Zarlenga Interview with Alistair McConnachie, Prosperity
AN INTERVIEW WITH STEPHEN ZARLENGA,
by Alistair McConnachie, Part 1.
PROSPERITY, JUNE 2004: Stephen, it was a pleasure to meet you at the Reformers bookshop in Edinburgh in May, and to see a copy of your book, The Lost Science of Money. Please tell readers about yourself?
Thanks Alistair, it was good to meet, after hearing about you from Peter Challen and James Robertson.
My parents emigrated from Europe to Chicago and achieved the “American Dream” – owning a home, a job, more opportunity for their children. They sacrificed and I attended the University of Chicago, under the Hutchins curriculum, a unique program that focused on “The Great Books of the Western Tradition” and on critical thinking and using primary source materials – as much as possible.
What do you do for a living?
I’m the Director of the American Monetary Institute.
What is the American Monetary Institute, what is its aim, why did you set it up, and where is it?
The AMI is a Charitable Trust dedicated to the independent study of monetary history, theory and reform. Emphasis on Independent. The universities have let society down regarding progress in economics, especially money and banking
It can be contacted at AMI, PO Box 601, Valatie, NY 12184, USA; Tel: (USA) 518-392-5387 firstname.lastname@example.org www.monetary.org
When did you become interested in Money Reform and why?
I’ve always been interested in it, even as a teenager. The subject as taught, never made full sense. I remember civics class in high school when the Federal Reserve was “explained.” I exchanged glances with my childhood friend Chuck and we both shook our heads in disbelief.
Are you a full-time campaigner now?
Yes . Feels like, more than full time though! Thanks to good fortune and growing interest from the Institute’s supporters and friends I devote all my time to spreading our research results.
What sort of campaigning do you do to spread the message – other than writing this amazing book, that is? For example, have you spoken at any conferences?
Thanks. The book is our main vehicle for the message and funding. I talk wherever I’m invited. Recently at TOES (The Other Economic Summit) in Brunswick Georgia, June 10th, contra the G8 finance ministers meeting.
In May I spoke at the International Philosophers for Peace conference at Radford College.
I told them that as philosophers – the guardians of human knowledge – they had the standing to de-certify economics as a science until the economists cleaned up their act regarding methodology, and definitions.
They laughed in the aisles as I described typical economist methodology.
What were your impressions of the Money Reform scene over here?
People in the UK have a more advanced view of monetary reform than in the US.
We’re burdened by nonsense spread by the Austrian School of Economics – a monetarily and methodologically illiterate group in my view. Libertarians are generally under their sway.
That’s why we still have “goldbugs” in the US. “Goldbug” is the term we generally use here to describe proponents for going “back onto a gold standard” [See Prosperity, December 2003].
There is a mythology that there was great stability under the so-called gold standard.
The goldbug folk tend to be conservatives, often from the fundamentalist Christian community, combined in an unlikely alliance with generally atheistic Libertarians, who learned to be goldbugs from the novelist Ayn Rand, as exemplified in
the cocktail party speech of one of her fictional heroes Francisco D’Anconia. She was mentally fixed on this subject by the Austrians.
Sorry to bring in such fictional writers, but in fact one of the methodological weaknesses of the Libertarians is that they have confused Ayn Rand novels with historical evidence!
Some Austrian sympathizers criticize me for being so gruff with them, but that’s all they merit, as I demonstrate in the book.
I regard it as a kind of duty to wean my fellow Americans off their pablum.
Traditionally the US was ahead of the UK in monetary thought. We were a monetary laboratory from the start, and tried everything; whereas the UK was quickly put on the false path of private bank credit money with the formation of the Bank of England in 1694. In our monetary struggles, the UK would send financial “experts” like Walter Bagehot and Bonamy Price to befuddle the Americans. Normally they failed.
Let’s talk about your book. What gave you the idea for The Lost Science of Money, and how long did it take to write?
One of my major goals was to discover a solution to our unjust monetary system. That took years of focused research begun in 1991. Over 800 monetary source books and papers and materials were studied to reach the main thesis.
Your book is heavily based on history. What was your reason for covering history so fully?
The history of money has been ignored – even censored. Yet, that history presents some self-evident conclusions regarding money and banking, that are counter to the practices of today’s financial establishment.
Those supporting corrupt monetary power find it easy to hide behind obtuse theories, but historical case studies are usually clear and instructive.
The monetary system is a source of so much power to those who control it that the area is purposely confused. So a detailed historical format was considered necessary to help do an initial cleaning up of the error and misinformation
which we have all suffered under.
Without history, you are in what some Brits used to call “cloud-cuckoo-land.” You need the facts to utilize the empirical method to the extent possible, and those monetary experiences are found in mankind’s history.
It’s also the easiest way to understand the subject and explain it to others. Since I did the studies chronologically, that’s the way I present them.
Finally, since money is always so close to power, following the money thread gives a fascinating historical perspective. It’s not about remembering dates, it’s about clashes of power!
What’s the main point you aim to make in the book?
The main point is the importance of the concept or nature of money as an abstract social power embedded in law.
Not a commodity, not really a form of tangible wealth, and certainly not to be confused with private credit; money is on a higher order as an unconditional means of payment.
The main political battle over money, from Aristotle’s time to the present, has been whether society’s money power be in private hands, and thus used for the benefit of the few in control; or in public (governmental) hands thus potentially used
for “promoting the general welfare.” That is the big divide – public v private. Today it’s Aristotle v Adam Smith, with Smith on the wrong side of that battle.
Part 2 of this interview will be continued in the July 2004 issue of Prosperity.
AN INTERVIEW WITH STEPHEN ZARLENGA, with Alistair McConnachie, Part 2.
PROSPERITY, JULY 2004
Continuing Part 2 of our interview with author of The Lost Science of Money, Stephen Zarlenga. Part 1 of this
interview appeared in the June 2004 issue of Prosperity.
Stephen, as a consequence of your study, what are your suggested policy proposals for the government of the USA?
To reform our system and assert societal control we have to understand how it was stolen in the first place. It’s always relied on bribery but the main weapon has been Manipulation of Language through obscure theories on the nature of money.
By mis-defining the concept of money, corrupt interests grabbed control of society’s Money Power and the society itself. Definitions have been used as heavy artillery!
The latest form of this attack is an effort to remove the real concept of money from the English language and replace it with a concept of credit!
When I mentioned that at the House of Lords meeting of monetary reformers on 6th May, a number of people recognized how that process of language manipulation works and I saw a reaction go through the room.
There are three parts to the American reforms:
First: Nationalize the Federal Reserve System as the Bank of England was nationalized in 1946.
Reconstitute the Fed within the US Treasury, to evolve into a fourth branch of government, on a par with the executive, judicial and legislative branches.
Only our government would create money, and it would do so directly, not by making loans. Money’s nature is not a loan credit. That is crucial to remember.
Once the money is in existence, it could be loaned, but you don’t want a situation where repaying loans then liquidates the money. Using loans to create money would make it too easy for banking elements to regain their private control over money.
Second: Remove the privilege which banks presently have to create money. They continue to be private companies but can only lend what has been deposited with them. An elegant process automatically turns the previously issued bank credit into real American money. 100% reserves are reached not by calling in loans and wrecking the economy but by increasing reserves.
Third: Provide for automatic, constitutionally determined government money creation, starting with the 2 trillion dollars which the American Society of Civil Engineers say is needed to bring infrastructure up to acceptable levels.
From there we go forward carefully determining how to best run the monetary system, and thoughtfully use Aristotle’s method, we learn by doing.
Do you think these policies are also suitable for the UK?
Yes, you have already done step number 1, thanks to the Archbishop of Canterbury’s initiative, which I describe in Chapter 20.
Next remove the money creation privilege from private banks. Figure out how that money power is best applied, based on desired social goals.
What difference would these policies make to the life of the average person, if they were implemented?
Government money tends to go into infrastructure, like education, roads, clean water, health care and social security.
Control over how the money is used directs the money to solving pressing problems rather than into useless speculation that merely concentrates wealth. This assures a better quality of life not dominated by arcane forces with whatever hidden agendas.
Have you faced any outright opposition to your ideas, and if so, from whom?
The opposition doesn’t want to draw attention to the book so they ignore it, or misreview it – create false reviews putting forward things that are not in the book.
If a reviewer gives an accurate picture of a book and then attacks it, many people still say – “but I find those ideas interesting” and get the book anyway.
False reviews don’t give the reader that chance. Nasty reviewers try to make a book sound either dull, or weird, and turn people away. There have been two reviews like that, apparently from Austrian School sympathizers – one an American goldbug, the other a Canadian economist.
Outright opposition doesn’t work against my book because I present so much of the factual evidence that destroys their arguments and outright lies.
The opposition prefers such evidence never be seen or discussed. In other words the facts beat them.
So getting interviewed in positive publications such as prosperity is really quite important.
Now because my book breaks much new ground, reviewing it requires a really good mind to start with. And I’m happy to report that we are getting some great reactions as more people read the book. PROSPERITY readers can see the
reactions, including reviews at our website ww.monetary.org/lostscienceofmoney
I can’t over emphasize the importance to the AMI of people purchasing and reading this book. It’s only when people help by purchasing our research results in book form, that we can continue with more research.
What sort of people are most interested in your book?
Those looking for an uncensored, accurate presentation of the monetary problem and its solution. It’s strongly enjoyed by those with an inkling something’s wrong with the monetary system but can’t put their finger on it; or have done a bit of
reading in this area or even devoted a lot of effort but still haven’t put all the pieces together.
We do put the pieces together and give tons of factual ammunition of which most specialists are not aware. For example, a substantial part of my presentation in London was dispelling the myth that government money systems have
been more dangerous and inflationary than privately controlled ones. We aim to make monetary reform the 21st century’s top priority.
Can you give us an idea of the Money Reform scene in the USA?
After WW2, the Bank of England was nationalized and the locus of the world’s money power had a little earlier shifted over from London to New York. With it came the Austrian School of Economics with their monetary obfuscations and
wearing the “freedom” mantra on their cuffs, while the real effects of their ideas were to promote plutocracy.
This culminated in Hayek’s, Denationalization of Money book in the 70s – an unsuccessful attempt to throw a monkey wrench into the EURO plans and an affront to all thinking people. Ayn Rand put the Austrians on the map in America, through her “Objectivist” movement.
She was stuck in a backward “money is gold” framework. And so we have small pressure groups promoting goldbug viewpoints and these are easily ignored in public debates, and they expect to be ignored also. Normally they are
promoted by mining companies, coin dealers and related investment groups and much of their leaderships focus is on making money rather than achieving reform.
The Libertarians are either backing these gold standard ideas, or even worse Hayek’s free banking viewpoints.
I demonstrate the free bankers 6 major errors in Chapter 16. The first is that they have misidentified the free banking period of American history.
The local currency people are very decent people who understand that there is a serious monetary problem, and I’m very interested in reaching them, as a believer in moving forward along many fronts toward monetary reform. But some
of their leadership seems to think they can ignore the national reform scene and will be allowed to escape into their local enclaves.
That kind of escapism was promoted by Ayn Rand – her heroes in Atlas Shrugged escape to a secret valley in Colorado, as civilization crumbles around them!
Then there is the American Monetary Institute promoting the reform proposals described above. We have to do a great deal more than we have so far.
Politicians are still afraid to get involved in any of these movements because they are all counter to the Fed. That will happen when the bankers malfeasance creates the next crisis.
Our battle is not only with the financial establishment, it’s with a confused atmosphere where some who think of themselves as reformers are actually serving to confuse the situation.
Life is interesting, and it would be strange indeed if this key power area had been left undefended. It’s up to the AMI to work harder and smarter to get our message across to those who have maintained open minds. We could use as much
help in that as we can get.
Now remember, although the book is printed on 300-year paper, I am highly optimistic that we will be successful in this work. Why?
TINA! There is no alternative! (note: the Brits were constantly barraged with this abbreviation by Prime Minister Thatcher in her drive to de-regulation and pseudo-free markets)
The alternative is too terrible to imagine. Mankind’s “fate” is not to have civilization derailed by the characters presently controlling our money systems!
Stephen, best of luck in your important work, and thank you for a very insightful and instructive interview.
Thank you Alistair!
Was the Iraqi Shift to Euro Currency to “Real” Reason for War?
Several persons have asked the American Monetary Institute to comment on the viewpoint that the “real” reason for the war against Iraq was Sadam Hussein’s decision to price Iraqi oil in the new EURO currency of the European Union rather than in U.S. Dollars. The argument goes that unless the price of oil is denominated only in Dollars, then the U.S. would not be able to continue to run huge balance of payments deficits. The argument is based on the idea that the motivation for other nations to hold accounts and reserves in Dollars is that they can use them to pay for oil.
We do not agree with this viewpoint and here are some of the reasons and background. The Euro and its potential beneficial effect for humanity is discussed in much more detail in chapter 23 of our book The Lost Science of Money: The Mythology of Money – the Story of Power, a 736 page work in 24 chapters, with 119 illustrations; presenting the research results of the American Monetary Institute to date. (see http://www.monetary.org/lostscienceofmoney.html)
Launching the Euro
The planning and preparations for the Euro Currency are at least three decades old. The plans were adjusted in stages as the “Common Market” evolved into the European Community, prior to the currency’s recent inauguration. The official structuring of the Euro was apparently designed to be at par with the U.S. Dollar, at launching in January 1999 – that is 1 $ = 1 Eur. However in the last part of 1998, some European currencies, such as the German Mark rose substantially in speculative foreign exchange trading so that the Euro was launched at about $1.18. That was too high and from that level it had nowhere to go but down. It dropped for 21 months, causing most financial operators to proclaim it dead on arrival.
Our view at the American Monetary Institute was decidedly different: that until the Euro came on the scene, there was only one “world class” currency – the U.S. Dollar. Now there would be two. That represented progress. For quite apart from the ideologies motivating the present Euro monetary managers, even if they, like the Federal Reserve System, were strongly biased towards deflation, it was now structurally possible for the Europeans to get out from under Alan Greenspan’s “Dollar Hammer.” In our view a now developing Asian area currency will also be a good addition to the international monetary order and could have avoided the currency crisis that occurred there in the late 90s – i.e. there would be three “world class” currencies instead of two.
We had for some time concluded that Greenspan’s Fed was engaging in a deflationary monetary policy, under cover of vast substitute money forms being generated in the “Dot Com” and other market bubbles, where stocks were being used as money. For example to pay workers with stock options, or when AOL used its stock to buy Time Warner in the largest merger of all time. In April 2,000 we warned about what would happen “when, not if“ those high Price Earnings ratios would disappear. See the Deflation Studies at this web site.
The Euro thus gave the Europeans the ability to take substantial non-deflationary monetary action independently of the Fed. If in the arcane world of currency machinations, there was ever anything to fight about over the Euro, it was that fact.Thus I wrote (August 2002) in Chapter 23:
“Conflict with Europe? Hard as it is to imagine, there is now a potential for monetary (even military?) warfare between the U.S. and Europe.”
As the value of the Euro plunged down to about $1.07, we pointed to the earlier overpricing at its launch and we predicted that it would continue falling down to 82 cents, from where it would rise to about 109, fall back under 100 and then oscillate around 100 (at “par” where 1 Eur = $1). The reasoning behind our prediction was that the Euro managers had probably done their job well, and “par” was the “correct” value. However once markets are in motion they tend to go too far, up or down. Thus our prediction was that it would over-react down to 82 – as much under par as it had been previously over par.
Well the Euro declined exactly as we predicted, reaching 82 cents in October 2000. Iraq is reported to have shifted $ reserves into Euro around then. The Euro rose to 96, fell back to 83 in July 2001, and has since risen to just over its launching peak at about 119. The point is that the rise from 82 is not so easily attributable to Iraq’s action. It was also predictable from normal market mechanics. Any real trading professional will confirm that. Overshooting our prediction of a rebound back to 109 was due to the weakening of the US Dollar attributable to the Iraq war and America’s unnecessary alienation of its main trading allies.
The Petro Dollar vs the Petro Euro Argument
Now we see arguments that the real reason for the 2nd Iraqi war was Saddam Hussein’s shift to the Euro, and to keep the U.S. Dollar’s dominant position as a reserve currency, enabling the US to continue running deficits by sending Dollars abroad. While Iraq’s switch was perhaps one more factor in the equation, I strongly doubt such an over-arching explanation for the warfare. Indeed, if anything, so far the second Gulf War has served to increase the Euro’s value and weaken the Dollar. Furthermore, this weakness could become more permanent, unless the administration alters its “in your face” attitude which is keeping our traditional allies from helping with the desperately needed policing and rebuilding costs for Iraq.
In addition, there is no hesitancy for foreign countries to continue accepting U.S. Dollars in payment for their goods and services. Most countries are cash starved and require dollars to pay interest and principal on huge Dollar loans. They eagerly seek dollars, since much of the world’s debt, private and public, is denominated in Dollars. Even in Iraq, we found vast amounts of dollars being hoarded in banks and even by Sadaam Hussein himself where over 800 million Dollars in cash were found stashed away in one of his palaces.
Still another problem with the argument is its commodity bias. It is the International Monetary Fund (IMF) with its rule setting procedures that will probably have more to say about the power of currencies, than the OPEC Oil Cartel. Although the Bretton Woods agreement gave a specially privileged position to the Dollar in 1946, as we point out in Chapter 22, since 1975, the Pound Sterling, Japanese Yen, Swiss Franc, German Mark and French Franc were also empowered to serve as reserve currencies by central banks. And superceding some of these currencies, the Euro has that status also (or soon will) – acceptable as a reserve currency under IMF rules. We are not promoting the IMF (see another article on the IMF at this website) as a fairly run institution, but legal factors usually supercede commodity markets in determining the power of currency.
While the process of using other currencies to obtain Dollars to buy oil would provide a demand for Dollars; after the oil is paid for, the same dollars still have to be attractive for the new owner to hold on to them – an owner who presumably does not need the Dollars to pay for oil! And other major oil suppliers exist outside the Middle-East, such as Norway and Russia. Does anyone really believe that Norway with its vast reserves, would withhold sales from the European Community paid for with Euros? Are we contemplating war with Norway?
Consider that the very existence of two world class currencies implies and necessitates that world reserves will to varying degrees be held in both of them.Thus any such “threat” to the dollar would obviously have originated long before Iraq’s decision, in the European community’s long standing plans for its own currency, which are decades old. And yet we find no serious attempts to block the Euro, from any of seven U.S. Administrations – not a one. On the contrary they were encouraged, according to Mr. Prodi, the European Commission President in a recent Charlie Rose Interview. He remarked (in January/February 2003) that we could have stopped their Euro plans, “with just a word.” Yet America did not lift a finger to stop the Euro. So much for the “monetary sky is falling” because of the Euro argument.
I found only two notable attempts to sabotage the Euro, both originating from British elements. The first was “Austrian School” economist F. A. Hayek’s immature essay entitled “The Denationalisation of Money – The Argument Refined” – really a childish attempt to throw a monkey wrench into Euro plans, published by London’s Institute of Economic Affairs in 1976 and 1978. (That book is strongly critiqued in Chapter 16 of The Lost Science of Money). But the only people who took Hayek seriously were American Libertarians and other “Austrian Schoolers.” Then in the mid 90s, Connolly’s Dirty Rotten Heart of Europe, fell flat in its name calling attack on the Euro.
WHATS IN STORE FOR THE MARKETS?
As to what happens next to foreign exchange markets, gold prices and inflation/deflation, welcome to the casino! When the rule of law is attacked in such fundamental ways as has needlessly been done in the pre-emptive strike against Iraq – especially by the U.S. – the country which should be at the forefront of advancing international law; it tends to generate an element of panic in general, which spills over into markets as well. With large amounts of speculative cash sloshing around (and that’s about the only place you’ll find so much liquidity these days), markets and prices can become violent.
A particular danger may exist in the gold futures markets, where violence in that market can easily be mistaken as a monetary “signal” in a way that a similar price disruption in Pork Bellies would not. The existence of a small but vocal group of monetarily illiterate pro-gold Americans egged on by gold mining and investment interests makes this more than a theoretical danger. However, the exchanges do have the power to solve such a problem – if they want to – as was done in the Hunt Brothers corner of the silver market in 1980-81. The Billionaire Hunts had the silver market makers on the hook for six to eight billion dollars, but were then driven to complete ruin and bankruptcy when the Comex Exchange simply altered its trading rules. The Hunts said “You can’t do that!” The exchange lawyers told them they should have read the futures contract fine print, and the courts agreed. The Hunts lost not only the $6-8 billion in profits, but their entire fortune as well.
So at present, foreseeing the future becomes a bit more difficult. You see there is no longer a countervailing media power to keep watch over what various gangs are doing. Bad ideas – even really bad ones – for example tax cuts for the super-rich, which could cause a form of currency debasement combined with economic contraction, and a de-funding of government, do not get reported as poor public policy, or more accurately as insanity, but instead get presented as valid questions for economists to argue over. Obscene Power Grabs are made in broad daylight such as the recent FCC de-regulation of the media – one of the most irresponsibly run industries in the U.S. All this prompted Nobel Laureate in economics (2001) George A. Akerlof to recently remark:
“I think this is the worst government the US has ever had in its more than 200 years of history.
It has engaged in extraordinarily irresponsible policies not only in foreign policy and economics
but also in social and environmental policy.” (SPIEGEL Online interview, thanks to Alanna Hartzok)
What can best be described as the “Ministry of Propaganda,”euphemistically referred to as “talk radio” represents the interests – day in and day out – of only one tiny element in the nation – the owners of the networks – all super-rich. At present there is no democratic (small d or big D) opposition. The way that elections, and communications are financed has demolished both, except for the rare PBS presentations of Hedrick Smith, or Bill Moyers.
As to what the real cause of the war was, I’ll close with this observation:
Watching Hedrick Smith’s recent P.B.S. Frontline documentary on the Worldcom and other financial scandals, the thought struck me that if we had not been distracted by war reporting, museum lootings, library burnings, and daily reports of continuing casualties among our troops, then these financial scandals, would have been center stage for many months. Smith’s condemning evidence reached all the way up to Alan Greenspan; it went beyond personalities, to indict “free market ideology” as well. That is long overdue!
So that “distracting process” could have been a major war motive. (Remember how Richard Nixon tried to scramble the strategic air defense bombers, during the watergate disaster?) Throw in the oil-grab factor; throw in the Neo-Conservatives Middle East agenda shared by the evangelical Christians supporting Israel’s interests. Then too we’ve all been reminded (many times) that S. H. tried to kill Mr. Bushes’ daddy. Add in the Arab League’s now forgotten watershed peace initiative toward Israel last year and the problems that posed for the war parties on both sides, etc, etc, etc. Mix all these factors into an environment of panic over the World Trade Center disaster, and Voilà – Gulf war II.
External policy should not worry about the Euro, but focus on rebuilding respect for international law and co-operation toward justice. That strengthens the U.S. Dollar. That fosters a respect for human life and well being everywhere. That will reduce the level of anger and hatred directed at Americans – yes it reduces the causes of terrorism.
This young, inexperienced President needs to separate himself from older elements in his administration that are against that – the empire promoters. And he must hold fast to formulating and enforcing a viable “roadmap” for peace between Israel and Palestine. Success there would really help erase the recent blemishes on America’s worldwide standing, abroad, and at home. Domestic policy should focus on rebuilding respect for our rights – for privacy, dissent, and due process matters; so that we can get to the crucial issues of monetary reform, so needed to get America off the road to serfdom, which has been paved by the Austrian School and other economists, and back on track toward liberty and justice for all.
Director, American Monetary Institute
Monetary Transparency Act
Transparency in the Creation of Wealth Act of 2008
H. R. 7260
To increase the quality and public accessibility of research by the Board of Governors of the Federal Reserve System on the effects of monetary policy on the distribution of wealth in the United States, and the proportion of newly created monetary resources directed into various sectors of the economy, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
October 3, 2008
Mr. KUCINICH introduced the following bill; which was referred to the Committee on Financial Services
To increase the quality and public accessibility of research by the Board of Governors of the Federal Reserve System on the effects of monetary policy on the distribution of wealth in the United States, and the proportion of newly created monetary resources directed into various sectors of the economy, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Transparency in the Creation of Wealth Act of 2008′.
SEC. 2. ESTIMATE OF THE OVERALL MONEY SUPPLY.
The Board of Governors of the Federal Reserve System shall devise, calculate and publish a replacement for the discontinued M3 monetary statistic, in order to provide a transparent estimate of the nation’s total money supply.
SEC. 3. STATISTICAL ESTIMATE OF THE DISTRIBUTION OF WEALTH IN THE UNITED STATES.
The Board of Governors of the Federal Reserve System shall tabulate and publish a statistical description of the current distribution of wealth in the United States by quintile, including a further examination of the uppermost 1% sections by 0.1% each.
SEC. 4. CREDIT INSTITUTION SEIGNIORAGE CALCULATION FOR REPORT TO CONGRESS.
The Board of Governors of the Federal Reserve System shall calculate and report to the Congress the total annual seigniorage interest income received by financial institutions as a result of their being allowed to create money in the form of the credit they extend above their own cash deposits or reserves prior to extending the loans.
SEC. 5. CALCULATIONS FOR THE SEMI-ANNUAL HUMPHREY-HAWKINS TESTIMONY.
The Board of Governors of the Federal Reserve System shall calculate and publish semi-annually the loss or gain in economic output due to the deviation of the previous year’s actual unemployment rate from the 4% level required by the Humphrey Hawkins Full Employment and Balanced Growth Act of 1978 (15 U.S.C. 3101 et seq.), including such loss or gain, in income by quintile.
SEC. 6. ACCESSIBLE STATISTICAL COMPARISONS OF WHERE CREDIT IS BEING DIRECTED .
(a) In General- The Board of Governors of the Federal Reserve System shall tabulate and publish data showing the amount of credit and the percentage of credit now being created and directed into each of the following:
(1) Public infrastructure.
(2) Primary residences.
(3) Secondary residences.
(4) Stocks, bonds, commodities.
(5) Foreign currency and derivatives trading.
(6) Mergers and acquisitions.
(8) Manufacturing infrastructure.
(9) Military expenditures.
(b) Additional Analysis- Each category referred to in a paragraph in subsection (a) shall be further analyzed by type, gender, race, wealth status, and location, if applicable.
SEC. 7. LAND VALUE CALCULATION FOR THE FLOW OF FUNDS REPORT.
The Board of Governors of the Federal Reserve System shall develop a market-based estimate of the value of residential, corporate and publicly owned land and report figures.
SEC. 8. FOREIGN DEBT CALCULATION.
The Board of Governors of the Federal Reserve System shall make projections, in 10 year increments, of the net foreign debt, and estimate and report on the location of Federal reserve notes, by country and type of holder; including an estimate of lost notes.
SEC. 9. GAO AUDIT REQUIREMENT.
Notwithstanding the requirements, limitations, and exceptions contained in section 714 of title 31, United States Code, the Comptroller General shall conduct a full audit of the Federal reserve system in every year before a Presidential election year.
SEC. 10. IMPROVEMENTS TO THE SURVEY OF CONSUMER FINANCES.
The Board of Governors of the Federal Reserve System shall undertake the Survey of Consumer Finances every year.
SEC. 11. SUMMARIES OF TOTAL CREDIT MARKET DEBT AND ECONOMIC GROWTH.
The Board of Governors of the Federal Reserve System shall publish a summary of total credit market debt, quarterly and annually.
SEC. 12. PUBLIC NOTIFICATION REQUIREMENT.
The Board of Governors of the Federal Reserve System shall release–
(1) the statistics required to be compiled by this Act at a quarterly news conference; and
(2) the survey of consumer finances and the total credit market debt report at an annual news conference.
Internship and Voluntary Work Programs
As a 501c3 Publicly Supported Charitable Trust, the American Monetary Institute sponsors both internship programs and voluntary work programs for specified time periods under the supervision of Director Stephen Zarlenga. Participants combine a program of learning the methodology and results of the Institutes research with their own focus on monetary system matters. Through their concurrent contribution of time and effort on tasks necessary for the continued operations of the Institute they help the Institute fulfill its educational and charitable purposes in spreading the results of our research into monetary history, theory and reform.
The work focuses on several areas: normal administrative tasks; website assistance; help with the many aspects of our annual international monetary reform conference; grant writing; development of AMI chapters throughout the U.S.; editing our video and audio presentations; student out reach programs; etc. We do try to make sure that while this is serious work, that its done in an enjoyable atmosphere. And you’ll meet interesting people, at the forefront of monetary research and reform in the U.S.A.
For further information or applications please email Stephen Zarlenga at email@example.com and tell us about yourself – your background and your objectives – and please send in a resume, including any relevant personal info.
A Refutation of Menger’s Theory of the “Origin of Money”
To download the full Power Point Presentation of the
Refutation of Menger. Click here. Then please donate $10 to the Institute.
Here is a summary:
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]
“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.
Money is “a token for purposes of exchange.”[ix]
“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”
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”
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.
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.
[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.
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.
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, 7th 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 GOVERNMENT 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
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.
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
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)
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.)
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
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.
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?”
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
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.
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.”
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.
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.
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
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
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,
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
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.
In 1723 Pennsylvania’s system loaned the bills into circulation, charging interest on them and using it to pay colonial expenses. Ben Franklin wrote:
“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.
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.
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.
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.
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.
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.
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!
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.
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:
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.