A very long but interesting lecture by the author of a classic book on monetary history, which will be our book of the day in 2-3 days:
* Speech: THE LOST SCIENCE OF MONEY & MONETARY JUSTICE USING PUBLICLY CREATED MONEY TO FUND PUBLIC PROJECTS TALK AT THE HOUSE OF LORDS; London May 4, 2004
Stephen Zarlenga talks:
“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)
(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.)
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:
“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
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.
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:
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. (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%
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.
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.
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.
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:
“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.”