Review of the Book:
The Lost Science of Money
by Stephen Zarlenga
Edward J. Dodson
[Written for publication on the website of the
Banneker Center for Economic Justice, 2003]
I cannot remember with any certainty when I first encountered Stephen
Zarlenga's perspectives on the global monetary system. At some point
in my own internet-based research on the subject I came across the
website for his American Monetary Institute. Mr. Zarlenga and I differ
significantly in our views of what constitutes a just - and sound -
monetary system. As conveyed in a May 2000 interview by a reporter
with the Gold Newsletter, his explains that the most important
issue to be resolved is "whether money is a power, embodied in a
commodity like gold; or a creation of the law. That is does its value
come from its 'intrinsic' (commodity) value or from sponsorship or
legal requirements of government? Or a combination?" To answer
this question to his own satisfaction, Stephen Zarlenga embarked on a
long journal of research and analysis. He argues:
"History shows money is an abstract institution of
society and government. As far back as 340 BC Aristotle wrote:
'Money exists not by nature but by law.' He's saying true money is a
fiat (decree) of the law."
"Panics are caused by fractional reserve banking, where banks
create money in the form of bank credits. But these credits aren't
the same as money because they depend on the bank's staying liquid.
Paper money in hand is more secure. In a crisis this leads to cash
runs on banks. [The solution was proposed during] the 1930's when
Henry Simon created the 100% Reserve Solution. It avoids collapse by
changing outstanding bank credit into actual cash. First, banks
(including the Federal Reserve Banks) are required to establish 100%
reserve backing for all deposits. To do this, the US Treasury loans
them (at interest) freshly printed US currency to bring their cash
reserves up to 100 %. Treasury paper held by banks, gets credited
against these borrowings; canceling an equal amount. Banks are then
confined to lending existing funds."
"This elegant reform transforms the private bank credit money
created out of thin air for decades, into US legal tender -- real
money. All US debt held by the banking system is canceled out by the
banks borrowings from the Treasury. Banks become panic proof, with
cash to pay all claims."
"This reform wouldn't be inflationary or deflationary - it
simply makes tangible what had been thought to be the existing money
supply. This reform removes the money issuing power from private
banks and places it in the US Treasury. Its not paper money that's
immoral; its the private issuing of it."
Mr. Zarlenga brings together the results of his penetrating research
in a new book, The Lost Science of Money[1]. He provides
evidence to show that even the most common items exchanged in barter
did not evolve into money. Rather, "the original development of
money may have arisen out of the need for uniform sacrifices or dues
to the gods, and fees to the priests." My own investigation of
the organization of the priestcraft confirms that those who served as
the knowledge-keepers and seemed to have the means of communicating
with the gods were increasingly able to accumulate wealth without
having to produce it themselves. Priests could not survive by
accumulating precious metals, but the problems of storing grains and
other commodities were greatly reduced by introducing symbolic items
to represent a future claim on production. The widespread discoveries
of large gold deposits resulted in a steady accumulation of gold by
the priestcraft, who, as observed by Zarlenga, began to accept gold
for their priestly services. By the time of Alexander the Great (and
surely long before) the priests effectively controlled the supply of
gold taken from the land. They determined how much was held in storage
and how much was put into circulation. By keeping the amount of gold
in circulation stable, they were able to effect a relative stability
of the price of goods and services in terms of gold.
Metal coins were in general circulation in various parts of the Old
World somewhere between 1200 and 700 BC - minted by those who held
power, with a fixed exchange value in terms of goods and services.
This, Stephen Zarlenga looks upon as not only desirable but the
highest level of practical application of monetary theory. "Coinage
was a big improvement over the ancient Oriental money systems because
it was legally valued and its quantity could be controlled by law,"
he writes. "But it was still vulnerable to manipulation and other
defects mainly because its metallic content could interfere with its
monetary function, since the metal was considered valuable apart form
the coin form."[2] The next advance was to issue coins minted out
of the increasingly more available silver metal, then the circulation
of silver coins small enough for everyday commerce. Fixed prices in
terms of gold or silver coins also slowed the loss of farms to
creditors, who during the era of floating monetary values loaned the
farmers money when commodity prices in terms of money were high but
more often than not had to repay the loan when commodity prices in
terms of money had fallen.
The story told by Stephen Zarlenga is one of ongoing monetary
chicanery interrupted by a precious few periods of honest attempts by
those governing to establish fiat currency on a stable basis. So long
as gold and silver coins were relied upon to serve this purpose, money
changers engaged in hoarding, smuggling and speculation. Rome
temporarily evaded these problems by minting and declaring coins made
of bronze as the republic's legal tender.
"Under this bronze [coinage], republican Rome grew
powerful, staying independent from Eastern power and blocking the
easy establishment of Eastern financial beachheads on Roman soil.
Under this bronze money, Rome developed and gave the world a system
of law that is still consulted after 2300 years - a legal system
separated from religion to a higher degree than seen before in
antiquity."[3]
Roman monetary independence did not last, however. The conquests by
its legions brought enormous quantities of silver and gold into the
empire. Gradually, many Roman citizens became propertyless as control
over land became increasingly concentrated. As would occur later in
northern Europe, peasant farmers were displaced by sheep and cattle.
The production of foodcrops for the general population was supplanted
by cash crops for export and consumption by the wealthy. Zarlenga
makes a convincing case that the move away from fiat (bronze) to
commodity (gold and silver) coinage was a primary cause for the
gradual decline of the Roman republic. The lesson is clear:
"If the cause of Rome's decline has remained
mysterious, perhaps it's not so much from a lack of knowledge of
what took place, but to shield from closer scrutiny similarly
destructive attitudes and institutions operating on present day
Western society."[4]
The eventual re-emergence of Mediterranean societies as centers of
commerce and culture and military power is taught as the
Renaissance of Western civilization. Zarlenga adds his voice to
historians who point to the Crusades as an important series of trigger
events in the rise of the European - and Christian -- nation-states.
Zarlenga points to the organization of the Knights Templar early in
the 12th century as a major institutional change that had an enormous
effect on the future of northern Europe, accumulated landed wealth and
gaining power. Constantinople - the center of Christendom in the East
- fell to Europe's armies in 1204. Silver and gold in undreamed of
quantities was carried off. Armed with this enormous infusion of
(largely) silver coinage the Renaissance began. The returning
Knights Templar became the continent's bankers until their network was
broken up early in the 14th century by the French monarch. Zarlenga
repeats what several historians surmise - that their treasure was
moved to Scotland under the protection of Robert the Bruce. The
Knights continued, as proponents of freemasonry, to have a continuing
influence over world events. Once again, the priestcraft took over as
the principal monetary authority. Merchant bankers also began to
appear across Europe.
What Zarlenga next tells the reader is that the absence of a truly
fiat coinage set the stage for another series era of economic
upheavals. The exchange value of silver in terms of gold was much
greater in the Middle East and Asia than in Europe. The result was the
gradual transfer eastward of most of the silver confiscated from
Constantinople - as well as Europe's production - and the accumulation
of gold by the merchants of Europe. European princes tapped this
commodity money to finance their expansionist ambitions. At the same
time, the merchant bankers began to extend credit well beyond the
value of commodity coinage held. Catholicism's moral leaders fought
against the charging of interest but lost. Discovery of the ocean
route to Asia around the African continent, followed by the discovery
and exploitation of the New World then combined to dramatically alter
the balance of power between core and periphery powers. Spanish
treasure ships (those that escaped English privateers) were making
their way back from the New World, funding the empire-building and
luxury-consumption of a Spanish aristocracy as well as new
manufacturing enterprises in the north. Added to all of these dynamics
came the quasi-religious wars that were to initiate great migrations
of people to unsettled lands in the New World. Noble factions aligned
with the new Protestant sects engaged in open warfare against their
Catholic-aligned nobles, Europe's huge landed estates the main prize.
After two centuries of these civil wars, the modern nation-states of
Europe were largely formed, along with the pattern of shifting
alliances in pursuit of temporary advantage over one another. While
Spain emerged as the first global empire, "the democratization
and wider distribution of wealth in the north led to increased
industry and prosperity, while the increased concentration of wealth
in Spain lead to stagnation and relative decline,"[5] observes
Zarlenga. The dynamic role of gold and silver commodity coins
certainly played a role far more significant than most historians have
recognized. However, the other extremely important ingredient for the
rise of the northern nation-states (and of England, most particularly)
was the migration of people forced off the land by enclosures to the
coastal cities and then to the growing list of colonial possessions.
The effectiveness of this pattern of empire-building is evidenced
today by the widespread use of the English language around the
globe.[6]
In reading this book, I was eager to reach the point where Mr.
Zarlenga discussed the creation of the Bank of Amsterdam and the
impact this unique "deposit bank" had on the global economy
during its relatively brief period of operation as a bank of deposit.
Our author quotes Jonathan Israel's assertion that the "Bank's
most vital feature was that it was a civic and not a privately owned
or managed institution"[7] rather than the manner in which the
bank operated. As a bank of deposit, the Bank of Amsterdam "made
profits on money changing and gold and silver purchases, charging up
to 2.5%," writes Zarlenga, as well as "supplying the city
mint with gold and silver bullion."[8] The fact that the City of
Amsterdam owned the bank and employed its managers is not, in my view,
its essential advantage. The key issue is whether monetary systems are
inherently monopolistic and, therefore, best operated under
the auspices of government. Zarlenga then notes that the Bank's
appointed managers allowed the City of Amsterdam and the Dutch East
India Company (a government-chartered monopoly) to withdraw money left
on deposit by others, but states the "overdrafts
caused no
difficulty for over a century."[9] Clearly, the story of the Bank
of Amsterdam is one more piece of evidence that the short-run
interests of political decision-makers have a tendency to result in
corruption of sound economic institutions. Stephen Zarlenga's
conclusions are rather different:
"The overall record of the Bank of Amsterdam stands
out as one of the best run banking institutions in history. It
became a mythical model for how a banking system should function.
Those who held it up as the ideal gold and silver banking system
were generally unaware that the Bank had issued new money in the
form of overdrafts to the City and the Dutch East India Company."
If ever there was a time when a real gold and silver system might
have worked, it was then, with the vast metallic plunder coming from
America. Yet the Bank considered it necessary to begin issuing
abstract money within six years of starting operations. That it felt
compelled to keep it a secret indicates the retardation of monetary
thought in the merchant's mindset."
Its great success was that it was a public institution owned and
run by the City for the benefit of the country and its merchants,
and not run by private parties for special interests. This enabled
it to raise the credit to make good on all of its deposits when it
got into trouble.
"[10]
Dishonesty is dishonesty. The managers of the Bank were guilty of
fraud - by their self-creation of credit - and should have been
prosecuted and removed from their positions. Of course, they were
essentially ordered to commit this fraud by their employer, the
officials governing the City of Amsterdam. Where, I might ask, was the
City Controller when all this was happening? Well, of course, the City
Controller (if there was one) was either in on the fraud or was
prohibited from auditing the Bank's activities. I am not foolish
enough to argue to private sector fraud is any less frequent. I do
argue that one important lesson of history is that the potential for
despotism increases the broader is the scope of governmental
functions.
One of the most dangerous powers government can be allowed to possess
is the self-creation of credit. By this power, governments issue
promises to pay (i.e., government bonds) to investors or the central
bank the legal tender the government printing presses issue upon
request of the central bank in order to "purchase"
government bonds.
Perhaps if we (and other societies) lived under systems of real
participatory democracy not controlled by powerful vested interests I
would be more trusting in societal institutions. As things stand, I
believe the practical answer is to enact legislation permitting
investors to create a private sector network of deposit banks, the
operations of which would be regularly audited (the auditing firm
selected based on very stringent criteria that prevents the kind of
collusion between auditors and corporate management that has come to
the surface recently). Criminal penalties, vigorously enforced by
government regulatory agencies, need to be adopted. An additional
market response comes from insurance companies, which are in business
to protect investors from losses associated with these and other types
of risk. The enabling legislation should require that deposit banks
maintain adequate insurance to protect investors and the public from
losses associated with criminal wrongdoing on the part of bank
management. I am reminded of the wise advise of Max Hirsch, writing at
the turn of the last century in Democracy versus Socialism:
"Democracies have produced men of great ability and
of conspicuous honour to deal with great questions of State. But
where democratic governments have undertaken the conduct of
industrial functions, the task has generally fallen into unreliable
and incompetent hands. Universal experience proves that the more
detailed governmental functions become, the more they deal with
industrial matters, the less lofty is the type of politician. Abuse
of power, neglect of duty, favouritism and jobbery have been the
almost universal accompaniment of industrial politics."[11]
One can argue, I am sure Stephen Zarlenga would, that government
today - at least in the world's more responsible social-democracies -
has many more safeguards in place to prevent the kinds of systemic
corruptions identified by Marx Hirsch and others who wrote during the
era of the robber barons. Ironically, protecting citizens from
monetary inflation is one of the areas where governments have
demonstrated the least self-control. The culmination of Mr. Zarlenga's
historical analysis arrives at the beginning of the sixteenth chapter:
"Our review of Greek, Roman, Byzantine, Venetian,
Dutch, and English money, until the formation of the Bank of
England, showed that monetary control was generally either in
government or religious hands and was inseparable from ultimate
sovereignty in the society. Yet in America today, the idea that
government should control the issuance of money is guaranteed to
arouse ridicule among most economists. The government's monetary
role is under attack by diverse elements from the paid apologists
for privately controlled central banks, to free banking advocates,
to gold standard enthusiasts."[12]
He then asks, "are their views well grounds in historical or
modern experience, or merely a bias they picked up in economics class
or from re-reading Ayn Rand novels once too often?"[13] This last
comment may be directed toward Alan Greenspan, I suspect, who is known
to have been a strong admirer of Ayn Rand as a young man. However, I
do agree with him that insufficient skepticism toward modern monetary
theory (or, perhaps more accurately, monetary conventional wisdom) has
been exhibited among economics professors. Mr. Zarlenga attempts to
make the case that by comparison, government issuance of currency
throughout the history of the United States was done with greater care
and responsibility than by private banks. Insofar as the comparison
goes, I agree with his conclusion. However, after the brief period
during which the Bank of Amsterdam operated consistently as a bank of
deposit there is nowhere in history to turn for guidance. John Wood,
writing for the American Institute for Economic Research, also reminds
us that "[g]overnments have imposed severe penalties - the
cutting-off of hands is a favorite - for using foreign currencies in
attempts to compel their citizens to hold their own depreciating
currencies."[14] These are worst cases, of course, and not the
practice (nor within the current legal authority) of market-oriented
social-democracies. What keeps governments and their central banker
partners from an unrestricted expansion of paper currency is the
political and economic risk of what one might call a run to quality
(i.e., a large-scale sale of the nation's currency in the
international currency markets). This, more than anything else, is
what today prevents governments from balancing budgets on the backs of
those who hold liquid assets denominated in the nation's paper
currency.
Stephen Zarlenga's means of protecting the general public from
potential corrupting actions of government officials charged with
managing the monetary system is to, first, provide a clear legal
definition of money; and, second, clearly delineate how "new
money" is to be added to the money supply. "The attempt to
disconnect the money system from politics reflects a distrust to the
citizenry in such matters," he writes, continuing: "Of
course it should have independence, like the Judiciary. But it must be
accountable, and it is through politics that the citizens express
(indirectly) whether the money system is functioning well or not.
The
raison d'etre of the money system is to serve the community,
and history gives us little reason to place more trust in money
systems controlled by elites, rather than by the citizens."[15]
Looking at history and our ongoing everyday experience with as
objective eye as I can muster, I remain a skeptic. If what Henry
George meant when he wrote "it is the business of government to
issue money"[16] was that commodity money coinage of a consistent
and known gold/silver content, the U.S. Mint is already entrusted with
this task in a limited sense - by the issuance of gold and silver
coins to be held for investment purposes rather than circulation in
exchange for goods or services. The U.S. Mint also possesses the
capabilities and controls to issue paper currency that cannot be
easily counterfeited. What is at issue is the method of putting paper
currency into circulation. The bottom line for Stephen Zarlinga is
ending privilege, an objective with which I am in full agreement:
"A society such as the U.S., depending on private
bank credits in place of government-created money, is operating in
moral quicksand. It has established a special privilege of power for
those private parties issuing the credit - the bankers.
"[17]
The problem is that the commercial banks are not beneficiaries of the
current system. Even the Federal Reserve Banks have restrictions
imposed by law of their distribution of profits to member bank
shareholders. The primary beneficiary is the United State government,
which, as I have explained earlier, along enjoys the power to
self-create credit. Neither government nor privately-owned banks ought
to have this destructive power. Purchases up to some relatively low
value level can be adequately handled by fiat coins of nominal
intrinsic value without risking the integrity of the system. However,
paper currency must be denominated in quantities of specific goods and
services over which the issuing deposit bank has control (and its
delivery thereof upon demand is appropriately guaranteed by
governmental regulation, independent auditing and required insurance
coverage).
This debate is far from over, of course. Although Stephen Zarlenga is
more comfortable with government in full control of money issuance and
circulation than I am, the introduction of a long list of other
reforms might persuade me that government had reached a point of
sufficient public trust to trust government to introduce and maintain
sound money.
Edward J. Dodson / January 6, 2003
FOOTNOTES AND REFERENCES
1. Stephen A. Zarlenga. The Lost
Science of Money (Valatie, NY: American Monetary Institute, 2002),
p. 11.
2. Ibid., p.26.
3. Ibid., pp. 53-54.
4. Ibid., p. 92.
5. Ibid., p.217
6. From the 17th century on, English became the language of commerce.
Even today, when the number of Spanish-speakers in the American
hemisphere exceeds English-speakers, English predominates in the
commercial sphere and is the second language of individuals who aspire
to participate in the global economic, academic and political arenas.
7. Ibid., p. 229. Quoted from Jonathan Israel, Dutch
Primacy In World Trade (NY: Oxford Univ. Press, 1989), p. 77.
8. Ibid.
9. Ibid., p.231.
10. Ibid ., p.232.
11. Max Hirsch. Democracy versus Socialism (NY: Robert
Schalkenbach Foundation edition, 1966. Originally published 1901),
p.287.
12. Stephen Zarlenga, The Lost Science of Money, p. 433.
13. Ibid., p. 434.
14. John H. Wood. Money, Its Origins, Development, Debasement,
and Prospects (Great Barrington, MA: American Institute for
Economic Research, and Economic Education Bulletin, Vol. XXXIX, No.8,
August 1999), p 59.
15. Ibid., p. 645.
16. Henry George. Social Problems (NY: Robert Schalkenbach
Foundation edition, 1966. Originally published 1883), p. 178.
17. Stephen Zarlenga. The Lost Science of Money, p. 661.
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