of the damage caused by the financiers and bankers. Some
suggestions:

§ Nationalize Fannie Mae and other government-supported enterprises
instead of coddling them. Restore them to their original status as
nonprofit federal agencies that provide a valuable service to housing
and other markets. Make the investors eat their losses. Buy the shares
at 2 cents on the dollar. Without a federal guarantee, these firms are
doomed anyway.

§ Resolve the democratic contradiction of “too big to fail” bailouts by
dismantling the firms that are too big to fail–especially the newly
created banking conglomerates that have done so much harm. Restore the
boundaries between commercial banking and investment banking. In any
case, market pressures are likely to shrink those behemoths as banks
sell off their parts to survive. For the remaining big boys, revive
antitrust enforcement. Set stern new conditions for emergency lending
from government–supervised receivership, stricter lending rules to
prevent recidivism and severe penalties for greed-crazed shareholders
and executives.

§ Assign the Federal Reserve’s regulatory role to a new public agency
that is visible and politically accountable. Make the Fed a subsidiary
agency of the Treasury Department and reform its decision-making on
money and credit to restore an equitable balance between competing goals
and interests–seeking full employment but also stable money and
moderate inflation.

§ Begin the hard task of re-creating a regulated financial system
Americans can trust, one that recognizes its obligations to the broad
national interest. This requires regulatory reforms to cover moneypots
like private-equity funds and to clear away the blatant conflicts of
interest and double-dealing on Wall Street, and also to give responsible
shareholders, workers and other interests a greater voice in corporate
management and greater protection against rip-offs of personal savings.

§ Re-enact the federal law against usury. The details are difficult and
can follow later, but this would be a meaningful first step toward
restoring moral obligations in the financial sector. People would
understand it, and so would a lot of the money guys. Maybe in the
deepening crisis, Washington will begin to grasp that money is also a
moral issue.

Copyright © 2008 The Nation