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TH 




LOST 



SCIENCE OF 

MONEY 

by Stephen Zarlenga 




The Mythology of Money - 
the Story of Power 



PROMOTIONAL TEXT FROM OUR BOOK JACKET 



WHAT'S GONE WRONG? 
Unheard of wealth concentrates into 
very few, largely undeserving hands. 
Americans work harder and produce 
more than ever but increasingly fall into 
debt and bankruptcy while corruption 
rules and predators plunder society by 
merely shuffling papers. Less than 1% of 
the population now owns about 50% of 
the wealth, and receives 70% of the 
income! The Lost Science of Money 
shows how a false concept of money 
allowed it to happen, and tells how to 
reverse it. 

SECRET POWER 
UNMASKED 

Here are the keys that unlock the 
mystery of the money power - the hidden 
force secretly exercised by those holding 
society's monetary reins. 

The Lost Science of Money exposes 
the mythology created to protect those 
who are embezzling from society, under 
cover of a deceptive ideology of money. 

This group has immorally used eco- 
nomic theory as a tool of class war for the 
past three hundred years, while scream- 
ing accusations of "class warfare" against 
those who question their power! 

The author provides the weapons 
needed to protect self, family, nation, and 
humanity from the predations of this 
gang, that has shrouded itself under cover 
of "econo-speak" for so long. 

These ideas are presented accurately, 
but in "down-to-earth" language, without 
the confusing economic jargon that Has 
usually served to obfuscate the subject. 
Historical cases with 119 illustrations help 
to convey the author's unique message. 



A GENERATION 
MISLED 

The gates protecting America have 
been left undefended. September 11th 
demonstrated only one aspect of this 
problem. Our people have been under 
monetary attack from within and from 
abroad for most of our history, and the 
physical, financial and psychological 
damage has far exceeded the terrible loss- 
es at New York's Twin Towers. 

An entire generation has been led 
astray into market worship and other 
forms of religious fundamentalism. A 
dysfunctional media focuses on the elec- 
tions and sex habits of politicians while 
the real outcomes in society are deter- 
mined behind the scenes by the structure 
of the nation's money system. 

This problem goes much deeper than 
accounting and stock fraud, and even 
beyond the graduate schools of business 
that inculcate such criminal behavior. The 
deeper causes lie hidden in the structural- 
ly corrupt core of our banking system and 
our schools of economics. It arises from 
the falsehoods they have spread on the 
nature of money, allowing their patrons to 
control the money power, and in turn, to 
dominate our society. 

Those who really want to get to the 
bottom of the problem will find this 
book's message timely and valuable. 






THE 

LOST SCIENCE 
OF MONEY 



The Mythology Of Money - 
The Story Of Power 



Stephen A. Zarlenga 



American Monetary Institute 

Box 601, Valatie, NY 12184 

http://www.monetary.org 
ami@taconic.net 



Library Of Congress Control Number: 2001088376 
ISBN: 1-930748-03-5 

Zarlenga, Stephen A. 

THE LOST SCIENCE OF MONEY 

The Mythology Of Money - The Story Of Power 

Stephen A. Zarlenga 

Includes Chapter Endnotes, Bibliography, 
and Index. 

Copyright 2002 by the 

American Monetary Institute Charitable Trust 
First English printing in September 2002 
Printed in the United States of America. 



All rights are reserved. No portion of this book may 
be stored or reproduced, by any process or technique, 
without the express written consent of the publisher. 



Although written in English, this book was first 
published in German in mid- 1999 by Conzett Verlag 
of Zurich, Switzerland, under the title: 
^^Der Mythos vom Geld - die Geschichte der MacM^ 
(The Mythology of Money - The Story of Power) 
This first English edition is expanded and updated. 



American Monetary Institute 

P.O. Box 601 

Valatie, NY 12184 

ami@taconic.net 

http ://www. monetary, org 



To my mother Lauretta and my father Dino 



vi The Lost Science Of Money 




The Tower of Hercules at La Corunha, Spain, said to be the oldest continuously operated 
lighthouse site in the Western World. Here in June 1 984, the author learned of the 
death of his father, and promised to carry out a task in his memory. This book fulfills a 
part of that pledge. 




A view from the author's Battery Park 
apartment in lower Manhattan in May 
1 99 1 , just after the first Gulf War. 
Looking past the south tower of the old 
World Trade Center, up Liberty Street, 
the road was like a dark canyon, but at 
its end was the New York Federal 
Reserve Bank, basking in sunlight. Its 
structure dominated and confined the 
subdued roadway below. At that 
moment the author realized it was time 
to concentrate on this work. 



Contents 



Dedication 



Preface x 

Acknowledgments xi 

Introduction 1 

1. The Origins Of Money Systems 9 

2. Rome's Bronze Nomisma: 

Better Than Gold 39 

3. A Monetary View Of Rome's Decline 83 

4. Re-Instituting Money In The West 109 

5. The Crusades End Byzantium's 

Monetary Dominance 131 

6. Renaissance Struggles For 

Monetary Supremacy 151 

7. The Scholastics - 

The Moral Economists 177 

8. 1500 - History's Pivot: Power Shifts 

From The Mediterranean To The North Sea 207 



viii 1 ne L.OSI bcience UJ Money 



9. The Rise Of Capitalism In Amsterdam 227 

10. Transferring Capitalism To England 251 

1 1 . Hatching The Bank Of England 277 

12. Political Economists; Priesthood Of 

The Bankers Theology 305 

13. The Usury Debate Continues 335 

14. U.S. Colonial Moneys 361 

15. The Money Power vs. The Constitution 389 

16. U.S. Govemment Money 

Compared To Private Money 433 

17. The Greenbacks: 

Real American Money 453 

18. 19th Century Monetary Crimes - 

The Great Deflations 479 

19. Triumph Of The Bankers - 

Establishment Of The Federal Reserve 507 

20. The Federal Reserve System 

Wrecks America 535 



IX 



21. Germany's 1923 Hyper-Inflation 

Under a Private Central Bank 575 

22. International Monetary Organizations 603 

23. The European Monetary Union 629 

24. Proposals For U.S. Monetary Reform 651 
List of Illustrations 688 
Selected Bibliography 691 
Index 708 



X The Lost Science Of Money 



PREFACE 



The final words of our last chapter were written on Labor Day at 
Oak Street Beach in Chicago. A week later on September 11, 2001, New 
York's World Trade Center was attacked. 

That event, the world has been repeatedly told, "changed every- 
thing." To the author, however, rather than a changed world, it seemed 
more a case of our gaining a greater realization or understanding of what 
the world had already been allowed to become. 

But since the book hadn't gone to the printer, as the illustrations 
were still being assembled, there was the opportunity to see if indeed 
changes were called for. We added a few notations in the Introduction, 
also in the section on Islamic monetary traditions, and the new European 
Monetary System. Several paragraphs were added to the reform propos- 
als in Chapter 24, to analyze some of the dangers the attacks pose for 
temporary interference with our Bill of Rights and our constitutional 
Republic, and thus the prospects for monetary reform. 

The events of September 1 1 th, and the potential for farther attack, 
do not alter the book's thesis, or monetary concepts and history present- 
ed. Rather, those horrendous, inhuman acts and threats show all the more 
strongly the pressing need for security, which can only be brought about 
through a strong long term commitment to justice. And that includes - 
even depends on - a just monetary system. 

The matters we discuss in this book have direct impact not only on 
our daily lives, but on the direction our civilization will take. That can 
still be in our hands, if we choose to make it so. 



XI 



ACKNOWLEDGMENTS 

Two persons deserve special recognition for helping to bring this 
book into existence. The support and encouragement of Dr. Lucienne De 
Wulf, through years of research and early drafts, made it possible for the 
concepts to be developed and written. Also, Dr. Jurg Conzett's support 
of research of the American Monetary Institute, and his decision to pub- 
lish this work in German, provided the essential push needed to get the 
book completed. 

Special thanks go posthumously to Robert de Fremery who always 
stood ready to give the benefit of his decades of valuable study and 
experience on the reform of our nation's money system. 

And I salute Alexander Del Mar, the great monetary historian, 
whose writings of a century ago provided the necessary keys to redis- 
covering the lost science of money. 

Wendy Fuller of the Chatham Public Library greatly facilitated the 
on-going research, tirelessly obtaining the hundreds of works requested 
through the Interlibrary loan system. This small Carnegie Endowment 
library could borrow books from many of our nation's best university 
libraries, and on the rare occasions when they didn't have a particular 
monetary source book. West Point Military Academy usually did. 

The facilities of the N.Y, Research Library were essential to the 
commencement of this work; the Palatine Public Library helped sub- 
stantially at its conclusion. 

Sincere thanks go to those who assisted in the production, printing, 
and funding of this book: Frank Shannon, Victoria Besterman, Lee 
Ponsler, David Gineris, Ayana Brooks, Bobby Fisher, Ron Heyman, 
Sonia Ortiz, Maria Myers, Jim Catalano, Lewis Coleman, George and 
Irene Romero, Ole and Suzy Mackeprang, Willie Kanies, Louisa Maudr, 
Lynn Yost, Marc Van Riper, David Hershey, Rob Willems, James Fencil, 
and especially Takis Kalogroulis. 

I'm indebted to David E. Cassel for his valuable editing assistance; 
to Jesse DeGroodt, Dr Lucienne De Wulf and Dr Lewis Coleman for 
reading the manuscript and making helpful suggestions; to Cybele De 
Wulf for photo selections; and to Dolores Grande for the index. Of 
course this work's presentation, including any errors and omissions, are 
my responsibility alone. 
Stephen A. Zarlenga 
Kinderhook, New York 
March 21, 2002 



xii The Lost Science Of Money 



"Universal historians will be valuable only 
when they can reply to history's essential question; 

What is power?" 

"History can only be explained by introducing 
a power which they apparently do not recognize." 

Leon Tolstoy, War and Peace 



INTRODUCTION 



MONETARY AWARENESS 
IS THE CRUCIAL MISSING ELEMENT 



To begin understanding how the world's power structure operates as 
we enter the third millennium, citizens must first become aware of cer- 
tain monetary concepts. 

On a national level the behavior of the stock exchanges in the late 
1990's appeared to break free of any connection to the real world. As if 
by magic, wealth and power were quickly and effortlessly amassed and 
concentrated, as never before, into the hands of a small part of the pop- 
ulace. At the same time growing numbers of normal working people 
were placed under greater financial stress, falling behind into debt or 
even bankruptcy. Such developments threaten American Democracy, 
especially when they occur together. 

While financial promoters hailed the coming of a "new era" of ever 
rising share prices, it was clear to many that something was seriously 
wrong - but exactly what was it? When the markets began to falter, peo- 
ple were vaguely aware of a monetary cause of the predicament and just 
before September 11, 2001, the Federal Reserve Chairman's image alter- 
nated between "hero" and "rogue," depending on who was asked. 

While September 11th was a tragedy for most good people around 
the world, it has also provided some with a convenient "cover story" to 
take the blame for the results of flawed systems and policies - dilemmas 
that were fast coming home to roost anyway. 

However, these problems go beyond the shortcomings of any indi- 
vidual and are rooted in the false structure of our monetary system. To 
understand how America is currently mis-ruled requires that we under- 
stand the real monetary causes of the difficulties. To solve them will 
require that our money system be based in law - not in lies. 



2 The Lost Science Of Money 



On a global level, organizations such as the International Monetary 
Fund, the World Bank, and the World Trade Organization, long assumed 
to be serving the financial needs of mankind, have come under attack by 
youthful demonstrators, charging that their real intent in promoting 
"globalization" is not to serve but rather to ensnare humanity in a type of 
perpetual bondage. Statistics do support their charges. 

Yet on both the national and international levels, meaningful criticism 
should also present a better alternative to the present monetary regime and 
its tendency to consider mankind as so many economic units. To formu- 
late such alternatives we must first examine the nature of money. 

MONEY IMPACTS EVERYTHING 

The effects of a flawed money system are not limited to economics, 
and while monetary knowledge can lead to wiser decisions on personal 
investments, society's preoccupation with speculation is itself a symp- 
tom of the wider disease. 

Since the monetary question directly impacts all areas of human 
activity, in order to make real progress towards justice, a clean environ- 
ment, a sound energy policy, decent health care and retirement systems, 
and greater real freedom of choice and action for the citizenry requires 
the monetary problem to be addressed and solved first. 

International developments also demand such knowledge. In Europe 
the formation of the European Community is among the most important 
geopolitical events of recent centuries, on the magnitude of the original 
formation of the United States, and is bound to affect world events far 
into the future. 

A major part of this new political reality is the merging of Europe's 
national moneys into a single currency - the Euro. Although the media 
concentrates on the political and economic aspects of the European 
Union, history indicates that the monetary area will be of paramount 
importance in shaping the European Community. 

PRIMARY IMPORTANCE OF THE MONETARY POWER 

The secular power in society is exercised largely through its mone- 
tary and banking system. While much attention is focused on the elec- 
tions of presidents, prime ministers, and representatives, the real out- 
comes in society, such as whether there will be general economic justice, 
or whether some groups will get special privileges, are often quietly 
determined by the structure of the society's money system. 

These monetary decisions will most directly impact citizens' daily 



1 INTRODUCTION 3 



lives, more so than the activities of Congress, the President or the 
Judiciary. Monetary decisions determine how^ money is made available 
in the community and who gets it - whether it finances industry and 
more environmentally friendly production and much needed infi:*astruc- 
ture, or goes into speculation and other forms of corruption. It will 
determine levels of employment and unemployment, incomes, interest 
rates, and much more. It will shape health care and education and even 
the arts. It will continue to determine whether the home population is 
protected from biological and other attack, or is left to fend for itself. 

Depending on their structure and implementation, monetary institu- 
tions are in a position to do great good or harm to the society they are 
supposed to serve. Citizen awareness can affect how these institutions 
are formed and run. Since beginnings often determine the long range 
functioning of institutions, it would be best if such knowledge can devel- 
op and influence the European Monetary Union in its formative stages. 

But even if this awareness requires more time to mature, it can still 
be applied later, should the money system falter and require structural 
reform. That's the monetary task we face in America today. 

OUR THESIS 

The thesis of this book is that a main arena of human struggle is over 
the monetary control of societies and that this control has been and is 
now exercised through obscure theories about the nature of money. If it 
had to be summarized in one sentence, it is that by misdefining the 
nature of money, special interests have often been able to assume the 
control of society's monetary system, and in turn, the society itself 
Describing how this has been done historically will make these concepts 
clear and vital, and hopefully sweep aside the mystification in which 
money has been purposely shrouded. Guidelines for monetary reform 
are then presented, to end the private control of monetary systems and 
instead assert the public societal role to control money under the rule of 
law, rather than the whims of men. 

THE MAIN OBSTACLE - THE MYSTIFICATION OF MONEY 

A major problem to understanding money is that, because so much 
power is exercised through monetary systems, those who control the 
systems and receive special benefits have protected those privileges by 
shrouding the monetary concepts in secrecy and confusion. 

These smoke screens, applied for centuries, have actually caused 
many of the principles of the science of money to be lost, as various arts 



4 The Lost Science Of Money 



and sciences disappeared during the dark ages. These principles are lost 
to the general public, and to many in the economics profession, some of 
whom have further confused the monetary picture. 

MONETARY HISTORY HAS BEEN IGNORED 

The mystification process succeeded largely because of the domi- 
nant method economists have used to study money. From Adam Smith 
to the Austrian School, they've placed too much emphasis on theoretical 
reasoning - logical argumentation - rather than on direct observation. 
Furthermore, they've tried to exclude considerations of morality from 
their theorizing. About a century ago, the great monetary historian 
Alexander Del Mar wrote: 

"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 prin- 
ciples of this imaginary knowledge."^ 

That this tendency has continued up to the present is confirmed by 
the self-admitted methods of Ludwig Von Mises, who in The Theory of 
Money and Credit, one of the bibles of the Austrian School of 
Economics, wrote: 

"The proof of a theory is in its reasoning."^ 

That might make sense if he were discussing mathematics, but not 
economics. Von Mises actually attacked historical research: 

"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 pubhcation of old documents." 

Knapp had launched his own verbal salvo in the introduction to his 
State Theory of Money: 

"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." (p. vii) 

The combatants in this struggle don't stop at sarcasm, but sometimes 
get quite harsh toward those who disagree with their monetary views. 
Von Mises slurred Benjamin Franklin, the great scientist, inventor, and 
American revolutionary leader. With Franklin silent in his grave. Von 
Mises accused him of making positive observations about paper money, 
because he was a printer and would benefit financially. 

The reason that knowledge of monetary history is so crucial is 
because it can take generations for the effects of a money system to 
become apparent. Therefore the available empirical data - the facts - on 
money exist mainly in history. By ignoring, even ridiculing, historical 



1 INTRODUCTION 5 



Study, such economists unwittingly cast aside whatever limited use his- 
tory can make of the Scientific Method, and the benefits to be derived 
from it. It's no accident that most of the "guiding lights" of such schools 
were formed intellectually before the power and benefits of that method 
were truly recognized. 

MONETARY HISTORY HAS BEEN CENSORED 

Another obstacle is that monetary history has been heavily censored. 
For example, in the Athenian Constitution that comes down to us, we 
can find how the garbage was collected, but search in vain to learn how 
the Athens state coinage system operated. "The Minister of finance is 

veiled in obscurity," wrote Andreades,^ Solon's great monetary reforms 
can barely be pieced together from his poetry and, 'There is no record 

of (his) introduction of coinage into Attica," wrote Freeman.^ Rome 
offers a picture that is by no means complete and unambiguous. "Rome 

has no literary remains," wrote Ridgeway.^ 

MONETARY DATA IS OFTEN MISINTERPRETED 

Still another obstacle is that 19th and 20th century historians tend to 
apply Adam Smith's monetary concepts in their work and mis-evaluate 
the monetary data that has survived. Economists often do worse. When 
the recorded facts conflict with their favorite theories, it's not unusual 
for them to dispute the facts with a statement such as: "we know that 
can't be right." They reverse the proper relation between facts and theo- 
ry. Sound thinking requires theories to conform to the observed facts. 

OUR PURPOSE 

The purpose of this book is to contribute some insights from history 
to clarify these monetary ideas in order to provide a sound conceptual 
basis for crucially needed monetary reform in the United States, and also 
to maximize the potential for a good outcome of the new European 
Monetary Union. Our method is to focus on important principles of the 
science of money, derived directly from historical examples of monetary 
systems and thought. We then incorporate them into proposals for 
American monetary reform, and briefly evaluate the new Euro system's 
stmcture. 

Since my personal re-discovery of these concepts resulted from 
chronologically examining monetary events in history, I'll recount them 
to you in the same way, ordered in time. My task is to make sure you will 
find that monetary history is never dry or dull, for it is the story of 
power! 



6 The Lost Science Of Money 



A special notice and caution to readers and researchers: 
As we trace the monetary thread through several thousand years, a 
brief presentation such as this shouldn't lay claim to finality in all 
respects. The study of monetary history, theory and reform continues to 
advance, making this a work in progress. 



NovgoP»(f^ 




Ufiderlying map courtesy of the Map Collection, University of Chicago 
Regenstein Library and Mr. Christopher Winters. Cities and names added 
by AMI. While these towas did not all exist at the same time, most are 
referred to in our early chapters and we locate them on one map for our 
readers convenience. © 2002 AMI 




1 INTRODUCTION 7 



An objective of the American Monetary Institute is to expand sev- 
eral chapters into book length works. A book of this size and scope, 
however, is needed today to help integrate these broad monetary con- 
cepts into the citizenship's political views and into the work of other 
social sciences. 




8 The Lost Science Of Money 



Subsequent editions will have additions, clarifications and correc- 
tions called for by continuing study and communication with other 
researchers, who are encouraged to bring their relevant work to our 
attention and be acknowledged for so doing. 

READING THIS BOOK 

The author recommends reading one or two chapters a day. Though 
the material is presented chronologically and is most comprehensively 
understood when read that way, some readers may also use it in 
reference style and focus on sections of immediate concern. If a partic- 
ular historical period is not your cup of tea, then consider moving to the 
next Chapter until you find information that draws you more deeply into 
the book's themes. It is there; and once that happens, the reader may see 
the significance of other periods in a more meaningful light. 

Two cautions are made: Our concentration on the primacy of mone- 
tary matters does not deny the sometimes primary importance of other 
factors, occasionally even of chance, in determining the unfolding 
course of human events. That said, we do point out that this book looks 
at history in a new way - it is a monetary interpretation of iiistory. 

Second, when the monetary views of historical figures are attacked 
or praised, it does not mean that their other views or life work is there- 
by denounced or embraced. When we do find such monetary "heroes" 
and "villains," it will be made explicit. 

Finally, please bear in mind as you read this work that we are a char- 
itable organization, dependent on public support for our continuing 
research. This will continue if enough of those who find these views valu- 
able will take the next step and join the American Monetary Institute as 
Supporting Members. Details may be found at the end of the book. 

(Introduction end notes are with the Notes to Chapter I. Please note that 
wherever quotations are emphasized in bold or italic type, the emphasis has been 
added.) 



CHAPTER 1 



THE ORIGINS OF MONEY 

SYSTEMS 



9i 



". . .Money exists not by nature but by law. 

Aristotle (Ethics, 1133) 



The battle for control over society's monetary power is fought at 
many levels, even in theories about monetary beginnings. The origins of 
money are shrouded in uncertainty. Very few facts are yet available, 
making most ideas about it a kind of educated guesswork. But the dom- 
inant theory reflects the desires of present day forces intent on keeping 
government from exercising an appropriate monetary role. Three gener- 
al types of origins have been put forward - a sacred or religious origin, 
a social or state origin, and a commercial or trading origin. This last the- 
ory, being preferred by economists, has received the most promotion. 

THE "TRADING" ORIGIN OF MONEY 

According to this scenario, in a pre-monetary society goods were 
traded directly or bartered for each other. The need for money arose 
because the goods to be traded weren't always equal in value, and 
because traders might not desire the particular goods offered at a partic- 
ular time. In theory some commodity, because of appropriate qualities, 
such as high unit value, portability, divisibility and consistent composi- 
tion, became more and more used as an intermediate item in barter - as 
a medium of exchange. 

In theory, this usage increased its liquidity, which further improved 
its use in exchanges, so that it eventually became agreed upon as a 
money commodity. Traders were willing to accept it because they knew 
that they could more easily exchange it for desired items at a later time. 
The money commodity's physical qualities also made it a convenient 



10 The Lost Science Of Money 



measure of value, or accounting, and at least a temporary store of value.^ 
Some economic schools promote this origin theory because they 
want to keep the government out of monetary decisions in the present 
day, and therefore prefer a market-oriented origin theory, which does not 
depend on a governmental or other institutional decision. But they may 
be allowing the present day obsession against government to color their 
judgment. 

For while the trading origin sounds quite plausible, it does not stand 
up to close scrutiny. The scenario already presupposes high levels of 
development - the recognition of private property as separate from trib- 
al property; the recognition of contracts - the trades; and presumably 
some system to enforce them. Could these conditions exist unless some 
other form of money were already in use? 

Considering that cattle was a favorite early money, the trading scenario 
loses a good part of its credibility. It's really an attempt to show the origin 
of metallic money, not of money. But the crucial question of what gave 

metallic money its value is not answered, or seriously considered.^ 

THE "SOCIAL" ORIGIN OF MONEY 

The anthropologist A. H. Quiggin presents a very different origin 
picture in her book, A Survey of Primitive Money. While anthropology 
by itself cannot establish an historical process or event, it may give use- 
ful clues. Her idea was that by studying money in primitive societies still 
in existence, some clues on monetary origins might be found: 

'The evidence suggests that barter... 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)." And, 

The objects that are the nearest approach to money substitutes may 



tf 



^This "origin" was originally put forward (in "modem'' times) by John Law 
in his book Money and Trade Considered. Law was blamed by many for 
bringing down France's money system in the early 1720s. Carl Menger, the 
founder of the Austrian School of Economics, resurrected Law's theory in his 
Principles of Economics (1871). Despite its name, this school is primarily 
active in the U.S. Their ideas have been taken up in late 20th century America 
by the Libertarian political party. For example, Robert Nozick used Menger's 
"Origin" to launch (p. 18) his book, Anarchy State and Utopia, one of the 
Libertarians' bibles. 



1 ORIGINS OF MONEY SYSTEMS 11 



be seen to have acquired their functions by their use, not in barter but in 

social ceremony."^ Her anthropological studies showed that standard- 
ized payments for brides and blood money for injuries and deaths were 
the main uses for money. 

THE RELIGIOUS ORIGIN OF MONEY 

Paul Einzig and Bernard Laum have presented the case for a sacred 
origin of money. In Primitive Money, Einzig notes that: 

"Primitive man was guided largely by non-economic considerations. 
Among these the belief and fear of supernatural forces... This factor 
plays an overwhelmingly important part in the life of primitive man and 
for this reason religious requirements are apt to play a more important 
part in the origin of money than economic requirements. The evolution 
of the economic system in general was itself largely influenced by the 

religious factor."^ 

Laum's historical research is presented in his book Heileges Geld. 
Money's origin, he found, lay in religious cult, as the prescribed sacri- 
fice to the gods, and payment to the priests. As such it became a "crea- 
ture of legal rights," the oldest such right being the "rite" of the gods. 
The norm for religious payment then spread to private payments. Laum 
concluded that the Greek city state came to hold the monetary power 

"because it held the cult."^ 

So the original development of money may have arisen out of the need 
for uniform sacrifiices or dues to the gods, and fees to the priests. The com- 
bination of fear of the supernatural, plus respect for the priests' ability to tell 
the right time to plant crops, and their primitive knowledge of both medi- 
cines and poisons, would have been a very powerful influence. 

CATTLE WAS AN EARLY MONETARY STANDARD 

Developments in archeology, numismatics, and other disciplines 
will continue to give us a clearer picture of monetary beginnings. 
Although we may never know exactly how the earliest money arose, it 
may have been fi-om a combination of the factors described, which were 
in any case likely to be closely linked. We do know that one of the most 
widely used moneys and measuring units for large transactions was the 
ox or cow. From Ireland to the Mediterranean to Africa, cattle were used 
as a means of exchange, and especially as a measure of value. 
Furthermore, they appear to have had a fairly stable value, with three to 
four cows exchangeable for one slave woman in ancient Ireland and in 

Homeric Greece. ^^ 



12 The Lost Science Of Money 



CIVILIZATION'S TIMELINE 

Let us place money into the context of the major milestones of 
human progress: 

Starting around 30,000 BC, a progressive refinement is apparent in 
human existence until social and economic forms of agriculture 
appeared around 10,000 to 7,500 BC. This took the form of hoe garden- 
ing done mainly by women. Because hoe gardening was more produc- 
tive than hunter gathering, scholars have theorized it led to matriarchal 
societies dominated by women. 

From around 6,000 BC the horse was tamed, and sheep, goats and 
cattle were domesticated, so that by 5,000 BC there existed a mixed cul- 
ture based on animal breeding and hoe gardening. The great plow revo- 
lution, starting about 4,500 BC, was complete by 4,000 BC. The remark- 
able plow enabled the first city civilizations to quickly arise. 

THE ANCIENT ORIENTAL MONEY SYSTEM 

The form of social and economic organization taken by these early 
urban communities in Egypt, Assyria, and Sumeria is known as the 
Ancient Oriental System. It embraced the "concept of a living King as 
the divine representative and savior of the whole human race, who had 
the power to organize the welfare of the whole world." A powerful Royal 
household, in conjunction with a temple hierarchy, held centralized con- 
trol over the economy. Compulsory labor service could be required for 
public works, and the Pharaohs instructed what and how much to plant, 

and how much of the harvest would go into storage. ^^ 

Agricultural commodities by weight served as the primitive money 
system in the ancient Oriental societies. They also used metallic com- 
modities, particularly silver by weight. Thus when money is discussed in 
the Old Testament, as metal by weight, it has less to do with divine inspi- 
ration than with the lingering influence of the primitive Oriental systems 
in place prior to 600 BC, when the Bible began to be orally created. 

It is presumed that in earlier agrarian societies, loans had been made 
in seed grains, animals and tools to farmers. Since one grain of seed 
could generate a plant with 100 new grain seeds, after the harvest farm- 
ers could repay the grain with interest in grain. Similarly, when animals 
were loaned they could be repaid with interest in the form of sharing in 
any new animals bom. 

The Sumerians used the same word - mas - for both calves and interest. 
A similar Egyptian word meant to give birth. What was loaned thus had 



1 ORIGINS OF MONEY SYSTEMS 13 



the power of generation, and interest was a sharing of the result. 

According to Heichelheim, this was changed in old Babylonia: 'The 
main ancient oriental innovation in this field was that inorganic materi- 
als were treated as if they were living organisms with the means of 

reproduction," he wrote. ^^ 

THE USURY ERROR 

It would have been a major conceptual error to allow usury to be 
charged on agricultural loans denominated in metals, especially if the 
interest and principal was to be paid in metal. For one thing, metals are 
"barren" - they have no powers of generation. Any interest paid in them 
must originate from some other source or process, outside of the bor- 
rower's understanding or control. Money and power would concentrate 
in the hands of lenders. 

This structural flaw was alleviated by the central authority. Although 
the Royal household was the largest lender and charger of interest, it 
took decisive action to minimize the harmful effects of usury, by peri- 
odically declaring agricultural debt forgiveness. It also set official prices 
for valuing various farm commodities, in effect monetizing them. 

"In the earliest city cultures every form of exchangeable goods could 
be used as money," Heichelheim reports, estimating that 12 to 20 such 
commodities were monetized. He thought that price lists such as 
Hammurabi's price tables (and those of Sumer, and of Mesopotamia) 
have been misinterpreted as price controls when they are really official 

exchange rates of various commodities when used as money. ^^ 

This meant that borrowers, depending on their harvest to repay 
loans, wouldn't be harmed by seasonal market supply and demand 
forces, as the increased supply from their harvest tended to push market 
prices lower Thus the effect of monetizing these commodities was to set 
minimum floor prices for them, when used to repay loans. 

But the usury error struck in Europe, and by the time the practice of 
usury reached Greece and Rome, over a millennia later, repayment and 
interest of metallic loans for agriculture were being demanded in metal 
or coinage. This practice was not sustainable, and as we shall see, it led 
to horrendous societal problems wherever it occurred. 

DID "MONEY" ARISE IN ORDER TO STANDARDIZE DEBT? 

Recent research on the monetary activities of Mesopotamian temples, 
by Michael Hudson's scholar's conference, shows a connection between 
debt and the origin of money. ^^ There we first encounter interest-bearing 



14 The Lost Science Of Money 



debt. Credits extended by temples were denominated in barley and in sil- 
ver. Hudson postulates that temples developed money as an accounting 
tool - a means of denominating debt - in order to standardize their 

accounting procedures,^ 

IRON DISRUPTED THE ANCIENT ORIENT 

The foundations of the oriental societies were shaken by the intro- 
duction of iron around 1400 BC, which spurred great migrations into 
areas like Greece, Italy, and other parts of Europe by nations which took 
advantage of the new weapons to conquer more conservative peoples. 
Iron created as much turmoil as the great plow revolution because pre- 
viously unworkable heavy soils in southern Russia, Italy, Spain and 
Germany could be worked with the iron plow. 

Even after the oriental societies faltered, the temple cults, which had 
performed monetary functions for the Royal households, continued to 
exert an oriental influence on money systems. They developed earliest 
and most powerfully in Egypt and Mesopotamia: 

"By the second millennium BC the temples of Re, Ptah and Ammon 
had become organizations of great power... In the Harris Papyrus of the 
11th century BC we find recorded the tremendous holdings of the God 
Ammon, his [headquarters] centered at Thebes [the fabulous 
Luxor/Kamak complex]. This household controlled great stretches of 
arable land and the slaves to work them. It owned towns on the Red Sea 
coast and in Syria. It owned ships for carrying its surplus beyond the 
bounds of Egypt. Industrially it was a great and self sufficient unit," 

^ Hudson notes that temples had made advances of food - two meals a day - to 
sustain farmers working on temple lands. This probably gave rise to the region's 
sexagesimal (based on 60) counting system for weight and monetary units: 
"Inasmuch as food rations were to be consumed twice daily, the temples and 
palaces divided their monthly measures into 60 units [their calendar used a 30 
day month]. This made the typical small meal measure - one 'quart'- l/60th of 
the monthly 'bushel' allocation"... This sexagesimal system... spread through- 
out the Sumerian economy, including the units of weight used to measure sil- 
ver. The large institutions based their accounting systems on the equivalency of 
one mina of silver per 'bushel' of barley. Dividing the mina weight into 60 
shekels of silver made each shekel equal in value to a 'quart' of barley. This par- 
ity enabled the institutions to keep their accounts in a bi-monetary stan- 
dard... calculated readily and equally in terms of silver and barley."^"* 

For accounting convenience 3rd millennium BC interest on silver loans 
was calculated at l/60th per month - one shekel per mina, which was 12/60th 
per year, or 20%. 



1 ORIGINS OF MONEY SYSTEMS 15 



wrote William Linn Westerman.^^ 

Egyptian temples made check- like transfers of grain between depos- 
itors, even to branches at different cities, supporting the view that grains 
had been monetized. 

Egypt had the largest and most densely settled population of the 
Mediterranean world, making it more of a nation, or at least a river state, 
than a city state. It had one of the most advanced priestly classes, which 
Herodotus tells us traced their chronology back 17,000 years, yet no coin 
of the Pharaohs has ever been found. However, glass and porcelain 
scarabs have been found in large numbers, prompting speculation by 
some monetary historians that at one point the scarabs constituted a 



money system. 



16 



ABSTRACT "TOOL" MONEY IN THE WEST 

The newer Western societies organized themselves on a more indi- 
vidualistic basis than in the ancient Orient, functioning with less central 
control. Money took on more abstract forms in the West; advanced forms 
that were outside of the monetary traditions of the Orient. 

In 1991, high in the Austrian-Italian Otztaler Alps, the 5,000-year- 
old body of a man was discovered on a melting glacier. Among his pos- 
sessions was a well-preserved copper ax which mystified experts who 
determined it couldn't have been very useful as an ax. 



la. Tool moneys probably 
began as usable utensils and 
evolved into a primitive token 
money, as representations of 
tools. These crude abstract 
moneys developed both to the 
east and west of the ancient 
oriental cultures (Babylon), 
where they were unknown. 
This fish hook money is from 
Larins, Persian Gulf. As it 
becomes used as money, 1 
evolves into 2; and 3 evolves 
into 4. 





1. 



2. 




. 



til 

3. 



16 The Lost Science Of Money 



It may have been an early form of what is called "tool money." This 
money form, in the shape of tools (hooks, knives, axes, shovels), pre- 
sumably started out as real, usable tools, valued for their function. Then 
over time, as their use as money became dominant and their "tool" use 
became unimportant to their value, their form as money became their 
defining characteristic while their possible use as tools became almost 
non-existent. 

Such tool money developed both to the east of the ancient Orient, in 
China, and to the west in Europe. We concentrate here on the Western 
developments. Heichelheim writes: 

"Cattle... was an often chosen primitive measure... but more often a 
fiarther form of money was popular among the Greeks and the other new 
racial groups. . .especially for the more local trade. . .this was 'metal tool 
money.' These were not carefully weighed and examined, but were 
accepted... if they had the traditional form and appearance.,. ,"^^ 

Tool moneys were used over substantial geographical areas, within the 
tribes or nations that recognized and sanctioned particular forms of them. 
The oriental system of metal by weight was still potentially relevant for 
more distant trading. 

MONETARY ROLE OF THE GREEK TEMPLES 

Sir William Ridgeway, in The Origin of Metallic Weights and 
Standards, described the Greek temple activities of a later period: 

"The Temple shrines of Delphi and Olympia, Delos and Dodora 
were centres not merely of religious cult but likewise of trade and com- 
merce.. .merchants and traders taking advantage of the assembling 
together of large bodies of worshippers from various quarters to... 
'tempt' them with their wares. The Temple authorities encouraged trade 
in every way; they constructed sacred roads, which gave facility for trav- 
eling 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."^^ 
This development may have been an isolated event. Qujggin, 

describing how real metal hooks, knives and spits used as money 

became transformed into token representations of such objects, writes: 
"To us looking backward, the next step appears obvious and 

inevitable, but it was only in rare spots, possibly only in one rare spot, 



1 ORIGINS OF MONEY SYSTEMS 17 



that the final stage was reached, and definite weights of metal, rounded, 
flattened and stamped, can be called coins."^^ 

THE MONETIZATION OF GOLD 

Between roughly 1500 BC and 1000 BC the money systems of 
Mediterranean societies began shifting slowly but directly, from a cattle 
standard to a gold by weight standard. It appears that the temples played 
an important role in monetizing gold. 

In the ancient world, gold would have been the easiest metal for 
primitive man to obtain. It occurs geologically in ore bearing reefs asso- 
ciated with volcanic activity, and was present in most mountain ranges. 
Though the metal would have been hard to extract from rock, weather 
and erosion broke the rock down, separating the pure gold particles and 
depositing them in river beds in easy to mine "placer" deposits. Since 
gold doesn't decompose or oxidize, the deposits would have remained 
intact until men found them. Copper would have been the second easi- 
est to obtain, and silver would have required the most developed tech- 
nology of the three. 

We can surmise that at a very early date gold, which was used orna- 
mentally, was accepted as donations or fees to the temples, along with 
agricultural and animal produce. Unlike the organic donations which had 
to be consumed, the gold would remain. Over time, a large proportion of 
the existing gold would accumulate in the temples. 

This is supported by the vast amounts of gold and silver that 
Alexander the Great later seized in 330 BC from the eastern temples at 
Susa, Ecbatana and Persepolis, estimated at 740,000 talents, including 

2,200 metric tons of silver valued at 180,000 talents.^*^ 

The size of these hoards indicates that they were not accumulated for 
economic reasons, for they could never actually be used in commerce. 
"Supply and demand had little to do with the production of precious 
metals," concluded Francis Amassa Walker, once head of the US Bureau 

of Statistics.-^^ 

Augustus Boeckh, in The Public Economy of Athens^ concurs 
that "There was an abundance of the precious metals, although not, 
to be sure, in circulation... A great quantity was kept from circula- 
tion (by Darius)... In Greece, also great quantities were kept from 

circulation, and accumulated in temples."^^ 



18 The Lost Science Of Money 



The abundance of gold held by the temples after centuries of suc- 
cessful accumulation would be one reason to monetize it. Just so much 
artwork and ornamentation would be tasteful. Just so much might be 
traded for intended use as jewelry, or introduced into circulation as 
loans. Only so much was prudent to hold in reserve. Thus the commod- 
ity value of gold would tend to drop over the centuries as more gold was 
accumulated, unless the Temple used its deep pockets to hold it back off 
the market in useless storage. 

THE "CONSECflATION" PROCESS REMOVED GOLD 

One visible aspect of the withdrawal of gold appears in a long-stand- 
ing tradition: a "consecration" process in which gold or coinage was 
buried in the foundations of Temples or similarly walled up. 
Archeologists have unearthed substantial numbers of coins buried with 




lb. Aristotle and his student Alexander the Great Alexander's quest was 
not for treasure! The metal he seized was put into circulation as coinage 
to support his military and cultural operations. This caused the prices of 
practically all commodities to double over a fifty year period, according 

to price lists from the temple records of Delos.^^ 



1 ORIGINS OF MONEY SYSTEMS 19 



the foundation stones of the great Temple of Diana at Ephesus. Roman 
historian Livy described another case: 

"Gains Sulpicus. . .collected from the spoils a considerable weight of 
gold, which he walled up with hewn stone in the Capitol, and so dedi- 
cated," during the war with the Gauls in 359-358 BC.^'* 

Tacitus describes the survival of this custom 400 years later, on the 
restoration of the Capitol by Vespasian around 69 AD: 

"Contributions of gold and silver and virgin ores never smelted in 

the furnace... were showered on the foundations."^^ 

Monetizing the gold - declaring a fixed amount of it equal to one 
cow - would alleviate the problems of gold abundance. Further, a more 
abstract form of money is created, able to symbolize or represent sub- 
stantial wealth with a small physical quantity, whereas the value of a 
cow would tend to be limited by what people saw as the value of its 
products. 

The Temples held such a large portion of the existing gold that they 
could control it. It would be difficult for others to obtain substantial 
amounts except through them, and they could create a value for it by 
accepting it for their "services," which people considered a necessary part 
of life. Even, for example, to pay for "temple prostitutes" as described by 

Herodotus and Strabo, for later periods.^^ Our studies suggest this "con- 
trol" factor as potentially more important than intrinsic value considera- 
tions; that money is more a question of power than economics. 

WHAT DETERMINED GOLD'S VALUE? 

The answer to this important question must recognize that gold was 
probably not so scarce in the temples. The value of a cow or ox is fairly 
concrete. It can give milk and fertilizer, or pull a plow, create more cows, 
or ultimately give its hide and meat. What, however, determines the value 
of apiece of gold or silver which is not even consumed? 

Who decided what the ratio of cattle to gold would be, and how did 
they come to this great financial decision of antiquity? Economists from 
Adam Smith down have assumed that the value of gold is determined by 
supply and demand, cost of production, and market factors. However, as 
we shall leam from the way other similar values were determined, such 
as the gold/silver ratio, it is likely that this decision was much more arbi- 
trarily made. 

It's more likely that this policy decision was designed to improve the 
power of the "Who" part of the question - the priesthoods of the great 



20 The Lost Science Of Money 



Temple cults. So the real point is not what, but WHO gave gold its value. 

How it was done was to translate gold's value into the unit societies 
were used to - the cow. In Homeric times, just before the widespread 
introduction of coinage, the relation between gold bullion and cattle was 
1 cow or ox equaled 130 grains weight of gold, which was known as a 
"talanton." Each grain corresponded to the weight of a grain of wheat. 
One hundred thirty grains is just under 1/4 ounce, or about 8 grams. 

"The gold unit represented originally simply the conventional 
value of the cow as the immemorial unit of barter,'^ wrote Ridgeway, 
who conjectured that 130-135 grains was selected partly because it 

fits conveniently into the palm of the hand.^^ 

This institutionally determined convention or standard appears to 
have been adopted around the Mediterranean for several centuries. 
Simple gold rings found in Egyptian ruins weigh 128 grains. Similar 
gold jewelry found by SchHemann at Mycennae, Agamemnon's home, 
weighed 130-135 grains, as well as rings found on the island of Aegina^ 
just 20 miles off Athens. 

GOLD WAS AN EARLY "FIAT" MONEY 

The 130 grain convention would, over time, confer or identify a 
monetary value on that amount of gold as equal to a cow. Supply and 
demand would not be a major factor, as the temples had ample supply, 
the power to hold it off the market, and the power to create a demand for 
gold by requiring it for their services. 

This would make gold one of the early fiat moneys used by man. A 
fiat money is one whose value is decreed and fostered by institutional 
decision. The process of monetization confers value on the symbol to be 
used as money. 

Gold also has a commodity value. With gold these two attributes 
have always been confused, so that people speak of gold money as being 
"intrinsically" valuable. They are referring to its commodity value. But 
in reality this commodity value is only responsible for a part of the price of 
gold. Perhaps a larger portion of its value is due to its designation as money, 
because this assignment caused vast amounts of gold to be held off the mar- 
ket in various treasuries. 

THE EAST INFLUENCED MONETARILY 

Over time, with the powerful sponsorship of the Eastern temples, 
gold would supplant cattle, and come to be valued as money. The 
spreading of this concept westward is one of the earliest examples of a 
theme that has recurred throughout Western history: monetary control 



1 ORIGINS OF MONEY SYSTEMS 21 



usually went from east to west. 

In this process the "East" made "gifts" of gold to the West. King 
Gyges (682-52 BC) and King Croesseus (561-46 BC) of Lydia in Asia 
Minor made large gifts of gold and silver to the temples at Delphi and 
Branchidae, the two main temples of Apollo, Such donations did not 
always benefit the donor - the Oracle's bad advice to Croesseus led to his 
rapid downfall at the hands of the Persians. But using the East's money 
generally brought Eastern influence. 

Thus when the Cretans went to Delphi in 480 BC to ask the Oracle if 
they should join the other Greeks in the war against Persia, the Oracle of 
Delphi ridiculed them and kept them out of the fight. 

"The Persians invaded Greece, the famous batdes of Thermopylae, 
Artemisium and Salamis were fought (and) the Delphic Priesthood came 
near to collaborating with Persia," wrote Seltman, "For 50 years after the 
Persians were defeated, Olympia rather than Delphi became the spiritu- 
al center of Greece. "^^ 

The Priests of Branchidae openly sided with the Persians and had to 
emigrate east after their defeat. About 150 years later Alexander The 
Great, in his conquests, came across the descendants of that Priesthood 
living in a community just south of Samarkand. Alexander uncharacter- 
istically killed them all and had the town razed to the ground, giving 
humanity a lesson in the importance of not forgetting this type of treason. 

Then there is Herodotus' report of Alcmeonides, the Athenian who 
the ruler Croesseus permitted to take as much gold out of his treasury as 
he could carry, multiplied by two! This treasure established generations 
of the Alcmeonid family, which became a center of power and contro- 
versy in Athens. Were these cases of international generosity or of trans- 
planting - insinuating - a gold money system and ultimately Eastern 
influence into the West? 

GREEK CITY STATES INTRODUCE COINAGE 

Exactly when coinage was introduced is still debated. China's oldest 
document, the Shu Ching, says coinage originated there in 1766 BC, 
while the Shu Chi (written from 163 to 85 BC) dates the origin from the 
Emperors Shun and Yu, in the 3rd millennium BC. 

In the West, Plutarch's Parallel Lives says Theseus issued coins in 
Athens with the "impression of an ox," about 1260 BC. Pausanius dis- 
cusses coins in Troezen (near Epidavrous) around 1200 BC with a trident 
and the head of Athena (Book II, Argolics, Chapter 30). However, numis- 
matists and economic historians prefer to place the date at about 700 BC, 



22 The Lost Science Of Money 



and the place at Lydia on the western coast of present day Turkey. They 
consider that as the time true coinage became systematized, and we have 
specimens of some of the coins. 

THE COINAGE "COMPROMISE" 

Coinage of gold and silver has been viewed as a compromise 
between the more abstract fiat tool money forms of the West and the 
more materialistic metal by weight system of the Orient. For while the 
money was made of gold, it was valued by tale - the official form and 

stamp.^^ 

Lydia was organized largely on the Oriental model but fresher Greek 
societies were on its western border. Coinage didn't start in the Lydian 
capital of Sardes, but on the border in the Greek cities of Ephesus and 

Miletus, which were allies or subjects of the Lydian Kings,-^^ 

THE MIDAS WARNING 

Interestingly the legend of King Midas arises from this region - a 
story powerful enough to reach us through nearly 30 centuries of most- 
ly pro-gold indoctrination. Ovid related the story in his Metamorphoses'. 

Midas was granted one wish by the Gods, who wanted to know what 
mankind considered the greatest gift. A kind man who ruled his kingdom 
fairly, Midas was not one to think very deeply about what he said, and 
though already wealthy, he quickly wished that whatever he touch be 
turned to gold. He soon realized his error when he could not eat the food 
he touched and his beloved daughter Marygold turned into a statue when 
she hugged him. The God Dionysius took pity on Midas and allowed the 
waters of the Pactolus river to cleanse him of the power and reverse its 
effect, restoring his daughter. 

We usually view the Midas legend as a warning against greed, but 
perhaps it is more of a monetary warning against idolizing gold. The 
story remains a powerful block to making a fetish out of gold. It helps 
us to keep from confusing the value and proper role money has in human 
life with a cold, dead commodity for its own sake. 

EACH CITY USED ITS OWN COINAGE 

Coins at first were very crude and stamped on only one side. From 
the reign of Amyntas II (393-369 BC) of Macedon, Alexander's grand- 
father, coins were well stamped on both sides. Perhaps the word "mint" 
evolved from his name. The word "coin" is modem, from the French 
"coigne" - a comer or wedge, derived from the Latin cuneus, a term for 
the wedge or punch used in striking coins. 



1 ORIGINS OF MONEY SYSTEMS 23 



Coinage was introduced under the political authority of each city 
state, in response to their needs. It brought obvious advantages over 
bullion as the uniformity of the coins material was assured by the minting 
authority and need not be tested. Perhaps more importantly, it was a way 
to limit or define the total amount of money legally authorized to circu- 
late in a particular jurisdiction. 

"Coinage in the Greek cities was the monopoly of the state, and the 
use of the local coins was compulsory in the territory of a given city," 
wrote Rostovtzef Coins from other cities could circulate only if counter 

stamped by the city authorities.^^ 

Hasebroek's Trade and Politics in Ancient Greece gives an example 
of restrictive coinage legislation: 

"The Athenian decree of 420 BC (S.I.G., 87) lays down that 'if any 
man in the allied cities coin silver money, or does not employ the 
Athenian coins, weights and measures, but foreign coins, weights and 
measures, he shall be punished according to the earlier decree of 




Ic. Though there are earlier references to coins in ancient texts, systemat- 
ic coinage is considered to have first developed in the Greek city states 
of Ephesus and Miletus on the border of Lydia (now western 

Turkey) in the 7th century BC. 



24 The Lost Science Of Money 




2.312 grams; 9.8 mm. 




Id. Early Lydian coins were often made of electrum, a mixture of gold 
and silver occuring in nature, and were stamped or marked on one side, 
with the punch mark on the obverse. Above is an Ionian gold "hecte" (1/6 
stater) of the late 7th century BC. 
7e, Below, is a sixth century BC gold stater of King Croseus, at 135 grains. 




8.038 grams; 19 mm 
(135 grains) 




Clearchus. Private persons shall... hand over their foreign money; the 
city shall change it... they shall pay it into the mint where the superin- 
tendent shall receive it',.,."-^^ 

Prof. Kolin Kraay, in Greek Coins confirms that: 

"The issuer in all identifiable cases proves to be the supreme politi- 
cal power in each city or state; there is no evidence in the Greek world 

for the private issue of coins by bankers or merchants,"-^^ 

We are used to thinking of bullion and coinage as convertible to one 
another, but that wasn't widely practiced in Europe until the 16th and 17th 
century free coinage laws of Holland, Spain and England. 

Bernard Laum said the monetary power was in city hands because 
they also held the cults. But while each city revered a particular god 
above the others, the cults operated internationally, often as bankers. 

GREEK TEMPLES AS BANKS 

Temple treasuries often functioned like banks, loaning not only their 
own money, but money that had been entrusted to them for safekeeping. 
Prof. Andreas Andreades wrote: 



1 ORIGINS OF MONEY SYSTEMS 25 



"The only 'great capitalists' were the Panhellenic shrines at Delphi 
and Olympia, earlier Ephesus and at Athens. The shrines were extreme- 
ly cautious on loans. Of 13 state debts [owed] to Delos, Island of Apollo, 
two were paid in full; two never paid the interest; eight paid irregular- 
ly.. .The state loans were short term - five years or less,., As security the 
Temples received concessions on public revenues and mortgages of 

fields and buildings. ..the interest rate was 10-12% per year."^"^ 

The revenue of local temples came from the same sources as the city 
revenues - dues, fees and fines. They received 1/10 of many fines col- 
lected by the city, and 1/10 of war spoils. But the largest source of tem- 
ple revenues was from donations and death bequests. Internationally 
important temples such as on Delos island, a stone's throw from 
Mykonos, and at Delphi, about 100 mountainous miles west of Athens, 

received many of their bequests from foreign lands.^^ 

The city states respected the property of foreign temples and rarely 
seized it, but the international temples' interests did not always coincide 
with those of the cities' which were more tied to one piece of real estate 
and one citizenry. 

"TREASURERS OF THE GODS" 

Battles had occurred between cities and temples, as when the 
Athenians invaded and took possession of Delos island and its Temple 
of Apollo, in about 425 BC. The oracle of Apollo's Temple at Delphi 
commanded them to leave, and they did. The temples could form power- 
ful alliances as in about 418 BC, when during the Peloponesian War the 
treasurers of 10 major temples were united into one board, calling itself 

the "Treasurers of The Gods."^^ Such combinations had the potential to 
create monetary problems for a city by moving gold or silver into or out 
of it. With their own local coinages, the city states could "disenfran- 
chise" foreign coin and metal hoards and exercise more control over 
their destiny. 

State coinage then may have resulted from a power shift, a "devel- 
opment," or an understanding between the city states and the interna- 
tional temple cults - between government and religion. The city coinages 
were still closely associated with the temples, with the city's mint 
annexed to a particular temple. In Athens, the mint was at the sanctuary 

of Stephanephore (Theseus), ^^ 

THE 130 GRAIN STANDARD "RELIGIOUSLY" CONTINUED 
The Greek city states continued the old 130 grain standard in the 



26 The Lost Science Of Money 



new coinage. Ridgeway's examination of gold coins of several cities 
from 600 to 200 BC shows that they were minted within five grains of 

Homer's Talanton - the ancient ox/cow unit:^^ 

Indian Dharana (600-500 BC) 130 grains 

Croesseus Gold Stater (c. 550 BC) 128 grains 

Darius' Persian Daric (c. 505 BC) 130 grains 

Rhodos gold coin (early 4th cent, BC) 130-35 grains 

Thasos gold coin (c. 400 BC) 135 grains 

Athens gold coin (c. 400 BC) 130 grains 

Philip IF s Macedonian Stater (c. 345 BC) ... 130 grains 

Bactrian Stater 130-32 grains 

Babylonian and Phoenician coinage 260 grains 

(a double 130, possibly indicating that a yoke 

[pair] of oxen was more normal in this advanced area). 

Some of these coins conform to the Attic standard, probably insti- 
tuted by Solon about 594 BC; or to the earlier 130 grain Euobic standard, 
on which the Attic was based. This was nearly identical to the Persian 

standard, which the Persians probably adopted for use with the Greeks.^^ 
Later, many coins were minted at about 145 grains. 

By focusing on the similarities of these coinages, Ridgeway's Origin 
of Metallic Weights and Standards^ published in 1892, presented a pow- 
erful argument for an institutional origin of money. Carl Menger, 
founder of the Austrian School, felt compelled in 1892 to issue The 
Origin of Money, an excerpt from a previous book, which argued from 
theory for a market or trading origin of money. Menger's ''Origin'' is 
promoted by the Austrian School with an aura of being historically 
based, but this author has demonstrated that Menger's view is entirely 
theoretical, by pointing out that Menger's historical references all argue 

180 degrees against Menger's own thesis,"^^ 

PROBLEMS WITH "INTRINSICALLY" VALUABLE COINAGE 

Coinage was a big improvement over the ancient Oriental money 
systems because it was legally valued and its quantity could be con- 
trolled by law. But it was still vulnerable to manipulation and other 
defects mainly because its metallic content could interfere with its mon- 
etary function, since the metal was considered valuable apart from the 
coin form. 

Del Mar wrote, "It was only necessary for an enemy to quietly with- 
draw some of the precious metals in circulation, or as quietly to add 



1 ORIGINS OF MONEY SYSTEMS 27 




}g. Gold Daric of Darius; 
7.74 grams; 130 grains; 
522-486 BC. 



If Cyzicus; Priest sacrificing a ram, 

16.05 grams; 269 grains electrum, 

(double 135);c.475BC. 




Ik Thasos; satyr 
abducting a nymph; 
8.73 grams silver; 146 
grains; 411-390 BC. 





li. Macedonian gold 
Stater of Philip II; 
8.56 grams; 21 mm; 
143 grains; 
382-336 BC. 





Prof. Ridgeway identified a 130 grain weight consistency in several old 
Mediterranean coinages, such as the Croesseus Stater, fig, le, p. 24; the 
Cyzicus coin^ fig. //above; the Persian Daric, y?^. Ig above; and others. 
This argued for an institutional rather than a market origin of money. 



28 The Lost Science Of Money 



illegally fabricated, albeit full weighted coins, to the circulation, in order 
to produce a prolonged financial crisis, and alter the entire relations of 
society." Changes in mining, or even in the fashion of wearing gold jew- 
elry, could affect the money system.^^ 

Greek silver coins would later turn up in India in substantial num- 
bers as silver objects of trade. But this did not help the functioning of the 
money system in Greece. 

HIGH POWERED COINAGE WAS LIMITED IN USE 

The early Lydian coins were made of electrum - a mixture of gold 
and silver. These and the gold coins from various cities could be used for 
major transactions but were not suitable for everyday trading, even less 
than trying to do all local shopping with only hundred dollar bills would 
be today. 

Silver coinage, which could be used in everyday commerce, finally 
developed further to the west on the island of Aegina around 630 BC, 
Corinth in 610 BC, and in Athens about 600-590 BC, in Solon's era. 
Peisistratos later unified the issue of Athen's coinage, minting the 
famous silver "Owls," which remained popular from the 6th to the 2nd 
centuries BC. 

SMALLER SILVER COINAGE REVOLUTIONIZES GREEK SOCIETY 

The Greek silver coinage was issued in large pieces close in value to 
the small electrum coins, but also in coins at 1/10 the value of the elec- 
trum coins, and less. These readily available small coins became 




In the mid-500s BC 
Pesistratos began mint- 
ing the Athenian Owl 
coinages in many small 
denominations. This 4 
drachma piece dates 
from 449 - 404 BC, is 
24.7 mm across, and 
weighs 17.1 grams. 



1 ORIGINS OF MONEY SYSTEMS 29 



indispensable for everyday use, replacing the old tool money, making 
it possible for small measures of agricultural and industrial products to 
be easily bought and sold. Small farmers and craftsmen became able to 
establish savings, broadening the economic infrastructure, which was an 
essential precondition for Periclean democracy: 

"...and here only in three mints (Aegina, Corinth and Athens)... an 
economic development led to a higher pattern (or revolution) before the 
late 6th century BC than anybody had yet thought of. ..the traditional 
power of the aristocracy gave way before tyrants and finally before 
democracy... merchants here attained social distinction for the first time 

in world history," wrote Heichelheim."^^ 

BUT THE USURY PROBLEM REQUIRED SOLON'S REFORMS 

The negative effects of the ancient oriental practice of treating inan- 
imate and organic materials identically for purposes of agricultural usury 
had been alleviated by monetizing other commodities. But in the Greek 
city states, prices and required acceptance of agricultural commodities 
were not monetized by central authority but valued by more individual- 
istically determined markets. Charging usury on coinage led to severe 
problems which required Solon's monetary interventions. 

In Athens about 600 BC the class of free small farmers was vanish- 
ing, with land becoming concentrated into the hands of the Oligarchy. In 
the words of Professor Calhoun: 

"Before the introduction of coined money the peasant farmer 
borrowed commodities and repaid the loan in kind, and... was prob- 
ably 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 nec- 
essary supplies at a time when money was cheap and commodities 
dear. When a year of plenty came and he undertook to repay the 

loan (in money), commodities were cheap and money was dear.'"*^ 

J.G. Milne's highlighted another obstacle to the farmer: Through an 
obscure process, the lenders controlled the exchange rates of silver 
between Athens and the Island of Aegina, at that time the source of 
Athens's silver coinage: 

"He got from the lenders coins which were valued at the Aeginaten 
rates, and then had to pay the interest on the loan by means of his pro- 
duce which he sold at the Attic (Athenian) rates: with the result that the 

rate of interest was in effect increased by something like 50%.'"^'* 



30 The Lost Science Of Money 



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. The rest of 
this momentous reform has been "censored out of the records" and is 
found mainly in Solon's poems."^"^ He canceled such existing debt con- 
tracts, and gave back land that 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 by Solon."^^ 

In addition, Solon used the ancient oriental method to alleviate the 
usury error: he declared a definite minimum monetary equivalent for 

each agricultural product, in effect setting floor prices for them.'*^ 

Solon was probably the first to introduce locally minted silver 
coinage into Attica, switching from the "Aeginatic" to the lighter weight 
"Attic standard" where a 130 grain silver coin was valued at 2 drachmas. 




Ik. Solon decreed 
several monetary 
reforms for 
Athens' debt crisis, 
including monetiz- 
ing agricultural 
commodities to off- 
set usury's destruc- 
tive effect on farm- 
ers. These laws 
were later studied 
and partly copied 
at Rome. 



1 ORIGINS OF MONEY SYSTEMS 31 



This reduced coinage weights by about 3/7 ths, ending the lender's for- 
eign exchange advantage. According to Aristotle, Solon increased the 
amount of coinage in circulation, obtaining the silver from Corinth. He 
favored smaller farmers and helped them by setting a maximum size on 
land holdings. But he did not go so far as to redistribute the land in equal 
portions, as Lycurgus had done in Sparta. Thus this important early 
reform was unpopular with everyone, farmer and moneylender alike. 

Solon's reforms were essentially protectionist. He forbade export of 
all agricultural produce except olive oil, which brought lower food 
prices and better quality foods to the home market. Foreigners had to pay 
special fees to sell in Athenian markets. Solon's laws against female lux- 
uries reduced imports of such items into Attica.^^ 

In his travels as a youth, Solon had functioned as a merchant and 
understood commerce. Yet he blamed Athens' problems mainly on the 
rich Oligarchy. He became known as one of the seven great wise men, 
and presented the Oracle of Delphi with the "wisdom gift" which 
became inscribed on the temple entrance there: "Know thyself and 
"Nothing too much." 

Solon wrote that he based his laws on an overriding Greek principle 
- his ideal "eunomia." Aristotle would later call it "mesotes" and the 
Roman Cicero called it "aurea mediocritas" - the perfect balance 
between conflicting extremes. Solon's intent was to establish eunomia 
by law - a perfect balance in state and society. 

Solon's reforms achieved such international recognition that 145 
years later, in 454 BC, a small settlement on the western Italian 
Peninsula sent a delegation to Athens to study his legislation, parts of 
which became incorporated into their legal code when they returned 
home to Rome. 

EVIDENCES OF A LOST SCIENCE OF MONEY: 
LYCURGUS' NOMISMA SYSTEM IN SPARTA 

Coinage was one way to limit the negative commodity aspects of the 
ancient eastem money systems. But an even more fundamental approach 
in harmony with the nature of money is described in Plutarch's Parallel 
Lives. As a member of the Delphic priesthood, Plutarch recounts (in 100 
AD) the first documented attempt to establish a "nomisma" money system, 

by Lycurgus of Sparta in the 8th century BC.^^ 

According to Plutarch, Lycurgus had traveled widely, visiting India, 
Spain and Libya. On the island of Crete, once home of the dominant 
Minoan culture, he met the lyric poet Thales "the lawgiver." They 



32 The Lost Science Of Money 



returned to Sparta and Lycurgus, who was of Sparta's royal house, took 
control of the government, and established a constitution based on the 
Cretan model, which became one of the longest lasting in the Greek 
world. He instituted land reforms and other measures aimed at cleaning 
up a corrupted society, "whose whole wealth had centered upon a very 
few," wrote Plutarch. 

Lycurgus launched his reform by posting 29 armed volunteers to 
spread fear in the marketplace of Sparta. An important part of these 
reforms was a new monetary system. He made it illegal to use gold or 
silver as money and legislated that a number of elongated iron discs 
would be used for money instead. 

Furthermore the iron discs were purposely made useless for any- 
thing else by dipping them in vinegar while they were hot to make them 
brittle. The "intrinsic" value of the pieces was purposely destroyed. Each 
iron disc weighed just over Vi kilo, and was called a Pelanor, because 
they were shaped like small cakes (pelanoi). 

The Pelanors were a form of "Nomisma," as described below by 
Aristotle. According to Heichelheim some have "been excavated from 

the deeper levels in Sparta."^^ However, to date, the American Monetary 
Institute has been unable to locate any specimens at the British Museum, 
the Athenian Numismatic Museum, or the Smithsonian Institute, 

Lycurgus' money system appears to have been based on law, where 
the value of the money was probably determined in part by decree, and 
mainly by the legal number of units in circulation, not by the commodi- 
ty of which it was made. Alexander Del Mar, one of the few researchers 
to have understood it, calls it a "nummulary" system. Today we can call 
it a fiat or token money system, where the total amount of money 
allowed into circulation is regulated by law and where the value of these 
symbols serving as money depends on limiting the number in circulation. 

In Sparta's case it seems to have worked well for about VA centuries, 
during which time she became a premier Hellenic power. It was aban- 
doned about 415 BC, after Sparta embarked on campaigns of foreign 
conquest and captured large amounts of gold and silver. The historian 
Polybius recounted: 

"But once they began to undertake naval expeditions outside the 
Peloponese it was evident that neither their iron currency nor the 
exchange of their crops for commodities which they lacked... would 

suffice for their needs. "^^ 

Such a fiat system, based on law, was normally limited to domestic 



1 ORIGINS OF MONEY SYSTEMS 33 



boundaries, much as the older tool money had its social boundaries. 

The misnamed "Classical" economists - the Adam Smith school - 
with their primitive materialistic view of money as gold and silver com- 
modities by weight, have had great difficulty understanding the Spartan 
money. 

For example, the numismatist Fran9ois Lenormant doubted the 
Pelanor tradition: "But we can't believe he dipped it in vinegar to render 
it useless, because only by its value as merchandise, given and accepted 
for its metallic value could the bars circulate and serve as exchanges.. .its 

only originality is in its use of iron in place of other metals. "^^ 

Most 20th century economists are unaware of Sparta's fiat money 
system. A few, unable to envision the abstract nature of money or per- 
haps concemed that this money represents a threat to their monetary the- 
ories, claimed that the vinegar treatment would have been ineffective in 
ruining the iron. 

Over time token money systems like Sparta's were adopted by some 
other city states and records of some of them have survived: 

In Ionian Clazomenae (20 miles west of present day Izmir, Turkey), 
thin iron discs were stamped and used for money as evidence of debt, 
like a note promising convertibility into money. This would not have 
been a true nomisma system, since Clazomenae's iron discs were evi- 
dence of debt, and thus were not money itself. 

In Byzantium, before it became Constantinople, iron money was in 
use in 431-404 BC, where it was called "Nummus Spartaeus," and 
"sidareos." It consisted of discs of thin sheet iron impressed on one side. 
Del Mar called it "the best substitute for paper notes which the condition 
of the mechanic arts permitted at that time." But in this case, Boeckh 
insists that the iron was not an evidence of debt, it was the money itself. 

In other words they were an advanced money system.^^ 

Athens also briefly used fiat systems, first in a war emergency situa- 
tion in 407 BC, when she melted the partly copper statue of Victory for 
coinage. Then again in 390-350 BC, "Timotheus issued a numerary 
money composed of copper discs highly overvalued. These were receiv- 
able for all payments, the public dues included, and were nominally 

redeemable, at an indefinite time, in silver," wrote Del Mar.^^ 

Syracuse, on the island of Sicily, used a token money of tin at four 
or five times its commodity value, and of silver at about double its 
commodity value under the rule of Dionysus from 387 BC. A few years 
later, the ruler of Syracuse hosted a visit by Plato, raising the possibility 



34 The Lost Science Of Money 



of his involvement in the monetary system. 

Most importantly, Rome also adopted a nomisma system using cop- 
per, and making little compromise with the East. In Chapter 2 we show 
why an awareness of this concept of money is necessary to understand 
Roman history. Subsequent chapters will demonstrate its continuing 
importance in the development of the Western world. 

ARISTOTLE EXPLAINS "NOMISMA" 

Money in Greece came to be known by the word NOMISMA 
because it attained its authority by law (or binding custom) which in 
Greek is "nomos." Aristotle (384-322 BC) gave the culmination of 
Greek thought and experimentation on money: 

"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." 
And he continues: 

"Now the same thing happens to money itself as to goods - it is not 
always worth the same; yet it tends to be steadier... money then acting as 
a measure makes goods commensurate and equates them... There must 
then be a unit, and that fixed by agreement" (Ethics 1133). 

There is much more here than meets the eye; Aristotle's brief 
description has never been bettered, and is seldom equaled. 

Aristotle's strong condemnations of usury also take on greater rele- 
vance in light of our analysis of the ancient Oriental system's usury 
error, for Aristotle's main argument against usury was that money is ster- 
ile and not capable of "breeding" interest.^^ In Chapter 7 we discuss this 
in greater detail, and why some twentieth century economists are agree- 
ing with Aristotle's conclusions on usury. 

Significantly, the term "nomisma" is seldom found in early Greek 
texts. LesHe Kurke, of U.C. Berkeley, finds it in Herodotus in the 400s 
BC, but not again until Aristotle, over a hundred years later. In harmony 
with our view that monetary history has been censored, Kurke believes 
the concept of nomisma was suppressed in an ongoing struggle between 
oligarchic forces arrayed against public money, and the developing, 
more democratic, public sphere of the Greek Polls, which introduced 

and controlled this new payment mechanism.^^ 

As we shall see, this "private vs. public" battle for the control of the 



1 ORIGINS OF MONEY SYSTEMS 35 



money power is a recurring theme throughout history, and continues to 
this day. 

PLATO AND ARISTOTLE AGREE ON MONEY 

Although the Platonic method was overly theoretical, without as 
much regard for history and the facts as the Aristotelian school demand- 
ed, Plato (427-347 BC) and Aristotle closely agreed on the nature of 
money. 

In the Socratic dialogues on wealth (Eryxias)^^, Plato tells us 'The 
Carthaginians used money of this sort: something which is the size of a 
4 drachmae coin is tied up in a small piece of leather. What it is no one 
knows but the makers. A seal is next set upon the leather [by the state] 

which then passes into circulation."^^ 

Plato mentions that in Ethiopia engraved stones were employed as 
money, and confirms that Sparta's system consisted of iron money which 
"had been rendered useless," referring to it as based on the "Doric" system. 

Plato favored a fiat money system for his "Republic." His strict mone- 
tary regulations show an awareness of serious problems with the "precious 
metal" moneys. In Plato's money system: 

"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.. .."^^ And: 

"Then they will need a market place, and a money-token for pur- 
poses of exchange."^^ 

Both Aristotle and Plato noted the paramount monetary principle - 
that the nature of money is a fiat of the law, an invention or creation of 
mankind and society, rather than a commodity. 

This important principle, part of a lost science of money, must now 
be releamed in the 2 1st Century - the 3rd Millennium - in order for 
humanity to achieve the monetary reform necessary to move back from 
the brink of nuclear disaster, to move away from a fijture dominated by 
fraud and ugliness, and to progress toward a world of justice and beauty. 



36 The Lost Science Of Money 



Notes to Introduction and Chapter 1 

Full publication details are found in the Selected Bibliography. 

^ Alexander Del Mar, History of Monetary Systems, (1895; reprint, New York: 
A.M. Kelley, 1978),p.lOL 

^ Ludwig Von Mises, Theory of Money & Credit, 1912, (Capetown, Jonathan 
Cape, 1934), pp. 82, 478, and Ch. 7, sect. 1. 

^ Andreas Andreades, History of Greek Public Finance, (Cambridge: Caroll 
Brown, 1933), pp. 172-192. 

"^ Kathleen Freeman, Work and Life of Solon, (Univ. of Wales Press, 1926), p. 
92 & see Ch. 4. 

^ William Ridge way. Origin of Metallic Weights and Standards, (Cambridge 
Univ. Press, 1892), p. 234. 

^ See Stephen Zarlenga, A Refutation of Menger s Theory of the Origin of 
Money, (Valatie, NY: American Monetary Institute, 1993). 

^ A.H. Quiggin, Survey of Primitive Money, (London: Metheun, 1949), pp. 321-22. 

^ Paul Einzig, Primitive Money, (New York: Pergamon, 1966), p. 371. 

^ Bernard Laum, Heileges Geld, (Tubingen: Mohr, 1924), section transl. by 
Stephanie Watjen, pp. 124-5, 158-161. 

^ ^ Patrick Nolan, A Monetary History of Ireland, vol. 1 , (London: King & Son, 1 926). 

^^ Fritz Heichelheim, An Ancient Economic History, transl. Joyce Stevens, 

(Leiden: 1938, A.W. Sijthoffs Uitgeversmaatschappij, 1958), p. 105. 

^^ Heichelheim, cited above, p. 104. 

^^ Heichelheim, cited above, pp. Ill, 184. 

^^ International Scholars Conference on Ancient Near Eastern Economics, 
Michael Hudson & Baruch Levine editors, Privatization in the Ancient Near 
East and Classical World, 2 vol., (Cambridge: Harvard University, Peabody 
Museum of Archeology and Ethnology, 1994, 1996, Bulletins # 5 & 7) Citation 
is from Michael Hudson and Marc Van De Mierop, editors. Debt and Economic 
Renewal in the Ancient Near East, (Bethesda, MD: CDL Press, 2002), pp. 7-58. 

^^ William Linn Westerman, Warehouse and Trapezite Banking in Antiquity, 
Journal of Economic & Business History, (vol. 3, 1930-31), p. 34. 

^^ For example, Lenormant and Humphreys, cited here and in Chapter 2. 

^^ Heichelheim, cited above, pp. 212-15. 

^^ Ridgeway, cited above, p. 215. 

^^ Quiggin, cited above, p. 322. 

^^ C.C. Patterson, Silver Stocks & Losses in Ancient & Medieval Times, 
Economic History Review, (vol. 25 May 1972), pp. 205-33. 

^^ FrancisAmassaWalker,/jf7fem^^?o«a/5/>we?a//;^m, (New York: Holt, 1896), pp. 1-27. 

^^ Augustus Boeckh, The Public Economy of the Athenians, (Boston: Little 
Brown, 1857), pp. 12-13. 



1 ORIGINS OF MONEY SYSTEMS 37 



^^ Tenney Frank, Economic History of Rome, (1920, New York:, Cooper Square 
Pub, 1942), pp. 74-5. 

^"^ Livy, Book 7, (Loeb Classical Library, Harvard Univ. Press), p. 407. 

^^ Tacitus, The Histories, Book 4, section 53. 

26 Herodotus, (1.196-199); Strabo, (16.1.20/745). For an in depth discussion of 

temple prostitution see Kurke, (endnote 56 below), pp. 228-232. 

^^ Ridgeway, cited above, pp.155-56. 

2^ Charles Seltman, Greek Coins, (London: Metheun, 1965), p. 101. 

2^ Heichelheim, cited above, on the coinage compromise. 

^^ Heichelheim, cited above, on Miletus and Ephesus starting coinage. 

^^ M. Rostovtzef, Social and Economic History of the Hellenistic World, (Oxford: 
Clarendon Press, 1967), p. 385. 

^2 Johannes Hasebroek, Trade and Politics in Ancient Greece, (New York: Biblo 
&Tannen, 1965), p. 158. 

^^ Kolin Kraay, Greek Coins, (New York: Harry Abrams, 1966), p. 12. 

^^ Andreades, cited above, pp. 172-92. 

^^ Andreades, cited above, pp. 190-92. 

^^ Thucydides, History of the Peloponesian War, L8.iii.l04 v. 1, as quoted by 
Boeckh in The Political Economy of Athens, cited above. 

^^ Francois Lenormant, Monnaes De Antiquita, vol. 3, (Paris: Bibliothetic 
Nationale, Rallen Et Fevardent, 1878). 

^^ Ridgeway, cited above. Chapter 6, Chapter 7, pp. 132, 153-54. For the Indian 
Dharana see Del Mar, Hist. Monetary Systems, cited above, p. 5. 

^^ Freeman, cited above, Chapter 4. For a detailed discussion of ancient stan- 
dards, see also Charles Seltman, cited above. 

^^ Stephen Zarlenga, Refutation ofMenger, cited above. 

^^ Alexander Del Mar, History of Money in Ancient Countries, (London: Bell, 
1885), p. 235. 

^^ Heichelheim, cited above, p. 218. 

^^ George M. Calhoun, The Business Life of Ancient Athens, (Univ. of Chicago 
Press, 1926), p. 22. 

^ J. G. Milne: The Monetary Reform of Solon, Journal of Hellenic Studies, 
(1930), pp. 179-85. 

^^ Freeman, cited above, pp. 60-92. 

^^ Heichelheim, cited above, p. 253. (Pollux VIII 130) is his source for this. 

'*^ Heichelheim, cited above, on monetizing products and landholding limits, pp. 282-6. 

"^^ Heichelheim, cited above, pp. 282-7. Quoting Pollux VIII, 130, p. 253. 

^^ Plutarch's Lives, section comparing Lycurgus to his "parallel" Numa. 

^^ Heichelheim, cited above, p. 214. 



38 The Lost Science Of Money 



^^ Polybius, Book vi, extract iii, Chapter I, as quoted by Del Mar, Money In 
Ancient Countries, cited above, p. 340. 

^^ Lenormant, cited above, vol. 1, pp. 218-20. 

^^ Del Mar, Money in Ancient Countries, cited above, p. 166. See also Boeckh, 
cited above, pp. 768-9, 

^"^ Del Mar, Money in Ancient Countries, cited above, p. 171. See also Boeckh, 
cited above, p. 762-69. 

^^ Aristotle, Politics, 1258b. 

^^ Leslie Kurke, Coins, Bodies, Games, and Gold, Princeton University Press, 

1999, p. 68nl0. See her introduction and conclusion. 

^^ Dialogues of Plato, trans. B. Jowett, (New York: Random House, 1937), 
Socrates dialogue Eryxias, p. 814, Steph. # 392-400. The Phoenicians used a 
similar leather pouch system. 

^^ Consistent with our theme on the muddling of monetary history, when our 
German language editor checked footnotes he couldn't fmd the Eryxias dia- 
logue of Plato. Checking at the SUNY Albany Library, I found that of four 
"complete" works of Plato, only two contained the Eryxias, The Library's 
"complete" works of Plato in German lacked Eryxias, Efforts to eliminate this 
rare ancient commentary on money as a work of Plato at this late date seem 
strange and inappropriate especially since the monetary commentary in Eryxias 
is fully consistent with Plato's monetary proposals in The Laws. 

^^ Dialogues of Plato, cited above, section on The Laws, Steph. #742. 

^^ Plato's Republic, trans. Jowett, (New York: Black, Classics Club, 1942), 
p. 270(371B). 



39 



CHAPTER 2 



ROME ' S BRONZE NOMISM A 
- BETTER THAN GOLD 



"The Roman adoption of a national and exclusive 
copper coinage produced a revolution in the monetary 

system of all civilized nations." 

Humphreys, Ancient Coins and Medals 



In the war for control of society's money power several battles have 
been fought in the arena of Roman numismatics. Today the field is lit- 
tered with the debris of these skirmishes. Indeed, some principles 
involved in the early Roman monetary system still threaten the validity 
of the political economist's "modem" economic and monetary doctrines. 
That's why I have stated the conclusion they were avoiding, as the title 
of this chapter. 

When Lycurgus established iron nomisma in Sparta, to the west at 
Rome a new culture was beginning which would come to dominate the 
Mediterranean world, both militarily and monetarily. The Greeks were 
artistic; the Romans practical Greece faced east; Rome faced west. So 
go the stereotypes of these cultures. But one thing that truly set Rome 
apart was her money system. 

The growth of Rome from a small village in the 8th century BC, to 
creator and ruler of the WORLD ORDER, resulted in large part from her 
bronze money. In the east, gold and silver were being coined as money, 
but Rome chose to base her money on bronze - a mixture of mainly cop- 
per, some tin and a bit of lead. And not just commodity bronze, but mon- 
etized pieces called the Nummi, or Nomisma. 



40 The Lost Science Of Money 



I ask the general reader not to be discouraged by the level of detail 
this chapter presents, for it is needed to clarify some questions in the 
field, for specialists. Also, describing nearly two thousand years of 
Rome's monetary history in just a few pages requires that we apologize 
in advance to numismatists and historians alike. Most generalities will 
have exceptions. Thousands of years have elapsed; documents and other 
evidences are rare. If it is brought to our attention that any of their 
researches of particular significance to our main themes have been 
missed, they will be noted in future printings. 

ROME WAS MONETARILY ISOLATED 

The decision of Numa, Rome's second King (716-672 BC), to insti- 
tutionalize the use of bronze instead of gold and silver for money had far 
reaching consequences. Copper would be easier to get since much of the 
precious metals were stored away in eastern temple establishments. 

But even more important was the disenfranchisement of the gold/sil- 
ver hoards, and therefore much of the power of the eastern temples and 
merchants. This wouldn't be total because their gold and silver could 
still be traded in Rome as merchandise. But without the monetary power, 
gold would be limited to jewelry use and to Rome's needs in foreign 
trade. Thus the ability of the eastern temples or merchants to control or 
disrupt Rome's money would be greatly reduced and Rome would have 
a better chance to control her own destiny. 

When over 2,000 years later, the United States rose to become the 
dominant world power, we didn't have this advantage of monetary inde- 
pendence. But during both of the two great crises of America - the 
Revolutionary War and the Civil War - monetary systems completely 
independent of Old World Power were temporarily erected - the 
Continental Currency and the Greenbacks. And though both have been 
harshly criticized, these independent currencies saw America through 
the crises, and served her well. 

Rome's monetary decision was probably not accidental, for Numa 
was renowned for his high inteUigence. Was it a conscious way for 
Rome's leaders to reduce outside influence? Numa was from Rome's 
Sabine territory and considered himself a descendant of the Spartans. He 
inaugurated new religious institutions such as the Sacred College and the 
Pontifex Maximus, which existed throughout Rome's history and con- 
tinue today in the Catholic Church. It's notable that when Plutarch, the 
historian priest of Delphi, described Numa in his classic work Parallel 
Lives, he designated Numa of Rome and Lycurgus of Sparta as parallels. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 41 



At first Rome's monetary independence had only a domestic effect: 

"The busy farmers of the (Roman) plain seem all the while to have 
cut themselves off from contact with the Phoenician traders who so con- 
stantly bartered with the neighboring cities of Etruria," wrote Tenney 
Frank in his Economic History of Rome. ^ 

But as her power grew the policy gained international significance: 

"The Roman adoption of a national and exclusive copper coinage 
produced a revolution in the monetary system of all civilized nations; for 
as the Roman conquests spread we find the gold and silver coinages of 
other countries disappearing and the Roman copper with Roman weights 
and measures taking their place, and that with a rapidity truly astonish- 
ing," wrote Humphreys in Ancient Coins and Medals? No, this is not an 
example of "Gresham's law;" of "bad" money driving "good" money 
out of circulation. That process only occurs when two moneys that have 
the same legal value, contain different commodity values, as discussed 
in Chapter 12. 

Rome had precious metals and could probably have used them for 
money if she wanted. Numa established a goldsmith's guild as one of 
Rome's early corporations, and later gold and silver bars were cast and 
stockpiled in her treasury. But Livy says "marked bronze pieces were the 
only legal tender in 406 BC... although other metals were available in 
large quantities, and were even cast by the State. "-^ 

When under siege by the Gauls in 389 BC, Rome agreed to pay a 
ransom of 1,000 pounds of gold to cease hostilities. According to one 
over-dramatized account, while it was being weighed out, Camillus 
mounted a counter-attack and defeated the Gauls! Pliny mentions 4th 
and 3rd century BC laws that forbade precious metals mining in Italy. 
Rome may have discouraged their production.^ 

Humphreys summed it up: 

"As the Spartans... are said to have adopted iron money, the 
Romans, who have been otherwise compared to that people, adopted 
copper in contempt of the gold and silver of their neighbors, which they 
were acquainted with but would not adopt... foreign money of gold and 
silver circulated in Rome from the earliest period."^ But these coins 
were not money in Rome; they were merely merchandise. 

ROME'S TRADITIONAL HISTORY IS BEING RE- VALIDATED 

There has been a pseudo scientific bias among some scholars to dis- 
card Rome's early history as "fabulous" and "legendary" in the same 



42 The Lost Science Of Money 



way that misguided antiquarians denied the existence of Homer's Troy 
until Schliemann uncovered that ancient city in 1870. But today a more 
sane view is beginning to prevail: 

"...it is not necessary to be convinced a'priori of the inaccuracy of 
the annalistic account. . ." wrote Bloch in The Origin of Rome, "(T)hanks 
to pottery found on the spot, excavations have been able to show that the 
oldest layer, corresponding to the first occupation of the site, belongs to 
about this date (mid 8th century BC)... Excavations have amply con- 
firmed the picture painted by Livy. . There is no doubt that all the archa- 
ic rituals attributed by Livy to the eighth or seventh centuries... can be 
traced to the earliest periods of Rome; the archeological evidence and 
(comparison of rites)... leave no room for doubt."^ 

Archeologists have even found some of the hut foundations in the 
original settlement area on the Palatine hill, as well as the later foundations 




2a. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 43 



of the "Regia" palace built by Numa. 

"The ancients never doubted the existence of the Roman Kings," 
wrote Peruzzi, stressing that fresh data show "the substantial reliability 
of the Roman tradition as a whole... The kings of Rome are historical 
characters who mark definite chronological periods."^ 

Numismatists-especially from the "English"-school have been very 
quick, sometimes even eager, to discard monetary evidence in ancient 
Roman literature when it conflicts with their viewpoint. In doing this 
they have insisted that Rome's money system is a much more recent cre- 
ation than the texts indicate, partly because of the limited evidence of the 
coin hoards that have been found, and the difficulty of dating them. 

Understandably they are concerned with coins first, and with the 
analysis of ancient Greek and Latin texts, only second. But also their 
monetary ideas have been shaped by the dominant Adam Smith school, 
which tended to regard pieces of gold and silver as the only "real" 
money (see Chapter 12). Since early Roman money was based on bronze 
and on law, confusion and misunderstanding easily occurs. 

A hundred years ago Del Mar made this harsh criticism: 

"Such a school (the political economists) exhibits no claims to be 
regarded as authorities on either the principles or the history of money. 
They have been taught to look upon money as so much metal, whereas 
it is plainly an institution of law. It is as though measures of length and 
volumes were regarded as so much wood, because it has been found con- 
venient to make yardsticks, pecks and bushels of that material."^ 

While views are slowly changing, in some ways those pre-concep- 
tions still linger, though the world's economies have functioned without 
even the pretense of metallic money for decades, and for centuries have 
been dominated by paper money and credit. Hopefully this book will 
help end those prejudices, and certainly the 1985 publication of 
Pemzzi's Money in Ancient Rome will guide serious researchers to a 
more accurate appreciation of the ancient texts. 

Our approach takes the ancient monetary references seriously, in 
their proper context, unless disproved archeologically. Especially when 
they describe monetary events that would have been called for by 
Rome 's known political changes. 

I also caution against expecting a linear development, progressing 
over time from a primitive towards a more advanced monetary system. 
As the reader will find in our chapters on American monetary history, 
that is not guaranteed, or necessarily even probable. It's not unusual to find 



44 The Lost Science Of Money 



that an earlier system, based on law, was far superior in terms of concept, 
than later ones that then tended to become dominated by special interest 
power factions. 

KING NUMA'S REFORMS - A BRONZE STANDARD 
AND A NOMISMA UNIT 

The initial political development - the foundation of Rome - would 
soon call for a monetary event - the establishment of an official standard 
or measure of value. The texts tell us this was given by Numa 
Pompilious, the 2nd King of Rome. 

Before Numa, bronze already had a crude monetary function in 
Rome, where metal lumps of it ("Aes rude") were traded by weight. (For 
clarity, we choose to capitalize AS, Aes, Asses and Ace throughout.) By 
the time of his accession, it had progressed to include cutting weights of 
bronze from thin stips, to arrive at exact amounts. Numa's inauguration 
date (716 BC) is therefore the latest possible time for bronze to have 
been given a monetary function in Rome, according to the evidence of 
the ancient texts. Later, during and after Numa's reign, the money sys- 
tem progressed to cast bronze, and marked bronze bars, and over time it 
became an abstract system where limited issues of coins had a value 
much higher than their commodity content. 

Earlier attempts to discard Numa as a mythical figure are being 
abandoned. Emilio Peruzzi's Money in Ancient Rome notes that: 

"It is certain that Suetonious reported a Roman tradition according 
to which Numa had been the first to give his subjects monetary bronze, 
and called such pieces nummi." 

Peruzzi at length establishes the reliability of the 354 AD 

"Chronographus" text on Roman history.^ While he can't identify the 
now lost sources which the Chronographus author depended on, Peruzzi 
notes that the records of the Arval brotherhood founded by King 
Romulus could still be perused in Rome after 382 AD, and the very 
ancient Lupercal (wolf) cults which pre-dated Rome's founding were not 
abolished by the Senate until 496 AD. Either could have been the source. 

Peruzzi cites Chronographus' description of Numa's gift on ascend- 
ing the throne as: 

"Indisputable evidence Numa Pompilious 'gave aces of leather, and 

to the soldiers 2 V2 Aces cut in bronze. '"^^ But just what does this mean? 
The Roman Ace or Aes or AS, was 12 ounces (one Roman Pound) of 
bronze, about 325 modem grams. Some later texts would report that the 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 45 



Asses were signified by leather, wooden or clay "coins. "^^ This is really 
not so unimaginable as it has sounded to some, even to Peruzzi. Milne 
noted that: "(I)n the Greek trade world nomismata of leather are record- 
ed: in Assyria Sargon issued half shekels of lead: clay tokens are found 

at Palmyra and in Mesopotamia. . ."^^ 

However, it's unlikely that such an advance toward abstract money 
would have been made in Rome at that early date, and with the present 
state of evidence, we will go with Peruzzi's careful linguistic analysis of 
the various texts: that the other items referred to, leather, wood and clay 
were being valued in bronze rather than representing it. 

WHY THE "2 Vi'' AMOUNT? 

We should ask: why does a King bother with 2V2 ? Why not leave it 
at 2, or go to 3? The next King, Ancus Marcius (639-616) also gave a 
"donatium" of 2^2 Aes to the soldiers, on celebrating his rise to the 

throne. ^^ 

At the time of Numa's accession, there may have been a need to rec- 
oncile two different measuring systems - one counted in tens and the 
other based on twelve. As part of this process Numa added January and 
February to the Roman Calendar, extending it from 10 to 12 months. 

The ''IVi' unit could have been a way to reconcile the weights and 
values of the two systems, there being four such IVi "units" in a ten 
count, and very close to ten units in a 24 count (double twelve). 

THE "NUMMI" 

It was probably at a later point in Numa's reign that nummi or 
nomisma were introduced. The ancient texts tell us that Numa began the 
casting of rough bronze bars, with a substantial admixture of iron which 

gave them a reddish appearance. ^^ 

Such pieces would be the precursors of the early bronze bars marked 
with a branch-like design called "ramo secco" - dry branch. The term 
nomisma can just as well refer to a cast bar as to a coin. For example 
Sparta's \Vi pound iron pelanors were called "noumisma" by Xenophon. 

Numismatists assume that this "nomisma" represented a Roman 
Aes, or 12 ounces of bronze. But since the term nomisma was specifi- 
cally applied to the giving oflVi Aes, in our view it more likely repre- 
sented 2y2 Aes or 30 ounces of commodity bronze. Numa's major reform 
would then have been the adoption of the nomisma, a monetary unit 
representing IVi pounds of bronze - IVi Aes. 



46 The Lost Science Of Money 



The weights of these earhest bars found in ancient hoards range 

from Vi pound to 7 Vi pounds. ^^ Later they were cast at a more standardized 
5 pounds. Note the potential relevance of the IVi unit to these weights. 

If Numa's name is connected with his monetary innovations, it 
would mean that he was named after them rather than the money being 
named after him, since the term nomisma denoting money was of Greek 
origin. The monetization of Bronze under Numa would indicate some 
state control over that industry and indeed one of the early corporations 

(the third) that he organized was a bronze smith's guild. ^^ 

KING SERVIUS' MONETARY REFORM: 
MARKED BRONZE BARS 

Servius Tullius (578-534 BC), the sixth of Rome's seven Kings, 
built the great "Servian wall" around Rome, which continues to impress 
visitors today. He first subdued the adjacent Etruscan society and then 
extended Rome's dominance over the nearby Latin peoples, establishing 
a Federation of the Latin nations with the Temple of Diana on the beau- 
tiful Aventine Hill as their common shrine. Your author had the good for- 
tune to live on that hill for a time. 

In this second political phase, the expansion of Roman influence and 
control required changes in government organization and in the money 
system. Again the ancient texts provide descriptions of the King's actions. 

For military and taxation purposes Servius organized Roman citi- 
zens into a more regimented society divided into six classes by wealth, 
to determine how much they paid in military dues. Members of the first 
class had assets valued at over 100,000 asses; members of the sixth class 
had less than 11,000 asses. Wealthier citizens had to contribute more, and 
the first two classes fielded over half the "Centurys" composing the Army. 

This Latin Federation required a more sophisticated money system. 
While the Latins were somewhat accustomed to using bronze, cattle and 
sheep had also served as a measure of value. The bronze bars were now 
cast in a more pure form, measuring 6V2 x VA inches and standardized at 
about 5 pounds each. They are found in ancient hoards in and around 

Rome.^^ 

Servius is credited as the first to mark these bronze bars, most like- 
ly inifiating the ramo secco design, followed by a kind of fishbone 

design, and after Servius, the images of animals were used,^^ These bars 
are called "Aes Signatum" by scholars today, but that's a modem term, 
not from Rome. According to the texts, Servius also cast some bars of 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 47 




2b. Ramo secco type fragment, 102 mm long. 




2c. Flying horse design; 154 mm long. 



lypes of Aes Signatum. The "ramo secco" (dry branch) design type, at top, has 
been definitively dated to the reign of Servius Tullius (578-534 BC). It evolved 
into a "fishbone" pattern (not shown). Eventually Aes Signatum had animal 
patterns. These pieces generally weighed 5 Roman pounds. 



48 The Lost Science Of Money 



silver, but none have been found. '^ 

Perruzzi tells us that this money affected a large part of Italy and was 
"a legal tender - not a doubt about it... With the adoption of the Aes 
Signatum under Servius, bronze already used with a monetary function, 

becomes legal tender in Rome,"^^ and he noted that: 

"..Aes signatum circulated widely, well beyond the frontiers of 
central Italy: pieces of it reached as far as south western Sicily, where a 
fragment has been found [at Bitalemi] associated with Greek pottery dat- 
able to 570-540 BC."^^ 

The "Bitalemi" dating is highly significant for it corresponds exactly 
to the Servius time period. It dates the bars of Aes signatum about two 
centuries earlier than some numismatists of the English school have until 

now been willing to acknowledge, and it is not the earliest of them.^ 

HOW SERVIUS MONETIZED THE BRONZE PIECES 

The most intriguing part of Servius' monetary reform was in con- 
nection with his new census system, as related in detail by Dionysius of 
Halicamassus and Lucius Piso. Servius divided the city and the coun- 
tryside into regions and required everyone of the same district "to con- 
tribute a certain coin per head, men paying one kind, women another, 
and children yet another.. .and to know the number of those living, newly 
bom and died and came of age, he prescribed which coin relatives were 
to contribute for each one - into the treasury of Juno Lucina for the new- 
bom, into that of Libitina for the deceased, into that of Juventas for those 
arriving at manhood. From those coins he would know every year the 

total of the inhabitants and which of them were of military age."^^ 

Rudi Thomsen, in his work Early Roman Coinage, relied on misin- 
formation from another numismatist, Ridley, and simply discarded this 
written tradition as "bearing the stamp of legend." But Peruzzi conclu- 
sively demonstrated Ridley's error,^^ 

We are not told what these nomisma consisted of. They could have 
been the bars - the Aes signatum. Or the inconvenience of such large 
pieces may have led to their being cast in smaller, more coin-like form. 



^ For numismatists: 'The technical inspection of the (fragment) enables us to 
determine that the fragment does not belong to the most ancient class of such 
items: this ingot has a more rectangular and regular shape; the edge flashes (due 
to the imperfect contact of the two valves of the mould) which are a feature of 
earlier specimens have disappeared: the mark of the 'ramo secco' itself is regu- 
lar and of neat outline." L. BregUa, "Annali", as cited in Peruzzi, p. 217. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 49 



Their value was either an Aes - a pound of bronze, as is generally 
assumed, or the IVz Aes we have postulated. 

THE ROMAN AES GRAVE 

The first type of coins used in early Rome, called the "Aes grave," 
were large round 9 to 10 ounce discs cast of the same material as the 
bars. This is the only coinage found to date that could conceivably cor- 
respond to the nomisma. The earliest among these Aes Grave are the 
deity Janus double headed coins. Over time they became smaller and 
lighter while keeping similar designs, with what looks like the number 1 
on them. But one what? Probably one nomisma. 




2d Aes Grave of 222 BC, or earlier; 

about 10 Roman ounces (.85 Roman 

pounds or 274 grams); 61 .8 mm. 



Aes Grave began as large cast 
discs of the same material as the 
Aes Signatum. These coins most 
likely developed from the nomis- 
ma introduced by Servius for his 
census counts, and the number 
"1" probably represents one 
nomisma, valued legally at 30 
ounces of bronze. The Roman 
pound weighed 320-330 modern 
grams. 

2e, Aes Grave with value mark 
above the Janus heads. 




50 The Lost Science Of Money 



Up to the present, archeological finds of these coins cannot be dated 
to such an early time as Servius, and may have developed as a legal insti- 
tution of the Roman Republic, not the monarchy. Numismatists have 
noted the uniqueness of the Aes grave but don't agree on dating them. 
Burnett wrote, "There are no obvious forerunners in Italy for the Aes 
grave: it seems likely that the Aes grave of other non-Roman communi- 
ties was itself derived from the Roman model."-^'^ Rudi Thomsen, per- 
haps trying to smooth the generally antagonistic tone toward Rome of 
the English school (to which he did not belong), still managed to put his 
foot in his mouth: 

"The Romans... actually made an original contribution on one 

important point. About 289 BC they invented the Aes Grave."^^ 

This unfortunate attitude still permeates the study of Roman numis- 
matics. Some of those responsible will be taken to task below. But the 
one hundred year old view of Alexander Del Mar, who truly understood 
nomisma, deserves attention: 

"With regard to the Janus-faced circular copper coins (Aes grave), 
which Francois Lenormant ascribes to the period of the Gaulish inva- 
sion, B.C. 3 84... although these pieces are now regarded as Aces, they 
may have been nummi, afterward called sesterces, or pieces of 2V2 Aces, 
the figure "1" upon them signifying one nummus instead of one 
Ace... That these coins were connected with the nummulary system of 

the Republic there can hardly be a doubt. "^^ 

WHY DID NOMISMA CIRCULATE AS MONEY? - 
LEX ATERNIA TARPIA 

About 84,000 persons were registered in Servius' first census, prob- 
ably in 554 BC.^"^ Dionysius called the coins "noumismata" and "a trib- 
ute imposed per head."^^ Servius had designated three temple treasuries 
to accept the per capita nomisma payments and failure to comply was 
made punishable by death and confiscation of property. 

This is an ancient example of the primary monetary principle that an 
abstract symbol can be given value by accepting it for taxes. Later, under 
the Republic (from 509 BC) a Roman law, the Lex Atemia Tarpeia of 
454 BC identified values for the coinage in terms people understood. 
Each Ace was 12 ounces of commodity bronze. The law fixed one sheep 
at 10 Aces, and one ox at 100 Aces. We think one Nomisma was 2 1/2 
Aces. This is a documented example of Ridgeway's explanation in 
Chapter 1, of how the eastern temple cults earlier had established a value 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 51 



for a metal coin, by relating it to cattle. 

On the model of Solon's Reform the same law extended the legal 
tender function to the animals themselves (one sheep ===10 Aces and an 
ox = 100), so that the animals need not be sold in a market, but could be 
tendered directly for fines; in effect establishing "floor" prices for the 
animals and indicating that the nomisma issues were quite limited. 

Theodore Mommsen, the great 19th century German historian of 
Rome, believed that the Lex Atemia law indicated the limited circulation 
of coinage at that date (454 BC). The author's inclination is to agree that 
by then, almost a hundred years after Servius' institution of the Aes sig- 
natum, it is quite likely that the smaller, more convenient representa- 
tional Aes grave would have been devised. Consider that the Lex Aternia 
laws were written upon the return of the two ambassadors Rome had 
sent to Athens to study Solon's legislation. Remember from Chapter 1 
that an important part of Solon's remedies for Athens' were monetary 
reforms including the monetization of some agricultural goods, during 
the period of the introduction of coinage there. The Lex Atemia similar- 
ly does this in Rome for cattle and sheep. 

Consider also the story as told by Livy of senators making what was 
called a "showy affair" by actually delivering wagon loads of bronze 
bars to pay army units in 406 BC. This description indicates that such 
delivery was not normal. Though Livy tells us that marked silver didn't 
exist yet, perhaps some smaller, less showy instrument such as the Aes 
grave nomisma were in use.^^ 

THE ROMAN REPUBLIC'S FIAT MONEY 

". . .the Roman monetary system was a numerary one, and the numis- 
matic relics which have so long been regarded by the learned world as 
copper coins, were essentially irredeemable notes stamped (for lack of 
paper) on copper, and devised and designed to pass in exchanges for a 
much greater value than that of the material of which they were com- 
posed," wrote Alexander Del Mar,^^ 

Because numismatists tended to view the value of a coin by its metal 
weight, when faced with unmistakable evidence that Roman coins were 
worth more than their commodity content, they apply the term "over- 
valued" to such coinage. But it's like calling a $100 bill overvalued, 
because of the low commodity value of the paper it is printed on. Thus 
Thomsen remarks: 

"There was undoubtedly since the beginning of Roman bronze 



52 The Lost Science Of Money 



coinage an overvaluation of more than one third. . .(and in) the hghter series 

of Aes grave, this overvaluation was even increased (to double). . ."^^ 

But such terminology is too easily misunderstood. One may say the 
nine or ten ounce Aes grave coin, worth (Thomsen thought) one pound 
of bronze, was a third overvalued. But when that nine ounce disc has 
later evolved into a two ounce ("sextantal") coin, still valued at an "AS" 
- a pound of bronze, it would have been worth six times its weight, or be 
500 % "overvalued;" and when it later became a one ounce ("uncial") 
coin, it was worth 12 times its weight. This abstract, legal nature of the 
system should be clearly identified. 

Now consider if the value that the nomisma referred to is not one 
pound of bronze, but IVi pounds as we postulate with Del Mar. Later, in 
the evolution of the struck bronze coinage, when they become identified 
by the term "AS," we agree that they probably then represented 12 
ounces of bronze. That's what "AS" means, literally. No one knows just 
how nomisma and "AS" evolved in relation to one another, and the 
numismatists may not have been on the lookout for such clues, which 
could draw them even further from their concentration on metal. But 
Andrew Burnett discusses an interesting case: 

"After 225 BC the (Roman bronze) system prevailed, and it quickly 
spread throughout Italy,.. Li Sicily it co-existed with the Sicilian system 
whereby one talent of three denarii equaled 120 litrae; presumably therefore the | 

AS, which circulated extensively in Sicily, was worth 2 Vi Litrae (pounds)"^^ 
Therefore this possibility cannot be excluded for the "AS" at that 
time in Rome also. 

Under the Republic, the nomisma's value as a pledge or representa- 
tive token became several multiples of its bronze content value. For 
while it started out at 9 to 12 ounces, it probably had a legal value of 30 
ounces of bronze. At some point, the "AS" unit of 12 ounces of bronze 
becomes the standard on which the coins are issued and the weight of the 
coins signifying an "AS" were then continuously reduced; to six ounces 
after the 1st Punic War (264 - 241 BC); down to two ounces in about 217 
BC after the 2nd Punic war started (218-202); and down to one ounce at 
its end. Yet Del Mar noted that "Nowhere in Roman history do there 
appear any complaints of these reductions." 

Under this bronze nomisma, republican Rome grew powerful, stay- 
ing independent from Eastern power and blocking the easy establish- 
ment of Eastern financial beachheads on Roman soil. Under this bronze 
money, Rome developed and gave the world a system of law that is still 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 53 



2f, The "Romano" coinage. 
Rome's earliest silver bullion 
pieces weighing 7.58 grams, or 
127 grains were used in "for- 
eign" trade with the Greek 
towns in southern Italy from 
about 330 BC. They had no set 
value markings and did not 
circulate in Rome itself. 
This piece is from 275-270 BC; 
7.355 grams; 21.8 mm. 




2g, About 240 BC, "Roma" 
coinage (weighing 6.55 grams) 
replaced the Romano issues, 
and were again not for use in 
Rome; and had no value 
markings. 

This piece is from 241-235 BC; 
6.43 grams; 19 mm. 




2k The "Quadrigatus", a later 
version of the Roma bullion 
coins began in about 225 BC, 
and weighed 6.77 grams. 
Again with no value marks 
and not for circulation in 
Rome. 
This piece, from 222-205 BC; 
weighs 6.604 grams; 22 mm. 




54 The Lost Science Of Money 



consulted after 2300 years - a legal system separated from religion to a 
higher degree than seen before in antiquity. Del Mar wrote: 

"Rome's numerary system lasted 200 years (he dates it roughly from 
385 BC), during which all that was admirable of Roman civilization saw 
its origin, its growth and its maturity. When the system fell, Rome lost 
its liberties. The state was to grow more powerful and dreaded, but that 

state and its people were no longer one."^^ 
Tenney Frank echoed Del Mar: 
"Bronze was indeed the only metal coined at Rome... during the 

whole period of rapid expansion that made her supreme in Italy."^"^ 

UNIFICATION OF THE ITALIAN PENINSULA 

In 338 BC Rome dissolved Servius' Latin Federation, constituted 
herself as its successor, and undertook the unification of the peninsula. 
This political and military activity required some monetary maneuvers, 
but Rome insulated her population from them: 

"(W)hen Rome sent her armies into Campania,.. her generals found 
themselves in contact with.,. peoples who used silver currency. In order 
to buy army equipment from them it was necessary to have... silver 
money; and the soldiers must also have desired their pay in a curren- 
cy... (accepted) where they were billeted. Silver was accordingly pro- 
vided for use in Campania... Why the government did not bring this silver 
coinage to Rome during the fourth century it is diflFicult to under- 
stand, . .The scarcity of these coins on Latin soil. , .would seem to indicate 

that Rome did not encourage their circulation northward," wrote Frank.-^^ 
Frank thought Rome's first silver coins known as the "Romano" 
type began about 330 BC. Burnett places it from 310. This timing fits 
fairly well with Rome's monetary requirements for the conquest of the 
south. According to Burnett the Romano coins were succeeded by the 
"Roma" types around 240 BC, and these were followed by the 
"Quadrigatus" coinage about 225 BC, 

These three silver coinages minted by Rome had an important fea- 
ture in common: they had no marks of value but were bullion coins val- 
ued for their silver content. As such they were not part of Rome's regu- 
lar monetary system, but were for use with "foreigners" - the Greek 
cities in the southern peninsula - and they are found mainly in the south- 
em regions. This brings to mind the rules Plato established for his 
Republic, where citizens had token money for use with each other, but 
gold or silver were to be provided for foreign trading. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 55 



In contrast, from the beginning nearly all of Rome's bronze coins - 
the cast Aes grave and the later struck bronze coins - had value mark- 
ings. With the unification of the peninsula the towns in the south began 
to mint bronze coinage based on Roman measures. 

ROME vs. CARTHAGE 

It took until 266 BC for Rome to unify the Italian peninsula into a 
commonwealth - just in time to face Carthage's growing power. 
Carthage was a 9th century BC Phoenician colony on the north African 
coast, at present day Tunisia. She was originally established as a way 
station for importing metals from the western mediterranean back to 
Sidon and Tyre. Her language was Canaanite Hebrew and as she devel- 
oped toward empire, dominating parts of nearby Sicily, conflict with 
Rome became inevitable. 

In Arnold Toynbee's analysis, Carthage had occupied the African 
coast and only took possession of the hinterland farming areas from the 
native population from 450 BC, when she instituted a system of slave 
plantation farming. Carthage was a plutocracy: 

"The prestige of the Carthaginian nobility was based above all on 

wealth," wrote the Charles-Picards.^^ She never developed a manufac- 
turing industry but maintained a powerful navy to enforce her trading 
relations: 

"The Phoenicians made their profits in the western Mediterranean 
not by selling home made manufactures, but from a middleman's trade 
and from finance - particularly by keeping the price of precious metals 
in the under developed regions under Phoenician control much lower 
than the price in the economically more advanced areas," wrote 

Toynbee, who concluded, "Carthage was parasitic."-^^ 

Interestingly, generations of English readers have been given a very 
different and more sympathetic view of Carthage by Christopher 
Marlowe's exceptionally popular drama Dido, Queen of Carthage. 

THE DESTRUCTION OF ROME'S MONEY SYSTEM 
IN THE PUNIC WARS 

The great double war with Carthage (264-241 BC and 218-201 BC) 
placed severe stress on Rome's republican institutions and money system. 

When the 1st Punic war began Rome's money system was com- 
posed of the various Aes signatum, the heavy and light cast Aes grave, 
and several types of struck bronze coinage; an AS became signified by 



56 The Lost Science Of Money 



a six ounce coin, described as semi-libral (half a pound). 

But especially in the 2nd war, with Hannibal and his elephants rav- 
aging the countryside, Rome was no longer able to insulate her domes- 
tic economy from the silver coinage. Carthage's long standing sophisti- 
cation in manipulating gold and silver prices could thus translate into a 
military danger for Rome, 

Burnett thinks Rome demonetized and melted down the earlier 
coinages in about 212 BC, soon after the 2nd Punic war began, and that 
virtually all coins circulating in Italy and Sicily were replaced with the 
new silver Denarius. But he couldn't fully explain it: 

"It is not exactly clear why Rome adopted this aggressive new policy. . ."^^ 
Roman coinage cannot be understood using only a commodity ori- 
ented concept of money, but the clues are there! For example Crawford 
makes a telling point about the ancient bronze bars before Servius: 
"(B)oth types were highly ferruginous copper and would have been 

useless as metal without further refming."^^ 

Only when one understands that it was not the bronze commodity 
that gave the money its value, but Rome's legal commitment concerning 
them, does it become clear that she could demonetize the coins in the 
hands of the enemy, or in towns wavering in their allegiance. Thus the 
old coinage could not be used to pay for military operations against her. 
In order to obtain new coinage, friends would either have to exchange 
the old for it within some time limit or perform vital services for Rome. 
This brings to mind Aristotle's description of money from Chapter 1: 

". . .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." 

If Burnett is correct about the demonetization, Rome did exactly 
that: the demonetization was a wartime measure to isolate Carthaginian 
power. With Carthage's experience in exploiting monetary weaknesses, 
Rome was forced to make a monetary response as well as a military one. 
But in doing so under desperate pressure, she made grave monetary errors. 

INTRODUCTION OF THE SILVER DENARIUS 

Unlike the previous silver bullion coins, the Denarius, minted at 72 
to the pound of silver, was made a part of the Roman money system, 
with a marked value of ten Asses. Rome also minted silver sesterce, at 
four to the denarius. Thus each sesterce was worth 2 V2 AS, exactly the 
old nomisma's value. This inextricably linked the existing bronze 
coinage with the fate of the silver denarius. The word "money" comes 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 57 



from this coinage, which was minted at Rome's temple of Juno Moneta. 

Much ink has flowed in numismatists attempts to understand how 
the Denarius was valued. Especially since it was long thought to have 
been introduced in 269 BC when the coin representing the AS was 
"libral" - almost 12 ounces in weight. Since the 1/72 pound silver 
Denarius was worth ten Asses, or 10 pounds of bronze, numismatists 
were dismayed when they originally calculated that the silver to bronze 
ratio would have been an impossible 720 to 1. 

But they are treating the denarius as a commodity, when Rome had 
made it into money! At the time of the denarius' introduction in 214 BC, 
the Aes, or 12 ounces of bronze, was represented by a two ounce coin. 





Denarius of 144 BC. 
8.58 grams; 22 mm. 

2i Note the value mark "10" or X on the Roman Denarius. Numismatists 

fought over dating their introduction, but neglected to examine and 

understand the legal, not metallic basis of the Republic's money. 





Victoriateof205-195BC; 
2.59 grams; 15.9 mm. 

2j. The Victoriates succeeded the Quadrigatus in about 214 BC for use in 
foreign trade. Their large issue concurrently with the silver Denarius shows 
the Denarius was not merely intended as a commodity coinage. 
Victoriates weighed 3 scruples (3.4 grams, or 57 grains). 



58 The Lost Science Of Money 



In all likelihood, the Romans similarly overvalued the silver coin by 
about six times the value of its commodity silver content. Thus the ratio 
could not be calculated by comparing the weight of monetized silver to 
the weight of commodity bronze! 

But not understanding this, when the numismatists pushed the 
denarius' introduction date forward to 214 BC and saw the bronze coin 
representing the AS then weighed two ounces, they got a more reason- 
able ratio of 120 to 1; using this method, not realizing they were com- 
paring monetized bronze to monetized silver, they accidentally came up 
with the right ratio! 

Considering the number of decades (over a century really) spent on 




2k. During the crisis stage of the 2nd Punic war, Rome borrowed gold jew- 
elry from its citizens, and used its 4,000 pounds of treasury gold to mint its 
first gold coinages: The "Oath scene" coin (above) was to remind allies of 
their solemn oaths of allegiance (6.9 grams, 18 mm). 
21 The Mars/Eagle gold coins (below), a more warlike theme, were issued 
in denominations of one, two and three scruples (1.1 grams, 2.3 grams 
and 3.4 grams respectively). The 3.4 gram coin was 14 mm. in diameter. 





2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 59 



this "problem," one is tempted to say "serves 'em right" for ignoring Del 

Mar, who pointed this out about a 1 15 years ago in his Money in Ancient 

Countries, 

Tenney Frank came closest to the solution in 1920, writing: 
"When in 269 Rome reformed her coinage on a new system she was 

able to restore the old ratio of 120 to 1, which had for some years fallen 

to 20 to 1,""^^ But he did not consider, as Del Mar did, that this could 
resuU from a six fold raising of the value of monetized, as opposed to 
commodity silver, or that the 20 to 1 ratio was most likely the result of 

comparing monetized bronze to commodity silver."^ ^ His 269 BC reflects 
the older dating estimates. 

There is an important clue showing that Rome did not intend the 
denarii as mere commodity valued coinage. Contemporary with minting 
the denarius, she began issuing the silver Victoriates in large numbers. 
These were in fact bullion coins with no value marks; a replacement for 

the quadrigatus."*^ 

ROME'S FIRST GOLD COINAGE 

More than 500 years after her founding, in about 218 BC at the start 
of the Hannabalic crisis, Rome borrowed gold jewelry from her wealthier 
citizens and minted her first gold coinage, the "Janus/oath scene" pieces. 
Then again in about 209, she also used the 4,000 pounds of gold in her 

treasury for an emergency minting of the gold Mars/Eagle series. ^-^ 

These events give an insight into the difficulty of reconstructing a 
history of Roman money from the physical evidence of the coin hoards. 
Thomsen estimated that just the 4,000 pounds could have made 256,000 
coins; yet there are only 40 extant specimens of the "oath scene" gold 
coin, and only 108 specimens of the mars/eagle gold coin in existence. 
Pliny later blasted the new gold coinage: 

"The next crime committed against the welfare of mankind, was on 
the part of him who was first to coin a Denarius of gold. A crime the 
author of which is unknown... would that gold could have been banished 
forever from the Earth, accursed by universal report, reviled by the 
reproaches of all the best men, and looked upon as discovered only for 

the ruin of mankind.""*"^ 

Pliny's anger seems strange today, but the life or death struggle with 
Carthage presented opportunities for an emerging plutocracy to abuse 
Rome's monetary system and achieve its own ends at the expense of 
their society. For example, there is the matter of how the jewelry loans 



60 The Lost Science Of Money 



were valued. Indications are that the gold was valued at a 20 to 1 ratio 

with silver, about double the normal ratio in Rome at that time.^^ This 
would mean that if repayment was later made in silver, at the normal 9 
or 10 to 1 ratio, the lenders got a 100% profit, perhaps to make up for 
the value of the artwork lost to the melting pot. 

NUMISMATISTS BEHAVING BADLY 

Though we generally criticize some numismatists for overempha- 
sizing the trees and ignoring the forest, the following is not meant to 
denigrate the important research that such scholars are carrying out. In 
particular we are grateful for the work of Thomsen, Burnett, Kraay, 
Milne, Sutherland, Crawford, Jenkins, Grierson, and yes Mattingly, to 
name just a few. This chapter could not have been written without citing 
some of the important facts they have established. 

But viewing Roman money as a commodity has led to a distortion 
of Roman history, and in one particular case, to what amounts to an 
attempted subversion of Roman numismatic study in a shameful display 
combining chauvinism, stubbornness and even a degree of deception. 
Unfortunately this episode must be described, since only one numisma- 
tist dared write about it, and readers deserve to know. 

Harold Mattingly, an important numismatic scholar, nevertheless 
unfortunately brought insupportable prejudices to his Roman studies. 
Right from the introduction of his book Roman Coins his attitude is 
clear: 

"As long as we find Rome content with her cumbrous native methods of 

exchange, we may reckon her as an undeveloped. , .as a barbarous people. "^^ 

What is such a statement doing at the beginning of a book on Roman 
coinage before any evidence has been presented? By page 3, this preju- 
dice favoring his own nation's use of gold and silver leads to abuse of 
the subject matter: 

"But all these early studies may be dismissed out of hand," he tells 
us, discarding the early traditions. He even attacks, without giving rea- 
sons, the genuineness of the 454 BC Lex Atemia Tarpei law. 

Finally it degenerates into a preemptive attack and slur against some 
of those who might disagree with him: "Patriotic pride seems to play its 
part in insisting in every detail on the early greatness of Rome." This is 
a clear case of psychological projection. ' 

The deception incident was brought to light by Rudi Thomsen in his 
monumental three volume work, Early Roman Coinage. In 1932 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 61 



Mattingly and E.S.G. Robinson came up with a new timing for the issue 
of the Denarius, which had been thought to be 269 BC based on the texts 
of PHny and Livy. Instead they placed it in 187 BC, reflecting in part 
Mattingly's tendency to re-evaluate downward the age of Roman 
coinage and institutions. Incredibly they based this mainly on their inter- 
pretation of a comedy of Plautus. 

Then the discovery of the Mintumo coin hoard was made, which 
proved the denarius was already in existence in 191 BC (later the 
Morgantina hoard would date the denarius to at least 211 BC). Thomsen 
(a Dane) wrote: 

"Thus the Mintumo hoard presented a serious obstacle to the new 
English chronology of the early Republican coinage of Romc.Seltman 
hurried to the rescue of his compatriots by asserting... that a 'careful 
perusal of Mr. Newell's account of the. . .hoard leads to no final conclusion.'" 

Thomsen politely concluded that: 

"(Seltman's) report of the contents of Newell's work, written with 
the purpose of supporting the Mattingly-Robinson chronology, is 
absolutely unreliable... above all he did not allow his readers to under- 
stand Newell's (viewpoint). Nevertheless in spite of its apparent unreli- 
ability it has never been attacked, and... no later scholar has subjected 

the Mintumo hoard to a more profound scmtiny.'"*^ 

All that to protect a four year difference in a 2,000 year old chronol- 
ogy! But how can one repair the loss of tmst in the sincerity of the schol- 
arship? Hats off to Thomsen for speaking up. Apparently Newell, an 
American numismatist, was too polite to raise objections. 

THE FALL OF ROME'S REPUBLICAN MONEY SYSTEM 

Most 19th and 20th century economists, favoring gold and silver 
over copper, have misinterpreted the introduction of silver as progress. 
Only Del Mar recognized the use of silver and gold as a regression from 
legally based nomisma back toward more primitive commodity money. 
Because of the various family markings on different Denarius 
issues, and the fact that a substantial portion of the silver taken as war 
booty went to the victorious patrician generals, Del Mar believed that the 
patricians issued the coins privately, under state license, reaping a 500% 
gain on their silver by having the state stamp a coin. Private issues are 
known to have occurred just before and during the civil wars of the 1st 
century BC. 

Numismatists now view the earlier denarii as state issues. But the 



62 The Lost Science Of Money 



effect would have been similar if the Roman mint obtained silver from 
private sources at the full monetized value of the coins rather than its 
commodity value, giving the private supplier a six fold profit on their silver. 
But even if we assume that the emerging plutocracy of wealthy 
patricians and equestrians in one way or another used the overvaluation 
concept necessary in a nomisma system to plunder Roman society, that by 
itself wouldn't have destroyed Rome's money system. Although the "prof- 
it" on overvaluation should (and may) have gone to the society as a whole, 
what broke the system was that the issues of these coins were unlimited. 

LIMITATION OF ISSUE WAS IGNORED 

Del Mar accurately noted that limitation of issue, the primary mon- 
etary requirement for a nomisma or numerary or fiat money system, was 
being ignored. 

With the coinage of the Denarius, Rome had a mixed system that 
could not be lastingly defined. The Denarius was 73 grains of silver orig- 
inally valued at 10 aces. The silver Sesterce, at % the Denarius, was 
equal to 2 V2 aces, exactly the nomisma's value. But the value of the 
bronze coinage was a legal concept, not a market one, and depended on 
the limitation of its issue. The value of the Denarius and Sesterce, since 
their issue was unlimited, would eventually have a commodity-based 
market value. 

In 168 BC, Rome obtained 75 million denarii worth of silver spoil 
from her conquest of Macedon. Significantly, the coining of Victoriates, 
Rome's bullion silver coin, was stopped at this point, in favor of the 
denarius. It appears to have taken about 60 years for the Denarii to sta- 
bilize with their silver commodity value."^^ 

The bronze money could not escape the effects of unlimited silver 
coinage. Crawford says the production of bronze was temporarily 

stopped in 146 BC.'*^ Burnett tells us that very little bronze coinage was 
issued after 150 BC. 

In 141 BC, 63 years after the introduction of the denarius, it was re- 
valued at 16 Asses. But was it the denarius, or the As (or both, perhaps 
one falling and the other rising) that was changed? 

The limited data we have indicate that prices were not greatly affect- 
ed. Burnett notes that from about 200 BC to 100 BC wheat prices 
approximately doubled, a tiny annual increase. Thereafter they remained 

stable until into the 1st century AD.^^ Crawford concurs that, although 
there were very substantial amounts of silver coined from 157 BC, only 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 63 



certain prices rose; 

"The only area where inflation did occur is in the prices paid by 

members of the elite for luxury goods. "^^ 

Such goods came mainly from the East. 

One way to estimate price rises is to look at army pay. Soldiers in 
the 2nd century BC got 110-125 denarii per year. A hundred years later, 
their pay doubled to 225; after another hundred years to 300; and by the 

3rd century AD had increased to probably 600 denarii per year.^^ 

The main effect of commoditizing Rome's money system was to 
destroy the institution of money based in law. Over time, the Republic 
lost control over its money system to the temple establishments and 
associated private merchants, those who could control the commodities. 
Over time their interests would take precedence or be advanced instead 
of the common good. But over time, a society's existence depends on 
protecting the common good. The growing concentration of wealth and 
privatization of power was an unstable process that did not self correct 
except in the sense of arriving at ultimately destructive results. 

THE END OF ROME'S MONETARY ISOLATION 

Commodity money in Rome brought Rome's monetary independ- 
ence to an end. It was similar to the Attic Drachmae of Greece and the 
Romans treated them as equal. 

Once reduced to using a commodity weight to signify money, Rome 
would be on a never ending quest for precious metals - a great waste of 
resources and misdirection of energy. Even worse, since these metals 
were concentrated in eastern hoards, this handed power over to the east, 
to assert its ancient ways on Rome. 

THE EASTERN CULTS ENTER ROME 

"The original Roman Numina (gods) had not been conceived of as 
being personalities in human form," they were more abstract, wrote 

Toynbee.^-^ But as Roman money under eastern military pressure 
regressed from the more abstract bronze nomisma to concrete gold and 
silver weights, so did Roman religion. 

In addition to the monetary disarray, the wars with Carthage took a 
heavy spiritual and physical toll As news of Hannibal's victories 
reached Rome, it created severe psychological pressure, especially on 
the female population. On learning of the Lake Trasimene defeat (218- 
217 BC) "the women got out of hand," and after the disaster at Cannae 



64 The Lost Science Of Money 



(216 BC), "This time the women in the city got out of hand in such num- 
bers that the senators themselves had to... go out into the streets com- 
pelling (them) to go, and stay indoors, and silencing their lamentations," 

wrote Toynbee.^"^ Almost one third of Rome's citizens were killed in 
those two battles! 

Frazer's Golden Bough tells how in 204 BC, after enduring 16 years 
of Hannibal's rampage and 70 to 100 thousand dead, the war weary and 
desperate Romans were seduced by a prophecy concocted from the 
Sibylline books that: 

"The foreign invader would be driven from Italy if the Oriental 
Goddess, the Phrygian 'Mother of the Gods' were brought to Rome... 
ambassadors were dispatched to her sacred city, Pessenius in Phrygia (at 
Mount Ida in Asia Minor). The small black stone which embodied the 
mighty divinity (Kybele) was. ..conveyed to Rome. In the very next 
year... Hannibal embarked for Africa... He could not foresee that Europe, 
which had repelled the arms, would yet yield to the gods of the 
Orient."^^ (Could anyone foresee it?) 

The Phrygian Goddess' sanctuary was established on Palatine Hill 
Some have argued that this cultic "success" in ridding Italy of Hannibal 
threw open the gates of Rome to a variety of Eastern cults: 

"Success had,.. given the highest possible approval to the principle 
of the importation of foreign, especially Eastern, Deities," wrote 
Frederick Grant, pointing out that the Roman test of religion was not 

philosophical, but "Does it work - does it help the state?"^^ 

But Toynbee took a more cynical view: 

"The Roman 'Establishment' having consulted the Sibylline Books 
had to do what the Books (interpreters) told them to do on this occasion, 
but this recommendation was an indiscretion which the 'Establishment' 
did not forget. It did not ever allow the Books to recommend the intro- 
duction of any other foreign divinity after that,"^^ 

Rome later extinguished the Dionysian/Bacchan cult in 186 BC 
because it wasn't officially authorized, showing that the State could still 
determine which gods Roman citizens could worship. 

Eventually Scipio Africanus, Rome's greatest general, though out- 
numbered and out elephanted, defeated Hannibal in 202 BC and 
destroyed Carthage's power, but the warfare had already helped bring 
down the money system and Roman justice with it. Once Eastern cults 
got in, they would fiirther alter the mind and manners of Rome. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 65 



THE EMERGING PLUTOCRACY 

The "commoditization" of Rome's money system dramatically 
accelerated the emergence of a plutocracy - a ruling order based on 
wealth. The commodities would by definition tend to be in the hands of 
the wealthy. 

"We may infer that at Rome in 264 BC, this class was not yet in exis- 
tence, and that it came into existence in the course of the first bout of the 
Romano-Carthaginian war, thanks to the lucrative contracts...," writes 
Toynbee, and he described how inefficiencies in the Roman city-state 
organizational form made it easy to take advantage of the wartime emer- 
gency. According to Toynbee this business class was essentially identi- 
cal to the new, no longer militarily based, Equestrian Order, formally 
composed of 1800 members - the 18 "Centuries" organized by Servius 

Tullius.^s 

Henderson's study of the Order's origins reasoned that: 
"A new money class thrusting rapidly to public estate in an ancient 
society, needed the enhancement of symbols and titles. . .It was natural to bor- 
row the name of the old Roman cavahy with its association of high rank. . ."^^ 
Toynbee wondered aloud where the money came from: 
"By the date of the (2nd Punic war) there were evidently already sig- 
nificant accumulations of capital in the hands, not only of the Roman 
'Establishment,' but also of a non-Senatorial business class. This capital 
may have been the fruits of profits made during the (1st Punic 
war)... Whatever its origin was, its existence is proved by... the financ- 
ing... of the enormous costs of the second bout. Contractors commanded 
sufficient reserves to make deliveries to the Roman Government on 

credit fi-om 215 BC onwards... "^*^ 

Our hypothesis that silver was provided to the mint at a six fold 
overvaluation can help to explain where the money came from. And the 
timing also works. 

No doubt some of the loans of money and gold jewelry were made 
in a patriotic spirit, but the overall picture is of a plutocratic class pro- 
moting its interests at the expense of Roman society. 

For although Rome was hurting financially, the loans were being 
repaid even before the war was over. Then immediately upon defeating 
Hannibal, there was a political thrust to start a new war with Macedon. 
Apparently those benefiting from the warfare didn't want any interrup- 
tion to their profiteering. The move was at first rejected, but a year later 



66 The Lost Science Of Money 



in 200 BC a major war was started with Macedon which lasted till 168 
BC, giving no breathing space to Rome's citizen farmer/soldiers. 

THE RISE OF LATIFUNDIA 

The new wealth amassed through monetary mischief and war con- 
tracts soon entrenched itself in ownership of large plantations known as 
latifundia, converting the fleeting monetary liquidity into permanent 
land holdings. 

Hannibal's fast cavalry raids had made field work dangerous, forc- 
ing farmers into urbanized industrial labor, especially in war industries. 
Many had to abandon Italy permanently for Greece. Rome's primary 
demand on her citizens had been military service. But the lengthy and 
unpredictable overseas duty took the citizen farmers from their land and 
reduced their ability to hold onto it, 

Italian agriculture, which had consisted mainly of small peasant 
holdings, soon became a mixed system of large scale migratory herding 
between lowland and more mountainous regions, combined with large 
scale capital intensive plantation farming. The new capitalists and the 
old aristocracy invested in these activities, which were operated with the 
slave labor that became available in large numbers from the warfare. 
Between 264 and 146 BC, the number of new slaves available can be 

estimated at over 300,000.^^ 

While the "opportunity" to use the available Roman owned land, the 
"ager publicus," was theoretically open to all citizens, in actuality only 
the wealthy could take advantage of the possibility. This left the ordinary 
citizen farmer out in the cold: 

"The new Italy is a paradise for fruit trees and for profiteers and a 
comfortable berth for oxen, but it is a purgatory for evicted peasants and 

a hell for imported slaves," wrote Toynbee,^^ 



THE GRACCHAN REVOLT 

"It was a young aristocrat Tiberius Gracchus, the friend and associ- 
ate of a group of moderates that read Stoic philosophy,.. who had the 
courage and faith to attempt agrarian reforms which seemed to promise 

social and political amelioration...," wrote Tenney Frank.^^ 

Tiberius was elected Tribune in 133 BC, with the idea of enforcing 
the old Licinian law which limited the use of public lands to just so many 
herd animals per person, and just so much acreage per person. The law 
was being ignored as the wealthy gained control over the land. Tiberius 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 67 



sparked a movement which lasted 100 years, until Augustus' reign. 
Plutarch relayed his words: 

"The savage beasts in Italy, have their particular dens. . .their places 
of... refuge; but the men who bear arms and expose their lives for the 
safety of their country (have) nothing more (than) the air and the sun- 
light, and having no houses or settlements of their own, (must) wander 
from place to place with their wives and children... They fight and are 
slain... to maintain the luxury and wealth of other men... They are 
(called) the masters of the World, but... have not one foot of ground 

which they can call their own."^^ 

In 133 BC, Tiberius Gracchus passed a law to take back the illegal- 
ly occupied lands, and distribute them to landless Romans. Though he 
was murdered within the year at the instigation of the Senate, the pres- 
sure continued, and ten years later his brother, Gais Gracchus, was 
elected Tribune to carry the program forward. He too was killed in 1 2 1 
BC, in a riot. The revolt had only limited success, and the process of 
concentration of land ownership soon resumed, but this Roman family 
raised a standard of justice still remembered today. 

GROWING POLARIZATION 

Wealth continued to concentrate, and injustice grew. The resulting 
class warfare placed severe pressure on Roman institutions and public 
finances. Around 82 BC, Roman dictator Sulla, after defeating 
Mithridates in Asia, found the mint in need of metal and levied a tax of 
20,000 talents on the Greek Temples in order to issue coins. Sulla was 
inspired to remark that: 

"The man could not fail whose chest was replenished by the gods 
themselves." 

The priests of Delphi tried to scare him off, reporting they were 
afraid to send the treasure he asked because the "Harp of God" emitted 
a clear sound when they touched it. He reinterpreted their "sign," telling 
them that God apparently approved of his levy. 

TAKEOVER BY THE CAESARS 

The society was vulnerable to dictatorship. Rome's sacred establish- 
ment and Julius Caesar (100-44 BC) were getting ready. At age 27, 
Caesar, an accomphshed astrologer, was elected to the church's govern- 
ing body, the Sacred College. At 36 he was elected to the ancient posi- 
tion of Pontifex Maximus - its leader for life. At age 52, in 48 BC, after 
his victory at Pharsala over Pompey, Caesar went to the Temple of 



68 The Lost Science Of Money 



Jupiter Amon at the renowned Silwa Oasis in Libya, where he was dei- 
fied by the temple's ancient priesthood. Three hundred years eariier, 
Alexander the Great thought it important enough to take a three week 
detour and march hundreds of miles through desert, to be deified by the 
priesthood of this same Temple after he had conquered Egypt. ^^ This 
deification process was not taken lightly,^ 

Why was this religious stamp of approval important to Alexander, at 
a time when irreligion and disbelief in the pagan gods was already ram- 
pant? Ferguson observed that: 

"It made possible the lasting union of all the city-states of the world 

in a single great territorial state"^^ 

Julius Caesar's motivation would have been similar.^ Caesar 
returned to Rome not as a mere dictator but as a God, and they meant it. 
He and later Augustus combined the sacred power of the church with the 
secular power of the state, into the hands of the deified Emperor. The 
separation of God and State in Rome had ended. The control over the 

money system was placed in the religious office of Pontifex Maximus.^ 
Tenney Frank viewed Caesar in a very positive light: 
"(Caesar) understood that Italy's free stock must be saved if the 
heart of the Empire was to be sound. With this in view he declared that 
at least a third of the laborers employed on the ranches of Italy must be 
free cifizens. This is the first effort at Rome to check the spread of slav- 
ery. , .Caesar in fact had accepted the logical consequences of the demo- 
cratic theories of the Gracchi, of which they had themselves not seen the 
fiill meaning." 



^ Dei Mar maintains that it sprang from an Indian doctrine of the ten incarna- 
tions of leus Chrisnu; once every "great year" (658 regular years, based on an 
astronomical cycle I haven't identified). The 11th incarnation was due between 
78 AD and 1 BC, depending on which calendar was used. Christ did appear at 
that point, and Mohammed came almost 658 years later, 

^ Interestingly in 1999, Zbigniew Brezinski, formerly President Carter's 
National Security Advisor, insightfully predicted the failure of the "New World 
Order" because it had no universal religious underpinning. But he missed the 
fact that the emerging new order does have a religion called "Economics," and 
its god's name is the "Market," and its priests are called "economists." 
^ Other functions under control of the Pontifex Maximus were the superinten- 
dence of religon; custody of the code of procedure; erection and custody of the 
temples; and custody of the calendar. See Del Mar's Middle Ages Revisited, 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 69 



MONETARY DISORDER IN THE CIVIL WARS 

As Rome's legal system faltered and she degenerated into civil warfare, 
faction leaders produced their own coinage. Her money system became a 
shambles, prompting Cicero to remark around 50 BC that the currency was 

in such a fluctuating state that "no man knew what he was worth."^^ 

Crawford noted that: 

"(Caesar) struck his own coinage in enormous quantities, as an 
authority independent of and parallel to the state...." 

Caesar also issued a bronze coin in shiny gold like brass (called 
orichalcum), valued at 2 Aes. Once he seized Rome, his coinage became 
"Roman." But Rome didn't pass easily into dictatorship. He was soon 
assassinated by Brutus, who was regarded by many as a hero for it and 
Cicero defended the act as justified. Brutus proudly issued a coin, with 
two daggers and "Eid Mart" on it, to commemorate the assassination. 
The official moneyers produced a large coinage for the contending fac- 
tions of Antony, Octavian and Lepidus: 

"But within a couple of years the dynasts had ceased to bother with 
the coinage of the moneyers and simply produced their own issues in 

their own names."^^ 

THE TEMPLES PROMOTED GOLD COINAGE 

The private coinage signaled an important shift to gold, the tradi- 
tional asset of the temple establishments. Crawford noted that: 

"Much of the coinage of the dynasts, like that of Caesar, was in gold, 
and the emergence of this metal as a major element of the Roman mon- 
etary system emerges with great clarity. . .(when Antony distributed gold 





2m. Brutus issued his "eid Mart" dagger coins, proudly commemorating 
the assasination of Julius Caesar, his political enemy, and the 

lover of his mother. 



70 The Lost Science Of Money 



nummi to soldiers in 44 BC)." 

The "deep pocketed" temples financed Octavian's (Augustus) battle 
for the succession. Appian's Roman History recounts how this financial 
help enabled him to use Roman Legions as a private army: 

"Octavian made many other gifts to the indigent soldiers, borrowing 
from the temples for that purpose," and 

"War was raging in all the provinces that had fallen to the lot of 
Octavian..,for which reason he borrowed money from the temples, 
promising to return it with thanks, from the Capitoline Temple at Rome, 
from those of Antium, of Lancium, of Nemus, and of Tibur, in which 

cities there are today the most abundant stores of consecrated money. "^^ 

DESTRUCTION OF THE ROMAN ETHOS 

Roman morale, weakened by the Eastern cults and the displacement 
of Roman freemen and citizens by slaves, was finally broken by the civil 
wars. There was a great foreboding of the future, as shown in Appian's 
account: 

"An old Etrurian sage was brought to Rome to explain the incredi- 
ble signs - wolves in the Forum, statues sweating, cows talking, voices 
heard from nowhere, continuous lightning. He said the Kingly rule of for- 
mer times was coming back and that they would all be slaves except him- 
self, whereupon he closed his mouth and held his breath till he was dead."^*^ 

Many illustrious individuals and families were cruelly murdered in 
the civil wars, including Cicero,^ whose severed head was presented to 
Antony. Atrocities and horrors occurred daily, prompting Appian to 
remark: 

"These things took place not in an ordinary city nor in a weak and 
petty Kingdom, but the evil Deity thus shook the most powerful mistress 
of so many nations."^^ 

It seems it wasn't early Christianity that destroyed Rome, but a 
much older religion. Rome wasn't ruined from the bottom up, but like 
America in the 20th century, the disease was spread from the east, to the top, 

^ Cicero's greatness is apparent in his philosophic work ''Nature of the Gods" 
probably the source from which several illustrious American colonial leaders 
adopted Deism, Cicero's hometown of Arpinum is in the same region from 
which the author's parents emigrated to America. 

^ Strangely, a new printing of the book (1981, by Crown Publishers) reverts to 
his initial manuscript, which contains none of these additions which Frazer 
made as his studies progressed. A subtle form of censorship? 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 71 



then down. 

At the heart of the later editions^ of James Frazer's Golden Bough 
is his analysis of how the eastern cults destroyed Rome's social fabric: 

"A multitude of... oriental faiths in the latter days of paganism 
spread over the Roman Empire, and by saturating the European peoples 
with alien ideals of life gradually undermined the whole fabric of ancient 
civilization. Greek and Roman society was built on the concept of the 
subordination of the individual to the community, of the citizen to the 
state. It set the safety of the commonwealth as the supreme aim of con- 
duct, above the safety of the individual... Trained from infancy in this 
unselfish ideal the citizens devoted their lives to the public service and 
were ready to lay them down for the common good; or if they shrank 
from the supreme sacrifice, it never occurred to them that they acted oth- 
erwise than basely in preferring their personal existence to the interests 
of their country. All this was changed by the spread of Oriental religions 
which inculcated the communion of the soul with God and its eternal 
salvation as the only object worth living for... The inevitable resuh of 
this selfish and immoral doctrine was to withdraw the devotee more and 
more from the public service... The saint and the recluse, disdainful of 
earth and rapt in ecstatic contemplation of heaven, became in popular 
opinion the highest ideal of humanity, displacing the old ideal of the 
patriot and the hero who, forgetful of self, lives and is ready to die for 
the good of his country. . .A general disintegration of the body politic set 
in. The ties of the state and the family were loosened: the structure of 
society tended to resolve itself into its individual elements and thereby 
to relapse into barbarism, for civilization is only possible through the 
active co-operation of the citizens and their willingness to subordinate 
their private interests to the common good."^^ 

Frazer did include Christianity among these Oriental cults. 

THE IMPERIAL GOLD STANDARD EMPOWERS 
EASTERN FINANCE 

The Caesars and the Pagan church established a de facto gold stan- 
dard throughout the Empire in 45 BC. Gold coins didn't replace silver 
and bronze as the circulating money, but all large sums became expressed 
in gold, and the relative value of gold against silver was raised by 1/3. 

This reform centered on Rome's gold coin, the Aurei, which had 
weighed 168 grains and was set at a value ratio of 9 silver for 1 gold. 
Caesar, in several steps, quickly reduced the Aurei to 125 grains of gold 



72 The Lost Science Of Money 




2n. Under the Emperor 
Augustus, Rome again 
issued uniform copper 
coinages in great quanti- 
ties, botii for Rome and 
for the provinces, setting 
the pattern for Roman 
copper money for the 
next 250 years. This 
Dupondius was struck 
under Tiberius in 22 AD. 



- to near the ancient Temple ox/cow value. This brought the Roman ratio 
to 12 silver for 1 gold where it remained for nearly 1,300 years, until the 
downfall of the Roman/Byzantine Empire in 1204. 

It is important to observe that the gold/silver ratio was set by gov- 
ernment decree, not by market forces. 

From the Caesars, religion became inseparable from the monetary 
power, though Roman state finances were separate from that of the 
Pagan and later the Christian Church. 

Gold, the main holding of the eastern temples from time immemori- 
al, became empowered as money throughout the Empire. Moreover, by 
raising the ratio to 12 to 1, Caesar arbitrarily increased the temple gold's 
value in relation to silver and bronze, the more commonly used coinage. 

Julius Caesar in his campaigns had sought to control the important 
gold producing regions of the Empire, increasing Rome's supphes of 

gold.-^^ Shifting to a gold standard probably worked to his personal 
advantage and may have been a matter of necessity for him as he was 
deeply in debt. In addition, he had made plans for eastward expansion, 
including digging the Corinth canal for a fast transit to Asia. This would 
have secured as much gold as the Empire could foreseeably use. 

AUGUSTUS' MONETARY REFORMS 

During Augustus' reign from 31 BC tol4 AD, he consolidated the 

control over Roman bronze, silver and gold coinage into Imperial hands. 
He aboHshed the coining privileges of the Patrician families; no new 
issues appeared after 10 AD. 

From 23 to 19 BC, Augustus began issuing copper coinage in the 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 73 



form of orichalcum, a shiny brass. Except for Julius Caesar's brief issue, 
and an earlier shorter one of Pompey in Spain, no bronze had been 
coined from the time of Sulla. To make it appear that he was giving the 
right of coinage back to the Senate, he stamped the new brass coins with 
"SC" - Senatus Consultus. But this was window dressing. 

Augustus' new copper Asses weighed one half ounce. Interestingly 
the still circulating one ounce Asses were doubled in value, and were cut 
in half, dividing the Janus heads. This had not happened when the earli- 
er Republican bronzes were reduced in weight. Augustus' initial reform 
thus increased the value of the bronze money already in circulation. But 
it appears that he ignored the essential concept of limitation of issue. 
Crawford noted that: 

"Within a few years, however, even the doubled stock of Republican 
Asses paled into insignificance compared with the growing volume of 
new Augustan Asses."^^ 

And Burnett points out that: 

"...the purchasing power of base metal coinage was greatly 

increased, not just by the revaluation of the old coins but also by the pro- 
duction of new coins of a much higher denomination than had been pre- 
viously made."^^ 

Augustus also issued large amounts of uniform provincial bronze 
coinage in both the eastern and western parts of the empire, which could 
circulate in any Roman city, and set the pattern for Roman coinage for 
the next 250 years. 

Rome had coined at intervals determined mainly by war: "All the 
great wars... are represented by great additions to the coinage," wrote 
Mattingly, who noted that the establishment of a colony was also an 
occasion for new coinage: "(it was) only natural that the colony should 

be started in hfe with a supply of Roman coinage. "^^ 

From the Emperor Vespasian on (69 AD), Rome coined continuous- 
ly, producing the bulk of the coinage at Rome, and distributing it through 
state expenses, army pay, and as gifts. Julius Caesar had introduced dis- 
tributing coinage as gifts through the "dole." According to Mattingly, 
Trajan distributed at least 650 Denarii per head; Hadrian 1,000 per head; 

and Antonius Pius over 800 Denarii per head. -^^ Severus made six dole 

distributions totaling 220 million denarii, before his death in 21 1 AD.^^ 

Michael Grant, as president of the Royal Numismatic Society, 

argued that a historian couldn't truly understand an emperor's reign 

"unless he had a good knowledge of the local coinages issued... in that 



74 The Lost Science Of Money 



reign." But because of the complexity and number of issues, "attempts 
to compile empire-wide descriptions of local coinages for any given 

period have so far been extremely rare,"'^^ 

PRECIOUS METALS DRAIN TO THE EAST 

Rome s gold standard was thus born in the dictatorship of the 
Caesars, and then nurtured through three centuries of growing totalitar- 
ianism, slavery and injustice. 

No sooner was Rome fiilly committed to gold and silver for her pri- 
mary coinages, when she began to run out of them! Trade with India was 
draining the monetary metals from the empire. Rome began importing 
"(F)eminine articles. ..the costly spices and perfumes from the east. To 
pay for them she had no great mass of manufactured goods to offer; pay- 
ment had to be made for the most part in bullion. The result was a 

steady... depletion of the stocks of precious metals," wrote Mattingly^** 



PROBABLE ROMAN MONEY SYSTEMS 
8th century BC: 

King Numa Pompilious: Established a Bronze standard; later he cast Bronze 

(with iron) bars; inaugurated the "Nummi" valued at IVi Aes. (30 oz.of bronze) 

6th century BC 

King Servius TuUius: Further refined and marked the bronze bars (Aes signa- 

tum); later he monetized nomisma pieces for taxation and census counts. 

Early Republic (from early 5th century BC, to pre-Punic wars, 268 BC) 

Nomisma system of fiat money with limited issues of Aes Grave representing 

nomisma - i.e. representing IVi Aes . 

Silver bullion coins for foreign trade (Romano, Roma and Roma/Quadrigatus ). 

Smaller, lighter Aes Grave in limited issues, both cast and struck. 

Later Republic (c. 268 - 60 BC) 

Stmck bronze coins, in limited issues; As (still fiat) representing 12 ounces of bronze. 

Silver Denarius, and subdivisions in unlimited issues. 

Small issues of gold for war emergency 

RomaA^ictoriates silver bullion coins for foreign trade (in large amount). 

Pre Empire Civil War upheavals (c. 60 - 40 BC) 

Previous coinages still circulating. 

Private coinage of the civil war leaders, who borrow and monetize Temple gold 

into coins. 

Early Empire (the Augustans - Augustus, Tiberius, Caligula and Claudius) 

Old bronze still circulating as money. 

Gold Aureus; Silver denarius; Augustus: new (orichalcum brass) issues from 

23 BC, in unlimited amounts and higher denominations. His large issues of 

standardized bronze for the provinces sets the pattern for the next 250 years. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 75 



This was not merely a negative balance of payments accounting sit- 
uation; Rome's actual money supply was constantly being exported to 
the east. 

Religious dues also drained the money supply to Asia: 
**One of the most important privileges in Jewish eyes was the per- 
mission to collect money and send it to Jerusalem. The sums of money 

collected among the Jews were not small," wrote Victor Tcherikover.^^ 
During the Roman Empire it was 2 Denarii per head each year, for all 
men 20 to 50 years of age. 

This constant drain to the east was probably aggravated by loan 
sharking - usury. Once Rome monetized gold, she handed power to the 
eastem holders of the metal. They could have used their metallic hoards 
in loans through intermediaries. Over the centuries, this cumulative drain 
could have been enormous, with powerful deflationary consequences. 

In spite of the great amounts of silver denarii being minted, Rome 
faced severe hquidity crises. First Augustus had to advance 15 million 
denarii around 7 BC, Then in 33 AD, the Emperor Tiberius felt com- 
pelled to coin and advance 100 million Sesterce interest free for three 
years to prevent foreclosure on many indebted farmers. 

The flow of precious metals to the east was relieved by military 
expeditions against the east, which brought large quantities of gold and 
silver back to Rome to be coined. Still, the precious metals content of 
Roman coinage had to be reduced. 

The gold Aureus went from 125 grains in Julius Caesar's time, to 68 
grains under Constantine The Great, 375 years later - a drop of 46%. The 
silver content of the Denarius fluctuated much more, falling from 58 
grains to almost no silver content at one point in the late third century, 
and finally being re-constituted at 36 grains under Constantine (a drop 
of 38%). 

These reductions have usually all been indiscriminately character- 
ized as "debasements" by commodity money advocates and seized upon 
as an over-simplified explanation of Roman moral degeneration! But 
Tenney Frank gave this opinion: 

*'Our conclusion is that neither the lack of metals nor the debasement 
of the currency was a serious factor in the economic debacle before 250, 
but rather that the imperial currencies followed the road to degradation 
at about the same rate as the government and society in general, and that 
debasement was an effect rather than a cause of the wreckage. "^^ 

We can agree up to a point. Reducing the metals content was probably 



76 The Lost Science Of Money 



a necessary means of alleviating the deflationary effects of using scarce 

commodities for money,^ enabling Rome to partially offset the export of 
her money supply to the east. For especially in later centuries a steady 
deflation and scarcity of money most likely plagued Rome, 

THE EMPIRE SHIFTED EASTWARD 

Adopting the gold money system of the east focused the Empire in 
that direction, as precious metals flowed eastward mainly for luxury 
items, for religious dues, and probably for usury payments. The severe 
problems caused by the Caesar's gold standard demonstrates the primary 
importance of not placing the control of the monetary system outside of 
the community. 

Julius Caesar was preparing an attack eastward on the gold rich 
Parthian Empire, which would have alleviated this problem for the fore- 
seeable future, when he was assassinated. 

Trajan launched a campaign against Parthia and got as far as Basra, 
but was stopped by the Jewish revolt behind his lines, in 115-117 AD. 
The Empire had reached its greatest land expanse. Hadrian pulled back, 
dismantling the great bridge over the Danube, moving all troops to the 
west of the Euphrates river and building a defensive wall across Britain. 
Diocletian would later attack eastward. 

DIOCLETIAN BEGAN THE REFORM PROCESS 

Twentieth century economists like to ridicule Diocletian for setting 
up price controls in 301 AD, and point to their failure as one of the main 
examples of why governments should not intervene with markets. But as 
the body of Diocletian's reforms continue to be pieced together, the pic- 
ture emerges of him as one of Rome's more capable Emperors. 

He was the first to organize the Roman budget on an annual basis 
and to levy taxes uniformly throughout the Empire. Before he acted on 
prices or coinage reform, he had extensive research carried out to better 
know what he was doing. Diocletian's pet peeve was merchants taking 
unfair advantage of movements of the army, "extorting" prices that were 
"unspeakable:" 

"The Emperor's chief complaint... is of the universal existence 
of, ..a raging avarice, a desire of unrestrained madness amounting to a 
religion and an unbridled passion for plundering... Wherever the Army 
be directed - villages and towns, even roads - the profiteer extorts prices 



^ One of the rare modem writers to recognize this was Robert de Fremery in Money 
and Freedom. Another was Elgin Groseclose in Money the Human Struggle. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 77 



that are not simply four times or eight times but are such to render the 
name of the price and the act incapable of description by the human lan- 
guage," wrote H.L. Cope in Diocletian s Price Edicts}^ 

Diocletian, who began his career as a slave, resigned the 




2o, Constantine the Great inaugurating the new capital of 
Byzantine/Rome. Adopting the gold money system of the East drew the 
empire in that direction until finally Constantine relocated the capital at 
Byzantium on the border of Asia, renaming it Constantinople. 



78 The Lost Science Of Money 



Emperorship in disgust, and retired to his home on the Dalmatian Coast. 
When pressured to resume the throne he repHed: 

"Would to god that you could see the herbs which I cultivate with 
my own hands at Salonika, you would not think of making me such a 



proposition."^^ 

CONVERSION OF THE EMPIRE TO CHRISTIANITY 

Trade with India dealt the Pagan Church a great blow. The mythol- 
ogy of Roman religion which had been derived from Homer, Virgil, 
Hesiod, and the Sibylline Books, was seen to be of Indian origin, much 
older than previously thought.^^ 

By 324 AD Constantine converted the Pagan Church to Christianity. 
It didn't triumph over Paganism, but Paganism's leaders adopted it, 
substituting Christ for Caesar. Christianity inherited the Pagan Church's 
property - about 1/3 to 1/2 of all the lands of the Empire, with about 1/4 
of its population. The shift was gradual. Acknowledgment of the con- 
version in the coinage, the normal place for such announcements, only 
starts to appear in the coinage of Constantine 's son. 

CAPITAL OF THE EMPIRE MOVED EAST TO BYZANTIUM 

Finally in 331 AD, Constantine The Great moved the seat of Empire 
to Byzantium, on the border with Asia, renaming it Constantinople. 
From this point the Empire is called the Byzantine Roman Empire. Asia 
was literally within eyesight of the Imperial Palace. Brooks Adams char- 
acterized the city as "a horde of Roman capitalists washed to the con- 
fines of Asia by the current of foreign exchanges."^^ 

While the Emperor's office had been temporarily divided, the reli- 
gious office of Pontifex Maximus, which held the money power, was 
generally not split. Constantine The Great continued to hold this office 
until his death, calling himself the "Chief Pontifif."^'^ In the east, the 
Pontifex Maximus office was called the Basileus. The Basileus contin- 
ued to exercise effective internal control over the Empire's money sys- 
tem until it fell in 1204 AD, marking nearly 2,000 years of Rome. 

Constantine used gold appropriated from the temples to inaugurate 
the famous Bezant coin (usually referred to as the Nomisma) at 68 grains 
of gold, almost exactly half the ancient 130 - 135 grain ox/cow standard 
For 900 years the Nomisma: 

"...was seldom degraded, and but once debased; it never ceased to 
be regarded as money. There was no ingot-money, there was no weighing 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 79 



of gold coins, they passed then as they do now, by tale, and what is more, 
it was unlawful to refuse, criminal to aUer, and death to deface them or 

reduce them to bullion," wrote Del Mar.^^ 

But this did not mean that the Empire's monetary problems were 
solved - far from it. While in the east, the finances of the Empire's 
administration and army were carried on successfully, in the west the 
rule of law continued to degenerate, and money, which is based in law, 
almost disappeared. 

The culmination of Roman thought on money is in the 6th century 
code of Justinian, tenth book, a passage of Julius Paulus, a Jurisconsult 
ofaround300AD: 

",..a device was chosen, whose legal and permanent value remedied 
by its homogeneity, the difficulties of barter. This device being officially 
promulgated, circulated and maintained its purchasing power, not so much 
from its substance as from its quantity. Since that time, only one consid- 
eration in an exchange is called merchandise. The other is called price." 

This concise statement of the principles of nomisma helped to con- 
vince Del Mar that the Romans indeed must have used and understood 
such a system. Otherwise how could Paulus be so aware of it? 

So the historical record, up to and through Rome shows the money 
power to be a convention or legal institution, of either the Temples (reli- 
gion), the government, or both. Now we know why the banks are dis- 
guised in Greek temple architecture. But where did the idea come from 
that a nation's money system should be placed in the hands of private 
bankers? Not fi"om Greece or Rome - certainly not from classical sources. 



Notes to Chapter 2 

^ Tenney Frank, Economic History of Rome, (1920, New York: Cooper Square 
Publishers, 1962), p. 20. 

^ Henry Noel Humphreys, Ancient Coins and Medals, (London: Grant & 
Griffith, 1850). 



80 The Lost Science Of Money 



^ Livy, c.f., s. 77, as cited by Peruzzi, see #7 below, pp 228-245. 

4 Pliny, Historia Naturalis, Book 3, Ch. 30, S. 138, Book 33, Ch. 4 (21), S. 78, 
and Book 37, Ch. 77, S. 202, quoted by Toynbee, cited in note # 37 below, 
p.361. Also, Pliny, iii, 24 and xxxiii21, as cited by Del Mar, Money in Ancient 
Countries, cited in note #30 below, p. 220. 

^ Humphreys, cited above, pp. 127-31. 

^ Raymond Bloch, The Origin of Rome, (New York: Praeger, 1969) pp. 19, 20, 56, 

■^ Emilio Peruzzi, Money in Ancient Rome, (Florence: Academia Toscana Di 
Sciencze E Lettere, 1985), pp. 9, 10. 

^ Alexander Del Mar, History of Monetary Systems, cited above, p. 78. 

^ Peruzzi, cited above, pp. 97-105. 

Peruzzi, cited above, pp. 97, 275. 

Peruzzi, cited above, p. 113. 

JG Milne's article, The Classical Review, (vol. 63, 1949) p 86. 

Chronographus, cited by Peruzzi, see note # 7 above, p. 168. 

^ Joannes Antiochenus 33, and Suda, I p 378, quoted by Peruzzi, cited above, p. 151. 

^ Rudi Thomsen, Early Roman Coinage, 3 vol. (Copenhagen: Nationalmuseet, 1961), 
vol. 3, p. 204. He gives 3,435 grams (=- 7.57 lb) and 216.1 grams (= .48 lb) 

6 Pliny, N.H. XXXIV, 1. 

■^ Andrew Bumett, Coinage in the Roman World, (London: Seaby, 1987), p. 3. 

^ Pliny quoting Timaeus (c. 356-260 BC) in N. H, 33.43, as quoted by Peruzzi, p. 158. 

^ Varro, records ap. Charis, GLK, I, pp. 105.5-7, as quoted by Peruzzi, p. 227. 

^^ Peruzzi, cited above, pp 171, 225. 

2^ Peruzzi, cited above, pp. 208, 216-17, 220-21. 

^^ Peruzzi, cited above, pp. 231-32. 

^^ Peruzzi, cited above, pp. 231-33. 

^4 Bumett, cited above, pp. 3-6. 

^^ Thomsen, cited above, vol. 3, p. 256. 

^^ Del Mar, cited above, p. 63. 

^^ Peruzzi, cited above, pp. 233-239. 

^^ Peruzzi, cited above, p. 233. 

^^ Livy, 4.60.2 and 4-6, quoted by Peruzzi, p. 138. 

^^ Alexander Del Mar, Money in Ancient Countries, cited above, p. 187. 

^^ Thomsen, cited above, vol. 3, p. 239. 

^^ Andrew Bumett, Rome and the Hellenistic World in Coins, (London: 
Metheun, 1980), p. 55. 

^^ Del Mar, Money in Ancient Countries, cited above, p 241. 

^^ Frank, cited above, pp. 71-2. 



2 ROME'S BRONZE NOMISMA: BETTER THAN GOLD 81 



^^ and again, Frank, pp. 71-2. 

^* Gilbert and Colette Charles-Picard, Daily Life in Carthage, trans. A.E. Foster, 
(New York: Macmillan Co., 1966), footnote p. 85. 

^^ Arnold Toynbee, Hannibal's Legacy^ (Oxford Univ. Press, 1965), vol 1, pp. 33-8. 

^^ Burnett, Coinage in the Roman World, cited above, p. 33. 

^^ Michael Crawford, Coinage and Money Under the Roman Republic, (Univ. 
of California Press, 1985), p. 3. 

^^ Frank, cited above, p. 76. 

4* See Pliny Hist. Nat. XXXIV, 34. 

^^ Burnett, Coinage in the Roman World, cited above, p. 35. 

^^ C.H.V. Sutherland, Roman Coins, (London: Baine & Jenkins, 1974), p. 47. 
AlsoUvy,XXVi, 10, llf. 

^ Pliny (xxxiii, 13), also in Ch. 2 and Ch. 3, as quoted by Del Mar, Money in 
Ancient Countries, p. 212 footnote. 

^^ Thomsen, cited above, vol. 2, p. 249. 

^ Harold Mattingly, Roman Coins, (London, Spink and Son, 1977). 

^^ Thomsen, cited above, vol. 2, pp 198-200. 

^^ Based on the account of Mathew Raper in McCulloch's Rare and Valuable 

Tracts on Money, 1856, (reprint. New York: A.M. Kelley). 

^^ Crawford, cited above, pp. 178-83. 

^^ Burnett, Coinage in the Roman World, p. 109. 

^^ Crawford, cited above, p. 177. 

^^ Burnett, Coinage in the Roman World, p. 111. 

^^ Toynbee, cited above, vol. 2, p. 'MS-IG. 

^^ Toynbee, cited above, vol. 2, p. 380. 

^^ James George Frazer, The Golden Bough, (NY: Macmillan, 1953), p. 404. 

^^ Frederick C. Grant, Ancient Roman Religion, (NY: Liberal Arts Press, Bobbs 
Merrill, 1957), p. xix. 

^^ Toynbee, cited above, vol. 2, p. 384 footnote 7. 

^^ Toynbee, cited above, vol. 2, pp. 349-50 (footnote). 

^^ M.I. Henderson, The Establishment of the Equester Ordo, Journal Of Roman 
Studies, (Liii 1963), pp. 61-72. 

^** Toynbee, cited above, vol. 2, p. 174. 

^* See Toynbee, cited above, vol. 2, tables on pp. 171-3. 

^^ Toynbee, cited above, vol. 2, p. 312. 

^^ Frank, cited above, p. 129. 

^ Plutarch, Plutarch s Lives - Tiberius Gracchus, (Chicago: Great Books of the 
Western World, Univ. of Chicago, Encyclopaedia Britanica, 1952), p 675. The 
tenses of some verbs have been altered, for understanding. 



82 The Lost Science Of Money 



^^ William S. Ferguson, Greek Imperialism, (NY; Biblo & Tannen, 1963), pp. 
126-130. 

^^ Ferguson, cited above, p. 148. 

^^ Cicero, De. Off. L.iii, S. 20, as cited by Del Mar, Money in Ancient Countries, 
cited above, p. 298. 

^^ Crawford, cited above, pp. 242-44, 250- L 

^^ Appian's Roman History, Book 4, (Loeb Classical Library, 1979), pp. 397, 417 

^^ Appian, cited above, p. 147. 

^^ Appian, cited above, p. 165. 

^^ Frazer, cited above, pp. 414-5. 

^^ Del Mar, Money in Ancient Countries, p. 290, 300-01. 

'^^ Crawford, cited above, p. 261. 

^^ Burnett, Coinage in the Roman World, cited above, p. 54. 

^^ Harold Mattingly, Roman Coins, (London: Metheun, 1928), p. 182. 

^^ Mattingly, 1928 edition cited above, pp. 90-91, 196-206. 

^^ Sutherland, cited above, p. 215. 

^^ Michael Grant, Roman History from Coins, (Cambridge University Press, 
1958), pp. 73-79. 

^^ Mattingly, 1928 edition cited above, pp. 185-96. 

^^ Victor Tcherikover, Hellenic Civilization and the Jews, (Jerusalem: Jewish 
Publication Society, 1959), p. 308. 

^^ Frank, cited above, p. 491 

^^ L.H. Cope, Diocletians Price Edict, as quoted in Michael Hendy, Studies In 
The Byzantine Monetary Economy, 300-1450, (Cambridge University Press, 
1985), pp. 450-60. 

^^ Humphreys, cited above, p. 176. 

^^ Alexander Del Mar, Middle Ages Revisited, (New York: Cambridge Encyl., 
1900), Ch, 8. 

^^ Brooks Adams, The Law of Civilization and Decay, (New York: Knopf, 
1943), pp. 97-8. 

^^ John Holland Smith, Constantine the Great, (London: Hamish Hamilton, 1971). 

^^ Del Mar, History of Monetary Systems, cited above, p. 82. 



83 



CHAPTER 3 



A MONETARY VIEW OF 
ROME'S DECLINE 



"There was no 'Fall of the Roman Empire'. 
The phrase is rhetorical and false..." 

Hilaire Belloc 



Our monetary interpretation of the decline of the Roman Empire is 
based on two important, but httle known monetary mechanisms of great 
antiquity. The first was the sacred gold coinage prerogative, and the sec- 
ond was the difference in the gold/silver ratio between east and west. 

THE SACRED GOLD COINAGE PREROGATIVE 

This ancient "privilege" is a dramafic example of how religious and 
monetary power continued to overlap. For over 12 centuries coining 
gold was regarded as the exclusive prerogative of the supreme sover- 
eign, and was a jealously guarded privilege of the Caesars as Pontifex 
Maximus for 300 years; and then in the east, as Basileus, for nearly 900 
years more. Infringements upon this power, which were extremely rare, 
were met with death or warfare. According to Del Mar, the phenomenon 
"ascends to the Archimenides of Persia (Cyrus and Darius) in fact it 
ascends to the Brahmins of India., .The Greek and Roman republics 
broke it down; Caesar set it up again."^ 

One remarkable attempt to infringe this sacred prerogative occurred 
when Moslem leader Abd El Melik minted gold coins. He had a 10 year 
peace treaty with the Byzantine Roman Emperor Justinian, whereby he 
paid Byzantium 1,000 gold coins a year which he was allowed to mint 
with Roman emblems. Then in 695 AD he issued gold coinage with his 



84 The Lost Science Of Money 



own image, holding a sword, and the words "Abd el Melik - servant of 
god" and tried to pay Justinian's tribute with them.^ 

Though this new coinage was similar in weight and purity, 
Justinian's generals recognized the significance of his act and immedi- 
ately declared war even before the news could reach Justinian. For Abd 
el Melik had committed the ultimate defiance in the ancient world - he 
had independently issued gold coinage, a prerogative of the Basileus at 
Constantinople. 

This prerogative is not much discussed today, as it does not fit with 
the assumed market nature of money and argues strongly for an institu- 
tional/legal nature of money. However, the prerogative is well docu- 
mented by authorities in the field: 

"As to the provinces.. .the coining of gold was nowhere permitted, 
not even in the client states," wrote Mommsen in the History of Rome? 

Lenormant's Monnaes de Antiquita noted: "With (one minor excep- 
tion) it is certain that the coinage of gold, no matter where, was always 
intended as a marked defiance to the pretensions of sovereignty by the 
Roman Empire... for many centuries neither the provinces subject direct- 
ly or indirectly to the Basileus, nor even more or less independent states 

adjacent to the Empire, ever attempted to coin gold money. "^ 

Harold Mattingly confirmed that the few gold pieces that were man- 
ufactured outside Byzantium's system are regarded as medallions issued 

to commemorate special occasions, not as coinage.^ 

"More decisively important than the [centralizafion of minting] was 



'V. '-f ■ 




3a. 

Abd El Melik's gold 
coinage of 695 AD 
sparked a war with 
Byzantine Roman 
Emperor Justinian. 
He violated the 
ancient prerogative 
that only the supreme 
religious authority (at 
that time the Basileus 
at Constantinople) 
could coin gold. 



3 A MONETARY VIEW OF ROME'S DECLINE 85 



the Byzantine reading or definition of the prime gold coin not simply as a 
token of exchange but as a sign of ultimate sovereignty," wrote Dean 

Miller in Imperial Constantinople.^ 

Local rulers were allowed to mint silver coinage, at the Roman ratio 
of 12 to 1, established by Julius Caesar. Del Mar maintains that this 
remained Rome's official ratio until 1204 AD. That's not to say that 
Rome's official ratio was everywhere followed at all times in the twelve 

centuries of Imperial Rome.^ 

Even the Popes of Rome, after seceding from the Empire in 755 AD, 
didn't dare to mint gold coinage for 560 years, until the Byzantium 
Empire fell in 1204, At that point local rulers all over Europe began 
minting gold coinage: 

EUROPEAN GOLD COINAGE BEGINS AFTER THE FALL 

OF THE EMPIRE 

DATE PLACE RULER COIN NAME WEIGHT 



1225 


Naples 


Frederick 2^^*^ 


Aurei 


81-82 grains 


1225 


Lyon 


Alfonso 


Ducat 


54 grains 


1250 


Paris 


Louis 9^^ 


Ag'ne 


63 grains 


1252 


Florence 


Republic 


Florin 


56 grains 


1257 


Englanc 


Henry III 


penny 


43 grains 


1284 


Venice 


Republic 


Ducat 


56 grains 


1316 


Avignon 


Pope John 22 


Sequin 


54 grains 



MONETARY "SECRET OF THE AGES" - A DICHOTOMY IN THE 
GOLD/SILVER RATIO BETWEEN EAST AND WEST 

The second ancient mechanism was the monetary "secret of the 
ages" - a difference in the gold/silver ratio between east and west. For 
thousands of years this mechanism was a great source of power to who- 
ever held it. Elements of the Roman establishment drew great strength 
from their control over it, until its effects helped bring down Rome from 
within. Venice's profits from it helped spark the Renaissance. It was qui- 
etly used for centuries by Jewish merchants getting transplanted from 
Asia into Europe. Control over it helped shift the balance of commercial 
power in Europe in 1500 from Venice to Portugal/Antwerp, then to 
Holland, and finally to England. In short, it was one of the primary 
forces that shaped modem capitalism. 

It worked like this: The gold/silver ratio in the West was kept high. 



86 The Lost Science Of Money 



ranging over millennia, from 9 to 1 , to 1 6 to 1 . However, the ratio in 
India and Asia was kept low - usually about 6 or 7 to 1 . This meant that 
silver talten from Europe to India exchanged for nearly twice as 
much gold in India as it did in Europe. The nexus of the trade was the 
land bridge above the Middle East; whoever controlled that area usually 
controlled the trade. 

If it was controlled from the West, they got 100% more gold for their 
Silver than the local value. It worked just as well from the East. If they 
controlled the trade they received 100% more silver for their gold. If 
control was shared, trade would probably have been at a 9 to 1 ratio, giv- 
ing each establishment a profit on exchange. 

The existence of this dichotomy and its significance is almost 

unknown. William Jacob discusses it,^ and Del Mar also discovered it: 
"About 69 BC, the Jews appear to have again acquired some share 
in that lucrative trade with India.. .which has ever been a source of con- 
tention and hatred among the states of the Levant. The principle channel 
of this trade was now by the Nile and Red Sea, and was in the hands of 
the Ptolemaic rulers of Egypt. A portion of it went overland by Palmyra; 
and from this portion Jerusalem derived important commercial advan- 
tages... [which] were lost to the Jews and acquired by Rome when in 63 BC 




3b. Whoever controlled the Middle East land bridge region between 
Europe and India could derive vast profits from the caravan trade, and 
amass gold by sending silver from Europe to India, where it was 

worth twice as much gold as in Europe. 



3 A MONETARY VIEW OF ROME'S DECLINE 87 



Pompey and Scannus snatched Judea from the contentious Maccabees..."^ 

THE GORDIAN KNOT? 

Three centuries earlier, Alexander the Great had seized control of the 
mechanism, when he conquered Asia Minor, Egypt, and parts of India. 
// is tempting to consider the mechanism as a kind of monetary ''knot'' 
between East and West, the control of which could yield great power 
"Whoever untied the knot shall be lord of Asia, '' stated an ancient leg- 
end connected with the region. 

At the Citadel of the city of Gordium, in Phrygia, there stood a cart. 
A"knof' of cornel bark held the cart's shaft to its yoke. The legend was 
that the cart had been brought there by a peasant's son on the day that 
he, Midas, was unexpectedly proclaimed King. The Midas gold connection 
is fascinating. We are told that Alexander sliced the knot with his sword. 

With Alexander's untimely death, power over the mechanism went 
to one of his aides, Ptolemy, founder of the Ptolemaic Dynasty of Egypt. 
To operate the mechanism from Egypt required a high degree of insula- 
tion from neighboring states. While the mechanism is still unrecognized, 
we can identify its traces in the work of modem historians such as M. 
Rostovtzef's Social and Economic History of the Hellenistic World: 

"The Ptolemies pursued from the outset their own monetary policy, 
regardless of what happened in this regard in the rest of the world. For 
reasons unknown to us but probably dictated by economics. ..they sepa- 
rated themselves and their Kingdom from the rest of the Hellenized 

world."^^ (emphasis added) 

Rostovtzef continued: 

"It seems to have been an accepted fact that the Ptolemies derived 
an enormous reserve of gold from the Arabian caravan trade." 

And, 

"Greek imports from the Ptolemies were without doubt paid for in 
good silver, of which the Ptolemies had such a pressing need." He fur- 
thernoted that there was a serious inflation in the value of silver in Egypt 
in the 2nd and 1st centuries BC, an effect indicated by the siphoning of 
silver to the east. 

Since traders could arbitrage or translate the existence of the 
gold/silver dichotomy into the values of other commodities, some con- 
trol over these is indicated: 

"The Ptolemies maintained effective customs barriers on merchan- 
dise," which had to be sold to them at officially fixed prices, wrote 
Rostovtzef Finally, what if a trader carried goods east to India, and 



88 The Lost Science Of Money 



returned with gold, presumably twice as much gold as the goods were 
worth in Egypt? Imported "foreign coins had to be reminted" at the 
Ptolemaic western ratio, of 12.5 to 1. 

Rome gained full control of this crucial Asiatic trade when it took 
Egypt from the Ptolemies in 48 BC, and quickly took steps to maximize 
control over the gold-silver ratio dichotomy. Tenny Frank observed that: 

"Augustus... virtually severed (Egypt) from the rest of the 
world... he desired it to be closed to Roman contacts," and he mentions 
"The temporary increase in land values near Rome in Augustus' day, due 

to the lavish coinage of gold brought by Augustus from Egypt... "^^ 
Michael Grant notes that in the reign of Tiberias, Rome's silver 

denarii were not allowed into Egypt. ^^ This made unofficial leakages of 
silver to the East more difficult. 

Pliny wrote that 100 million Sesterces of silver, equivalent to one 
million gold Aurei, was annually exported to India and China from 
Rome. He had been appointed Procurator in Spain and entrusted with 
managing the Revenue, But the secrecy of the mechanism is underscored 
by the fact that its workings were not known to him, for he couldn't 
understand why his countrymen "always demanded silver and not gold 

from conquered races."^^ 

Like the Ptolemies, from Augustus' time, Rome maintained "a high 
customs barrier along the eastern frontier of the Roman Empire. ..a fact 
of primary importance... this frontier remained intact... until the Arab con- 
quest., .In the first century a duty of 25% was charged on incoming goods 
and probably also on exports.. .all trade by mutual consent of Rome and 
Persia had to be channeled through certain cities," wrote A.H.M. Jones, 

m Asian Trade in Antiquity}^ 

According to Prof Jones, fi"om the fourth century the tariff dropped 
to 12 !/2%, and in the 6th and 7th centuries there was a deliberate increase 
of export tariffs on the Persian side, greatly reducing the amount of 
trade, indicating the fall of Roman power in the area as the Moslems 
conquered Persia. Rome's loss of absolute control over the mechanism 
hastened her decline. 

THE SILVER DRAIN CONTINUALLY PRESSURED ROME 

An awareness of this tendency of silver to drain eastward explains 
some of the legislation Rome enacted in response, as reported by 
Burnett: 

"The Republic (banned) the export of money (63 BC)... whereas in 



3 A MONETARY VIEW OF ROME'S DECLINE 89 



the imperial period the emperor solved the problem by making large 
interest free loans available.,. Augustus lent 15 million denarii from 7 
BC, and Tiberius 25 million in AD 33." 

"Caesar (in 49 BC) passed a law forbidding anyone to hoard more 
than 15,000 denarii... On other occasions one hears of attempts to 
restrict the flow of precious metal from Italy... or a ban on exporting 
coin from one province to another where it would be worth more. . ." 
The Fourth century Theodosian code proclaimed that: 
"It shall be altogether illegal for any person to buy coin. . .(pecunias) 
or to handle forbidden (vetitas) coin, because legal tender ought to be 
money, not merchandise... And if ships should come to any province 
with goods, everything should be sold with the customary freedom 
except the coins which are usually called largers, or common hundred- 

ers..."^^ 

THE JEWISH PIEVOLT OF 115-117AD 

The gold/silver ratio mechanism helps explain the Jewish revolt of 
115-17 AD, which historian E. Mary Smallwood called "one of the most 

puzzling chapters" of the relations between Rome and the Jews.^^ 
Edward Gibbon, citing ancient sources wrote in his Decline and Fall of 
the Roman Empire: 

"...In Cyrene they massacred 220,000 Greeks, in Cyprus 240,000. In 
Egypt a great multitude. The victorious Jews devoured the flesh, licked 
up the blood and twisted the entrails like a girdle around their bod- 
ies... and we are tempted to applaud the severe retaliation which was 
exercised by the arms of the Legions against a race of fanatics whose 
dire and credulous superstition seemed to render them the implacable 
enemies not only of the Roman Government, but of human kind... their 

irreconcilable hatred of mankind... etc." ^^ 

Gibbon noted that as a result of the massacre of 240,000 Greeks on 
Cyprus, Jews were not allowed to land on the island and even if ship- 
wrecked there, were put to death. Orosious and Eusebius also chronicle 
the destmction of the Cypriot city of Salamis. Roman forces rescued the 
large Greek population of Alexandria. 

Smallwood wrote, "The literary sources give no reason for the 
Jewish outbreak but all present the Jews as falling on the Greeks with- 
out justification or provocation: They rose 'as if mad' (Orosius), or 'as if 
in the grip of some terrible spirit of rebellion' (Eusebius), but the timing 
of the outbreak is surely connected with Trajan's Parthian war... conceivably 



90 The Lost Science Of Money 



the Jews even acted at Parthian instigation." The caravan route to India 
went through Parthia. 

Jacob Neusner reached the same conclusion in The History of the 
Jews of Babylon: "One may assume that the Parthians made preparations 
to meet the invasion by arousing Jewish rebelHon in Alexandria, 
Cyrenaica, and Cyprus. ..The Jews in Babylonia as well as those in 
Mesopotamia, along with the caravan cities of the Near East, stood to 

lose greatly by Trajan's revision of economic policy."^^ 

While this explains the Jewish uprising, it opens a larger question. 
For earlier, in 66-70 AD when Rome destroyed the Temple at Jerusalem, 
there wasn't any reaction from the Jewish Diaspora. Was the true locus 
of Jewish culture and power not the religious center at the Jerusalem 
Temple, but the wealthy merchants farther east? 

"Trajan's eastern conquests brought Rome for the first time into con- 
tact with the oldest and largest section of the Diaspora..." wrote Smallwood 
The revolt's broad effect was counter to the stand of the 300 Spartans at 
Thermopylae (the Hot Springs), and of the Athenians at Marathon. 

THE DICHOTOMY CONTINUED FOR MILLENNIA 

The dichotomy in the ratio lasted for thousands of years. As late as 
1625, Japan, valuing the ratio at 6 to 1, was unaware that the ratio in 
Europe was high (15 to 1 at that time), and Portuguese traders were able 
to strip Japan of two thirds of its gold; approximately 250 tons, between 
1564 and 1624 AD.^^ John Locke noted that the British East India 
Company was using the dichotomy well into the 18^^ century, disrupting 
England's silver money system. Locke called the mechanism "a destruc- 
tive plague... (which was) sinking the solid wealth of the (British) 

Kingdom into the Indian seas."^^ 

Attempting to explain how such a mechanism was brought into exis- 
tence and maintained, Alexander Del Mar postulated that: 

"The control of money and trade must have been in powerful hands 
to maintain it. . .whose hands? - the priesthood - the priests of Brahma or 
Buddha in the East, and (consecutively) the priests of Cyrrus, Darius, 
Tiglath, Nebu Nazaru, Osiris, Alexander, Ptolemy, and the Caesars, in 

the West."^^ 

Dishonest money systems tend to have some secret at their heart, 
and so it was with Byzantium. When we combine our two ancient mech- 
anisms, we can see that the "secret" dynamic behind the "sacred" 
gold coinage prerogative was that the Basileus would be ready to 



3 A MONETARY VIEW OF ROME'S DECLINE 91 



exchange centrally minted gold Bezants for locally minted silver 
coinage at a 12 to 1 ratio, when it could exchange that same silver for 
up to twice as much gold bullion in India, and points east. Any inter- 
ference with this mechanism struck at the heart of the Basileus' power. 

THE LATE 3RD CENTURY COINAGE CRISES 

From Caesar to 250 AD the drop in metallic content of the coins, 
when averaged annually, was minuscule. Then the position of Pontifex 
Maximus, shown by Del Mar's research to be in control of the monetary 
system, was divided between Balbinus and Pupienus in 238 AD, and 
from 250 on, Rome's primary coinages had severe problems for several 
decades. The silver coin, which in 250 AD had contained 40% of its 
original silver content, was down to 4 % silver just 20 years later in 270 
AD. And for a period they would be entirely copper. These disruptions 
in the primary coins continued until the reforms of Diocletian in 300 AD, 
and Constantine a bit later. 

The overriding cause of these problems was evident to Tenney Frank: 

"...fifty years of anarchy (235-285) and successive usurpations, a 
period of almost constant civil wars, and consequently of foreign inva- 
sions... During this period 26 men, mostly barbarians... reached the 
throne, while a larger number attempted to do so and failed. Each usurp- 
er in turn found the treasury empty and an army demanding bribes for 
support. To obtain the necessary fiands they resorted to debasement of 
the currency, forced capital levies, proscription of the well to do with 
confiscations, and when these did not suffice they had to allow their 
troops to plunder. "-^^ 

But Frank also understood that even this extreme deterioration of the 
coinage could be manageable: 

"(E)ven thus the depreciation was but slightly more than that in 
some European countries after the great war [World War I], where busi- 
ness has nevertheless succeeded in weathering the storm. . ."^^ 

Edward Gibbon identified another cause of the monetary disorder - 
the abuse by the private minters of Rome's coinage. Toward the end of 
the 3rd century this hereditary caste of "moneyers" became entrenched 
and regularly short-changed Rome, manufacturing coins without the full 
stated metallic content and keeping the difference for themselves. When 
they were discovered to be minting unauthorized coinage of a dead 
emperor, the Emperor Aurelian attempted to reform them in 275 AD and 
found himself at war: 



92 The Lost Science Of Money 



"The workmen at the mint., .have risen in rebellion. They are at length 
suppressed; but 7,000 of my soldiers have been slain in the contest." 

To explain how so many battle hardened troops were killed in tlie 
fight, Gibbon, concluded that: 

"Nothing less than the firm though secret conspiracy of the authori- 
ty of (the Senate); the wealth of (the Equestrians) and the arms of the 
(Praetorian Guard) could have displayed a strength capable of contend- 
ing in battle with the veteran legions of the Danube."^^ 

The monetary lesson is that those with special monetary privileges 
do not politely give them up when called upon to do so. 

CAUSES OF ROMAN DECLINE ARE STILL DEBATED 

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 oper- 
ating on present day Western society. 

From the viewpoint of advanced human and political values we may 
prefer to associate the descent of Rome with the fall of the Republic, 
which could not withstand the polarization and concentration of wealth 
that followed Rome's loss of control over her money system, brought 
about by the Punic wars. The results - the rise of the great land estates, 
known as "latifundia," and the vast, untaxed concentration of wealth that 
they represented - has been cited as the cause of Rome's undoing: 

"Latifundia perdida Roma" [the great estates destroyed Rome] 
wrote Pliny, in the 1st century AD. 

However, the question of Roman decline generally refers to the later 
decline of the empire. Edward Gibbon's Decline and Fall of the Roman 
Empire has long been the pre-eminent description of Roman decay. But 
today parts of his analysis and even its title is challenged: 

'There was no 'Fall of the Roman Empire.' The phrase is rhetorical 
and false..,," wrote the cleric, historian and economist Hilaire Belloc, 
"...The Church has been blamed for the decline, but on the contrary it 

saved all that could be saved."^^ 

A) Christianity Has Been Blamed: 

Belloc was reacting to Gibbon's writings, which laid a large part of 
the blame on Christianity's otherworldly attitude wherein Gibbon noted 
that "happiness of a future Hfe is the great object of religion."^^ Frazer's 
Golden Bough echoed Gibbon: 



3 A MONETARY VIEW OF ROME'S DECLINE 93 



"It should never be forgotten that in their glorification of poverty 
and celibacy both (Buddhism and Christianity) struck straight at the root 

not merely of civil society, but human existence. "-^^ 

But when Constantine tolerated Christianity in 313 AD, Rome had 
more influence on Christianity than the Church had on Rome. For exam- 
ple, in 324, there was no unified Christian religion. 

Approximately two thirds of the "Christians" were led by Arrius of 
Alexandria (Egypt). They were monotheists who revered Jesus as 
Yahweh's anointed king, not as god. In other words they were essential- 
ly Jews who viewed Jesus as the Messiah. 

The remaining third of the Christians were led by Athanasius of 
Alexandria. They were worshippers of the newly created trinity. 

Constantine convened the Council of Nicea in 325 AD to decide the 
question. But before the monotheist majority could arrive at Nicea (in 
north westem Turkey near Constantinople), the Council pronounced 
Jesus a god. Thenceforth the monotheists became the Arrian Heresy, 
Constantine 's Christianity left the minor gods their prerogatives but 
changed their names and called them saints. It was through this "Nicene 
Creed" that Christianity made a true break with Judaism, which 
Constantine had little patience with, having imposed severe penalties on 
Jewish proselytizing in AD 330. 

"The Council of Nicea transformed Christianity from a monotheis- 
tic mythology that could not have conquered a polytheistic world (into a 
religion that could and did)," wrote William Harwood in describing 

these events,-^^ Thus the often made assertion that Judaism, after all, con- 
quered Rome through Christianity is simply false. The religious domi- 
nance of Judaism in the west would have to await the rise of Calvinism 

and the Bank of England, in the 16* and 18* centuries, as discussed in 
Chapters 7 and 1 1 . 

Christianity also influenced the Empire: the Emperor was no longer 
a God, but represented God on Earth, his acts were inspired by God; his 
laws were promulgated with God's concurrence; and the privileges or 
titles conferred by him were as though conferred by God. 

B) Barbarians Have Been Blamed: 

Gibbon said the question wasn't why such a sprawling organization 
as Rome fell, but why it took so long to be finally "overwhelmed by a 

deluge of barbarians. "^^ 

Del Mar was among the first to disagree: 



94 The Lost Science Of Money 



"The conquest of the Empire by barbarians was invented by the 
monks to account for the ignorance and mischief which their pagan 

predecessors had brought about."^*^ 

The idea that Rome fell to repeated invasions of Germanic tribes 
was set aside by Henri Pirenne's 1920 classic Mohammett and 
Charlemagne. He concluded that there simply weren't enough 
"invaders" to accomphsh the feat; that possibly only 40,000 Visigoths 
had crossed the Danube and only 8,000 of them were warriors. Hardly a 
serious problem for Roman forces. While the Ostrogoths had temporar- 
ily rampaged through Italy, forcing the return of Roman troops from 
Britain, Pirenne concluded that "there was no break with what had been 

the economic life of the Empire"-^ ^ 

Del Mar, who had reached this conclusion 20 years earlier, also 
noted that the Roman system of land tenure and the organization of great 
estates survived and were still prosperous. The great domains of the 
church and of wealthy citizens were administered by candottore, who 
paid rent for them. These estates were vast self sufficient entities with 

sprawling holdings, sometimes not contiguous. ^^ 

C) Growing Slavery Was A Factor: 

The social injustice and the Empire's brutality towards the average 
Roman was a factor in the decline. The Plebians became more like 
slaves. The Empire abolished the Jury system. Previously voluntary con- 
tributions to the Church became mandatory tithes under Augustus. 
Marriage, which had been a civil contract under the Republic, was made 
a religious one, borrowing monogamy from the Orient. People of emi- 
nence moved to retreats or to the country as Rome was filled with the 
Emperor's spies. 

In Appian's words: 

"(T)he race of slaves multiplied, while the Italian people dwindled 
in numbers and strength, being oppressed by penury, taxes, and service 
in the army. If they had any respite from these evils they passed their 
time in idleness, because the land was held by the rich who employed 
slaves instead of freemen"^^ 

Tenney Frank noted: 

"The old stock that had made Rome what it was no longer existed... 
to take the place of all these had been brought slaves in great hordes, and 
the children of these strangers were now the dominant element in and 
about the ruling city... When the Emperor himself wrote... for this 



3 A MONETARY VIEW OF ROME'S DECLINE 95 



confused population he wrote in Greek."-^"^ 

The introduction of Christianity did not ameliorate the condition of 
Rome's four degrees of slavery. A great many of today's working people 
would fit into Rome's lightest slavery category - the "Nexus" (citizens 
compelled to work out a debt or ransom). The worst slavery degree was 
the "servus," the serf in feudal Rome, Yet even the serf, in theory, could 
not be made landless or homeless. 

D)The Oriental Satrapy System Devolved Into Feudalism: 

Alexander the Great's eastern conquests had unfortunately opened a 
conduit for transmitting oriental Kingship concepts westward. Despite 
the disapproval of his Greek comrades, and ignoring Aristotle's earlier 
warning against Eastern practices, Alexander assumed the sacred trap- 
pings of oriental royalty, insisting for example that all approach him on 
bent knee with head down. He also adopted the oriental system of ruling 
separate vassal kingdoms. 

From the inception of Empire the Caesars used this Eastern system, 
where local vassal rulers governed independent fiefdoms. King Herod of 
Judea was such a ruler. These vassals had near unlimited power over 
their subjects as long as they kept payments and other exactions going to 
Rome. But the inhabitants of the fiefdom owed their allegiance to the 
vassal and the law of a fiefdom was not Roman, but the law of the local 
ruler. Over time this eroded Rome's structure and was transformed into 
the feudal system. 

E) The Moslems Have Been Blamed: 

Henri Pirenne's explanation of the eventual decline of Rome blamed 
it mainly on the spectacular rise of the Moslems. 

The growth of Moslem power occurred with lightning speed. 
Mohammed was bom in 570 AD and died in 630. Starting with a 
120,000 man army, his followers subdued Syria, took Jerusalem, Aleppo 
and Antioch by 638. In 643 they re-opened the Arsinoe canal near Suez. 
They conquered Egypt and overran Persia by 651. In 655 they destroyed 
the Byzantine fleet at Lycia. By 709 all of northern Africa was con- 
quered. In 711 they entered Spain, occupying the whole peninsula in 
three years, governing it from Damascus. Their power was established 
from India to the Atlantic. 

Pirenne's thesis was that the Moslems destroyed Rome's economic life: 

"Islam shattered the Mediterranean unity which the Germanic inva- 
sions had left intact. From the middle of the 7th century, navigation 



96 The Lost Science Of Money 



between Moslem ports of the Aegean Sea and those parts which 
remained Christian had become impossible... the only persons who were 
still engaged in commerce were the Jews. They were numerous every- 
where. The Arabs neither drove them out or massacred them."^^ 

But blaming Rome's decline mainly on Moslems poses some prob- 
lems, one of which is timing. By 700 AD Rome's decline was already a 
fact, and by 800 one can find the first indications of rejuvenation, stem- 
ming from Venice's trade with the Moslems. 

OUR MONETARY INTERPRETATION OF IMPERIAL 
ROME'S DECLINE 

Rome's loss of control over its money system left the society open 
to all sorts of random problems, the way the human body becomes vul- 
nerable to chance diseases when its immune system malfunctions. It 
accelerated the destruction of Roman law, and the concentration of 
wealth into great landed estates. This concentration displaced Roman 
citizens with slaves, fueled civil warfare and led to dictatorship. Even 
dictatorship inevitably declined in tandem with the legal and money sys- 
tems, the one affecting the other, in a downward spiral until by 
Diocletian's reign we find the money system so weak that taxes were 
collected in farm produce rather than money. Within that context we 
present a monetary explanation of continued Roman decline, from the 
reforms of Constantine. 

Under the strict gold Bezant system inaugurated by Constantine in 
July, 325 AD, "debasement" of the gold coins was not tolerated. Perhaps 
out of a misguided religious motive, the commodity concept of money 
was taken seriously. Whenever that has happened in modem times, it usu- 
ally spelled disaster and this would be the "mother" of all such disasters. 

Constantine personally "ordered death for counterfeiting, and burn- 
ing of public minters committing falsification in the coining of 
money... because the crime is greater in him who commits this under 

public authority. "^^ The Byzantine Book of the Prefekt recites strict con- 
trols on those handling money professionally, and on jewelers who fab- 
ricated gold artwork. 

Money changers who received a counterfeit Bezant and didn't report 
it immediately were flogged, shaved and exiled. Goldsmiths needed a 
license to operate, and were only allowed to work gold in their shops, 
not at home. They could purchase no more than one pound of gold bul- 
lion at a time. 



3 A MONETARY VIEW OF ROME'S DECLINE 97 



These regulations had their effect. The gold Bezant was 70 grains 
(68 pure) when inaugurated by Constantine in 324 AD, and after fluctu- 
ating slightly was still 68 grains in 1025 AD. 

But this constancy occurred under declining supplies of metal. 
William Jacob in his 1831 classic The Precious Metals noted that "in 
the period from about 480 to 670 or 680, the greatest diligence has 
been able to find no trace in any author of the operations of mining 

having been carried on."^^ 

More recently, Peter Spufford's extensive monetary research has 
added that: 

"For nearly a century virtually no silver coin was struck at all in the west"^^ 

Jacob's study indicates a declining supply of metals, just from wear 

and tear, which he estimated at one- third of the total coinage weight, per 

100 years. Professor Grierson's 20* century studies arrived at a similar 
conclusion. Since the Bezant's weight is extremely consistent at 64-68 
grains, a reduced gold supply would mean fewer coins, causing a defla- 
tion over several centuries, potentially a major cause of decline. 

What about existing supplies? Could a lesser supply of metals per- 
haps not have been critical? Bezants are referred to in numerous literary 
records, such as the 6th century Christian Topography II, in which the 
monk Cosmas wrote: 

"Another mark of the power of the Romans. ..is in their nomisma that 





h. An early nomisma (left) of Constantine the Great (308-37 AD), weigh- 
ing c. 68 grains. A late nomisma (right) of Constantine VIII (1025-28 AD), 
weighing c. 65 grains. But this consistency took place over centuries of 
generally declining availability of gold and silver. 



98 The Lost Science Of Money 



every nation conducts its commerce, and that it is accepted in every 

place from one end of the earth to the other. "^^ 

Such references, and coin hoards found throughout Europe, caused 
Pirenne to question a scarcity of precious metals: "What w^e know., .con- 
cerning the Merovingian (Prankish) Kings' wealth in gold, and the 
wealth of the Church, and of private individuals proves that there was a 
very considerable stock of gold in the west, and yet there were no gold 

mines.... One thing is certain - there was an active circulation of money."^^ 
This is however a very subjective judgment, and Pirenne presents no 
real evidence of circulation. Later historians concluded that he overem- 
phasized Merovingian economic activity.^^ 

While there remains the possibility that Byzantium could still obtain 
sufficient supplies of gold bullion from India, this is unlikely because of the 
shortage of silver and other exportable goods. Also, the more commonly 
usable silver coinage, not gold, would have been more crucial to general 
economic activity. 

THE CONCENTRATION OF WEALTH 

Until now, historians have not considered how three critical factors 
combined with a diminished supply of precious metals. The first was the 
effects of a dramatic concentration of wealth into the Church and to a 
small number of powerful persons. A large proportion of private estates 
was being left to the Church in death bequests. The only Emperor who 
attempted to stop this concentration was Gratian Gallienius, who briefly 
confiscated the Pagan Church wealth to the state treasury, but was killed 

for it in 268 AD."^^ Eventually the Church held one-third to one-half the 
accumulated lands and wealth of the Empire, most likely including the 
existing coinage. 

This concentrated wealth held by a few individuals could produce a 
similar effect as a great scarcity of coinage. The question is not only the 
quantity of money in existence, but how it is distributed and available for 
commerce and industry. 

The Empire s vast wealth and power became ever more concentrat- 
ed, culminating in its ultimate concentration behind the 120~foot thick 
walls of one luxurious fortress city - Constantinople. This concentration 
probably inflicted a punishing, multi-century deflationary depression on 
the rest of the empire, especially in the West. Commerce and industry 
stagnated. Large sailing vessels disappeared. Arts and sciences were lost 
- even the knowledge of cement making disappeared. 



3 A MONETARY VIEW OF ROME'S DECLINE 99 



The absence of a legally based monetary power in the West acted to 
diminish the rule of law. The deterioration of the rule of law acted to 
diminish the monetary power, and so on. Money could not function as a 
legal institution. The Western administration could not even stop the city 
of Rome from being temporarily overrun. An unending depression 
which we call the Dark Ages took hold, and was not shaken off until the 
deflation began to end, starting at the close of the 8th century. 

The two other crucial factors - our ancient monetary mechanisms 
already described - combined to further depress the Empire's money 




3d Constantinople - "The City of the World's Desire." Its hundred and 
twenty foot thick walls are still one of Europe's great sights. For centuries 
they shielded the metallic hoards of the Christian Byzantine Roman Empire 
until the Fourth Crusade's sneak attack on the great city. 



100 The Lost Science Of Money 



system, by removing or at least diminishing the potential use of even a 
crude commodity based money. Only the Basileus could mint gold 
coinage. Local Princes were restricted to minting silver. But no new sil- 
ver was being mined; and the existing silver coinage was being drained 
to the east because in Europe, 12 ounces of silver exchanged for one 
ounce of gold; but in India, 12 ounces of silver exchanged for 2 ounces 
of gold. This dichotomy generally caused silver to flow east, century 
after century. 

The combined evidence on wealth concentration, the absence of 
mining, the normal erosion of the coinage through usage and the ten- 
dency of precious metals - especially silver - to flow eastward, presents 
a powerful argument that an inadequate supply of circulating medium - 
of money - was a (the?) major factor in the continued decline of the 
Roman Empire. 

Behind that scarcity, ultimately, was a huge error in monetary theo- 
ry, that some ideologues still make today - the false belief that money 
should be a commodity or economic good; that is, wealth, rather than a 
legally based abstract power 

Another lesson from the Byzantine system: monetary stability can be 
overdone, and should never be approached with ideological rigidity, 

MOSLEM ATTACK ON THE EMPIRE'S "MONETARY JUGULAR" 

We now have the background to more fully understand Abd El 
Melik's coinage, Pirenne's laying the blame upon the Moslems was partly 
correct, but for the wrong reason. Alexander Del Mar has identified the 
monetary nature of their attack. 

Moslem coinage had at first imitated the money systems of the con- 
quered countries. Initially the silver coins they used were those of the 
Persian Empire, and the gold coins were minted in Damascus under the 
authority of Byzantium, with Roman stamps, demonstrating the limited 
Moslem sovereignty. 

Abd El Melik's coinage changed that. His gold Dinars weighed 65 
grains, and were .98 fine, very close to the Bezant. Striking the coins 
with his own image, brandishing a sword, was a bit brazen. But the real 
danger to the Basileus was his gold/silver ratio. For he minted his silver 
Dirhems at 43 grains, .96 fine; and since the value relafion between the 
Dirhem and the Dinar was ten Dirhems to one Dinar, he thereby 
established a ratio of gold to silver of about 7 to 1 ! 

This would mean that Moslems could exchange their gold coins for 



3 A MONETARY VIEW OF ROME'S DECLINE 101 



nearly twice as many European silver coins as Moslem silver coins of the 
same weight The Basileus had tried to keep such trading to itself, overland 
to India if necessary, doing the exchange in reverse - exchanging silver for 
twice as much gold. Byzantium soon stopped minting silver coinage for 
its subjects, and forbade all trade with the Moslems. Subsequent 
attempts to revive extensive silver coinages would be short lived and 
quickly abandoned. 

CONFUSION OVER THE MOSLEM RATIO 

Del Mar first described this Moslem money system in 1895, but his 
explanation has been ignored, perhaps because accepting it would force 
are-thinking of Adam Smith's "classical" monetary views, and some of 
Smith's other notions as well. 

The problem arises because it is known that in their conquests the 
Moslems seized 5 million marks weight of gold and 100 million marks 

weight of silver. Eminent scholars of the mid 20^^ century have therefore 
been pressured to think the Moslems had to lower silver in relation to 
gold, because silver became so abundant: 

"...But all that we know of history suggests that the ratio must have 
changed substantially in favor of gold," wrote the renowned numismatic 
scholar Philip Grierson in 1960."^^ 

They put aside the more obvious evidence on the ratio, which they 
are aware of: 

"The Arab writers. ..harp endlessly on the fact that the weight rela- 
tionship of the (gold) Dinar to the (silver) Dirhem was as 10 to 7," wrote 
Professor Grierson. 

The Moslem sacred texts gives the value relation of the coins: 

"The law of the Prophet levies a tithe on all possessions of the pre- 
cious metals amounting to. ..200 silver Dirhems or 20 gold Dinars."^"^ 

From that fact we conclude that the value of 200 silver Dirhems was 
about equal to 20 gold Dinars. Thus the value relation of one silver 
Dirhem coin to one gold Dinar coin was 10 for one (200 Dirhems divid- 
ed by 20 Dinars). Now if the gold Dinar weighed the same as the silver 
Dirhem, then clearly the gold/silver ratio would have been 10 to 1. 

However, we know that the weight relationship of the (gold) Dinar 
to the (silver) Dirhem was 10 to 7. Since the silver Dirhem weighed only 
7/10 of what the gold Dinar weighed, by multiplying 7/10 times the 
value relation of 10 to 1, we get a gold/silver ratio of 7 to 1; which was 
the value relation of equal weights of gold and silver - the "ratio." 



102 The Lost Science Of Money 



Thus the Moslem gold/silver ratio was 7 to 1. I've explained this in 
great detail because it is a fact of some importance, as we shall see below. 

Instead, using single sentence sources from admittedly faulty com- 
mentators, some scholars used a Dinar - Dirhem value relationship of 1 
to 20, which gives a gold/silver ratio of 14 to 1. Professor Grierson 
extracts this indirectly from a 10th century lexicographer called Al 
Djawhri, which he (Grierson) saw quoted (misquoted?) in another work, 
the Lexicon Arabico-Latinum, written in 1653 by J. Golius. Grierson's 
comment on Golius should be enough: "This is still worth reading 
though the details cannot always be trusted and a number of the conclu- 
sions are incorrect." 

Numismatists must stop such bending over backwards to preserve 
Adam Smith's erroneous assumptions. As we've seen, it is not the first 
time his views have caused a misreading of monetary history. 

UNDERSTANDING THE RATIO EXPOSES ADAM SMITH'S 
MONETARY ERRORS 

This dichotomy in the ratio flies in the face of Adam Smith and the 
so-called Classical economist's assumptions, as well as those of Karl 
Marx, on the value of gold and silver, which they asserted was deter- 
mined by their cost of production, and amounts available. But they never 
bothered to check on the cost of mining! 

Historical evidence indicates that nations and Empires did set the 
gold/silver ratio, based on the amounts they had, but exactly opposite to 
the predictions of "free market" theories. In setting the ratio, a strong 
nation would raise the value of the metal that was most abundant! 

For example, when Caesar took over, gold supplies were increasing, 
from newly conquered provinces. He raised gold's value from 9 to 1, to 
12 to 1.45 

After the Moslem Empire plundered 20 times more silver than gold, 
they set the ratio at about 7 to 1, raising the relative value of the silver, 
which they held in greater abundance. It made sense for them to set the 
value of silver high, since they had so much of it. A large supply does 
not guarantee a low price, when the arbiter has the power to enforce 
prices. They knew no one was strong enough, economically or militari- 
ly, to break their ratio. 

Much later Spain plundered 1,230 tons of gold and 60,440 tons of 

silver from its 1493 to 1690 plunder of America. ^^ These vast amounts 
overshadowed existing supplies and by their quantities suggested a ratio of 



3 A MONETARY VIEW OF ROME'S DECLINE 103 



about 49 to 1; but the Spaniards set the ratio at 13.3 to 1 in 1546, and 14 
and 15 to 1 in the 1600's, keeping the value of their abundant silver high. 

It would take 400 years for ''the market" to adjust the values of the 
metals to that indicated by their supply. What fixed the gold/silver ratio 
y^as the law and the power of the dominant nation issuing the coinage. 

Thus a correct understanding of the ratio even calls into question the 
economist's most hallowed axiom - the so-called "law" of supply and 
demand, which in part asserts that a large supply of an item tends to 
lower its price (in the here and now, not the hereafter!). But in fact the 
economists ignore the question of power. An awareness of this potential 
to "overvalue the abundant" was one factor that helped lead to our 
Chapter 1 concept on why gold, which was abundant in the Temples, 
was monetized in the first place. 

THE MOSLEM'S ARISTOTELIAN MONETARY TRADITION 

Mohammed had been a merchant in his youth, and understood com- 
merce. The prophet Mohammed personally taught his followers of the 
legal, nominal nature of money, a fact of immense potential importance 
to modern day monetary reform. He instructed his followers to consider 
"overvalued" copper coins as much a currency as gold and silver 

coinage."^^ Thus these Moslem monetary concepts are in the Aristotelian 
monetary tradition - the truly "classical" monetary viewpoint (see 
Chapter 23). But Mohammed's followers quickly regressed to precious 
metals systems, pressured by their involvement in conquest. 

Up to the 13th century, only the Moslems and Byzantium struck 
gold coins in significant numbers, in pieces of near identical size. 
Moslems coins have been found in hoards throughout continental 
Europe, England, and Scandinavia. 

The Moslems worked the gold and silver mines in Spain with slave 
labor. Their occupation of Spain provided a conduit for the movement of 
Jews from Asia to Europe, which "constituted the only economic link 
which survived between Islam and Christendom or one may say between 
East and West," wrote Henri Pirenne."^^ 

Actually there was another Unk between East mid West - a cmcial one - 
Venice. 



104 The Lost Science Of Money 



DEI MAR'S TABLE OF THE ROMAN GOLD/SILVER RATIO 

78 BC- 1025 AD 4^ 
Year Emperor gold Aureus silver Denarius 



78 BC Sulla (dictator) 168.3 grains 60.6 grains 

25 silver Denarii = 1 gold Aureus; ratio 9 to 1 
45 BC Julius Caesar 125 grains 60 grains 

25 Denarii = 1 Aureus; ratio 12 to 1 
13 BC Augustus 121.6 grains 58.4 grains 

25 Denarii = 1 Aureus; ratio 12 to 1 
211-215 AD Caracalla 112.5 grains 54 grains 

25 Denarii - 1 Aureus; ratio 12 to 1 
2 1 5-2 1 7 AD Caracalla 9 1 .67 grains 54 grains 

24 Denarii = 1 Aureus; ratio 12 to 1 

silver Argentus 
(Antonionous) 
270 AD Aurelian 74 grains 33.5 grains 

25 Argentei = 1 Aureus; ratio 12 to 1 

274 AD Aurelian 90 grains 45 grains 

24 Argentei = I Aureus; ratio 12 to 1 

silver Denarius 

284 AD Diocletian 90.34 grains 45.2 grains 

24 Denarii - 1 Aureus; ratio 12 to 1 

by 3 10 AD Constantine 72 grains 36 grains 

24 Argentei = 1 Aureus; ratio 12 to 1 

gold Solidus (Nummus^ silver Miliaresion 

325 AD Constantine 68-70 grains 70 grains 

12 Miliaresa ^ 1 Solidus; ratio 12 to I 
491-518 Anastasius 70 grains 70 grains 

12 miliaresia ~ 1 Solidus; ratio 12 to 1 
705-711 Justinian II 68.35 grains 70 grains 

12 miliaresia = 1 Solidus; ratio 12 to 1 
802-811 Nicephorous I 63 Vi grains 63.5 grains 

12 miliaresia = 1 Solidus; ratio 12 to 1 
976-1025 Basil II 
& Constantine VIII 68 grains 68 grains 

12 miliaresia = 1 Solidus; ratio 12 to 1 

Note: Del Mar goes into more detail than presented here, to include the 
official values for bronze coinage during each period. 



3 A MONETARY VIEW OF ROME'S DECLINE 105 



WHAT ROME TEACHES US ABOUT MONEY 

Summarizing Rome's long monetary experience, several important les- 
sons are apparent. First, that governmental authority established a money 
system based on law, not commodity value. We saw the necessity for socie- 
ty to keep the control of its money system within the nation and not allow 
that control to slip away to foreign nations or merchants or even private ele- 
ments within the nation. For the control of the money power is inseparable 
from national sovereignty. If that control has become alienated, so has sov- 
ereignty, and the nation will degenerate. 

We observed how the control factor becomes very vulnerable during 
major warfare. Especially during such periods, careful thought must be 
given to monetary policies, even when emergency conditions require rapid 
action. We noted how under such conditions an advanced nomisma system 
degenerated into a commodity-based money. We saw how basing the 
money system on commodities rather than law accelerates the concentra- 
tion of wealth and power into the hands of a plutocracy, quickly destroying 
the possibility for social justice. This evil process was unstable - it did not 
self correct. Without social justice the society is on a path to destruction. 

We observed how commoditizing Rome's money system allowed the 
market aspects of the commodity to interfere dramatically with its function 
as money For example, the dichotomy in the gold/silver ratio between East 
and West, which caused silver money to flow east toward India, pressured 
Roman money systems for several centuries. 

We saw how a misplaced desire for monetary stability can be overdone 
and lead to an extended, debilitating deflation. Finally, we noted that exam- 
ining the historical facts regarding the gold/silver ratio was enough to call 
into question the monetary concepts of Adam Smith, and even to challenge 
the economists' sacred "law" of supply and demand! 

Today, the wonderful advances in technology that we enjoy require that 
nations employ reason and morality in structuring their money systems. For 
if we don't, these marvels of technology can too easily be tumed into 
engines of risk and destmction, as we have seen in the attack on the World 
Trade Center in New York City. Since a large number of us are thinking 
human beings, the author is confident that the correct decisions can eventu- 
ally become politically feasible. We need not repeat the kinds of errors that 
we saw Rome make. 



106 The Lost Science Of Money 



Notes to Chapter 3 

^ Alexander Del Mar, History of Monetary Systems, (1895, repr., New York: A 
M. Kelley, 1967), pp. 111-17. 

^ Del Mar, cited above, quoting Zonoras, and pp. 164-74. 

^ Theodore Mommsen, The History of Rome, (New York; Scribners, 1903), vol. 
4, p. 181. Also see vol. 5, pp. 436-7. 

"* Francois Lenormant, Monnaes de Antiquita, (Paris: Bibliothetic Nationale, 
Rallen Et Fevardent, vol. 1-3, 1878), vol. 2, p. 427. 

^ Harold Mattingly, Roman Coins, (London: Metheun, 1928), p. 254. 

^ Dean Miller, Imperial Constantinople, (New York: J. Wiley, 1969) pp. 70-1. 

■^ Del Mar, cited above, pp. 13 5-36. Del Mar demonstrated that scholars obtain- 
ing a ratio of 14.4 to 1, from the 5th century Codex Theodosian, have misinter- 
preted the "Libra" there as a weight unit instead of a money of account. 

^William Jacobs, 77?ePin?cz'cm' Me/aZs, (183 l,repr., New York: A.M. Kelley, 1966)p.354, 

^ Del Mar, cited above, p. 124. 

^^M, Rostovtzef, Social and Economic History of the Hellenistic Worlds 
(Oxford: Clarendon Press, 1983), pp. 385-94. 

^^ Tenny Frank, Economic History of Rome, (New York: Cooper Square Pub., 
1962, 1920), p.379, and footnote on p. 416. 

^^ Michael Grant, Roman History from Coins, (Cambridge Univ. Press, 1958) p. 81. 

^^ Pliny The Elder, Natural History', (Xii, 18) and (XXiii, 15). 

^^ A.H.M. Jones, Asian Trade in Antiquity, in Islam & The Trade Of Asia, edit. 
D.S. Richards. (Univ. of Pennsylvania, 1970) pp. 2-10. 

^^ Andrew Burnett, Coinage in the Roman World, (London: Seaby, 1987), pp. 
98, 107. 

^^ E.M. Smallwood, The Jews Under Roman Rule, (Leiden, Brill, 1981), pp. 
389,394,421. 

^^ Edward Gibbon, Decline and Fall of the Roman Empire, Great Books, Encyl. 
Brittanica, Univ. of Chicago Press, Vol. 40, v. 1, Ch. 16, p. 207, & fnote 1 (p.728). 

^^ Jacob Neusner, The History of the Jews of Babylon, (Scholar's Press, 1984), p. 78. 

^^ Alexander Del Mar, Money and Civilization, (1867, repr., New York: Burt 
Franklin, 1969), p. 102. 

^^ John Locke, Essay On Money And Bullion, 1718, pp. 19-20. 

^^ Del Mar, History of Monetary Systems, cited above, p. 471. 

^^ Frank, cited above, pp. 484-5. 

^^ Frank, cited above, p. 490. 

■^^ Gibbon, cited above, Vol. 41, v. 1, p. 271. 

^^ Hilaire Belloc, The Crisis of Civilization, 1937 Fordham lecture series, p. 44. 

^^ Gibbon, cited above, Vol.41, v.l, Chapter 38, part 6, General Observations on 



3 A MONETARY VIEW OF ROME'S DECLINE 107 



the Fall of the Roman Empire in the West, p. 63 1 . 

^^ James Frazer, The Golden Bough, (New York: Macmillan, 1953), p 420. 

^William R. Harwood, Yahweh and Jesus, Mythology's Last Gods, 1983 doc- 
toral thesis, accepted by Columbia Pacific Univ., pp. 338-9. 

^ Gibbon, cited above, again Vol.41, v.l, Chapter 38, part 6, General 

Observations on the Fall of the Roman Empire in the West, p. 631. 

^** Alexander Del Mar, Middle Ages Revisited, (New York: Cambridge Encyl., 

1900), Ch. 5. 

^* Henri Pirenne,Mo/za/?7?neJaA2JC/;ar/emag77e, (New York: Meridian, 1957), p. 116. 

^^ Del Mar, Middle Ages Revisited, cited above, Ch. 5. 

^^ Appian (Bell. Civ. I, 7), as quoted by Frank, cited above, p. 204. 

^^ Frank, cited above, pp. 478-9. 

^^Pirenne, cited above, pp. 164, 165. 

^^ M. Hendy, Studies in the Byzantine Monetary Economy, (Cambridge Univ. 
Press, 1985), p. 450. 

^^ William Jacobs, cited above, p. 236. 

^^ Peter Spufford, Money and its Use in Medieval Europe, (Cambridge Univ. 
Press, 1988), p. 12. 

^^ Cosmos Indocopleastes, edit. E. Winstedt, as quoted in Hendy, cited above, p. 8 1 . 

^^ Pirenne, cited above, pp. 111-114. 

^^ William R Lyan, Pirenne s Thesis Today, from The Origins of the Middle 
Ages, (Norton, 1972, as excerpted in The Middle Ages, vol. 2, Knopf, 1983). 

^^ Del Mar, Middle Ages Revisited, Ch. 6. 

^^ Philip Grierson, Monetary Reforms ofAbdAl Malik, Journal of Economic & 
Social History of the Orient, (vol. 3, Oct. 3, 1960), p. 259. Also Grierson's, 
Dark Age Numismatics, (London: Varorium Reprints, 1979), p 239. 

^ The Moslem sacred text, the Sunan of Abu Dawud, (about 750-800 AD) in 
the section on Zakah calls for alms of 5 silver Dirhems out of 200 Dirhems, or 
Vi Dinar out of 20 Dinars, establishing a value relation of 1 gold Dinar to 10 sil- 
ver Dirhems. This citation was graciously provided by Brother Mukhtar 
Maghrawi of the Albany Islamic Center. 

^^ Alexander Del Mar, Money in Ancient Countries, (London: Bell, 1895), pp. 
290,300,301. 

^ Del Mar, Money and Civilization, cited above, p. 102. 

^^ A.L. Udovitch, Partnership and Profit in Medieval Islam, (Princeton Univ. 
Press, 1970), pp. 52-54, 177. 

^^ Pirenne, cited above, p. 174. 

^^ Del Mar, History of Monetary Systems, cited above, pp. 70-99. 



108 The Lost Science Of Money 



109 



CHAPTER 4 



RE-INSTITUTING MONEY 

IN THE WEST 



"The advantage to society of having enough rule of law to 
create fiat money is enormous and not just a matter of degree. . ." 



The breakdown of law and of money continued to operate negative- 
ly, the one upon the other for centuries, in a slow downward spiral of 
societal decay. Re-building them would take centuries more. In that 
process we observe several attempts to resurrect commodity based mon- 
eys, which in many respects are more of an advanced form of barter than 
a true money system. 

Creating such commodity moneys requires expending a great deal of 
work in prospecting, mining, refining, and minting. Maintaining that 
money against the attacks of coin clippers, metal exporters and normal 
wear and tear over the decades also requires great energy. 

These heavy burdens tend to neutralize the benefits eventually 
derived from such money systems, leaving mankind trapped on an eco- 
nomic treadmill. This is especially true considering the low state of 
resources that societies had available to deploy in those darkest ages of 
Europe. At first the precious metals systems could be implemented 
mainly when the metals could be obtained by conquest or plunder, or by 
capturing enough slaves to operate mines. 

This plunder/conquest basis of precious metals systems continued 

well into the 17^^, 1«*, and 19^^ centuries. Modem 19^ and 20^^ century 
money systems, which claimed to be precious metals systems, generally 
depended on an element of fraud rather than force, as we shall see. 



110 The Lost Science Of Money 



Thus the advantage to society of having enough rule of law to cre- 
ate fiat money systems is enormous. It is not just a matter of degree, but 
produces a different kind of result altogether. It would take until the 13th 
and 14th centuries to reach that critical threshold in Europe. 



CHARLEMAGNE'S NORTHERN 
REVIVAL: A "FALSE DAWN"i 

"Money should never depend on the presence of exceptional 
individuals and available ore deposits..." 

An early attempt to rebuild the money system was made by 
Charlemagne (742-814), who is often credited with establishing a new 
monetary standard and with re-instituting weights and measures in the 
West, from which the pound, shilling and pence notations evolved. More 
accurately, Charlemagne's system was a revival of some Roman coining 
traditions. 

POUNDS, SHILLINGS AND PENCE 

Charlemagne's system of Livres, Sols, and Deniers had existed from 
at least 418 AD as seen in the Roman Code of Theodosius.^ This "money 
of account" system had served to unify different Roman coinages issued 
over time so that their relative values were understood. The alternative 
would have been an expensive re-minting, which would have meant the 
loss to the melting pot of the numerous historical monuments and com- 
memorations in the old coins. 

CONQUEST AND SLAVERY 

The basis of Charlemagne's Empire was military conquest and the 
enslavement of the subjugated peoples, mostly Saxons. Using this exten- 
sive slave labor he re-started or intensified precious metals mining at 
Chemnitz, Kremitz, and Rauthensberg, mostly of silver, working the 
slaves to death in the mines. Those slaves not needed for mining were 
sold to the Moslems through Jewish or Venetian intermediaries. 

THE SILVER PENNY 

In the century prior to Charlemagne, when small amounts of silver 
coins once again began to be minted, they imitated the appearance of the 



4 RE-INSTITUTING MONEY IN THE WEST 111 



Triens, a small Byzantine gold coin, and were sometimes issued by reli- 
gious authorities such as the Bishop of Lyon, the Abbey of St. Martin of 
Tours, or of St. Denis near Paris. The silver coinage was found mainly 
in a corridor between Provence (the French area around Nice) in the 
South and present day Belgium in the North. 

To mint Charlemagne's silver into pennies, many new mints were 
opened at Dorestad, Aachen, Bonn, Cologne, Maastricht, and Namur 
among others. Charlemagne took a "hands on" approach to his coinage. 
At one point he considered producing all the coinage at his Palace mint at 
Aachen, now a picturesque German resort spa near the Belgium border. 
Eventually Charlemagne had mints as far south as Pisa and Rome. 

His centralized control is evident in the uniformity of the coinage. 
However, the coinage was still scarce as indicated by taxes being col- 
lected mainly in services and produce, rather than coinage.^ 

CHARLEMAGNE'S POWER BALANCING ACT 

The Moslem revolt from 630 AD took the African provinces and 
eventually Spain from the Byzantine Roman Empire and dominated the 
crucial east/west trade. Then in 755 AD the Bishop of Rome seceded 
from Byzantium's domination. These factors, plus distance, combined to 
give Charlemagne a degree of independence from Byzantium. He 



4a, A silver penny of 
Charlemagne's successor 
Louis the Pious (814-40). 
After the lost Treaty of 
Seltz, Charlemagne raised 
the gold silver ratio to 12 
to 1 in line with 
Byzantium's ratio; 
an indication that he 
recognized the Basileus in 
Constantinople as the 
supreme pontiff over the 
Papacy in Rome. 



112 The Lost Science Of Money 



increased his autonomy with a complex power balancing between 
Rome, the Moslems and Constantinople. 

He used military power to keep Byzantium at bay and held out the 
threat of Moslem power by maintaining good relations through Jewish 
Ambassadors, with Haroum Al Raschid, Emir of the Moslems in Spain. 
For some reason Charlemagne encouraged or allowed the establishment 
of a Jewish royal house at Narbonne, and the Caliphate of Baghdad sent 
him a descendant of David to be King there. The house is said to have 
lasted for five centuries."^ 

CHARLEMAGNE AND THE PAPACY 

Charlemagne's relations with the Pontiff in Rome appear more com- 
plex because of attempts to alter the historical record: 

"It cannot be too often repeated that the entire stream of history has 
been corrupted by ecclesiastics . . . Every historian has discovered these 
corruptions, every one has either boldly or timidly condemned them. Yet 
there is always a new generation of unread people to whom these dis- 
coveries have to be again unfolded, and these condemnations repeated," 

wrote Del Mar.^ 

The Pope claimed to be the sacred ruler over the West through the 
''Decretals of Is adore,'' forged documents in which Constantine the 
Great had supposedly given the throne of the West to the Bishop of 

Rome in the 4^^ Century. The secession was triggered partly by orders 
from Emperor Leo in 737 to remove all images from the churches and to 
raise the statues out of touching reach, matters of some urgency to the 
literal minded in the West. 

The use of forgery rather than an outright declaration of independ- 
ence underscores the power that the Basileus, God's "representative" on 
Earth, continued to have over men's minds. 

The evidence shows that the Roman Papacy became subservient to 
Charlemagne, depending on him and on his predecessor Pepin, for mil- 
itary rescue when Byzantium's troops came calling, Del Mar maintains 
that Pope Hadrian issued coinage as a vassal, in Charlemagne's name, in 
772.^ There is also the unusual Christmas day ceremony in 800 AD with 
Pope Leo in Rome at which Charlemagne crowned himself Emperor. 

WAS THE BASILEUS STILL PARAMOUNT IN THE WEST? 

Since control over money indicates sovereignty, an interesting 
aspect of Charlemagne's coinage is the insight it may give to his 
relations with Rome and Byzantium. According to Del Mar, the 



4 RE-INSTITUTING MONEY IN THE WEST 113 




4h. Charlemagne's attempt to re-instate money in the West by working 
slaves to death in silver mines had only limited and temporary success. 
Europe remained on a monetary treadmill. 



1 14 The Lost Science Of Money 



Merovingian Franks had received permission to mint gold coinage using 
Byzantine markings. Over centuries they had removed the Byzantine 
features on the coinage. Charlemagne had continued this coinage at a 
gold/silver ratio of about 10 to L 

Then around 803 AD he concluded the now lost Treaty of Seltz with 
Byzantine Emperor Nicephorus T. 

"He made with them the most binding treaty possible that there 
might be no occasion of difference between them," wrote Eginhard.'^ 

Around this time Charlemagne changed the value of his silver 
coinage to bring it to the Byzantine 12 to 1 ratio with gold. The new pen- 
nies were 17.5 grains of silver, 12 of which were declared equal to one 
Byzantine Sou d'Or containing 17.5 grains of gold; giving a 12 to 1 
ratio. Furthermore, Charlemagne appears to have stopped minting gold 
coinage. Del Mar concluded from this that he recognized the religious 
supremacy of the Basileus in the Treaty of Seltz.^ 

More recently, Peter Spufford's work indicates that Charlemagne's 
successor, Louis the Pious, continued to mint gold coins until about 

818.9 

While the Moslem revolt had established their sovereignty, 
Charlemagne probably did not achieve a comparable independence from 
Byzantium as measured by one ancient sign of it - the gold coinage pre- 
rogative. Byzantine power was limited but probably still paramount in 
the west. 

Monetary conditions regressed soon after Charlemagne's death. The 
mines ran out of silver and the Carlovingian Empire ran out of conquests 
and slaves. The next short term coinage revival in the north would await 
the discovery of silver in Europe's Harz mountains in the 990s. 

THE RATIO MECHANISM WORKED AGAINST 
CHARLEMAGNE'S MONEY 

The ancient ratio mechanism - the difference in the gold/silver ratio 
between East and West - continued to put pressure on the already diffi- 
cult monetary situation of Charlemagne and his successors. During most 
centuries silver continued to flow east, which meant that Europe's silver 
money supply was continually being exported to India. 

One lesson of the Charlemagne era is that money systems should 
never be dependent on the presence of exceptional individuals or the 
existence of available gold or silver deposits. 



4 RE-INSTITUTING MONEY IN THE WEST 115 



SUNRISE 

ON THE MEDITERRANEAN: 

THE RISE OF VENICE 

"Venice recognized itself from the first as a strange and 
mysterious creation - the fruits of a higher power 

than human ingenuity." 

Jacob Burckhardt^^ 

While the East/West ratio mechanism worked against Charlemagne, 
Venice was able to harness the process to its advantage, thereby gaining 
a pre-eminent position in the West's economic affairs from 800 to 1500 
AD, laying the foundations for Westem Renaissance. 

VENICE'S UNIQUE BACKGROUND 

The origin of the Venetians is still unclear. They were not of Latin 
stock nor a Phoenician colony but possibly migrated from the southem 
coastal area of the Black Sea. Renowned for their skill as mariners and 
traders, the city fathers still practice the ancient ceremonial ritual of "mar- 
riage with the sea," where a gold ring is annually thrown into the waters. 

Venice had been the 1 7th Province under Constantine, but in 452 AD 
Attila the Hun swept into Venice and slaughtered every one except the 
one or two hundred families able to take refuge on the islands of the 
lagoon. Venice slowly rebuilt based on fishing and salt manufacture and 
became a republic in 697 AD with a constitution that would last over 500 
years. Frederick Chapin Lane called her the "first capitalistic society." 

Attila's holocaust had a leveling effect on Venetian society - every- 
one had to start over again. The aristocracy would be based more on 
ability than on chance inheritance. This aristocracy took a democratic 
form with a spirit of cooperation acting for the benefit of the Repubhc. 
They lived and ate frugally, later placing legal limits on luxuries when, 
as Longworth noted, "women were showing an unhealthy proclivity for 

conspicuous consumption."^^ 

Another leveling factor was Venice's armed citizenship. She needed 
large numbers of free men to row her ships, a large portion of whom had 
to be armed with bows for defense. 



116 The Lost Science Of Money 



Family partnerships were the basic unit of business and were run 
under state regulations. Later as capital accumulated they used a form of 
partnership called the Collegenza, borrowed from the Moslems, where 
the working partner went to sea and the investing partner stayed home. 
They shared the profits but losses belonged to the investing partner 

THE INDIAN TRADE THROUGH EGYPT'S ARSINOE CANAL 

Rome's Oriental trade had been conducted both overland and 
through the Red Sea via the Arsinoe canal, which had been constructed 
as early as the time of Pharoah Ramses 11. Over the centuries it would 
get filled with sand and eventually be re-opened. At one point the ruler 
of Egypt, Ptolemy Philadelphias, named the canal after his wife/sister, 
Arsinoe. The canal silted in again and in 639 AD the Moslem ruler Amri 
began clearing it.^ 

Early in the 8^^ Century as the population of Italy reached its lowest 
ever recorded levels, Venice ignored Byzantium's prohibition and began 
trading with the Moslems. The profits on this trade were immense - hun- 
dreds of percent per shipment. Venice was tapping into the low Asian 
gold/silver ratio in India through the Moslems of Alexandria. Her rapid 
accumulation of capital began with this trade. 

VENICE HARNESSES THE EAST-WEST RATIO MECHANISM 

Two forces were put to work that helped build Venice and created 
the foundations for the European Renaissance. First, the canal increased 
the safety and ease of shipping goods between East and West. Second, 
the East's 7 to 1 gold/silver ratio gave the Venetians up to an additional 
hundred percent profit on exchange. The importance of this extra boost 
should not be underestimated, for whichever state dominated the ratio 
trade usually dominated in the West. 

The force that had for centuries been working against Europe's sil- 
ver moneys was turned to Venice's direct advantage. The fiat nature of 
this difference in the gold/silver ratio between East and West should be 
remembered. 

From the East came spices, especially pepper; silks, gold weaved 
cloth, perfumes, drugs and gold. The Venetians sold these goods inland 
at Pavia, which became the chief commercial center of southern Europe. 
To the East went slaves, timber, iron and silver. 



^ Del Mar gives the canal's route as follows: "The Ptolemaic (and Roman) route 
was by Alexandria, the Nile, the Canal, Berenice, Sabia, and Muscat. It is fully 
described in the 'Periplus Maris Erythraei' of Arrian." 



4 RE-INSTITUTING MONEY IN THE WEST 117 




4c. St Mark and his lion, atop his Basilica, at St. Mark's Square in the 
heart of Venice. According to legend, St. Mark's corpse made a less than 
graceful entrance into the city, where it was used to bolster her political 
and religious independence from Constantinople. 



118 The Lost Science Of Money 



THE VENETIAN FLEET 

The Indian trade led to the growth of Venice's fleet, which became 
the key to her future development, for her navy could fight as well as 
trade. According to Del Mar, "It is in the trade of Venice with Alexandria 
that we hear of ships with sails for the first time since the classical ages." 

In 1 1 04 Venice founded the ''Arsenal," Europe's greatest shipyard or 
industrial enterprise of any kind. She built ever larger ships, which by 
1300 AD could each carry 140 tons below deck.^^ Byzantium came to 
depend on this fleet and most of her traffic to Europe was carried by it. 

Venice's ships sailed for specific destinations at set months of the year 
in fleets, pooling expenses and cargo risks. These fixed sailing dates cre- 
ated identifiable seasonal cycles in European commerce and finance. 

VENICE'S RELIGIOUS HIERARCHY 

The Venetian Doge was a political official paid and titled by 
Byzantium, but he was elected locally. In religious matters, however, the 
Basileus tried to subject Venice to the Patriarch of Aquila. She needed a 
strong argument to keep control of her own sacred establishment, and 
found it in the mummified corpse of St. Mark, which was entombed at 
Alexandria. Legend has it that two Venetian merchants stole the corpse 
while on a trading trip in 892 AD and smuggled it home in a pork barrel 

Pilgrims soon flocked to the enshrined corpse of St. Mark, and 
Byzantium recognized Venice as a religious center. Inspired by this suc- 
cess, she would continue to collect saintly bones throughout her history, 
eventually acquiring St, Stephen, St.Theadore, St, Donatius, St. Isidore 
and even St. Nicholas (Santa Claus).^^ 

THE HESITANT CRUSADER 

The army of the First Crusade was raised in Europe in 1095 and 
launched from Constantinople to retrieve Jerusalem from the Moslems 
(discussed in Chapter 5). Venice had stayed out of it, trying to maintain 
good relations with her trading partners in Alexandria. However, she was 
surprised by the Crusade's success and joined it late, believing that a vic- 
torious crusade would establish an overland route to the East which 
would nullify her route through the Egyptian canal. 

THE ATTACK ON CONSTANTINOPLE 

During the crusades Venice abandoned the Alexandrian connection 
and traded with the East by the overland Palmyra route through Antioch 
and Tyre. However, this route could not be maintained and her eastern 
trade was limited to "the profits of a factory which they were permitted 



4 RE-INSTITUTING MONEY IN THE WEST 119 



to conduct at Constantinople, and unless this precarious footing was 
soon bettered, there was grave danger that the trade would be lost to 
them altogether," wrote Del Mar.^^ This trade was so important to Venice 
that of her 60,000 population about 20,000 were in Byzantium. 

In 1204, aware that Byzantium was negotiating with the Genovese 
to replace them, Venice joined the conspiracy to divert the Fourth 
Crusade into an attack on Constantinople. Her fleet was essential for 
this. She received 85,000 silver marks in advance, plus half of the spoil 
and half of the conquered territories. Nothing was mentioned about the 
secretive ratio trade, which was worth more than all the rest. In the 
spring of 1203 twenty thousand "crusaders" set sail for Constantinople 
in Venetian galleys. The partially blind Doge Enrico Dandolo, at age 95, 
led the attack which toppled Byzantium in early 1204. 

Venice's share of the loot was 900,000 marks of silver (1 mark ^ 
about 8 ounces) and substantial new territories, not to mention the heads 




4d The secret chancellery room at the Doge's palace in Venice. It was here 
that details of the conspiracy of elements from Cluny, the Cistercian order, 
and some aristocrats, to turn the Fourth Crusade against Constantinople, 
were divulged to Doge Enrico Dandolo. He obtained great concessions 

for Venice's naval support 



120 The Lost Science Of Money 



of St. Abdon and St. Sennon, the arm bones of St. Sergius and the feet 
of St. George. 

VENICE'S MONEY SYSTEMS 

Venice had been content to use the coinage of her main trading part- 
ners - that of Byzantium, to which she was subject and paid tribute; also 
the Moslem gold and silver coinage and Prankish silver coinage. Her 
traders calculated profit and loss on a per venture basis and kept these 
international accounts denominated in gold. 

She minted her first coinage in 11 72-78, a few years after major sil- 
ver mines were opened at Frieburg in Germany. Doge Zianni minted sil- 
ver Denarii containing 1/10 of a gram of silver, at a value of 240 Denari 
to the Roman Pound. He also minted a copper coin, the Mezzodenaro, 
which contained 5% silver. Silver was used for all state transactions and 
for local business. Venice could not mint gold - that was the Basileus's 
prerogative. 

THE SILVER GROSSO 

Venice used her share of the Byzantine loot to mint the silver 
Grosso. It had 2.141 grams of silver, .965 fine, and soon became the 
most successful large silver coin in Europe, 

She coined the Grosso at 2% less weight than an equivalent value of 
Denarii in circulation, to take into account the wear and tear on the 
already circulating Denarii. She did this because she wanted the coins to 
continue circulating side by side, and therefore didn't put more silver 
value than legal value into the Grosso, than the Denari had. 

Two remarkable facts are evident from this: 

First, there was a high degree of sophistication regarding one of the 
dangers to which precious metals coinage was susceptible: the culling, 
or separating, of coins of higher metal content from legally equal, but 
lighter weight coins. This precise awareness of "Gresham's" law came 
300 years before Gresham (see Chapter 12). 

Secondly, it demonstrates that Venice did not have a problem with 
coin clipping, if their Denari were only 2% underweight. In England of 
the same period silver coins were 50% underweight from clipping! 
England's money system was destroyed by clipping on more than one 
occasion. Historical examples of Gresham's law in action were usually 
helped along by merchants illegally clipping the coinage. 

VENICE'S MINT POLICY 

Venice's mint was owned by the Republic. The 1278 mint law stated 



4 RE-INSTITUTING MONEY IN THE WEST 121 



its regulations in 134 paragraphs. Minting fees were reasonable, about 
0,8%, and all profits belonged to the Republic. It was managed by 
salaried officials for short terms with no immediate re-appointment 
allowed. Engravers were paid even more than the mint master, and their 
movements and whereabouts were carefully controlled. Venice con- 
fen^ed mint powers on committees rather than individuals, and there 
were monetary rewards for workers reporting irregularities. 

Once the Empire fell, Venice's money system had to stand on its 
own, and she adopted strong measures to protect it from foreign manip- 
ulation. After 1250 any gold or silver bullion coming into Venice had to 
be registered with the state before it could be sold. Only Venetians could 
export^bullion or coin:^^ 

"From its arrival in Venice as the funds of northern merchants to its 
departure in the galleys as newly minted Ducats and Grossi, precious 
metal was carefully regulated by the Venetian State," wrote Stahl.^^ 

THE LOOSE RATIO 

Byzantium's power had been strong enough to maintain an official 
gold/silver ratio at 12 to 1 for many centuries. This does not mean that 
it was so in all transactions everywhere in the Empire. But when she fell 
the ratio began to fluctuate rapidly. According to Lane, between 1250 
and 1360 the ratio in Venice went from 8.5 to 1, up to 14.2 to 1 and then 
back down to 9.6 to 1 .^'^ Venice rarely attempted to maintain a fixed ratio 
by law. Their trading mentality kept them from falling into that trap. 
They generally kept the ratio "loose," allowing merchants the opportu- 
nity to make a profit on it but not at the Republic's expense. 

Byzantium could counter any attacks on its declared ratio through 
customs enforcement, internal legal measures, and mainly by sacred pre- 
rogative. As to the erosion of the ratio by "free market forces," that could 
take centuries against a monolith like Rome/Byzantium with its deep 
reserves, and that kind of time scale doesn't attract speculators. 

However, a limited city Republic like Venice, Genoa, or Florence 
was another matter. Florence made the mistake of trying to establish a 
legal ratio in 1279 at about 10 to 1. But the market value of gold first 
fell, meaning the silver Florins could be melted down and sold at a prof- 
it, as their bullion market value was higher than their official value as 
coinage. Then gold rose, making the gold coins vulnerable to the melt- 
ing pot as its market value was above its coinage value. Then gold fell 
again, etc. Florence quickly abandoned the fixed ratio and established 



122 77?^ Lost Science Of Money 



two separate standards - one gold and one silver, with a fluctuating rela- 
tionship between them. 

VENICE'S GOLD COINAGE 

In 1284 Venice minted her first gold coin, the Ducat, under Doge 
Giovani Dandolo. It weighed 56 grains and was meant to continue the 
tradition of the Bezant. Venice at first repeated Florence's error and 
attempted to institute a fixed legal ratio of 10.7 to 1 (1 gold ducat to 40 
silver soldi a grossi), but she had to abandon it in 1296, 

As seen in the loose ratio policy it is foolish for a relatively weak 
legal power to present a stationary target when doing monetary battle 
with large commercial forces. Fighting in this case meant not presenting 
an easy-to-hit target. Bi~metallic standards of individual states have 
almost always been vulnerable to the speculative attacks of combined 
commercial interests. 

Venice developed at least four separate moneys of account: two 
based on gold and two based on silver. In 1400 she simplified them 
down to two, one gold and one silver. "With so many different moneys 
of account linked some to one coin, some to another, it is often difficult for 
a modem reader. The Venetians who used those moneys of account every 
day also had difficulties," wrote Lane.^^ 

EXCLUSION OF THE JEWS 

Venice and other Italian Republics had a firm policy of excluding 
Jews. Lane mentions that Venice first came into contact with Jewish 
moneylenders about 1250 AD. Venice didn't allow Jews to live there on 
a permanent basis until the 16th century. According to Cecil Roth, from 
1394 Jews temporarily in Venice were required to wear yellow hats.^^ 

Regarding usury, the Venetians assumed a man had a right to a return 
from a commercial contract only if there was a combined risk and if the 
return was uncertain. This prevailing attitude against usury encouraged 
the flow of capital into trade rather than pawn shop lending. This was 
consistent with the Moslem viewpoint and anticipated that of the 
Christian Scholastics. 

MONETARY DISHONESTY STRIKES AT VENICE 

A merchant or trader's mentality existed for centuries in Venice 
without any moves to corrupt the money system. But within a few years 
of the attempted hereditary definition of the aristocracy, and other influ- 
ences, monetary corruption made its first major appearance in the 
manipulation of the legal tender laws. 



4 RE-INSTITUTING MONEY IN THE WEST 123 



The Venetian Republics' public-spirited cooperation had operated in 
monetary matters until the Tiepolo Querini Conspiracy of 1292-1302, 
which attempted to constitutionally define Venice's leadership in a 
hereditary manner. 

Some monetary methods of plunder appeared soon afterward. In a 
two- step process the mint masters first concentrated on minting silver 
coinage in the money of account called the Piccoli, coining as many as 
possible from 1317-18; at least 200,000 per month, according to Lane,^^ 

Then in 1321, with the control of Venice's mint in the hands of the 
Quarantia body, the government agencies and customs were instructed 
not to accept this Piccoli money of account in any payments, and to 
accept only the silver Grossi money of account! Gold and silver bullion 
was not accepted either, except as a deposit to guarantee that the Grossi 
would be paid. 

This action in effect drastically reduced the money supply of Venice 
and raised the demand and value for the Grossi, which had to be found 
to make the necessary payments. This certainly worked to the benefit of 
those holding the Grossi or those merchants to whom it was owed. It was 
a reduction of the money supply probably engineered by those who ben- 
efited by the provision. 

At about this time some Venetian women began to overly indulge in 
conspicuous consumption, perhaps to assert their social position. This 
quickly led to the establishment of anti-luxury laws prohibiting such 
activities. 

Venice's money system again came under internal attack in 1327 
when bankers, aware of the upcoming resumption of the trade link with 
Egypt and the large amounts of gold expected from it, wanted the right 
to pay off their silver depositors in the expected cheap gold. In 1328 they 
forced through a law fixing the ratio of gold to silver at 14.2 to 1 (1 
Ducat to 24 Grossi), the highest level it had been in over 50 years, so that 
paying off their silver debts would be easier. 

But they miscalculated. Overvaluing the price of gold that way 
forced silver out of circulation, in a massive outflow to Constantinople 
and by 1335 the Grosso ceased to be a common means of payment in 
Venice. The trade with India didn't get started until 1345 after which the 
inflow of gold forced the ratio down to 9 to 1, In 1343 Venice elected 
Andrea Dandolo as Doge to remedy her monetary problems, as his 
ancestors Enrico and Giovanni had been responsible for some of her ear- 
lier monetary successes. 



124 The Lost Science Of Money 



VENICE UPSET EUROPE'S MONETARY RECOVERY 

From the mid- 1300s gold was generally falling in relation to silver 
because of this re-opening of Venice's Egyptian trading relations in 
1345, which had been closed down with the Crusades. Frederick Lane 
called it "a turning point" in European monetary history The timing was 
probably related to the suppression of the Knights Templar in 1307 and 
the breakup of the Templar's extensive trading links with the Levant, 
which had been organized during the Crusades. 

Venice's position would again be dominant in Europe, because of 
her ability to once more tap into the Eastern gold-silver ratio and the 
spice trade. However, while the earlier trade had brought gold to Europe 
in exchange largely for slaves and other commodities, at this point 
Venice's intention was to send mainly silver to the East in exchange for 
gold and spices. She would be doing what the Byzantine Roman Empire 
had done for centuries: destroying Europe's silver money system by lit- 
erally exporting it to India. 

Venice applied to the Egyptian government for a reduction on the 
tariff to ship silver there, "because that is most important for our situa- 
tion and we are more interested in a reduction of the tariff on silver than 
on any other merchandise,"^^ The tariff on silver was reduced from 10% 
to 2%. "Silver coins did not gain wide circulation in Egypt. Most of the 
silver sent there was., .sent eastward to India," wrote Lane. Shortly after 
this trade started there was a flood of gold into Italy and by 1360-70 the 
ratio fell to 9.6 to 1 in Venice and Florence. 

According to Spufford it is from this point that gold first began to 
appear in substantial quantities in northern Europe, 

Venice exported vast amounts of silver to Asia: 13,200,000 silver 
Grossi per year, about 20,000 tons. Europe was soon denuded of its sil- 
ver money supply. By the late 1300s the silver famine reached crisis pro- 
portions: 

". . .more severe than anything that had taken place since the 7*^ cen- 
tury," wrote Spufford.2^ 

The crisis peaked from 1457 to 1464, Most mints in Europe were 
closed. In the north, only London's mint remained open. The crisis 
prompted Naples to mint a pure copper coin, the "Cavalli," in 1472. 
Venice herself began minting the copper "Bagattini" coins in 1473. 
These developments were the right direction for Europe. Then some new 
silver mines were opened, alleviating the coinage shortage, and with the 
discovery of America, vast amounts of looted silver and gold began 



4 RE-INSTITUTING MONEY IN THE WEST 125 



entering Europe from America. This inflow of plunder had the unfortu- 
nate effect of retarding the development of sound monetary thought. 

Then from 1 503 Venice, whose leadership could not have been igno- 
rant of the severe monetary problems they were causing in Europe, was 
knocked out of its dominant position in the Eastern trade by Portugal's 
opening of the Cape Route around Africa. 

VENICE CAUTIOUSLY INTRODUCED NOMISMA 

During the Siege of Tyre in 1 122 Doge Michieli ran out of money to 
pay his soldiers so he gave them stamped leather money, which was 
redeemed when the fleet returned to Venice. This temporary leather 
money was not institutionalized; its general circulation was never 
intended, and it was quickly redeemed. 

The experience of how leather could function as money was not lost 
on these expert traders, but Venice didn't use a nominal money until 
1353 when Andrea Dandolo began minting the Tomesello for circulation 
in Venice's foreign territories, comprising modem day Greece, Bulgaria, 
Romania and the former Yugoslavia. 

The Tomesellos were a mixture of copper and silver, legally valued 
at twice their silver metal content. Minting costs alone took about 25% 
of the Tomesello 's value. Thus Venice did not stray very far from metal 
content value when you consider that Rome's numeraries were at least 
four times their metal value. 

The Tomesello was put into circulation by paying for Government 
expenditure: for fortifications, outfitting fleets, paying crews, etc. It 
functioned reasonably well: 

"As long as the Tomeselli were minted only in amounts equal to the 
need for them, their scarcity value enabled them to circulate at their legal 
tender value even though it was almost twice their silver value." 
However, after 1390: 

"Having been emitted in large quantities (about 4 1/2 million a year) the 
TomeseUi ceased to have the scarcity and utility value for some decades," 
wrote Lane.^^ Venetian territorial officials complained of being paid in 
them and a 20% discount was applied to them for a period. 

Though the Tomesello didn't circulate in Venice itself, in 1379 She 
began minting a new "overvalued" silver Grosso coin. It was nearly 
identical with the old silver Grosso, except that it had a star on it and it 
was legally valued at twice the old Grosso. 

The Starred Grossi were minted in large numbers for decades and 



126 The Lost Science Of Money 



were a large part of the minting when Doge Tommaso Mocenigo in 1423 
delivered his famous "Death bed oration" extolling the prosperity and 
power of Venice, praising her industrial and commercial achievements.^"^ 
The Venetians thus obtained only partial benefits of a fiat money sys- 
tem. Perhaps they didn't think they had the power to gain acceptance of 
a four or more times "overvalued" coin, which would have been enough 
to gain major advantages for their money system and their society. 





Venetian Tournesello 

(16.7 mm; .579 grams) 

4e. Venice was very timid witli its fiat money issues. The Tournesello (above) 
was worth only 25% more than its commodity content value and manufac- 
turing cost. But the presence of the small star on the silver Grosso (below, 
right, arrow) made its legal value double the normal Grosso. 




Venice's Starred Grosso 

(23 mm; 2.279 grams) 



4 RE-INSTITUTING MONEY IN THE WEST 127 



From about the mid- 1400s, coining machines came into use in 
Venice. Whereas previously a workman could manufacture 40 to 50 
coins a day, it was now possible to produce thousands. 

IHE IMPRESTIDI - GOVERNMENT FINANCE IN VENICE 

Banking was discouraged or suppressed under the Basileus. 
Coinciding with the fall of Byzantium, banking arose first in Catalonian 
Spain and Genoa around 1200 AD. 

Venetian banking evolved in order to finance the government after 
her participation in the first three crusades had drained the treasury. 
During one emergency, Doge Michieli borrowed from several rich mer- 
chants and paid it back. 

In 1173 the treasury was empty again and Doge Ziani instituted a 
forced loan of 1% of the total property of each household. These loans 
were called "Imprestidi" and paid interest of 4%. No certificates were 
issued for these bonds but they were recorded and transferable at the 
Imprestedi office. 

The Camera del' Imprestidi, often confiised with the later Bank of 
Venice, was not a bank - no deposits or loans could be made. To trans- 
fer the credits required both parties to be present at the office. After 1262 
these loans were no longer considered temporary but were consolidated 
into the "Monte Vecchio" bonds. Thereafter new levies, the "Monte 
Neuvo" bonds generally exceeded repayments. 

The amount each citizen had to loan was based on an adjusted esti- 
mate of his wealth - the "estimo," and the percentage of the estimo 
forced as a loan ranged from 3.87% in 1287-91, up to 62% in 1380-81. 
Lane estimated Venice's Imprestedi debt, in Lire a Grossi, at:^^ 



1255 


15,000 


1353: 


3.1 million 


1393 


12.5 million 


1402: 


9.5 million 


1413 


23 million 


1438: 


16.5 million 


1521 


21.5 million 


1620 


zero 



Since these Imprestedi were transferable on the books, they became a 
means of payment between merchants and therefore were a very limited 
form of money, even though they were never intended as such and had no 
legal tender status. This is one of the first instances in the West where 
govemment debt was monetized, although unintentionally. 

The money supply was thereby potentially increased by the amount 
of the Imprestedi loans in existence. 

The Venetian's initial lack of a state bank was by choice. As early as 



128 The Lost Science Of Money 



the 1300s proposals to set up a Deposit bank were rejected. There were 
moves to allow using checks to transfer Imprestidi bonds, which would 
have made them a nearer money form, but again Venice choose to forego 
this convenience. Finally in 1587 the Camera del' Imprestidi was con- 
verted into a Deposit, or "Giro," bank. This was among the earliest state 
Deposit Banks in Europe and was soon followed by the Bank Of 
Amsterdam in 1609. 

A Giro bank, in theory, accepts deposits and allows depositors to 
transfer amounts from their accounts to other accounts in the same bank. 
Giro banks were not supposed to make loans and were considered very 
secure. But Venice's bank was bankrupt by 1600, reflecting the turmoil 
she was in from the early 1500s. 

Substituting the Imprestidi loans to the Government in place of tax- 
ation, led to uncontrollable monetary consequences, when the state debt 
was reduced to zero. Creating the Imprestedi loans had increased the 
money supply, but eliminating them removed that supply. 

There had been private local banks in Venice from the 13th century, 
but around 1500 all except the very small banks went bankrupt. One rea- 
son was because the requirement to pay for the Imprestidi had forced 
wealthy Venetians to withdraw large sums from the banks, collapsing 
them. Furthermore, Venice's own silver trading with the East had caused 
money and banking to deteriorate throughout Europe in the mid- 1400s, 
so that most states were arrayed against her, 

THE DECLINE OF VENICE 

From the start of the 1 500s Venice was declining and 
Portugal/Antwerp were rising. The Cape Route to India was opened in 
1503 when the first Portuguese shipments arrived home. This ended 
Venetian dominance of the East/West trade and of the ratio mechanism. 
In the early years the Portuguese fleet brought in 2.3 million pounds of 
spices annually, mostly pepper. This came out of Venice's Alexandria 
trade which initially dropped by 75%. 

The year 1500 also marks the end of the century of warfare against bank 
credit, carried on in Northern Europe by the Hanseatic League and the Dukes 
of Burgundy, described in Chapter six. This battle caused large scale bank 
closures in northern Europe and the effects could easily have been felt in 
Venice. 

After 1500, Venice's fleet also went into relative decline. Her ship- 
building specialty had been the large expensive flat bottomed galleys, 



4 RE-INSTITUTING MONEY IN THE WEST 129 



about 140 feet long and 24 feet wide. But revolutionary improvements 
in sails and especially the rigging of round bottomed boats made them 
fester and easier to handle. The invention of cannon removed the security 
advantage of the large galleys. By 1606, affected by a severe shortage of 
oak, one-half of Venice's fleet was built in foreign shipyards and mar- 
itime supremacy shifted to Holland. 

LESSONS OF CHARLEMAGNE AND VENICE 

Charlemagne's experience shows, in part, the futility of basing a 
money system on hard-to-get commodities, or on exceptional personal- 
ities. For even with slave labor, the costs to society of creating and 
maintaining the metallic money supply took up too great a part of the 
eventual benefit the society derived from that money system. 

Then there was the fact that the commodity aspect of silver 
coinage caused it to continually drain to the East. Venice's ability to 
use gold and silver for money resulted in part from turning the silver 
drain to her advantage. That is, during several periods, her merchants 
were the ones doing the "draining." But this was at the expense or 
inconvenience of other European nations, and when they eventually 
had the chance to turn on Venice, they did. 

Perhaps the greater loss to Venice was that she remained timid in 
her creations of fiat money, and did not really develop an advanced 
system of nomisma.Thus when state finance later became a problem, 
she could not employ advanced monetary actions to help in solving 
them. She never fully realized the potential for monetary development, 
already so evident in the sophistication of her mint regulations. 

On the positive side, the trading profits of Venice and the other 
Italian city repubhcs raised the level of civilization in northern Italy to 
the point that renaissance became possible. 



130 The Lost Science Of Money 



Notes to Chapter 4 

^ Peter Spufford's phrase describing monetary developments in Charlemagne's 
time, in his 1988 work Money and its Use in Medieval Europe, Cambridge 
Univ. Press, 1988, 1993, SpufFord assembled the first comprehensive picture of 
metal and coin flows in the middle ages, from merchants notebooks, literary ref- 
erences and coin hoards. 

- Alexander Del Mar, History of Monetary Systems, (repr., A.M. Kelley, 1 967), pp. 1 1 6-7. 
^ Spuflbrd, cited above, Ch. 2. 

^ World History of the Jewish People - The Dark Ages (711-1096), (Jerusalem: 
Jewish History Publications, Reutgers Univ. Press, 19660, section by S. 
Schwarzfuchs, pp. 130-143. 

^ Del Mar, Middle Ages Revisited, (New York: Cambridge Encyl.Co., 1900), p, 204 
^ Del Mar, Middle Ages Revisited, cited above, Ch. 9. 

^ Eginhard, IV, 16, on Treaty of Seltz, as quoted by Del Mar, Middle Ages 
Revisited, cited above, pp. 192-202. 
^ Del Mar, Middle Ages Revisited, cited above, Ch. 10. 
^ SpufFord, cited above, pp.50-51. 

^^ Jacob Burckhardt, The Civilization of the Renaissance in Italy, (London: 
Phaedon, 1944), p.35, 

^^ Phillip Longworth, Venice - The Rise and Fall, (London: Constable, 1974), p. 84. 
1^ Frederick C. Lane, Venetian Ships and Shipbuildings (Baltimore: John 
Hopkins Univ. Press, 1934). 
'^ Longworth, cited above, pp. 15-20. 
'4 Del Mar, Middle Ages Revisited, pp.245-50. 

^^ Frederic C. Lane, Money And Banking In Medieval Venice, (Baltimore: John 
Hopkins Univ. Press, 1985), 
'^ N.J. Mayhew & Peter Spufford, editors. Later Medieval Mints, (BAR 

International Series, 1985), Chapter on Venice's mint in the 13^^ century by 

AlanM. Stahl, p. 104. 

^^ Lane, Money & Banking..., cited above, pp. 360-368. 

^^ Lane, Money & Banking..., cited above, p. 354. 

^^ Prof. Cecil Roth, Venice, (Jewish Publication Society of America, 1930). 

^^ Lane, Money & Banking..., cited above, pp. 315-340. 

^^ Lane, Money cfe Banking..., cited above, p. 370. 

^^ Spufford, cited above, p. 340. 

^^ Lane, Money & Banking..., cited above, p. 431. 

^"^ Lane, Money & Banking..., cited above, p. 174. 

^^ Frederick C. Lane, Venice In History, (Baltimore: John Hopkins Univ. Press, 

1966),pp.87-100. 



131 



CHAPTER 5 



THE CRUSADES 
END BYZANTIUM'S 
MONETARY DOMINATION 



"Then for the first time appeared this epidemic fury, 

in order that there might be no possible scourge 

which had not afflicted the Human race." 

Voltaire 



The Crusades are usually viewed as an emotional orgy of bloodlet- 
ting and in part, they were. But they became much more and served as 
the crucial pivot between the medieval period and the Renaissance. 
Monetary re-birth in Europe would have taken much longer without 
them. Social and governmental organization were also accelerated. 

In 1095 Pope Urban II passionately called for an expedition to take 
Jerusalem from the Moslems. "It is the will of God" chanted the multitude, 
and every village in Europe was affected by this greatest undertaking of 
any kind since the time of Imperial Rome. Millions went on the Crusades; 
many more millions of pilgrims followed them. 

GEOPOLITICAL MOTIVATION FOR THE CRUSADES 

By focusing on popular fervor, Voltaire's statement overlooks the 
major geopolitical motives for the Crusades which were becoming ripe. 
Popular Fervor 

The fervor was real but such a great Movement could not originate 
from popular desires in a world where the populace had so little to do 
with its own governance; and after all - Moslems had ruled Palestine for 



132 The Lost Science Of Money 



over 400 years. And while Egyptian Ruler Al Hakim burned down 
Jerusalem's Church of The Holy Sepulcher in 1009, his successor had 
rebuihitby 1048. 
Turkish Pressure 

The Emperor asked for help retrieving the holy lands to remove the 
military pressure the Seljuk Turks placed on Byzantium, which were 
harming its Moslem relations. 
Ending The Jewish Trading Dominance 

By this time the larger part of the Jewish population had moved from 
Asia into Europe. The occupation of Spain by Islam had brought a wave 
of Jewish migration with it. Until the first half of the 8*^ century, the bulk 
of the Jewish people lived in western Asia under Moslem rule, but by the 
W^ century most of the Jews had transferred from Asia to Europe. 
Pirenne notes that much of the East- West trade was in their hands, 
through Spain. 
Growing Princely Ambitions 

The economic and military position of the Western princes would be 
improved if they could re-take the Holy Land and estabhsh more direct 
trading relations of their own. The massacre of Jews in Europe by 
Crusaders as they left on the first Crusade may indicate that constricting 
the Jews was a mofivafion at more than one level. 
Papal Ambitions 

Part of Rome's motivation was defensive! The Saracen Moslems 
had reached the Pope's doorstep in 846 AD when they besieged the 
Castello St. Angelo, the Vafican's battlement on the Tiber River in 
Rome, less than a thousand yards from St. Peter's Basilica. 

But the Papacy also wanted to end the dominance of the Basileus 
which was apparently still recognized as the supreme religious authori- 
ty by most of the West's leadership. Retrieving Jerusalem with Western 
forces would strengthen the Pope's posifion, perhaps enough to dislodge 
the Byzantine establishment. Or, if a large Western force could be moved 
near Constantinople without raising alarm over the many years it would 
take to assemble, that force could ultimately be used to topple the 
Emperor 

All of these high level objecfives and more were in fact achieved 
during the Crusades. The Basileus succeeded in dislodging the Moslems 
from Jerusalem for almost 100 years and forever from Spain. ^ The 
Mediterranean was re-opened to general Christian traffic. Trade routes 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 133 




5a. In 1095 at Auvergne, Pope Urban II called for a Crusade to take 
Jerusalem. He started a movement that had been brewing for a century and 
would reach fruition a century later with the toppling of Constantinople in 
1204, ending Byzantium's hold over Europe's money systems. 



134 The Lost Science Of Money 



and lasting trading links were set up, especially by the Knights Templar 
organization. The significance of the Jews in international trade was 
"drastically reduced" after the Crusades broke the Moslem/Christian 
barrier, breaking the trading links of the Jews in Europe with the 
Radanites of Egypt, who held long standing trade relations in India.^ 

Yet to discount the religious "idealism" and emotional attraction of 
the Crusades would be to miss the great popular appeal of going forth 
together, acting in common for the glory of God. The Pope temporarily 
turned the sometimes frustrating "Thou Shah Not Kill" into the often 
more satisfying "Thou Shall kill the bad guys." 

THE CRUSADERS MASSACRED THE JEWS 

In the U.S. a growing attention has been devoted to the crusaders 
mistreatment of the Jews, and it is best to recount these events and their 
background from Jewish and philo-Semitic sources, such as James 
Parke's careful study The Jew in the Medieval Community,^ and 
Professor Cecil Roth's work in World History of the Jewish People - The 
Dark Ages, 711 - 1096^, and others. 

A primary activity that attracted the Jews into Europe from the 8^^ to 
the 11^^ century was to engage in the European slave trade. Parkes notes 
that from the 5^^ to the 8^^ century Jewish traders "continued and perhaps 
developed the trade in slaves," but this activity "only employed a rela- 
tively small proportion of the Jewish population."^ 

The burgeoning slave trade of the 8^^ to the \l^^ century, however, 
spurred by the Moslems occupation of Spain and their insatiable appetite 
for slaves, was on a much larger scale, and: 

"It is possible that the slave trade through north eastern Europe to 
the slave countries were for practical purposes Jewish monopolies," 
wrote Parkes.^ 

Charlemagne, who had both tolerated and benefited from this slave 
trade, had insisted that either a bishop or count be present at slave sales. 
The slave route was from Mainz to Verdun; through the Soane and 
Rhone Valley to Lyon, Aries and Narbonne; finally to the Mediterranean 
port of Barcelona, where they were sent east by ship.'^ It was along parts 
of this route that accusations arose that children were being kidnapped 
and included in the slave caravans. 

Professor Cecil Roth notes how in the documents of this period the 
Jewish slave trade occupies a particularly prominent place because its 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 135 



scale was so vast, and because it also presented religious problems. Roth 
was particularly concerned that the slave traders violated Jewish law, 
))rtuch forbade the castration of whole groups of people. The Jews cas- 
trated those captured as slaves, at their holding center in Verdun, before 
delivering them to the Moslems in Spain.^ 

Since there were not yet nation states developed in most of Europe 
1here was little or no organized opposition to capturing slaves, especial- 
ly from the "slav" areas and some of the "Wendt" areas. One of the few 
organized groups standing in the way was the Catholic Church, but it 
objected mainly to Jewish traders taking Christians as slaves. 

When today's Libertarians talk about doing away with national gov- 
ernments, they would do well to first prepare some defenses from any 
potential modem day equivalents of such slave trading, which in today's 
worid would likely originate in the private corporate sector. 
The Assembling crusaders attacked the Jews 

Many poor Crusaders had begun to gather in the spring of 1 096 AD 
for the long march to the Holy Land and assembled before their leaders 
were ready: 

"It was these bands who were responsible for all the massacres of 

the Jews," wrote Parkes.^ 

The attacks were said to be religiously motivated in that anyone who 
accepted baptism was not harmed - for example, all of the Jews of Trier. 
However, many massacres occurred elsewhere: in the Church at Rouen; 
at Speyer 800 Jews killed each other to avoid baptism; at Mainz 1014 
Jews similarly died together; and massacres occurred at Altenahr, 
Xanten, Mors, Kerpen, Gelden and Cologne. Parkes stressed that: 

"Unless the reader can seize some of the horror of those fatal weeks 
it is not possible to understand the subsequent history of the Middle 
Ages, or the bitterness of the hatred of the Jews for Christianity and for 
those Jews who accepted it."^^ 

THE FIRST MARCH 

When the Crusaders finally reached Constantinople they were awe- 
struck by the sight of the great walled city. Nothing like it existed in the 
West. Even today its great walls are impressive. The various leaders took 
oaths of loyalty to the Emperor and agreed to give him all conquered ter- 
ritories, still more evidence of the Emperor's continued supremacy over 
the West. 

The Army went on to Jerusalem, remaining orderly in spite of poorly 



136 The Lost Science Of Money 



planned logistics and inadequate equipment. There was no fodder for the 
animals. Sheep, dogs, and even pigs were used as pack animals. 
Desertions were heavy. The Emperor had been advancing behind them 
to take possession of his new lands, but heard of their problems and 
turned back home to Constantinople. 

Somehow, on July 15, 1099, after the chance arrival of a group of 
Genovese engineers, who built moveable towers, they took Jerusalem! 




5h. Dore's presentation of the first Crusade's Siege of Jerusalem. Though 
logistics were poorly organized, they managed to take the city; but then 

engaged in a terrifying, unnecessary blood-bath. 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 137 



An ecclesiastical Kingdom was set up there with Godfroi de 
Bouillon installed as king. They then took one city after another, perpe- 
trating many horrors in the name of Christianity. 

"On more than one occasion the inhabitants were slaughtered after 
they received safe conduct to leave the city, and their bodies were burned 
or cut open to secure the gold which they were supposed to have swal- 
lowed," wrote Munro.^^ 

hJEW FOUND RICHES 

"The Crusades lands were much richer in natural products than the 
west of Europe and in addition had been for many centuries the entrepot 
for wares which were luxuries or unknown in the West. The Crusaders 
found a much higher civilization than any to which they were accus- 
tomed," wrote Munro (p 178), who noted that the Crusaders prospered 
in Palestine: "Those who had a few coins, here possess countless 
Bezants." (p 82) The crusaders did not allow the Jews to own land in the 
area and there were only a few thousand Jews in all the Christian terri- 
tories in the Levant. Certain monetary accommodations were necessary 
for commercial activity with the Moslems: 

"...the Christians had to adopt the weights and measures in use in 
the country and needed a form of money which would be acceptable to 
the oriental merchants. While Greek and Western coins were used 
among the crusaders, a new coin the Saracenate (or Bezant or Dinar) of 
Tyre was struck for use in commerce. This was a gold coin imitating 
closely the standard Bezant, coined by Muslin's with Arabic legends, 
usually a text from the Koran. It continued to be used by the crusaders 
till the visit of Saint Louis to the Holy Land in the middle of the 13th 
century. Then Pope Innocent IV forbade such impiety... texts from the 
Koran were replaced by Christian inscriptions but these were still writ- 
ten in Arabic in order not to prevent the circulation of the coins among 
Muslin's," wrote Munro. (p 122-3) 

CONTRAST BETWEEN CHRISTIAN AND 
MOSLEM LEADERS 

Pope Urban II had presented the Moslems most negatively: "The 
Turk never ventures upon open close fight.. .and as he has poisoned 
arrows, venom not valor, inflicts death on the man he strikes. Whatever 
he effects then I attribute to fortune, not courage." (p. 110) 

But the Knights soon learned that "No one could find more power- 
ful or braver or more skillful warriors than they." The Saracens also 



138 The Lost Science Of Money 



developed an admiration for the Franks and Nereddin called the Franks, 
"The bravest of mortals." (p 111) 

The Seljuk wave of the immigrating Mongol hordes into the holy 
lands was a big factor in causing the Crusades. Within one lifetime they 
had destroyed most of Asia Minor, which was the reservoir of Byzantine 
landed wealth. Without the Crusades, Europe might also have fallen. 

Their battle tactics were actually quite formidable. Thousands came 
on horseback in a thin extended flank, galloping at full speed. They shot 
their arrows and retired as a second and third wave arrived. Then they 
would all attack together with their thin curved bladed, very sharp 
swords. 

Christian behavior contrasted poorly with that of the Moslems, espe- 
cially Saladin the Great. A Kurd bom at Takrit, Saladin had united the 
Moslems in order to fight the Crusaders. While besieging Jaffa, "Saladin 
heard that Richard the Lion Hearted was in town and had no horse on 
which to fight. Consequently Saladin sent Richard a splendid charger. 
During the siege of Acre, a Christian woman went to the Muslin camp 
begging for her baby, who had been carried off by the Saracens... Saladin 
was touched by her anguish; the tears stood in his eyes and he had the 
camp searched till the little girl was found." (p 173) 

In 1183 he re-took Jerusalem, granting merciful terms: 

"Saladin's guards kept such order that no Christian suffered any ill 
usage." The inhabitants were allowed to pay a ransom and leave with 
their belongings. "One of Saladin's Emirs ransomed a thousand 
Armenians; but the Christians took no thought for their poor fellow cit- 
izens and went away with all the treasure they could carry. The Patriarch 




^^^^^^^^^^^p^ gold bezant; 2.85 
^^^^^^^^^^ grams; 19.7 mm. 

5c. The crusaders soon adopted the coining standards of the conquered 
areas. A Kingdom of Jerusalem bezant with Arabic legends, of 

Conrad and Conradin; 1243-1268 AD. 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 139 



carried off all his own wealth, the treasures of the Churches, and even 
the gold plate from the holy sepulcher... (while) thousands of the poor 
still remained un-ransomed. Then Saladin's brother begged the gift of a 
thousand, and set them free... then Saladin freed all the old people. When 
Saladin saw wives of captured Knights he promised to free them if he 
could find them, and he does." 

"The contrast between this scene and the original capture of 
Jerusalem by the Crusades in 1099 offers some degree of the difference 
in character and degree of civilization between Saladin and the Christian 
leaders (who had slaughtered countless thousands of Moslems when 
they captured Jerusalem, burning their bodies in many huge pyramids)." 
(p 165-6) 

When Richard The Lion Hearted had captured Acre, he slaughtered 
2700 Moslems in cold blood because the ransom was late. "Nor was 
there any delay. The king's followers leapt forward to fulfill the com- 
mand, thankful to the Divine Grace that permitted them to take such a 
vengeance." (p 168) 

Saladin gave this advice to his son : "My son I commend thee to the 
most high God, the fountain of all goodness. Do his will, for that way 
lieth peace. Refrain from the shedding of blood; trust not to that; for 
blood that is spilt never slumbers. Seek to win the hearts of thy people 
and watch over their prosperity, for it is to secure their happiness that 
thou art appointed by God and by me." (p 171) 

ENCOUNTERING THE ESfFIDEL 

The Crusaders came into direct contact with the "infidel" and found 
him likable. "In Asia Minor many a pilgrim became a renegade to the 
Christian faith because of the good treatment received from Moslems... 
The common people said it was not necessary to capture cities for the 
Cmsades because the Turks are better and more trustworthy than they 
who kept no faith with God or duty to neighbor," wrote Munro. (p 137) 
This kind of "heresy" sprang up all along the routes to the Holy Land. 

ASSIMILATION 

The Crusaders were always a small minority in the cities they con- 
quered. After a while they took care to win the native's goodwill. Over 
time they inter-married with the "infidels," became orientalized, and 
didn't think much of home. The Kingship took on an oriental character 
- the King being approached on bent knee. 

Both Christian crusaders and Moslem defenders eventually sought 



140 The Lost Science Of Money 



inter-faith alliances in battles against co-religionists. Commerce brought 
them together. Christian seaports were active trade centers. Christians 
sometimes borrowed money from Moslems and made hunting agree- 
ments. Christians soon came to boast of Moslem descent! (pp 110-17) 
Christian rulers often borrowed the superior Doctors of Moslem rulers. 
The Moslems had preserved elements of Greek learning and Roman 
law in a better form than the West. An admiration of the arts, which they 
excelled in such as medicine, produced a desire to know something of 
their history and religion. Despite the Clergy's falsified reports on con- 
ditions in the Holy Land, the fame of Saladin The Great spread through- 
out the West and members of the educated classes desired to convert to 
Islam. 

The Crusaders also came into closer contact with the origins of 
Judaism and Christianity and some found reasons to question their faith. 
These discoveries - of worldly powers and of problems with the faith - 
led to the beginnings of a new freedom of mind in some individuals, 
which was transmitted through the Knights Templar organization. 

RISE OF THE KNIGHTS TEMPLAR 

One important resuU of the P^ Crusade was the formation of the 
Knights Templar, originally called the Poor Knights Of The Temple Of 




5d. St, Peter's crusader's castle at Bodrum (Halicarnassus), Turkey, con- 
structed in the early 1400s with stones taken from King Mausoleus nearby 
"Mausoleum," one of the "wonders" of the ancient world. 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 141 



Solomon. They were formed in 1114-18 ostensibly to protect pilgrims in 
the Holy Land. Fearless in battle, their flag was half black and half 
white, signifying death to their enemies and assistance to their friends. 
Questions have arisen as to their humble origin and goal: 
"The evidence suggests that this avowed purpose was a facade and 
that the Knights were engaged in a much more ambitious, grandiose 
geopolitical design," wrote Baigent and Leigh in their provocative book 
The Temple and the Lodge, ^^ The Templars original membership simply 
appears too high powered and their growth too rapid. They were 
involved with the Cistercian order, which became a primary promoter of 

the 4^*^ Crusade. Of the nine Knight members in 1128, were included: 
Fulk, the Comte D'Anjou (father of Geoffrey Plantagenet and grandfa- 
ther of Henry II, King of England); Hughes, Comte De Champagne; and 
Hughes De Pay ens, who became the order's first Grand Master. 

They received their charter from the Church in 1128 at the Council 
ofTroyes and: 

"within one year owned lands in France, England, Scotland, Spain 
and Portugal. Within a decade their possessions would extend to Italy, 
Austria, Germany, Hungary and Constantinople. In 1131 the King Of 
Aragon bequeathed to them a third of his domains. By 1150 the Temple 
had already begun to establish itself as the single most wealthy and pow- 
erful institution in Christendom, with the sole exception of the 
Papacy."^^ 

This phenomenal growth is hard to explain by the concept of pro- 
tecting pilgrims; even as there were other Knights groups - such as the 
Knights Hopitallier of St. John which evolved into the Red Cross; the 
Portuguese Knights of Christ and the Teutonic Knights. 

THE 4™ CRUSADE'S SNEAK 
ATTACK ON CONSTANTINOPLE 



Byzantium had obstructed the 3^^ Crusade and formed an alliance 
with Saladin, who held Jerusalem. Elements in the West, including the 
leadership of Cluny, France's greatest rehgious house, and especially 
members of the Cistercian Order, plotted Byzantium's downfall. The 

plan was to divert the 4^^ Crusade into an attack on Constantinople under 
the pretext of re-instating Emperor Isaac and his son Alexis, who had 



142 The Lost Science Of Money 



been deposed in a palace coup.^^ 

John Godfrey's The Unholy Crusade^^ describes how European 
nobility had no enthusiasm for this venture until Pope Innocent III 
threatened to place a 2 Vi % income tax on them if they stayed home.^^ 
The great body of knights would not know of the secret plan and were 
maneuvered step by step into the treachery. 

Venice's fleet would be crucial, A delegation negotiated with Doge 
Enrico Dandolo, who was able to exact heavy terms since their decision 
had been approved in advance. Dandolo must have been brought into the 
plot. He had a well known grudge, having been partially blinded by 
Byzantine officials, one of their favored torture methods. 

The army assembled in June 1202 and set sail, wintering at Zara, where 
Dandalo, ignoring orders fi*om the Pope, used the army to re-establish 
Venice's control over the city. He was quickly excommunicated. Most of 
the Knights expected passage to Egypt, but Venice had no intention of 
landing troops in Alexandria, which still contained elements of her trad- 
ing links. 

By the time the fleet reached Corfu in the early spring of 1203, sus- 
picion and arguments over their true destination came into the open and 
promises had to be made to the reluctant knights. After rounding the 

Peleponnesus and Attica, the fleet anchored at the island of Euboea."^ It 
then headed past Skiathos, took the long leg across the Aegean, past the 
desolate island of St. Efstratios; on to Lemnos Island; then to the main- 
land past Troy, to Galipoli, up the Dardanelles into the Sea of Marmara, 
then to Constantinople.^'^ 

THE "CITY OF THE WORLD'S DESIRE" 

Constantinople had been founded as Byzantium in 657 DC by 
Dorian Greeks as a colony of Megara. She was the largest city of the 
Medieval world, at 7 miles long and 5 miles wide, with a population 
approaching one million. There was a plentiful water supply, public 
parks, street lighting and a good sewer system. But the leadership, the 
army, the navy, and the people had degenerated markedly. 

"^In 1968 your author and three friends unknowingly retraced the route of the 4th 
Cmsade, in a Zodiac mbber boat, starting from Vouliagmeni Beach, near Athens, 
At our first stop on the beaches of Euboea, the inhabitants seriously lacked the 
normal Greek hospitality. I thought an event from WW2 of 30 years earlier had 
perhaps affected them. But it may have sprung from a much earlier experience: 
more than one Crusade had stopped there, one bringing the plague. Perhaps the 
Euboians have learned to beware of strangers arriving unexpectedly by sea. 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 143 



The appearance of the fleet in the harbor was enough to make the 
acting emperor flee by night and to have Emperor Isaac reinstated. 
However, when his son Alexi told him of the agreement he made to cede 
religious supremacy to Rome, he strenuously objected. When the 
Byzantines learned of the agreement in January 1204, they murdered 
both father and son and installed Canabus as Emperor. 

On April 9^*^, the Crusaders attacked and defeated the Byzantines. 
From April 13-15 the Christian invaders were turned loose on the great- 
est Christian city in the world. They went wild, sacking the city. They 
preserved the foolish relics - the bones of the Saints; pieces of the Cross; 
milk from the Mother of God; and destroyed the great artworks: the 
bronze charioteers of the Hippodrome; the She Wolf suckling Romus 
and Romulus; Paris presenting the apple to Venus; an exquisite statue of 
Helen of Troy; statues commissioned by Augustus; all the great works 
taken to Constantinople over nine centuries from the ancient temples. 
All were melted down into bullion or coins. 

It is this hatred of beauty, sometimes so clear in some Western 
elements, that discourages the good in the West and causes the 




5e. It took Venice a year and a half to transport the army of the 4th Crusade 
to Constantinople. Most of the knights were unaware of the expedition's real 
purpose, but once the great Christian city was looted, their objections faded. 



144 The Lost Science Of Money 



possibility, and in dark moments, even the desirability of the survival 
of what passes for the "Western tradition" to be called into question, but 
the thought soon passes. For the most part, we have little choice but to 
create and improve where we can. Yet we must find ways to expurgate 
the ignorance and evil that comprises too much of our "civilization," and 
devote real effort to that task. 

Constantinople's great library of 120,000 volumes had already 
burned in 476 AD. In 1204, some churches and monestaries still had 
good collections, especially the renowned Studius Monastery. But thou- 
sands of manuscripts and parchments from many personal libraries were 
now burned and fi-om that time on the works of many ancient authors dis- 
appeared altogether. It must be remembered that books in medieval times 
were extremely expensive. Cipolla estimated an average medical volume 
cost the equivalent of 3 months of normal living expenses and the aver- 
age legal book cost about 16 months worth of living expenses. 

On the positive side, some of the greatest works of Greek 
Philosophy, such as those of Aristotle, which had been non-existent in 
Europe, were saved from the flames of Constantinople and brought to 
the west. 

Baldwin of Flanders was elected Emperor and Venice took control 
of the Patriarchy and Churches, The loot was gathered up and divided. 
All thoughts of Palestine disappeared. Dandolo, aged 95, died in 
Constantinople and was buried in St. Sophia church. 

The Pope ratified these religious and political decisions. The schism 
between the Latin and Orthodox churches became irrevocable, and 
remains to this day. Michael 8*^ recovered Constantinople from the 
Latins in 1261. It fell to the Ottoman Turks in 1453. 

MONETARY SIGNIFICANCE OF THE 4th CRUSADE 

The fall of Constantinople in 1204 formally ended the Empire's 
monetary powers, which had held sway in Europe from the time of 
Julius Caesar. The monetary system of the Caesars was finished. This 
was one of the most significant monetary events in history. 

To repeat, the "secret" dynamic behind this "sacred" monetary sys- 
tem was that the Basileus would be ready to exchange centrally minted 
gold Bezants for locally minted silver coinage at a 12 to 1 ratio, when it 
could exchange that same silver for up to twice as much gold bullion in 
India and points east. 

When Byzantium fell, the control of money slipped from religious 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 145 



or sacred hands into secular hands. While the Lateran Council would 
soon (1211) declare the Papacy's supremacy over all earthly sovereigns, 
they couldn't make it stick, and Frederick 2^^^ assumed the sacred pre- 
rogative of the Basileus and minted gold coins of 82 grains at Naples in 
1225. Research is needed on just how Frederick came to do this. 
Local rulers all over Europe began minting gold coinage: 
In 1225 Lyon issued a 54-grain coin. In 1250 France under Louis 9th 
did so at 63 grains. In 1252 the Republic of Florence issued the gold 
Florin at 56 grains. In 1257, England, under Henry III, issued gold coins 
of 43 grains. In 1284 the Venetian Republic issued gold Ducats at 56 
grains. Finally in 1316 in Avignon, Pope John 22 minted the gold Sequin 
at 54 grains (see Chapter 3). The Old World Order had fallen, 

THE RETURN OF THE SPOILS 

Vast amounts of spoil were brought back to Europe from 
Constantinople, more than the official figures, because the marauders 
cheated their fellow Christians and did not put all of their loot into the 
official pool, which totaled about 400,000 marks weight worth of silver. 
The Venetians are known to have stored much loot in their ships rather 
than pooling it. The Churches were looted of vast amounts of gold and 
silver Forty barrels of gold were found beneath the altar of St. Sophia 

alone.^^ 

"The plunder of Constantinople by the Venetians and other of the 
Crusaders probably transferred more metallic wealth to western Europe 
than all the commerce of the centuries that preceded it," wrote Jacobs. ^^ 

The return of this metallic plunder to Europe gave a crucial mone- 
tary boost to European life and was probably the main factor in Europe 
finally reaching the magic threshold, the critical monetary mass where 
a truer, more advanced monetary systems could function. Nomisma 
could be re-introduced. 

RENAISSANCE IN EUROPE 

The hoarded coinage and bullion had been less than useless in 
Constantinople, where it required heavy storage expenses and served as 
a magnet attracting and inviting conquest. Its "intrinsic value" was really 
quite negative. In Europe it would be put to much better use: by Venice 
in her commercial activities; by the Princes in their realms; by the 
Church in helping to finance construction of the great cathedrals of 
Europe; by the individual crusaders and by the Knights Templar in their 
growing financial activities. 



146 The Lost Science Of Money 



THE KNIGHTS TEMPLAR FINANCIAL INNOVATIONS 

The Knights Templar organization had been quick to learn monetary 
and financial arts while in the East. It was after their return from the first 
crusade with a knowledge of banking and credit techniques that banking 
began to appear in Europe: 

"Historians generally ascribe the evolution and development of 
Western economic institutes to Jewish money lenders and to the great 
Italian merchant houses and Consortiums. In fact, however, the Jewish 
money lenders were minor compared to that of the Templars and the 
Templars not only pre-dated the Italian houses but established the 
machinery and procedures which those houses were later to emulate and 
adopt," wrote Baigent and Leigh. 'Tn effect the modem origins of bank- 
ing can be attributed to the Order of the Temple. At the peak of their 
power the Templars handled much if not most of the available capital in 
western Europe. They pioneered the concept of credit facilities as well as 
the allocation of credit for commercial development and expansion."^^ 

Byzantium suppressed banking but the Templars were strong 
enough to engage in it anyway. After 1204, with the Basileus out of the 
way, the Templars had a more free hand to introduce and develop bank- 
ing in Europe. 

The Templars owned and ran the depository that held the French 
treasury in Paris. They collected taxes for the Crown and made loans to 
the French and English Crowns. Between 1260-66, Henry III pawned 
the British Crown Jewels with the Templars; Queen Eleanor personally 
brought them to the Templar's Paris Preceptory. 

The Knights at times used methods similar to those of the Jews; they 
could be harsher than the Jews and sometimes charged higher interest 
rates. But since they were Christians, they were not perceived as aliens 
operating against the society. They had a very high reputation for accu- 
racy and honesty and their association with retaking Jerusalem added to 
their image. 

The popularity of the Templars became so great that: 

"...scarce a will of importance was made without an article in it in 
the Templar's favor," wrote C.G. Addison in The Knights TemplarP 
This began to change after it became clear that there was no chance of 
recovering Jerusalem. Their enemies argued that they couldn't have lost 
Palestine if they had been good Christians. 

Addison estimated the annual income of the Templars in Europe 
around 1300 AD at roughly 6,000,000 pounds sterling, from holdings of 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 147 



9,000 manors or lordships; with about 1/3 of their receipts in gold. The 
Templars were generally above or outside of normal law. Their houses 
were sanctuaries; they were exempt from most taxation or dues and 
could not normally be sued, 

THE KNIGHTS TEMPLAR TAPPED INTO THE EAST'S 
GOLD/SILVER RATIO 

Financial success on the order of that achieved by the Templars usu- 
ally also has some esoteric activity at its base. We find that they skill- 
fully tapped into the ancient dichotomy in the gold/silver ratio between 
east and west - using a mechanism similar to Byzantium's 900 year mon- 
etary game with the ratio discussed in Chapter 3. 

The travels of pilgrims and others to the reclaimed holy lands meant 
a tremendous transfer of funds for their expenses. But the pilgrims 
would rarely carry the coinage with them and relied on the Templars' 
facilities to receive payment in Europe and then make payment to the 
pilgrims in the holy land. For example Louis VII, after receiving a loan 
of gold Bezants from the Templars in the holy land, wrote to his finan- 
cial agent Sugar in Paris: 

"They lent us, and borrowed in their own name a considerable sum. 
Kindly repay them without delay 2,000 marks of silver. "^^ 

So the Templars received payment from the westerners in Europe in 
silver and then credited them in Asia (Jerusalem) in gold, presumably at 
the western gold/silver ratio of 12 to 1. But the silver the Templars col- 
lected in Europe could be exchanged for twice as much gold in India 
where the ratio was usually around 7 to 1, potentially giving the 
Templars a huge profit on these money transfers. 

THE SUPPRESSION OF THE TEMPLARS 

It seems they had grown too powerful, for on Friday 13, in October 
1307, King Philip of France (Philip Le Bel) had the Templars arrested 
throughout the realm with secret, sealed orders to all departments, which 
were opened at the same time and acted upon immediately. There were 
an estimated 20,000 Templars in Europe at this time, 10 % of them being 
fighting Knights. They offered no resistance, were interrogated over a 
period of years and many were tortured and killed. This bloody episode 
illustrates an important monetary principle that financiers sometimes 
forget: Ultimately in extreme conditions, political power is superior to 
the monetary power. 

It proved impossible to find a formula to bring them under Papal 



148 The Lost Science Of Money 



control and in 1312 the Pope, under Philip's influence, dissolved their 
charter and turned over their possessions to the Knights of St. John. 
Their leader, Jacques De Molay, a Burgundian, while being burned at the 
stake, called for Pope Clement VI and King Philip to join him within the 
year. They both died under suspicious circumstances within the year. 
The remaining Templars went underground, 

Philip Le Bel also banished the Jews from France in 1306. As his 
name implies he was well liked by the people and France is said to have 
prospered under his reign. 

DISAPPEARANCE OF THE TEMPLAR TREASURY 

Just before the 1307 raid the Knights at the Paris preceptory's treas- 
ury had left with many pack horses. They embarked on the Templars' 18 
ships and vanished completely with their vast treasure. Baigent and 
Leigh believe that they found refuge at Kilmarten in Scofland, whose 
leader Bruce was already excommunicate of the Papacy. Their disguised 
assistance to him in the battle of Bannockburn in 1313 produced a sur- 
prise defeat of the English. Bruce founded the Stuart line, which ruled 
Great Britain until 1688, 

The Templars' finding refuge there may explain why Scotland was 
later the origin of so many banking innovations and schemers, such as 
William Paterson, John Law and others. Even Adam Smith assembling 
The Wealth of Nations in a Scottish village, from 1773-1776, wrote that 
"Scottish Banking" was dominating the world. It would be in Scotland 
that the mutual fund was first invented or made public. 

It was through the Templars that the "Holy Grail" romances came 
into being. They served as an example of chivalry in action. Their theme 
of the infirm ruler, a land laid waste and the Knight in search of the Grail 
- the sacred object with the power to set things aright - sfiU provides a 
pattern formula for heroic action. 

The Templars later surfaced in some of the Freemason lodges. The 
Papacy confinued to hound them and Clement XITs 1738 Bull (In 
Eminenti) banned freemasonry and excommunicated Catholics who par- 
ficipated in it. But it confinued to flourish and in 1740 a Papal bull mak- 
ing membership in Freemasonry punishable by death had little effect. 
Freemasons were to have a strong influence on world developments. 

Their world-view was summed up in the "Oration'' of the Jacobite 
Freemason Ramsay: 

"The world is nothing but a huge Republic of which every Nation is 



5 CRUSADES END BYZANTIUM'S MONETARY DOMINATION 149 



a family and every individual a child." This view point is quite different 
from the kind of one-worldism being peddled now. In today's version, 
nations are impotent and International "financiers" rule. The rest may 
"survive" as corporate drones, and slaves. 

The Knights Templar were an important factor in the Magna Carta, 
England's great document of liberty of the 13th century. Their descen- 
dants, the Freemasons, were important in the French Revolution; in the 
unification of Italy; and most importantly in the American Revolution. 

Benjamin Franklin was America's best known Freemason, being the 
Grand Master of Pennsylvania from 1734. "Of 56 signatories to the 
Declaration of Independence, 9 were definitely Freemasons, and perhaps 
10 more.. .Of 74 general officers in the Continental Army, 33 were 
Freemason," wrote Baigent & Leigh. "It was largely through the lodges that 
they leamed of that lofty premise called the rights of man. It was through the 
lodges that they leamed the concept of the perfectibility of Society. "^^ 

Many of the British officers they faced in battle were also 
Freemasons. Ernst Troelstch, the great historian of the Reformation, 
agrees that while the rights of the individual came from America: "The 
influence of the literature of European Illuminism is unmistakable." 

These ennobling influences do not preclude the possibility that 
there are divisions within international Freemasonry, where some tradi- 
tions with less lofty ideals have also taken root. 

The great Voltaire wrote that "The only fruit of the Christians in 
their barbarous Crusades was the extermination of other Christians." But 
as we have just seen, he was wrong. 



150 The Lost Science Of Money 



Notes to Chapter 5 

^ By 1233-48, Cordoba, Toledo and Seville were recaptured from the Moslems 

by the Spaniards. Only Granada remained under Moslem control. 

^ Cecil Roth, World History of the Jewish People, the Dark Ages, 711 - 1096, 

(Jerusalem: Jewish History Publications, Rutgers Univ. Press, 1966). 

^ James Parkes, The Jew in the Medeival Community, (New York: Hermon Press, 

1976), 

^ Roth, cited above, 

^ Parkes, cited above, p. 17. 

^ Parkes, cited above, p. 25. 

^ See The World Historty of the Jewish People - The Dark Ages, cited above, 

Chapter five by S. Schwarzfuchs, pp. 129-131. 

^Roth, cited above, pp. 13-25. 

^ Parkes, cited above, p. 63. 

^^ Parkes, cited above, pp. 63-78. 

^^Dana Carlton Munro, The Kingdom of the Crusades, (Port Washington: 

Kennikat, 1966), p.85. 

'^ Michael Baigent, and Richard Leigh, The Temple and the Lodge, (Arcade, Little 

Brown, 1989), p.42. 

^^ Baigent and Leigh, cited above, pp. 42-43. 

'^ See especially Godfrey, The Unholy Crusade, next footnote below. 

15 John Godfrey, 1204 - The Unholy Crusade, (Oxford Univ. Press, 1980). 

1^ Godfrey, cited above, pp. 30-40. 

1^ Godfrey, cited above, pp. 125-135. 

*^ William Jacobs, The Precious Metals, (1831, repr., New York: A.M. Kelley, 

1967) p. 354. 

^^ Baigent Sc Leigh, cited above, p. 47 

^^ C.G. Addison, The Knights Templar, (London: Green & Longmans, 1842), p. 31. 

^1 P.W. Edbury & D.M. Metcalf, Coinage in the Latin East, Bar International 

Series 77, 1980. 4*^ Oxford Series on Coinage and Monetary Histojy, p. 10. 

^^ Baigent & Leigh, Cited above, pp.211, 219 



151 



CHAPTER 6 



RENAISSANCE 

STRUGGLES FOR 

MONETARY SUPREMACY 



"And all the kings horses and all the kings men, 
couldn't put Humpty together again." 

Children's nursery rhyme. 



The fall of Byzantium marked the passing of Caesar's money system, 
which had lasted over 1200 years. The money power slipped from reli- 
gious to secular control. None of the powers of the time - Venice, the 
Princes, the Pope, or the Templars - could re-assert it and it became dis- 
persed in the late medieval period. A struggle began for the control of 
money which would continue for 500 years until the formation of the 
Bank of England. 

GROWING URBANIZATION AND SPECIALIZATION 

In the later stages of the Roman Empire, the great manors, general- 
ly owned by the church and managed by their Condattore, became self 
sufficient. The Church held a near monopoly on literacy, accounting, 
capital, and management techniques, on which the Princes depended. 

Around 1200 the local customs of the towns that grew at the centers 
of these estates became institutionalized in law. One law - "Staadluft 
macht frei" - gave freedom to escapees from the slave manors after liv- 
ing in town for a year and a day. Except for parts of Flanders and 
Tuscany, towns generally held less than one-tenth of the population and 
each town's constitution applied only within its walls; a different 



152 The Lost Science Of Money 



law prevailed outside. According to Pirenne: 

'Tor burghers, the country population existed only to be exploited." 
"All merchants continued to invest their superabundant reserves in 
land.. .in the course of the 12th and 13th centuries they acquired most of 
the ground in the towns. The steady rise in population by converting 
their ground into building sites sent up their rents to such an extent that 
from the 2nd half of the 13th century many of them gave up trade and 
became rentiers."^ 

Within the towns labor became more specialized and efficient. 
Capital cities grew up around the Monarch's residence as lesser nobles 
built residence hotels nearby. 

THE TRADE FAIRS 

The principle method of promoting trade were the great fairs spon- 
sored by territorial Princes from the 1 1th century. The fairs were held at 
particular places annually or quarterly and the importance of the fair didn't 
depend on the importance of the town where it was held. The greatest 
fair was at Champagne, sponsored by the Comte De Champagne, an 
early member of the Knights Templar organization. 

The fairs were a "free trade zone," Taxes were waived, disputes aris- 
ing outside the fairs were set aside, regulations on trading were lifted and 
merchants were attracted from afar with their wares and their gold and 
silver coins. 

THE FAIR'S MONETARY CLEARING MECHANISM 

The main monetary feature of these events was a payment clearing 
mechanism where merchant's purchases and sales were matched and 
accounts were settled at the end of the fair. If a merchant sold more 
goods than he bought, he would receive the difference in coinage. If he 
bought more than he sold, he would pay the difference. If his credit was 
good, he could extend a debit to be payable at the next fair. 

At later fairs the clearance mechanism often had reciprocating 
arrangements with clearing mechanisms of other fairs. Eventually cash 
payments at fairs became unusual. Bills of exchange and finance bills 
were written so as to be payable at fair times, within the fairs clearing 
mechanism. The fair at Champagne even issued its own token currency? 
The fairs reached their height around 1250-1300. Their importance was 
reduced after bill clearing mechanisms were set up in money center towns. 
Finally cities like Antwerp became free trade zones, or perpetual fairs. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 153 



CIRCULATING COINAGE 

The gold and silver coinage of various cities was similar, but different 
enough for merchants to include foreign exchange considerations in their 
calculations. Often they didn't know whether a venture was profitable 
until the final exchange transaction had been completed, as foreign 
exchanges fluctuated considerably. 

Financial historian Raymond de Roover has shown that the Middle 
Ages were not as primitive as previously thought: 

"It is not true... (that) there was no planning, no intelligent direction, 
and no adequate accounting control.. .it was impossible to conduct medieval 
business in a haphazard fashion; competition was strong and profit margins 

were so small that merchants were forced to weigh their decisions."^ 

De Roover 's made this monetary observation: 

"The chief fallacy which pervades most of the work on money in the 
Middle Ages is the mistaken notion that 'money of account' was some 
kind of ideal or imaginary money which was used as a basis of the val- 
uation of real coins. This valuation, the theory runs, could be changed 
arbitrarily by the monetary authorities. The 'money of account' was thus 
some kind of standard suspended in mid air... In reality facts do not lend 
support to the theory of 'ideal' money or of an independent 
standard... medieval monetary systems were pegged either directly or 
indirectly to gold and silver. They were based either on a real coin... or on 
a coin which had ceased to circulate; but which still represented a definite 

weight of gold or silver."^ 





6a. The great fairs at Champagne, under princely sponsorship, developed 
clearing mechanisms to balance out merchant's credits and debits, and used 
a fiat coinage of "billon" metal with a negligible amount of sUver such as this 
coin of Thibault II (1125-52 AD), weighing 0.88 grams and 18 mm in diameter. 



1 54 The Lost Science Of Money 



"PECUNIA NERVUS BELLUM" 

"Money is the Sinew of war" was a primary aspect of this period.^ 
In the 1200s and 1300s military service became a profession and in the 
1400s it required skillful direction and large capital, carried on mainly 
by Swiss, German and Spanish mercenaries. Wars raged most of the 
time; when not at war soldiers often turned to banditry. 

The cost of maintaining armies was large and the money usually had 
to be raised quickly. Ehrenberg estimated the cost at 500,000 gold 
Florins for a six month period, not including provisions. 

The growth of firearms and cannon forced the cities to build stronger 
defenses and that usually required going into debt. A city's credit rating 
became its most powerful weapon. The cities had an advantage over the 
Princes, for until the 16th century, a Prince's debt was not binding upon 
his successor and the princes could not be foreclosed upon. Cities, with 
perpetual existence, were considered safer to lend to. 



THE KINGS' MINTS 

North of the Italian Republics, where Kings and Princes ruled larger 
expanses of territory, the monetary power naturally fell to their mints. 
But these powers were dispersed: 

"In England only the King had the power. In France 300 vassals had 
appropriated the right of coinage; under the Capetians the Crown was 
constantly trying to recover it. At the beginning of the 14th century thirty 

still had the power," wrote Pirenne.^ According to Hallam, in 1300 there 
were still 150 private mints in France, and 250 private mints in Italy.^ 

The Princes needed revenue, mainly for military expenses. Most of 
the wealth was in the hands of the clergy and nobles, who were difficult 
to tax. The result was that the mint became the main source of revenue. 
Ehrenberg noted that: 

"...many Princes did a roaring business in currency depreciation."^ 
From roughly the mid 1300s to the mid 1400s has been labeled the 
period of "Kingly abuse" of the monetary power, and is still pointed to 
by banker apologists in their very limited arsenal of arguments against 
government managed money. Even real historians have viewed this period 
in terms of the immorality of monetary "debasements." Today they must 
also be viewed within the context of Spufford's documented European 
silver famine of the period, described above in Chapter 4. 

A) Machievelli disagreed: "Nothing can be more false than the common maxim 
that riches are the sinews of war" he wrote, pointing out that wars are made with 
steel not gold, and that good soldiers are the sinews of war. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 155 



"(During) The reigns of Philip le Hardi, Philip Le Bel, Louis Hutin, 
Philip Le Long, Charles Le Beau, and Philip Valois, when we are taught 
that hundreds of alterations were made in the monetary system of 
France.. .In the single year of 1346, reign of Philip Valois, there are 
recorded no less than ten alterations of the ratio between gold and silver 

in the French coinage," wrote Del Mar.^ 

Later, as the Kings were regaining the coinage prerogative through- 
out Europe: 

"They considered the coinage merely as one of their most valuable 
sources of revenue. Thus when coinage once more became Royal, it was 
not much more stable than before. From reign to reign the quality of the 
coins issued became baser. Ordinance after ordinance was issued calling 
up the nominal value in accordance with the needs of the Crown, while 
its intrinsic value grew steadily less. Money was called up or down 
according as the King was creditor or debtor," wrote Pirenne, over gen- 
eralizing: 

"It became increasingly customary especially from the 13th century 
to multiply new issues of money the value of which became less and less 
each time; money was continually being recalled, re-cast and re-distrib- 
uted in a worse state than before. Such transactions were particularly 
frequent in Germany where, during the 32 years of Bernard of Ascania's 
reign, the coinage was altered or, rather, debased, on an average three 

times a year."^ 

Louis De Mai, Count of Flanders (1346-84) is often cited as one of 
the worst examples of monetary management, in his use of the mint for 
war expenditures: 

"(He) provides the classic example of monetary manipulation 
inspired by greed, or if attacking greed in government seems either 
redundant or naive, by fiscal not economic considerations. He minted 
exceptionally large amounts of coin and obtained the necessary metal 
mainly by devaluing previous issues and enticing them to the mint by 
offering more coins of the same legal value with less silver content," 
wrote Lane,^^ adopting an anthropomorphic view of government. 

Spufford's research showed that Louis De Mai's mint activities 
accounted for 20% of his governmental revenue. Even Del Mar, who 
understood that often the Princes' actions were not merely self serving, 
wrote: 

"Indeed nothing more curiously, yet unerringly marks the emergence 



156 The Lost Science Of Money 



of the Christian Princes from the position of vassals to that of independ- 
ent Monarchs than the open flagitious and radical alteration, debasement 
and degradation of the coinages which began in all parts of Europe after 
the fall of Constantinople, and which unlike the previous alterations 
parted completely with the Roman standards and never returned to 

them."^^ 

These authoritarian regimes in general produced a very poor mon- 
etary result when compared to the more self governing Italian Republics, 
as described in Chapter 4, 

ADMINISTRATION OF THE PRINCELY MINTS 

The Princes generally provided the mint's plant and equipment and 
hired the mint master. Minting was usually farmed out to the highest bid- 
der with the workforce coming from privileged hereditary corporations 
whose members also held other jobs: 

"Some were bakers and others were carpenters, they were not 

allowed to engage in banking...," wrote Spufford and Mayhew.^^ 

When hereditarily called to the mint, it usually meant a loss for them 
since they had to drop their other businesses and were irregularly paid 
by the mint, 

DEBASEMENT AS A TAXATION SUBSTITUTE 

By examining the taxation aspect of this process, Spufford has 
shown it in a fuller context, pointing out that a coinage debasement was 
an effective tax; equitable and unavoidable on the wealth of the subjects, 

and was relatively easy to administer. ^-^ He also noted the necessity of 
reducing the metal weight of new coinage issues from time to time to 
reflect the wear and tear weight loss on already circulating coinage. This 
was necessary if metal was to be attracted to the mint, and if the old and 
new coinages were expected to circulate together. 

As early as 1340 it was well understood that the debasement of the 
currency was very good for labor, fairly good for industry and mer- 
chants, and bad for landowner rents. The debasements were brought to 
an end when the landowners successfully promoted the writings of 
Nicolas Oresme, which condemned the process (see Chapter 12). 

However, the Prince s mixing of taxation with the money system 
retarded the development of monetary thought and gave the impression 
that money was merely a commodity: 

'The extravagant monetary policies of feudal lords tended in many 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 157 



ways to give added weight to a pure commodity theory of 
money... Monetary poUcy (between 1200 and 1700) would have faced 
fewer difficulties if the commodity concept of money had commanded 
less respect. Its persistence as an ideal obstructed and delayed the devel- 
opment of a workable system of redeemable money," ^"^ wrote Usher. But 
he also promoted the commodity concept of money in his notion of 
requiring its "redeemability" into a commodity. 

MONNAES NOIRE 

Along with the silver and gold coinage, "billon" coins, or monnaes 
noire or black money circulated. It was so called because at over 95% 
copper and less than 5% silver, it turned black with age. Black money 
was used for small everyday transactions and was accepted in limited 
political jurisdictions, generally a city. Their issue was increased during 
the silver famines. Much more research is needed on these "black mon- 
eys"; their importance may have been seriously underestimated by the 
tendency of earlier researchers to focus on the glitter of gold and silver. 

THE MEDIEVAL MONEYLENDERS 

From the 10th to the 13th century the Papal collectors were the first 
Christian moneylenders. Rich monasteries also made loans, but from 
about 1200 onwards, ecclesiastical establishments rarely lent money. 
They couldn't compete with the Kjiights Templars and the Italians, and 
the Church was enforcing the ban on usury. 

The Knights Templar, with their chain of holdings to the Levant, 
were the main financial power during the 13th century partly because 
they found a way to benefit from the East- West dichotomy in the 
gold/silver ratio. When they were suppressed in 1307, the field was 
opened to the Italians. The Templars brought double entry bookkeeping 
back from the Crusades and the Italians were among the first to master 
it. De Roover notes that 'Tn all centers. ..the great Italian banking hous- 
es were the principal lenders and practically dominated the money mar- 
ket."^ ^ The importance of the Jewish moneylenders during the medieval 
period has been greatly overstated, except perhaps in England: 

"Compared with the efflorescence and ubiquity of Italian credit, that 
of the Jews appears a very small affair and the part which they played in 
the Middle Ages has certainly been much exaggerated. In actual fact the 
more economically advanced a country was, the fewer Jewish money- 
lenders were to be found there. In Flanders there were never more than 
a negligible number but they became increasingly numerous toward the 



158 The Lost Science Of Money 



east of Europe.. .The revival of Mediterranean commerce in the 1 1th cen- 
tury made it possible to dispense with them as intermediaries, with the 
Levant,. .The Jews of the West were reduced to mere pawnbroking... their 
connections with their co-religionists not only in Europe but in the 
Islamic lands of the south made it easy for them to procure the ready 
money which they required for their business...," wrote Pirenne.^^ 

THE PRIVATE BANKERS 

DEPOSIT BANKING IN CATALONIA 

Deposit banking arose in the Catalonian region of Spain in the early 
1200s at about the same time the bank of St. George started in Genoa. 
Deposit banking was generally intended to perform safekeeping and 
transfer services, not to make loans. But after 1200 in Catalonia: 

"(The) Crown was borrowing considerable sums from Jewish money 
lenders and from the Templars.. ..In 1251 Roman Law, Gothic Laws and 

the Decretals of the Church were declared invaUd (in the area),"^ -^ 

These banks were private enterprises and ran into typical banking 
troubles, as seen from the banking laws enacted in 1300-1301: 

"No moneychanger shall keep a bank in any place in Catalonia 
unless he shall first have given surety (a bond).,. 

"No moneychanger who may fail, and none who has recently failed 
or in times past failed, shall again keep a bank or hold any office under 
the Crown" and "Until he shall have satisfied all demands, he shall be 
detained on a diet of bread and water." 

An appendix was added in 1321: 

"If no such settlement is made, they shall be proclaimed bankrupt 
and disgraced by the public crier in the places in which they failed and 
throughout Catalonia. They shall be beheaded and their property shall 
be sold for the satisfaction of their creditors by the Co wr^., Neither we 
nor the most high heir apparent, nor our successors may pardon any 
money changers who have failed or may henceforth fail." And, 

"In 1360 Fracesh Castello was beheaded in front of his bank."^^ 

THE ITALIAN BANKING HOUSES 

Only the Italians made "foreign" investments in the 1300s. Their 
main lending mechanisms were the bill of exchange and the finance bill 
Charging interest on riskless loans was generally forbidden by the 
Church. But as there were merchants who needed to borrow and bankers 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 159 



who wanted to lend, they found semantic ways around the prohibition. 
One method was to advance a sum in one city's coinage, guaranteed by 
a bill of exchange in a higher amount in another city's coinage and call- 
ing it a foreign exchange transaction rather than a loan. 

Think of it as a post-dated check in another currency payable after 
some months. The interest charge was contained in the difference 
between what was advanced and the amount of the postdated bill. 
Finally, the bill might never be sent for collection. The borrower would 
pay the loan in local money. This became known as ''dry exchange." 

Like a modem day check, a bill had to include the name of the per- 
son to whom it was payable, the amount, and date payable; the name of 
the paying institution and the name of the person who was paying - 
whose account would be debited. Such checks could also be sight drafts 
for immediate payment. The time necessary to clear these bills in the 
1400s was as follows: 

between: Florence and London - 3 months 

Florence and Brugge - 2 months 

London and Brugge - 1 month. 

That wasn't so bad when today it can take a month to clear a check 
between Germany and Switzerland. 

STRUCTURE OF THE ITALIAN MERCHANT BANKS 

Each Italian city state negotiated its own trade agreements. The main 
Italian trading cities were Venice, Genoa, Florence, Milan, and Lucca. In 
addition there were the notorious Lombards from Asti and Chieri in 
northern Italy. 

The real strength of the Italians was in their ability to combine 
finance with trade in goods. Their houses were organized as unlimited 
partnerships. At first they were centralized as one company with sub- 
sidiary branches. Later, houses such as the Medici of Florence became 
compartmentalized, with a partnership for the main office and a partner- 
ship for each branch as a separate legal entity, in which a senior family 
member held a controlling interest. These branches charged normal 
commissions and interest in their dealings with each other, but they also 
promoted each other's business. 

In 1458 the Medicis had seven international branches. Branch man- 
agers received a portion of the profits but also had capital invested. 
Managers went to Florence every two to three years to report. These 
were not large houses employing large numbers of people. The capital 



160 The Lost Science Of Money 



of the partnerships was their own, plus retained earnings. In addition 
they sought time deposits from wealthy Italians, including Clerics and 
Princes, on which they paid a fixed return of 7, 8 or 10%, 

SEASONAL PATTERNS WERE KNOWN 

Merchants and bankers were aware of seasonal variations in trade, 
due to the fixed seasonal sailing dates of the Venefian fleet to and from 
various trading centers. Uzzano's Handbook For Merchants advised 
them not to react to actual circumstances but to anticipate them. For 
example, it advised against sending money to places where it was scarce 
and removing it from places where it was plentifiil, because conditions 
would probably have changed by the time the transaction was completed. 

According to Ehrenberg the Florentines of the mid- 1400s knew 
accurately when to expect the recurrent periods of tight and easy money 
in various markets. Being such major lenders, one would think they 
could see from their own books when large amounts were due to them- 
selves. That time would be a tight money period, as the borrowers would 
be scrambling to get together the money to pay them, thereby soaking up 
liquidity from the market. Periods of easy money would be just after 
they got repaid, and would therefore be in a position to re-lend. 

EARLY BANKER MYOPIA 

While much is made of the Kings and Princes abusing the money 
systems, the private bankers often did worse. In 1339 the Florentine 
bankers were ruined when they greatly over-extended themselves in 
loans to Edward III of England who was unable to repay their millions 
of gold Florins when his war with France went badly. Florence was in 
turmoil The guilds took power, expelled the bankers, and seized their 
possessions. 

The clever Florentine bankers (the Medicis) tried again, loaning to 
Edward IV for the "War of the Roses" and also loaning to the rebels he 
was fighfing against -just in case. But in 1564 the rebels were dead and 
Edward was broke. Their London branch came to grief 

The obvious lesson - loans must never be overly concentrated. 

The merchant bankers of Lucca, though overshadowed by the 
Florentines, had been among the first to cross the Alps. They were mod- 
erate, kept good relations and neutrality, and outlived the Florentines in 
both Antwerp and France. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 161 



THE LOMBARDS 

The Lombards were essentially pawnbrokers making loans on 
pledges of personal property. They were found throughout Europe, but 
were tolerated rather than privileged. Their position was similar to that 
of the Jews - disliked everywhere, generally expelled from all countries, 
and occasionally, though much less frequently, massacred. 

They took time deposits and paid interest on them using the capital 
for the pawn-broking, often going bankrupt to the ruin of their small 
depositors. Like the Jews, they usually charged 43 1/2 % per year. The 
medieval pawnshops were an obvious place to "fence" stolen property. 
De Roover notes that "The Lombards were surrounded with so much 

odium that other Italians did not care to associate with them."^^ 

STATE OWNED BANKS 

In 1400 Barcelona organized a city owned deposit bank as a depart- 
ment of the municipal government, which guaranteed its liabilities. It 
was to allow overdrafts only to the city but in fact also allowed substan- 
tial overdrafts to the city commissioners. 

The Barcelona bank was not a monopoly; private banking was 
allowed alongside it. By 1433 it appeared to be leveraged 3 to 1, but was 
really leveraged about 10 to 1 - it had allowed overdrafts on its books to 

the city and others amounting to 10 times its usable deposits !^^ 

In 1468, during the great silver famine (see Chapter 4), a severe coin 
shortage forced the bank to suspend payments. It issued a 5% annuity to 
all depositors willing to accept them. Public officials were personally 
responsible for the honest functioning of the bank during their terms of 
office, but they fell behind in their auditing, whereby the prior 6 or 7 
administrations were still unaudited! The lesson - independent, timely 
auditing is essential. 

THE GREAT DISCOVERY: 
BANKS CREATE MONEY 

It must have soon become apparent to the Templars, the Italian mer- 
chant bankers and the great German lending houses that they possessed the 
power to create money in the form of bookkeeping credits on their books. 

The bankers sought deposits, on which they generally paid interest, 
and then made loans at higher rates, or used the money to discount bills 



162 The Lost Science Of Money 



(cash post dated checks) at a discount. Deposits were received in 
coinage, or if a bill was deposited, drawn upon another bank, ultimately 
coinage could be collected from that bank. However, the loans would not 
have to be made in coinage, but could be in credits to the borrower's 
account at the bank - in bookkeeping entries. The borrower would have 
the ability to write checks on that account. Such checks might not actu- 
ally be cashed, but be credited to another account on the books of the 
same bank. 

Once their clients got into the habit of conducting business with bills 
of exchange (checks) rather than actual coins, it became possible for the 
bankers to greatly multiply the apparent amount of money in circulation, 
in the form of these credits. 

In many ways this was a monetary power greater than the Kings 
control over the mint. This bank money was a more true fiat money form 
andfiirther removed from crude barter than the ''precious metals '' coins. 
But the bankers were usurping a power that derives from and belongs to 
society, and using it for personal benefit. 

First, they could write their own bills for use in their own business. 
Second, they could charge interest on the loans they were making, with 
money they created with a bookkeeping entry! They drew goods and 
resources from society without contributing anything to society. The 
whole process was inflationary, but because it fraudulently pretended 
that the bankers' paper was redeemable in metal, the system would col- 
lapse when too many bills had been written and finally their coinage 
reserves would be drained away. 

One could argue that this usurpation of society's money power at 
that time was justified, as Byzantium fostered such a great shortage of 
money in Europe over the centuries, and the expertise and legal power to 
create a proper money system had degenerated. The science of money 
had been lost. However, the evidence is that such bank money developed 

mainly where the supply of money was already abundant.^^ So even in 
this case, it is difficult to find justification for privately issued money. 

This type of banking business was growing dramafically in the late 
1200s, and loans made by banks, mainly through overdrafts, far exceed- 
ed their capital and deposits. 

De Roover notes that it was also carried on by certain monasteries 
and especially by the Knights Templar. For example, by 1409, Genoa's 
Bank of St, George had coinage reserves of less than 10% of its deposits. 

There was no regulation of these deposit creations. At times the 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 163 



banker's guild performed a form of self-policing; but they were mainly 
concerned with honest bookkeeping. In Florence, bank entries had to be 
made on the books before the customer left the premises. They had to be 
written in Roman numerals because Arabic numbers were too easy to 
falsify. Tom out leaves of the book were viewed with great suspicion. No 
blanks or erasures were allowed. The guild levied fines and reported 
offenders to city authorities. 

However, nowhere do we find any discussion of the big picture - the 
impropriety or immorality of what they were doing in creating money. The 
fact is that it was taking value from society without giving anything in retum. 

Despite all the problems encountered by the king's mints, the city 
republics, the city owned banks, and the private bankers, overall these 
developments represented a healthy decentralization from Byzantium s 
stifling, multi-century hard money system. 

The circulation of money in areas distant from Constantinople was 
increased dramatically, fueling industry and development. Peasants 
began to purchase their own land. Interest rates plunged from 20 - 22% 
in 1200, down to 5 - 8% in 1350. The revenues of the city of Florence 
had an eleven-fold increase from 1240 to 1343! She was striking 350,000 
to 400,000 gold florins a year, which became the standard throughout 

Europe.^^ The Dark Ages were over 

THE FUGGERS 

These powerful German moneylenders of medieval times were next 
to appear on the scene, centered at Augsburg in Bavaria. In the early 
1500s the Fuggers surpassed the dominant Florentine money lenders. 

The Augsburg Germans learned the money lending business from 
the Italians. Hans Fugger, a weaver, founded the House of Fugger with 
3,000 Florins in 1367. His great grandson, Jakob Fugger 11, who put the 
Fuggers on the map, had been studying for the priesthood but shifted to 
business at age 14. He learned the trade at the Fondacio Dei Tedeschi - 
the German traders compound at Venice. 

In 1488, just after the peak of Europe's great silver famine, the 
Fuggers got control of the Tyrol silver mines, Europe's greatest mines of 
the time, by loaning 150 thousand Florins to the Archduke. Through 
family connections they gained influence at the Augsburg mint and 

"possessed the right of coinage for nearly 100 years."^-^ 

Control over both the source of silver and the minting of it gave the 
Fuggers great power in the monetary sphere. From 1525 they were 



164 The Lost Science Of Money 



Europe's most influential financiers. They charged up to 30% on small 
loans, but as little as 2% on large loans. They maintained an extensive 
courier service which kept them well informed of any important politi- 
cal and financial news. Fugger bills of exchange were considered as 
good as gold and actually became an article of current trade. 

The Fuggers operated internationally, through offices in Antwerp 
and even had a representative in India. In 1 503-1 508 they held shares in the 
Portuguese round the Cape voyage, but were only allowed to participate in 
the first one. They kept their House intact over several generations by 
keeping the business in the hands of the male heirs; the females were 
given dowries. 

The Fuggers loaned to Emperor Maximillian, Queen Elizabeth I, and 
various princes and clergy. In 1518, they backed Emperor Maximillian's 
grandson, Charles V for the Kingship of Spain. In theory, the Church's 
College of Electors elected Princes to these positions. In practice this 
meant bribing the churchmen, and the price of the Crown was rising. 
850,000 Florins were needed to do the job. The Fuggers lent 543,000; 
the Welsers lent 143,000; the Genovese and Florenfines lent 165,000. 
"The election of Charles came down to one vote, the Margrave of 
Brandenberg. Francis had offered him a rich French wife with a large 

dowry. But Fugger countered 
with the granddaughter of 
Maximillian, and 300,000 
Rhenish Guilden." "Charles 
thus won not an election, but 
an auction of the College of 

Elector's vote," wrote Flynn.^"^ 

The French King, angry 

over losing Spain, warred on 

Charles, and was able to out 




6b, 

Jacob Fugger had saved 3,000 
guilders as a weaver, which he 
then used to start the great 
Catholic Fugger money lending 
fortune, with European heirs to 
this day. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 165 



bid him for the services of Swiss mercenaries, as he had used up so much 
of his credit to purchase the election. Charles would be in trouble and 
unable to repay the Fuggers for decades. In 1523 Jakob Fugger wrote 
him trying to collect his money: 

". . .It is also well known and clear as day that your Imperial Majesty 
could not have acquired the Roman Crown without my help, as I can 
demonstrate by documents of all your Imperial Majesty's 
Commissioners. . . .if I had remained aloof from the house of Austria and 
had served France, I would have obtained much profit and money, which 
was then offered to me. Your Majesty may well ponder with deep under- 
standing the damage which would have resulted for your Imperial 
Majesty and the house of Austria. Considering all this, I humbly petition 
your Imperial Majesty, graciously to. . . decree that the sum of money due 

me together with the interest should be (paid) without further delay. . ."^^ 
Still, during this period, from 1511 to 1527, the Fuggers had profits 

of over 1.8 million Gulden.^^ 

The Fuggers were Catholics and were often involved in Church 
finances. When Albrecht of Brandenburg was made Archbishop of 
Mainz he had to pay 30,000 Ducats to the Pope for the position and bor- 
rowed it from the Fuggers. For an extra 10,000 Ducats the Pope put him 
in charge of the New Jubilee Indulgence for Saxony. 

Everywhere the "Pardoner" Tetzel went, selling the forgiveness of 
sins, he was accompanied by a Fugger representative with a key to the 
indulgence chest. Whenever it was full, the entire contents were paid to 
the Fuggers. They paid half of it to the Curia and the other half went to 

their loan. This kind of business led to the Reformation.^'^ 

The Fuggers' operations apparently required close personal supervi- 
sion, for in 1548, when heirs were uninterested in the business, Anton 
Fugger liquidated a substantial part of the firm, distributing 2.1 million 

of its 5.1 million Guilden in assets.^^ 

By 1563, Hans Jakob Fugger was in serious difficulty. The opening 
of the Cape Route had greatly altered European trading relations. His 
loans to Spain had gone bad, and his castles and property were seized. 
His descendants didn't want to enter the business, but other Fuggers took 
over his debt. 

The Fuggers were extremely unpopular and though their motto 
"Silence is Golden" has survived, they also left a more profane contri- 
bution to every-day English. "To 'Fugger' meant to carry on trade in 



166 The Lost Science Of Money 



general and in the popular mind it had an evil connotation in the sense 

of usurious trade or sharp practices," wrote Streider.^^ 

And, according to Ehrenberg, the Fugger name is the source of the 

expletive "F ker." Though the Fugger archives have remained largely 

intact, there are no reference works on them at the great research library 
in New York at this time. 

WELSERS, HOCHSTETTERS AND TUCHMANS 

The Welsers of Augsburg were the second largest German money- 
lenders. Like the Fuggers they remained Catholic. Unlike the Fuggers 
they tried to maintain neutrality in loans to warring parties; but it only 
aroused the anger of both sides. The Welsers lasted until 1620, though 
their branch at Ulm continued into the 20th century. While the Fuggers 
tried but failed to acquire a large part of Chile, the Welsers did acquire a 
province of Venezuela, Their contribution to the English language is 
probably the word to 'Welsh '' on a debt. 

The Hochstetters of Augsburg, the third largest and most hated mon- 
eylenders of the time, like the Fuggers and Welsers, were Catholics. 




6c. Charles 5th at the Fugger castle after repaying their loan, to secure his 
election as King of Spain from the Church's College of Electors. Fugger 

has thrown the indebtedness papers into the fire. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 167 



Their own partners bitterly complained about their dishonest balance 
sheets. Was their language contribution to go into ''hock'l Finally the 
Tuchers of Nuremberg perhaps gave us the term to put the ''touch'' on 
someone. 

The audacious Jakob Fugger gets the last word in his self-written 
epitaph of January 1526: 

"To God, all powerful and good! Jakob Fugger of Augsburg, orna- 
ment to his class and to his country, Imperial Councilor under 
Maximillian I and Charles V, second to none in the acquisition of wealth, 
in liberality, in purity of life, and in greatness of soul, as he was compara- 
ble to none in life, so after death is not to be numbered among the mortal." 



BRUGGE: POWERHOUSE OF THE 

NORTH 

Brugge was the trading capital of Northern Europe. Flanders was the 
most densely populated area of Europe and excelled in the manufacture 
of fine cloth, which had been perfected from Roman methods and was 
in demand everywhere. 

Brugge had three classes of money dealers: The Italian merchant 
bankers, the Lombard pawnbrokers, and the Flemish moneychangers. 

The Lombards were irrevocably expelled from Brugge at the begin- 
ning of the 1600s. 

The Italian merchant banks were involved in both trade and banking, 
except for the Florentines who concentrated on finance. As bankers they 
were not lending at interest but were using the bill of exchange mecha- 
nism to accomplish the same purpose. The volume of their bills of 
exchange transactions was much larger than the volume of their mer- 
chandise trade transactions. 

"In Brugge there was the custom to pay bills of exchange by transfers 

in bank rather than in (coin)."-^^ They would credit someone's account 
rather than pay out coins, much as today when most checks are deposit- 
ed, they are credited to one's bank account rather than cashed for actual 
currency. 

Europe's first major Bourse, or exchange, was in Brugge. "Bourse" 
was the family name of the Flemish innkeepers frequented by brokers in 
the 1200s and 1300s. 



1 68 The Lost Science Of Money 



BRUGGE'S COINAGE 

Brugge minted silver coins called the Groat (after the Venetian 
Grosso). It contained 1 .82 grams of silver in 1356, By 1467, at the height 
of Europe's silver famine, it contained only 0.71 grams. Brugge had an 
open mint, which accepted all silver presented to it for minting into 
stamped silver bars which were in demand by the merchants of the 
Hanseatic league. These merchants often preferred such bars to coinage. 
Brugge also had a copper coin for small change called the Mite, ofiFi- 
cially valued at 1/24 of a silver groat. The cost of manufacturing the 
Mite was about half of its value. 

THE FLEMISH MONEYCHANGER BANKERS 

By 1325-50 exchanging one type of coinage into another was 
reserved to the Flemish guild of moneychangers: 

"It had become customary in Flanders by the 2nd quarter of the 
1300s for merchants and individuals to deposit with the moneychangers 
excess coins for safety. Moneychangers used it to expand their business.. .a 
form of deposit banking.. .At first the depositors didn't even know or 
give consent. Later they knew and didn't care as long as they could get 




6d. The Place de la Bourse in Brugge, Europe's first major exchange. The 
Inn (center) was operated by the "Bourse" family; thus the origin 

of the name for exchanges. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 169 



their money on demand... it was convenient in a difficult coinage situa- 
tion.. .The vast majority of accounts were small, with a few big 
accounts... orders to moneychangers were oral... No interest was paid on 
deposits. It seems as though no interest was charged on overdrafts (loans) 
either! They took their fees in the form of gold exchanged for silver and 
vice versa... in 14th century Brugge a [coinage] reserve of 29% was 

maintained by a typical [Flemish] exchange banker/' wrote De Roover.^^ 
The Brugge moneychanger/bankers transfered funds from one 
client's account to another and also made transfers to clients of other 
moneychangers. To do this every moneychanger kept an account with 
each of the other moneychangers, which could be debited or credited. 
According to De Roover this type of non centralized clearing house 
mechanism had also existed in Genoa from 1200 AD. 

THE HANSEATIC LEAGUE 

Whereas the Italians had linked Brugge to the South and the 
Mediterranean, the Hanseatics linked Brugge to the East and the Baltic.The 
cities of northem and central Germany banded together into a powerful 
commercial union called the German Hansa or Hanseatic League. 

"Hansa" in German means warrior bands. The members of the 
Hansa were not merchants but the towns themselves. While a Pagan 
Hansa had predated the Christian Hanseatic league by perhaps three cen- 
turies, the beginning of the League is put at 1 179 AD with the founding 
of Lubeck, now a beautifully preserved medieval town on the Baltic, 
about 50 miles northeast of Hamburg. 

The Hansa "core" were the Wendish towns with Lubeck as the nom- 
inal center. Other chief towns were Cologne, Bremen, Brunswick, 
Danzig, and Visby. Membership was by application. Self-interest, not 
coercion, held it together. At its height in 1450 there were about 180 
member towns. 

HANSA ACTIVITIES 

The Hansa protected its merchants in foreign ports, negotiating spe- 
cial privileges for them, primarily tax breaks. It maintained four 
"Kontoors" in the major centers it traded with that were not Hansa 
towns: Brugge, London, Novgorod (Russia), and Bergen (Norway). 
These Kontoors served as trading outposts, depots, and hotels, and 



170 The Lost Science Of Money 



except for Brugge were stockaded structures. In Novgorod, the Kontoor 
site was the stone Church of St. Peter, surrounded by a palisade with one 
entrance. The Church housed the treasury, weighing machines and was 
a depot at times filled with goods. 

The great trade axis of the Hansa was: Novgorod - Reval - Lubeck - 
Hamburg - Brugge - London. The cloth of Flanders was shipped East; 
furs, wax and oriental luxury goods were brought back to the West. 

Hansa merchants organized themselves into many independent part- 
nerships. Merchants from different towns often had a common interest 
in many different ventures. The trade was primarily maritime and for 
several centuries the Hansa had the best ship in the Baltic - the Cogge - 
about 90 feet long, 20 feet wide, and 10 feet deep. It had oars and sails 
and could carry 30 tons. The ship's captain usually owned 1/8 to 1/4 of 
the ship and only married men with children at home were allowed to 
captain vessels. The penalty for desertion by sailors was death. After 
about 1400 it became mandatory to keep a ship's log. 

The methods the Hansa used with its trading partners were negotia- 
tion, suppression of trade, blockade, and war. In 1280 it brought Brugge, 
its most important Kontoor, to its knees by shifting headquarters to 
another Flemish town, Brugge was forced to grant additional conces- 
sions to bring it back. This exercise was repeated several times in later 
years. 

In 1284 the Hansa blockaded Norway, purposely causing a great 
famine. When the blockade was finally lifted the Hansa forced the 
Norwegians to pay them the profits they had foregone while maintaining 
the blockade. 

The Hansa was able to undertake military actions from about 1370 
after associating with the Teutonic Knights. The Teutonic Order was the 
strongest element of the Hansa, was its largest ship owner, and its Grand 
Master was the only Princely member among the League. 

THE HANSA HAD NO MONETARY POWERS 

The Hanseatic League had no formal legal status except for its 
Hansetag general assembly, organized in 1356. The Hansetag met irreg- 
ularly yet made all decisions regarding the ratification of treaties, foreign 
negotiations, decisions of war or blockade. It could institute financial and 
economic regulations of all kinds upon its members. 

Yet the Hansa had no monetary powers whatever, a fact that argues 
against the assumption that money was originated by merchants. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 171 



According to DoUinger, the Hansa was unable to envisage the unifica- 
tion of the various money systems within her domain, even though the 
various currencies were a serious obstacle to Hanseatic commerce,^^ 

"In the Hanseatic orbit the most widely used currencies were the 
Lubeck Mark, the Flemish Pound of Groschen, and to a lesser extent the 
English Pound Sterling." The Lubeck gold Mark was equal to the 
Venetian Gold Ducat. Hansa merchants also used stamped silver bars. 

After 1350 the desire to simplify the currency led to monetary 
agreements among towns, but the only one of importance was among the 
Wendish towns of Lubeck, Hamburg, Wismar, and Luneburg in 1379. 
Other towns adhered to it temporarily. In principle it was an organization 
entirely distinct from the Hansa, incorporating non Hansa towns and 
holding meetings at different times and places from the Hansa. When the 
Hansa legislated on monetary matters, it was only on instruction from 
this Wendish union. Its crowning achievement was an 18 gram (290 
grain) silver coin, with the coat of arms of the four towns minted in 
about 1500. The Wendish union had no means of compulsion.^^ 

The Hanseatic League peaked around 1450 when Dutch shipping 
became faster and cheaper. The 30 Years War (1618-48) of the 
Reformation also damaged it, with the population of Germany falling 
from 17 million down to 8 million at war's end. Some Hansa towns sup- 
ported and others attacked the Reformation. From 1630 the Hansa was 
being dissolved and the last meeting of the Hansetag was in 1669. 

The Hanseatic League was very concrete bound and conservative. 
They were called "the merchants of the Holy Roman Empire" and the 
Teutonic Knights were the Pope's biggest agents for Christianizing or 
exterminating the Pagan Goths. They had a strong bias against using credit 
in trade and allowed no futures markets trading. They forbade selling 
herring before it was caught and grain before it was grown and cloth 
before it was woven. This attitude against futures markets was so strong 
that aspects of it survived until the early 1990s when most futures con- 
tracts in Germany were not legally binding upon the speculator. 

THE GREAT 150 YEAR WAR AGAINST CREDIT 

From about 1400 a major battle raged between the Hanseatic league 
along with the House of Burgundy using a cash based trading system, 
against the Italians, south Germans, English and others using credit in 
trade. This struggle with the bankers for control of the money power 
took the form of a war on credit. There was no organized money market 



172 The Lost Science Of Money 



in the Hansa towns: 

"One of the oddest features of Hansa pohcy was that it thought it 
necessary to engage in a systematic campaign against credit.. .on the 
grounds that it caused instabihty of prices which would upset business. 
Sometimes a buyer would prefer to sell at a loss in order to get ready 
cash to settle debts; at other times not being obliged to pay on the nail 
he would agree to an excessive credit. Credit was also accused of 
increasing the temptation to take risks and even worse of favoring the 
dishonest schemes of unscrupulous merchants, thus compromising the 

good name of the Hansa," wrote DoUinger.^^ 

The Hanseatics were alarmed by the Italians' command of credit. 
They met them at Cologne as moneylenders and at the Champagne Fairs 
and then at Brugge, England, and Frankfurt. According to DoUinger the 
Hansa recognized the financial power of the Italians and their superior 
commercial techniques. Furthermore the south Germans were learning 
the Italian methods. 

BRUGGE GETS DEFLATED 

This epic struggle against credit raged on the battlefield of Brugge 
for 150 years, starting in 1389 when the House of Burgundy, in reaction 
to an extended inflationary period resulting from credit expansion, 
adopted a hard money policy and brought on a severe deflation. De 
Roover called the deflation "even worse than the currency inflation of 

the previous period."^^ 

The beneficiaries of the deflation were the landed gentry, the clergy, 
and the rentiers. Rents, which remained constant, were being paid in 
more valuable money. Finally in December 1390 the Brugge City 
Treasurer was nearly killed by an angry mob and rents were scaled down 
by urgent legislation. 

Ten years later Brugge deflated again, ordering that all bills of exchange 
after Oct. 2, 1 399 were to be paid in coinage and not by crediting an account 
in a bank. This severely limited a bank's power to create money. 

It was further decreed that all foreign exchange bills were to be paid 
in gold; silver was phased out in 3 steps over about a year. By demone- 
tizing silver, a major part of the money supply was wiped out with 
extreme deflationary effect. The decree quickly became unworkable, 
had to be amended, and was soon repealed in September 1401. 

Then the Hansa joined the battle: 

"...they demanded and obtained an abolition of (all) credit 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 173 



transactions, even in Flanders in 1401. Lubeck forbade for three years all 
buying and selling on credit with foreigners in Flanders. ..in 1411. ..all 
imported goods had to be accompanied by a certificate saying that they 

had been bought in Flanders for cash," wrote Dollinger.-^^ 

By 1541 some variant of this process was repeated 5 times. The 
Hansa tried to enforce the same policy in London but failed. In 1433 the 
city of Brugge suppressed all bankers, foreign and domestic. An ordi- 
nance of 1489 gave the reasons: 

"(The banks) have wrought utter ruin among all classes of people, but 
especially among the merchants and persons of note. Next the ordinance 
accused the bankers of all kinds of offenses against the common weal 
and more specifically of picking and culling the currency, of sending 
bullion to foreign mints and of bringing the underweight monies of these 
mints into (domestic) circulation. These accusations were grave. ..the 
financial advisors to the Dukes of Burgundy were not children in mat- 
ters of finance... there is no doubt that the practice of picking and culling 
was greatly facilitated by the fact that the bankers accumulated in their 

coffers a considerable fraction of the total stock of (coinage),"^^ wrote 
De Roover. 

The Dukes of Burgundy and the Hanseatic League accurately 
described aspects of the bankers' credit creation activity, but nowhere do 
we find them correctly identifying this activity as usurping the monetary 
power of society. 

The policies wreaked havoc on the bankers. In 1478 the Medicis 
sold out their Brugge branch to their local partners. In 1488 the branch 
was catastrophically liquidated. In 1494 a mob invaded their Palace in 
Florence and burned the records. Machievelli blamed the failure on lack of 
discipline and attention, but their business tactics, which generally 
worked in an inflationary environment, had no chance in a deflationary 
one. 

THE DECLINE OF BRUGGE 

The Dukes of Burgundy and the Hanseatic league won the battle but 
lost the war. The larger bankers were international and could move. When 
a fortuitous opportunity presented itself with the opening of the sea route 
around the Cape of Good Hope in 1503, they shifted their operations to 
Antwerp. Brugge went into decline, its canals silting up. It is now a lovely 
city in Belgium, with many parks, colorful old canals, and very aggres- 
sive swans. 



174 The Lost Science Of Money 



This decline occurred even as the commercial dominance of Europe 
shifted from the Mediterranean to the North Sea. But before we exam- 
ine that process we will see how economic ideas and standards, espe- 
cially the concept of usury, were being formulated in a Europe inde- 
pendent from Byzantium. 



Notes to Chapter 6 

^ Henri Pirenne, Economic and Social History of Medieval Europe^ (New York: 
Harcourt Brace, 1937), pp. 57, 167. 

^ A. P. Usher, The Early History of Deposit Banking in Mediterranean Europe, 
(Harvard Univ. Press, 1943), Chapters 1 and 4. 

^ De Roover, Money, Banking and Credit in Medieval Brugge, (Cambridge Univ. Press, 
1948), p. 29 

^ De Roover, cited above, pp. 220-221. 

^ Pirenne, cited above, pp. 110-115. 

^ Robert Noxon Toppan, Paper to the Philadelphia Antiquarian Society, 
April, 1888. 



6 RENAISSANCE STRUGGLES FOR MONETARY SUPREMACY 175 



^ Richard Ehrenberg, Capital And Finance In The Age Of The Renaissance, 

A.M. Kelley reprint, 1967, Chapter I. 

^ Alexander Del Mar, Middle Ages Revisited, (New York) Cambridge Encyl. Co, 

1900, p. 333, 

^Pirenne, cited above, pp. 112-114. 

^^ Frederic Chapin Lane, Money and Banking in Medieval and Renaissance 

Venice, Chapter 19. 

^'Alexander Del Mar, History of Monetary Systems, (repr. A.M Kelley, 1967), p. 282. 

^^ N.J. Mayhew & Peter Spufford, Later Medieval Mints, (BAR International 

Series 389, 1985), p. 16 

'^ Peter Spufford, Money and its Use in Medieval Europe, (Cambridge Univ. 

Press, 1988), p.307. 

^^ Usher, cited above, p. 195. 

'^ De Roover, cited above, p. 57. 

'^ Pirenne, cited above, pp. 130-134. 

^^ Usher, cited above, pp. 237-238. 

^^ Usher, cited above, pp. 239-240. 

^^ De Roover, cited above, p. 108. 

2^ De Roover, cited above, pp. 318-320, and Usher, cited above. Chapter 5. 

^^ Spufford, cited above, p. 259. 

^^ Spufford, cited above, p. 259. 

^^ Toppan, cited above. 

^^ John Flynn, Men of Wealth, (Freeport, NY: Books for Libraries, 1971), p. 33. 

^^ 1523 letter from Jakob Fugger to Emperor Charles V, The City of Man, pp. 180-1. 

^^ Ehrenberg, cited above. Chapter 1 . 

^^ Ehrenberg, cited above, Chapter 1. 

^^ Ehrenberg, cited above. Chapter 1 . 

^^ Jacob Streider, Jacob Fugger the Rich, trans. Hartsough, (Hamden, CN: 

Archon, 1966), p. 170. 

^^ De Roover, cited above, p. 57. 

^^ De Roover, cited above, pp. 173, 305. 

^^ Philip Dollinger, The German Hansa, Trans. By Ault and Sternberg, Stanford 

University Press, 1970, pp. 206-226. 

^^ Dollinger, cited above, pp. 207-227. 
^^ Dollinger, cited above, p. 205. 
^^ De Roover, cited above, p. 227. 
^^ Dollinger, cited above, p. 206. 
^'^ De Roover, cited above, p. 340. 



176 The Lost Science Of Money 



177 



CHAPTER 7 



THE SCHOLASTICS - 
THE MORAL ECONOMISTS 



"Whence if men were silent against usurers, 
the stones would cry out if they could," 

William of Auxere (1160-1220) 



The Basileus, the sacred arm of the Byzantine/Roman Empire, the 
institutional successor to the Pontifex Maximus, lost control of the money 
power with the fall of Constantinople in 1204. Three Eastern offshoots of 
the Empire attempted to hold the monetary prerogative but failed. Its 
successor in the West, the Catholic Church, was unable to re-constitute 
the power as Princes began minting gold coins. 

When Pope Boniface wrote to Philip le Bel claiming him as "A sub- 
ject both in spirituals and temporals, Philip replied 'We give your fool- 
ship to know that in temporals we are subject to no person.' This remark 
blew away the last spark of Caesar's Empire," wrote Del Mar.^ The ''Old 
World Order" had fallen. 

But religion would continue to play a paramount role in economic 
thought and activity. The Church's primary mechanism in this area 
would be moral suasion and its powerful tools included denial of the 
sacraments, excommunication and the threat of eternal damnation. 

The Church scholars were called the Scholastics or Bookmen, Many 
were later canonized as Saints. They were familiar with the available 
writings in existence and focused a good part of their attention on eco- 
nomic matters, particularly on usury and the "Just price." 

They were attempting to build a rationally based moral code of 



178 The Lost Science Of Money 



business behavior to determine what should be rather than what was. 
Their guides were the writings of the Church fathers and Councils 
that had convened over the centuries. The Bible was not a predominant 
influence upon them, most references to usury being in the Old 
Testament. By the early 1200s the works of Aristotle became available 
in the West and he became their guiding light. 

THE JUST PRICE 

Price was considered the main factor determining equity or justice 
in commercial transactions. Far from attempting to dictate or fix prices, 
the Scholastics devised rules of thumb for use when disputes arose. 
Bargaining over terms was left to the parties and buyers and sellers were 
expected to try to take advantage of each other. One rule of thumb 
according to Odd Langholm, in The AristoteUan Analysis of Usury, was that 
such attempts should not go beyond 50% of the "just price." In other words 
trading should occur in a range between 50% and 150% of the fair price.-^ 

Bernard Dempsey noted that "The rules of markets of the 
Scholastics are very similar to the stated but unreached goals of today's 
markets." He quotes Leanord Lessius (1554-1623): 

"A common market is one from which monopoly is absent. From 
which is excluded every machination and effort of merchants by which 
they bring it about that they alone have the sale of something or sell at a 
certain price; where the price is based on the common valuation, made in 
good faith, entered upon without conspiracy or trickery, in view of the 

supply or the scarcity of goods, buyers and sellers and other circumstances."^ 



FREE BARGAINING NECESSARY 

Of great concern to the Scholastics was whether fraud or duress 
existed so as to invalidate the conditions of free bargaining. Langholm 
noted that "If one party to a contract was in the economic power of the 
other party and this power was wielded to obtain unjust terms of 
exchange, the terms did not stand." 

According to Bartolus (14th century), fraud existed in dealings when 
there was exploitation of the immature or the mentally deficient; where 
there was insufficient information, blackmail or moral coercion; or when 

one party was in the power of another."^ 

Thomas Acquinas (1225 - 1274) in Summae Theologica wrote that 
it was immoral for the seller to use a buyers dire situation, to demand a 
higher price, as the seller would then be selling something that "didn't 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 179 



belong to him"; for example life to the starving. 

According to Peter Olivi of Siena (1248-98) the nature of the buyers 
utility or need was irrelevant to a "just price." 

The Scholastics saw no difference between taking advantage of 
existing duress or of actively causing or applying duress. 

They recognized private property, but held that in a condition of the 




7a. St. Thomas Aquinas, 13th century student of the Aristotelian Master 
St. Albert the Great at Cologne, Germany. It was Aristotle and not the 

Bible that mainly influenced these Scholastics. 



180 The Lost Science Of Money 



"utmost need" all things were considered as held in common, and any- 
one in the utmost need could take the goods held in abundance by anoth- 
er for the preservation of his life. 

Clearly much of today's commerce would not measure up to the 
Scholastic's standards of justice in trade. 

THE SCHOLASTIC VIEW OF MONEY 

The Scholastics concentrated more on economic than monetary rea- 
soning, but still had the most advanced theoretical concept of money of 
the period, except perhaps for those involved in banking. Two basic 
views on money were shared by most Scholastics. 

First, they correctly maintained that there was a distinction between 
money and capital goods. While this distinction, even made by Aristotle, 
is the first key step necessary to advance monetary thought, it is a point 
that Calvin's Reformation found critical to dispute. Thus we find a 

relentless attack against Aristotle, over the 16^^, 17^^ and 18*^ centuries, 

In the 20^^^ century the advocates of usury, or capitalism, such as Ayn 
Rand, have taken a different tack, appearing to embrace Aristotle, while 
obscuring or ignoring his monetary message. 

Second, the Scholastics considered the value of money to be exempt 
from the laws of supply and demand, and in this they were mistaken. A 
more careful reading of Aristotle's statement in Chapter 1 on the supply 
and demand and value of money was needed. 

The scholasfic John De Lugo clearly stated the nature of money: 

"The principal distinguishing characteristic of money is not derived 
from the material but from the value by which it is formally constituted 
in the nature of money," and he distinguished between two kinds of 
money as: 

A)Material and 

B)Formal 1) Legal or Pragmatic 

2) Natural (intrinsic and extrinsic) 

The chief failure of the Scholastics was that they entirely missed the 
fact and the importance of bank created deposits as money. Over a peri- 
od of several centuries, "deposit creation as an economic phenomena is 

unmentioned by them," wrote Noonan.^ This unfortunate oversight is 
one reason for the lack of moral condemnation of such deposit creation 
in the present day, whereby banks substitute credit for money, through a 
process known as fractional reserve banking, which we describe later. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 181 



THE USURY PROHIBITION 

The Scholastics' prime economic concern was the practice of usury 
and their theory of usury is the first attempt at a science of economics in 
the West. They had observed the bad effects of usury and "had an intu- 
itive insight into the problem only now becoming apparent" wrote 
Noonan.^ They based their condemnation of usury on reasoning and 
observation; and on Divine, Natural, and Human Law. 

CHARGING INTEREST REQUIRED THE 
PRESENCE OF RISK 

People today see the ban on usury as a strange doctrine of backward 
churchmen. Growing up we are told to save regularly and earning interest 
is taught to us as a moral imperative! How can it be wrong? Well, for one 
thing the ban on usury has been misrepresented. 

At no time was it forbidden to take interest under proper conditions. 
The key was whether the lender was actually taking some risk without a 
certain gain. Venice had utilized advanced financial structures for hun- 
dreds of years, rising to the commercial domination of Europe without 
violating the bans on usury. Usury was not the same thing as just charg- 
ing interest - it was taking unfair advantage. 

Two types of loans were always exempt: first the "Societas," where 
the lender assumed some portion of the risk of the enterprise. Most of 
Venice's Collegenza partnerships were in this category. 

Second, the "Census" was always exempt. This was 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 capital- 
ized at eight times the annual return, but the risk of the 'Jruitful" base 
was on the lender, not the borrower In other words if the crop were 
destroyed by weather, the borrower had no obligation that year Eater, 
cities issued "census" obligations based an tax revenues, which came to 
be called "rents." 

Interest could also be charged when the lender was suffering some 
loss or was passing up some opportunity in extending the loan. 

DIVINE AND HUMAN LAW 

Most of mankind's moral/legal codes recognized the anti-social 
effects of usury and condemned, censured, or limited it in some way, 
usually with mild limits on interest rates and related conditions. But the 
Old Testament has strong prohibitions against usury. 

Jews were strictly forbidden from taking usury from their "brothers" 



182 The Lost Science Of Money 



(other Jews) and were discouraged in taking it from strangers. (The Old 
Testament references to usury are : Deut. 15:7-10; Psalms 14:5; Exodus 
22:25; Leveticus 25:35-37; Amos 8:4-6 and Ezekial 18:8, The New 
Testament is mostly silent on usury.) The Scholastics were looking upon 
all mankind as brothers. 

Other codes restricting usury include: 

*The Senchus Mor, the ancient Celtic law book; 

*The Code Of Hammurabi (2130-2088 BC) limited usury to 33%; 

*Lycurgus' Constitution, 8*^ century BC and Solon's Reforms, 594 BC; 

^Hindoo Law - Damdupat - when interest reached the full amount of the 
loan no further interest could be charged; 

*Roman Law for over 1,500 years limited interest to 4 to 12%. Cato's 
work on agriculture - De re Rustica gave the Roman view of usury: 
"It would be advantageous to seek profit from commerce if it were not 
hazardous, or by usury if that were honest; but our ancestors ordained 
that whilst a thief should forfeit double the sum he had stolen, the usurer 
should forfeit quadruple what he had taken. . ." 

"^The 6th century Roman Code Of Justinian reduced the 12 1/2% limit 
of Constantine the Great down to 4-8% and accumulated interest could 
not exceed principal: 

"The Code of Justinian dominated the subsequent span of Byzantine his- 
tory. From time to time all interest was prohibited but subsequently the 

laws of Justinian were re-installed," wrote Sydney Homer, -^ 

*The Koran totally forbade usury. 

*The laws of Charlemagne flatly forbade usury in 806 AD. He also gave 
a broader definition of usury: "Where more is asked than is given." 

*The Magna Carta limited usury, 

*Most States of the United States enforced usury limits until 1981. 

ARGUMENTS FROM AUTHORITY 

St. Ambrose of Milan (340-397) had opened the usury door by 
allowing it against enemies, but St. Jerome (340-420) preached that the 
usury ban to brothers was universalized in the Church. Pope Leo the 
Great (440-461) had categorically forbidden church clerics from taking 
usury and condemned laymen for it. This was the cornerstone of later 
Christian usury laws. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 183 



In 850 the Synod of Paris excommunicated all usurers. The 2^^ 
Lateran Council (1139) declared that unrepentant usurers were con- 
demned by both the Old and New Testaments.^ In 1185-87 Pope Urban 
Ill's citation of the words of Christ : "lend freely, hoping nothing thereby" 
(Luke 6:35) had a strong impact. 

But it was in the area of natural law - arguments from principle and 
observations of the evil effects of usury, that the Scholastics made their 
most powerful arguments. Logical reasoning, the Scholastics' main tool, 
is particularly applicable to such moral questions, as well as to mathe- 
matics, and to law. 

THE CONCENTRATION OF WEALTH 

St. Bemardine of Siena (1380-1444) noted that public usurers were 
usually foreigners, often Jews, and they drain the wealth of the city into 
other lands. Usury concentrates the money of the community into the 
hands of the few: 

"It is a contagious disease, for now all men are usurers."^ 
Wilham of Auxerre (1160-1220) eloquently wrote that usury was 
against natural law and was innately sinful, yet men pursue it "as if it 
were a business and a way of living.,. The usurer injures all creatures, 
even the stones; whence if men were silent against the usurers, the stones 
would cry out, if they could..." It was the sinfulness of selling time, 

which only God can give.^^ 

MISDIRECTION AND ABANDONMENT OF INDUSTRY 

Pope Innocent IV (1250-1261) "Said usury is prohibited because of 
the evil consequences that follow from the practice. If usury were per- 
mitted, all rich persons would rather put their money safely in a usurious 
loan than invest in agriculture. Only the poor would be left to do the 
farming and then they would not possess the animals and tools with 
which to farm. Famine would result. "Innocent's argument it might be 
added 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," wrote Noonan,^^ 

Henri Pirenne, in Medieval Cities^ remarked: ''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. ''^^ 



184 The Lost Science Of Money 



THE INFINITE APPETITE 

In Chapter 13 we present a mathematical exercise demonstrating 
that over enough time, even low levels of usury mathematically can 
destroy any money system. There is no indication that the Scholastics 
performed this kind of calculation but they came close intuitively. For 
example: 

Burudian (d.l358), a professor at the University of Paris, wrote: 
"Usury is evil because it is unsocial, illiberal, and because the usurer 

seeks avariciously what has no finite limits. "^^ This places its results 
outside of nature - often outside of the possible. 

In The Divine Comedy, Dante viewed usury as in conflict with 
nature: 

"Usury offends the Divine goodness... 

"...From these two (philosophy and physic).. .it behooves mankind 
to gain their life and advance. But because the usurer holds another way, 
he contemns nature in herselfi and in her follower, since upon other 
things he sets his hopes. '' 

And then Dante gave the userers Hell: 

"Their woe was bursting forth through their eyes.. .and when I set my 
eyes on the face of certain of those on whom the grievous fire falls, I did 
not recognize one of them; but I perceived that from the neck of each 
was hanging a pouch, which had a certain color and a certain device." 

ARISTOTLE'S CONDEMNATION OF USURY 

Aristotle stood tall as a Classical civilizing influence; a bulwark 
against the church's descent into superstition and ignorance; and block- 
ing oriental tendencies. 

Around 1250 his philosophy was being taught at Cologne by St. 
Albert The Great (1206-1280), the acknowledged Aristotelian master 
and the most influential medieval authority on science and philosophy. 
Thomas Acquinas was one of his students. 

Aristotle, who the Scholastics reverently referred to as "The 
Philosopher" condemned usury: 

"The most hated sort [of wealth getting], and with the greatest 
reason, is usury, which maizes 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. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 185 



Wherefore of all modes of getting wealth, this is the most 
unnatural/^ (1258b, Politics) 

"...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 evi- 
dently a sordid love of gain..." (1122a, Nicomachean Ethics) 

Aristotle is saying that money in principle is sterile. It does not beget 
more money the way cows beget more cows, or fields grow grain. He 
says that usury on money is contrary to the purpose of money, created 
by society as a measure and medium of exchange. He also attacks 
usurers based on his observations of their bad behavior and character 

"When Aristotle takes up the question of the social function of 
money in the Politics, what weighs upon him is the danger of a perver- 
sion of the purpose for which it was invented. Money.. .has a 'telos;' 

usury is an unnatural use of money." wrote Noonan.^^ 

The Scholastics echoed Aristotle: 

St. Thomas Acquinas (1225-1274) argued that money is a measure 
and usury "diversifys the measure." He meant that placing additional 
fiinctional demands upon the money mechanism as usury does harms its 
function as a measure. 

Henry of Ghent wrote: "Money is medium in exchange, and not 
terminus." 

Alexander Lombard: "Money should not be able to be bought and 

sold for it is not extremum in selling or buying, but medium."*^ 

Aristotle's works helped bring mankind's mind out of the darkness. 
They will be of supreme value as long as the human race continues, even 
where technological advances and instrumentation have shown him to 
be incorrect. His teachings became a primary obstacle to those pro- 
moting usury. 

Aristotle's distinction between money and wealth has been affirmed 
in the 20th century for example by Knut Wicksell, the father of modem 
day interest rate theory, who wrote: "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.^'^^^ 

I have added the italics because those words do not appear in the 

English translation of WickselFs book. Instead, translator R. F. Kahn 

or his editors have substituted the notation "etc." in place of those 

highly telling and descriptive terms!^*^*^'^ P- ^^^^ 



186 The Lost Science Of Money 




7b. Aristotle, who the 
Scholastics referred 
to as simply "the 
philosopher," spoke 
to them from across 
the centuries in a far 
more powerful voice 
than the Bible. His 
cogent arguments 
against usury were 
thus conveyed into 
Europe, with long- 
term beneficial 
effects. 



USURY: THE MISUSE OF THE MONEY MECHANISM 

A strong word is needed to describe the anti-social manipulation of 
monetary, banking and credit systems: a word as powerful as genocide, 
since the manipulation of money has often had similar effects. Aristotle's 
term for this is chrematistics, or chrematism. Chrema is a word for 
money in Greek. 

In English the best word for the structural misuse of society s money 
system is usury. The current mis -definition of the term as the taking of 
excessive interest, shows how far we have been led from understanding 
this subject, 

ACTION AGAINST USURERS 

In medieval times judicial action was only taken against the "mani- 
fest usurers," those practicing it openly - the Jews and the Lombards, 
Contrary to current opinion, the "usury traffic of the Jews was never 
viewed as permissible," wrote Noonan.^^ 

Discrete usurers, those who employed semantic tricks in making 

A) Knut Wicksell; Interest And Prices] English translation by R.F. Kahn, 1936; 
A. M. Kelley reprint, 1962; page xxvi. This carefully controlled "grooming" of 
the thoughts of Austrian economists in America would be de-railed if those 
economists were to really understand Aristotle's monetary views. Some 
Austrian economists would like to claim Wicksell as one of their own, but these 
ideas are very foreign to the Austrian's view of money. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 187 



loans, were mainly worried about excommunication and being denied the 
holy sacraments, especially burial in sacred ground. In order to expiate 
the mortal sin of usury, it was necessary for the usurer to make monetary 
restitution to his "victims" and if he couldn't find them, to the poor 
through the Church, Vast amounts of money were left to the Church for 
the benefit of the souls of departing usurers. The heirs of usurers were 
also required to make restitution. 

THE SEMANTIC AVOIDANCE OF USURY 

Every conceivable semantic trick was used to get around the usury 
prohibition. Goods were sold on credit at a higher price which factored 
interest into it, "Dry Exchange" bills in foreign currency were executed 
but not sent for collection and later resold to the borrower, the maker of 
the bill, for a higher amount, reflecting interest. The rationale was that it 
was a fee to change money. The Church never tried to regulate foreign 
exchange dealings, but condemned it if its purpose was really usury and 
the usurers were expected to make restitution. 

Most of the writings of the Scholastics were not addressed to con- 
sumptive, nonproductive loans, but to commercial loans, and as 
economies became more dynamic, with growth possibilities, it was becom- 
ing clear that charging interest on business loans, where the borrowing 
merchant prospered, couldn't be condemned as greed or lack of charity. 

By the end of the medieval period, there were really only two important 
arguments against usury still standing: Aristotle's point that money was 
sterile and usury was counter to the purpose of money; and Acquinas' 
argument that the usurer could not sell both the money and the use of it. 

According to Aquinas, once the money was handed over ("sold"), a 
"just trade" would require an equal value to be repaid to the lender. To 
demand more would be to either violate the "just trade" rule, or to alter 
the value of the money. 

If the lender claimed more because of the benefit the borrower would 
receive from employing the money, it meant the lender wasn't really trans- 
ferring full ownership of the money, but was unfairly transferring all the 
risks connected with ownership, to the borrower. But the borrower 
could not really use the money without consuming it, say in the purchase 
of productive goods. 

THE FALL OF THE USURY PROHIBITION 

With an increasingly powerful moneylending class, and the 
Church's moral power weakened by corruption, it was just a matter of 



188 The Lost Science Of Money 



time - and money - before the flood gates would be opened. By 1 5 1 6 the 
idea of a lending institution charging interest for its services had been 
widely accepted. 

Then Conrad Summenhart, a student of Biel, the medeival scholar at 
the University of Thubingen in Southern Germany, came forward. 
Summenhart put aside Aristotle's view by declaring it was all right to 
use something in a way that was not intended. 

But this ignored that such a use, improper according to Aristotle, 
might adversely affect the intended purpose of money as a medium of 
exchange and measure of value. The error arose ultimately from a con- 
fusion of wealth, with money. This mistake was easy to make when 
money became based on commodities. 

In 1515 the city of Augsburg, hometown of the Fuggers, was chal- 
lenging Florence for the financial leadership of Europe. The Fuggers 
financed John Eck, a student of Summenhart, to argue his thesis allowing 
a certain type of usurious contract. This was the so-called ''guaranteed 
insured contract," also known as the Triple Contract, the German 
Contract, or the 5% Contract. John Eck argued his thesis for five hours 
before the full assembled University of Bologna, then the most celebrated 
school of canon law in Europe, 

This so-called 5% contract semantically invoked an insurance prin- 
ciple whereby an "investor," for an insured guarantee of 5%, gave up all 
further gains on the investment. John Eck made this "triple" contract 
known to all and assured everyone that it had been in use for over 40 
years with no one being denied the sacraments, 

John Cauvin (Calvin) finished off the usury ban in 1536, His argu- 
ments were shallow compared to the attention the Scholastics gave to the 
problem. "When I buy a field does not money breed money?" he asked 
rhetorically. 

The Scholastics had shown the correct answer is no. It is the 
field and not the money that grows products. Calvin was not enthu- 
siastic about usury. But he called it sinful only if it hurts one's 
neighbor; that charity and natural equity alone could decide specif- 
ic cases and that it was generally legitimate in business loans. 
Calvin put aside the Aristotelian argument on the purpose of money 
He also disputed Aristotle's concept of free will, placing Calvinism 
in even more profound opposition to Greek philosophy than the 
Catholic Church had been. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 189 



KEEPING THE USURY GUILT ALIVE 

The Church's policy allowed new forms of loan making in response 
to the pressure of the developing commercial need, but never rescinded 
the sinfulness of the past forms of usury. Perhaps there was too much at 
stake in the forthcoming postmortem bequests of the old usurers! 

The Church moved very slowly on usury. It was not until 1822-36 
that the "Holy Office" said that interest allowed by law could be taken 
by everyone. It was ambiguous, however, and only for the guidance of 
penitents and confessors. It stated, "Those who preach that it is licit to 
take profit from a loan by title of the Civil law... define by private author- 
ity a question which the Holy See did not yet wish to define."^^. 

Even in 1917 in the Codex luiis Canonici, it was still left slightly 
unclear. The Church appears to be aware of the grave problems associated 
with usury, but has not had the courage or ability to discuss them openly. 

The Scholastics held back the usury deluge for centuries. One of 
their lasting contributions has been to identify that monetary and eco- 
nomic questions are profoundly moral issues. This fact has been sup- 
pressed by those engaging in predatory economic activities. Yet the con- 
nection between money and morality has stuck deep in the psyche of 
mankind, where it can one day be revived, and hopefully soon. 

20TH CENTURY CONFIRMATIONS 

Some 20th century economists, such as Baum Bauwerk, Wicksell, 
Schumpeter, Von Mises, and Irving Fisher, concluded that in the 
medieval world the Scholastic ban on usury was correct, because the 
medieval economy was a relatively static one, without growth possibili- 
ties and in such a static condition the "natural rate" of interest would 
have been close to zero. Also, in general there was no inflation. 

While this support of the Scholastic position is interesting, it disre- 
gards the need to consider morality in economics and inadvertently 
deflects a true examination of the Scholastic's position. Chapter 13 dis- 
cusses whether money's nature implies some limits to its usage. 

MARTIN LUTHER 

The attention that the Scholastics gave to morality was in stark con- 
trast to the corruption in the hierarchy of the Church. Martin Luther was 
infuriated by this corruption and attacked the Pope in colorful language 
which by today's standards would be four letter words. Luther was 
equally critical of the Jews and let them have it in the same terminolo- 
gy. He was a true reformer, railing emotionally at the generally fraudu- 



190 The Lost Science Of Money 



lent state of affairs. 

Asserting that he received revelations direct from God, Luther wrote 
extensively on his economic views: 

"If companies are to go on, then that will be the end of law and hon- 
esty; if Law and honesty are to remain, then the companies must cease "^^ 

Today we only hear calls for law and order ~ a very different 
concept. 

On usury, Luther went through three periods. First he condemned 




7c. Martin Luther had a reforming spirit, which rebelled against the evi- 
dent corruption and hypocrisy in the hierarchy of the mother-Church. 
Luther used "colorful language" - the equivalent of four letter words 

today - in his attacks on the Pope and the Jews. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 191 



anyone who charged interest as: 

"A thief, robber and murderer... Money is an unfruitful commodity 
which I cannot sell in such a way as to entitle me to a profit, , . . 

"In its effort to make a certainty out of what is uncertain, will not 

usury soon be the ruin of the world?"^^ 

Next, from 1523-25 Luther was somewhat reconciled to usury after 
being frightened by peasant revolts and their preacher leaders such as Dr. 
Jacob Strauss of Eisenach. These populists used the Mosaic Law of the 
Bible to threaten the concept of private property. Luther and Melanchton 
condemned any popular initiatives in this matter, Luther claiming that 
reform had to originate with Princes, and Melanchton declaring that the 
Law of Christ was not to be taken as the basis for the organization of sec- 
ular society. 

Then after a 15-year silence on usury, in the midst of a severe 
usury/economic crisis in 1539, Luther again blasted the userers, starting 

with the Princes,^ ^ Martin Bucer (1491-1551) became a kind of bridge 
between Luther and Calvin on the usury question. He preached that the 
Old Testament prohibition only forbade "biting" usury - "neshec" - 
meaning poison snake bite. 

Unfortunately Martin Luther was not aware of the advanced usury 
concepts developed by the Scholastics: 

"Luther tore the whole of this beautiful fabric to the ground, and 
carried back the teaching on usury to the primitive bare prohibition of all 
gain on loans, with the inevitable result that it could not be lived up to 
in the facts of modem life, and that it consequently fell into disrepute," 

wrote George O'Brien.^^ 

It may be of some importance that Luther supported polygamy, 
which had taken a long time for the Roman Emperors to suppress among 
the Germanic tribes. 

Luther appeared at a time when the commercial importance of the 
Germanic peoples had been growing. There was the Hanseatic league in 
the North and the Fuggers and other financiers of Augsburg in the South. 
However, in the world of commerce the round-the-Cape route to India 
quickly built up Antwerp and then Holland, and Germany's relative 
importance was reduced as a middle station between East and West 
trade. 

Lutheranism would become more of a Germanic territorial move- 
ment and Calvinism would dominate in Holland, and later for a time in 
England and still, in America. 



192 The Lost Science Of Money 



JOHN CALVIN'S REFORMATION 

"Usury was the brat of heresy" 
Thomas Wilson (1572) 

Luther's first protest occurred in 1517, His books were just reaching 
Paris in 1519 when John Calvin was a student there. Calvin's father 
Gerard, accused of embezzlement from the church, had refused to render 
accounts to the Cathedral authorities at the Notre Dame de Noyon 
Cathedral, about 65 miles northeast of Paris. The holy sacraments had 
been denied to the household. Gerard was excluded from burial in con- 
secrated lands and became a lawyer^^ 

In just seven years at school Calvin was able to meticulously read 
most of the important body of Church writings. In 1536, at the age of 
only 25, while living in Switzerland under the name Martianus 
Lucanius, he published ''The Institutes'' and seized the Reformation. 
While Luther's was a reforming spirit, Calvin's was more of a revolu- 
tionary nature. 

Four writers on the Reformation stand out: Ernst Troelstch; R.H. 
Tawney; Werner Sombart; and Max Weber Troelstch defined "The great 
main problem of economic history as the problem of the character and 
origin of capitaUsm." 

It is in the "Reformation" and its relation to Judaism, with its 
connections to the east-west trading axis, and the dichotomy in their 
gold/silver ratios, that elements of the answer can now be postulated. For 
we find among these elements the sources of many problems affecting 
present day monetary, social and spiritual life. 

CALVIN'S TEACHINGS 

Calvin's teachings were addressed primarily to the classes engaged 
in trade and industry. He began by immediately attacking Luther: 

"Persons who, abandoning the Scripture, imagine to themselves 
some other way of approaching to God, must be considered as not so 

much misled by error as activated by frenzy. "^"^ 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 193 



Rather than reforming the priesthood and hierarchy, Calvin did away 
with it. The great goal of the faithful was the salvation of their souls for 
eternity. Under the Catholic Church this was achieved through faith, 
good works and the sacraments administered by the Priesthood. Calvin 
eliminated these by preaching the doctrine of a chosen people - the 
"elect," chosen by: 

"[God's] gratuitous mercy totally irrespective of human merit... the 




7d. Jean Calvin dismissed Luther as "frenzied" and then transformed the 
Reformation into a revolution. His effect was to greatly elevate Judaism 
and to re-assert the Arrian Heresy, formerly decried at the Council of 
Mcea. This charge flustered Calvin, but he could not answer it. 



194 The Lost Science Of Money 



remainder have been consigned to eternal damnation by a just and irrep- 
rehensible, but incomprehensible judgment." 

Calvin justified this "incomprehensible" position by eliminating the 
concept of free will: 

"Man is not possessed of free will for good works, unless he be 
assisted by grace, and that special grace which is bestowed on the elect 
alone in regeneration."-^^ 

Calvin realized that this was irreconcilable with Greek philosophy 
and quoted the correct line: 

"They add, that unless virtue and vice proceed from free choice, it is 
absurd either to punish man or reward him... this argument is taken from 
Aristotle." But Calvin didn't answer the argument; he stonewalled it: 

"It is divine election which distinguishes among men."^^ 

Calvinism's basic appeal was an attack on the Priesthood. While he 
got rid of the Priests, his tenet that good works don't matter removed the 
potential of his code to guide human behavior - limiting its value as a 
moral code. What then would it become a code of? 

"In denying the efficacy of good deeds and of the human will, in 
leaving on the one side as useless all the doctrine and tradition of holy 
poverty, Calvin opened the door to the domination of the mind by 
money. St. Thomas Aquinas had said it centuries before - that if men 
abandoned the idea of God as the supreme good they would tend to 
replace him by the idea, implicit, not directly stated... that material 
wealth is the supreme good," wrote Hilaire Belloc.^^ 

Belloc characterized the Reformation as "a rising of the rich against 
the poor" and indeed Calvin had written the unfortunate statement: 

"The people must always be kept in poverty in order that they may 
remain obedient."^^ 

This closing of communication to God through the Church had 
serious effects: 

"(It) led to the Deification of the Bible... [Calvin] maintained the 
scriptures to be 'self authenticated. . .and ought not to be made the subject 
of demonstration and arguments from human reason,'" wrote Brooks 
Adams, noting that the elimination of the priests and their fees was 
"evidently a device of the Mercantile community and the savings to 
those who accepted it were enormous, but it disintegrated Christendom, 
and made an organized priesthood impossible. When each individual 
might pry into the sacred mysteries at his pleasure, the authority of the 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 195 



clergy was annihilated."^^ 

CALVIN'S ELEVATION OF JUDAISM 

Calvinism's doctrines greatly elevated the position of the Jews. The 
Calvinists' concept of a "chosen people" echoed Jewish dogma. Calvin's 
insistence on the Old Testament as the absolute word of God - a new idea 
at the time - greatly enhanced the Jewish position since it had been writ- 
ten by Jews: 

"It was the followers of Calvin, and especially the Puritans who first 
elevated the Old Testament into a position of supreme importance," 
wrote George O'Brien, who noted that during the Middle Ages the 
"blanks" in the Gospel were filled by Aristotle's work and by natural 
reason; 

"But the Calvinists discarded the great body of acute thought which 
had been raised on this double basis and sought for direct guidance in the 
code which had been laid down for the ancient people of God. By so 
doing they insensibly and unconsciously eliminated anything that was 
specifically Christian from the scheme of social morality and fell back 

on the Old Testament and the Jewish standards of commercial dealing."^^ 
Third, Calvinism adopted as scripture the sections titled "Hebrews" 
- which had been rejected in the Greek versions. The translator's preface 
to Calvin's Commentaries on the Epistle of Paul to the Hebrews 
describes the effect: 

"The arguments are founded on testimonies found in the Old 
Testament and not on his [Paul's] authority as a commissioned apostle. 
His main object appears to have been to shew and prove that the Gospel 
is but a fulfillment of the ancient scriptures which the Jews themselves 
received as divine. His arguments and his examples are throughout 
borrowed from the Old Testament. This is a fact that is too often over- 
looked... the epistle begins by indicating a connection between the Old 
and the New Testament: Both are revelation from the same God; he who 
spoke by the prophets in the Old speaks by his son in the New. Then 
the obvious and inevitable conclusion is, that the New is but the Old 
completed. It is on this ground that the whole argument of the epistle 

proceeds."^ ^ 

Fourth, Calvinism relied on the Massoretic, or Hebrew, text instead 
of the more accurate Greek. In spite of what the Cambridge History of 
the Bible called: 

"The doubts which had been raised concerning the veracity of the 



196 The Lost Science Of Money 



Massoretic text.. .(and) willful malicious tampering with it on the part of 

the Jews." 

The Cambridge History of the Bible observes that: 

"The Hebrew text of the Synagogue (had been) relegated to an inferior 

status. The Reformation had, however, instigated a counter movement. 

Its reliance on the Hebrew text accorded the latter a new place of honor 

in biblical studies... "^^ 

One reason for adopting Hebrew over Greek could have been an 
attempt to block out the teachings of Aristotle, which a knowledge of the 
Greek language would have encouraged and facilitated. Calvinism was 
thus an elevating of Jerusalem over Athens; of East over West. Judaism's 
religious influence grew and eventually dominated in the West through 
Calvinism. 

Fifth, Calvinism's legalization of usury would be very important to 
the Jews, condoning their primary monetary activity at that time. 

Finally, in putting the Catholic Church on the defensive, Calvin 
weakened the main countervailing force that had limited the practice of 
usury. 

ECONOMIC EFFECTS OF CALVINISM 

Of great consequence was Calvin's acceptance of usury, the effects 
of which were much better known at that time. Actually he had a distaste 
for usury: 

"Calvin deals with usurie as the apothecaire doth with poison," 

wrote Roger Fenton.-^-^ 

"Usury was the brat of heresy," wrote Thomas Wilson in his book^ 

Discourse upon Usury?^ 

Calvinism also introduced a doctrine promoting competition. 
Performance of the terms of agreed upon contracts became the overrid- 
ing determinant of commercial justice, apart from the contents of the con- 
tract, or any unfair circumstances which led to their being accepted. This 
led to an ever widening gulf between morality and the law. The study of 
economics would eventually come to reject considerations of morality! 
Henry Holzer, a leading professor of constitutional law, has written: 
"Without entering into a discussion of schools of jurisprudence, the 
writer does venture to express the opinion that the world did not gain 
when it abandoned the fusion between law and morals that the canon and 

early civilian lawyers insisted on."^^ 

Ernst Troelstch summed up Capitalism's economic and moral effects, 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 197 



but maintained that they were at odds with Calvinism's original intent: 

"The imposing but also terrible expansion of modem capitalism, 
with its calculating coldness and souUessnes, its unscrupulousness and 
pitiless-ness, its turning to gain for gains sake, to fierce and ruthless 
competition, its agonizing lust of victory, its blatant satisfaction of the 
tyrannical power of the merchant class, has entirely loosed it from its 
former ethical foundation; and it has become a power directly opposed 

to genuine Calvinism and Protestantism."^^ 

In the spiritual realm, according to Belloc, the effects were a dis- 
taste for joy and ease and beauty; an isolation of the soul through the 
elimination of private confession; and the concept of a chosen race. 
While the Prophet Mohammed had eliminated the complexities of 
Christian Dogma, other concepts of the necessity of morality in eco- 
nomic activity were kept alive and strengthened in Islam. 

As with all religions, terrorism played an important role. Calvinists 
burned one hundred and fifty heretics in Geneva in 60 years, including 
a child for striking its parent. But the primary fuel for Calvinism appears 
to be financial. In particular, the introduction to the ''Institutes '' contained 
an open invitation to secular rulers to seize the vast Church lands and 
estates in their domains. 

SEIZURE OF THE CHURCH LANDS 

Oliver Cromwell's grandfather, Thomas Cromwell, and elements of 
England's establishment began seizing the Church lands when the 
Tudors broke with the Papacy in 1536-53 (see Ch. 10). 

Calvin appealed to the French nobility to take the monasteries in 
France. According to historian Belloc, the Bourbon family became the 

main vehicle for this policy.-^ "^ In one sense this represented a better 
distribution of wealth - from the super super rich - the Church - to the 
merely super rich - the "nobles." However, in this process, especially in 
England, the serfs who had been allowed the use of Church lands were 
increasingly expelled without any means of survival as lands were 
enclosed. Tawney characterized this as an attempt to extend legal rights 
of ownership while repudiating legal obligations, which led to a theory of 
land ownership apart from the idea of the owner as a steward or trustee. 
This grasping for privilege while rejecting responsibility has 
become a hallmark of modem capitalism in America. 

CALVINISM'S DEVELOPMENT IN ENGLAND 

The English establishment had an early distrust of Calvinism. They 



198 The Lost Science Of Money 



had engineered their own secession from Rome. But Calvinism would 
eventually take root in England and help bring down the ruling House. 
In England it was called Puritanism: 

"Puritanism, not the Tudor secession from Rome, was the true 
English Reformation,. The growth of Puritanism was by means of the 
city of London," wrote Tawney.^^ 

Which is to say, by way of London's merchants. 

Troelstch noted how Calvinism challenged all governmental activity 
that didn't conform to its interpretation of the Bible: 

"Calvinism... successfully established the principle of the right of 
resistance... on behalf of the word of God... the exercise of which 
becomes the duty of the (lesser) magistrates. . .failing these it must be put 
in practice even by the individual; indeed in virtue of a special call thereto, 
the assassination of a tyrant is permissible,"^^ 

Bibliolatry And Protestantism 

Frederick C, Grant in his study The Gospels - Their Origins and 
their Growth, thought that in modem times (1957) Protestantism had 
progressed beyond bibliolatry, worshipping the Bible as the absolute 
word of God: 

"Bibliolatry has ceased to be dominant in the Protestant world, 
where it once flourished and where, indeed it reached its climax; its 
place has been taken by a saner, more wholesome, more constructive, a 
more ethically and religiously satisfying conception of the biblical liter- 
ature and of the history behind the literature. ""^^ 

However, this positive development has yet to reach those Christian 
sects that are growing in America and have taken on an especially polit- 
ical character. They have regressed to bibliolatry. We have seen this fac- 
tor growing in political debates, where its main effect has been to ignore 
conditions of economic injustice, which could be fairly easily remedied. 
Instead, the effect has been to concentrate on irreconcilable social issues, 
leading to a divisive and polarized politics of hatred. 

Bibliolatry Destroys Citizenship 

That the Bible can be used to render civil government ineffective 
and vulnerable is demonstrated in Chapter 10 below, in Hobbe's description 
of the "religious" undermining of the English Monarchy. We see clear 
examples of this in modified form in present day America, 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 199 



Bibliolatry Can Destroy Civilization 

"By their fruits shall ye know the tree" applies to the events of 
September 11, 2001. We must understand and admit that the destruction 
of New York's 110-story World Trade Center towers, collapsing on 
2,800 people, was an indirect result of the "deification" of religious 
scriptures. This was done first by some Jews and Christians, in their doc- 
trine of a "chosen people" - a diseased concept that has allowed the 
media demonization and subsequent mistreatment of the Palestinians for 
decades. Second, by some Moslems, reacting innappropriately to that 
injustice, only with further hatred and injustice. 

Such religious zealots, whether Jewish, Christian, Moslem, or what- 
ever "faith," have made themselves implacable enemies of common 
decency and now represent a great danger that societies must face. 
People trying to live in harmony with their fellow man must not allow 
the fanatics to do evil under a pretense of morality. Their true classifi- 
cation is not under the banner of religion or morality, but of insanity. 
The World has suffered their nonsense for too long. It is necessary, for 
the benefit of the children, to publicly identify them as insane. 

Bibliolatry Can Ruin The Mind 

A side effect of Bibliolatry is seldom considered: it can reduce the 
mind's power of critical thought and observation. Looking at the Bible 
as the literal word of God inevitably limits the mind's ability to use the 
foil methodology available to human beings for gaining knowledge: 
mainly observation, reason and logic, intuition, memory, transferring 
analogous conceptual structures, even authority. 

But Calvin's deification of the Bible renders it "self authenticated. . . 
not to be made the subject of demonstration and arguments from human 
reason." Once a mind accepts it as the literal word of God, that mind can 
no longer apply the human learning methods to the Bible itself or to mat- 
ters contained in the Bible. 

One must not surrender one 's mind and soul in that way, no matter 
what the promised benefits. The mind must never be abandoned, neither 
to superstition nor to any seductive ''ism " claiming to offer salvation in 
alternative form, such as Capitalism, Communism, Objectivism, 
Socialism, or Individualism, to name a few. 

Life is more complex and more interesting and potentially much 
more beautifial than that! 



200 The Lost Science Of Money 



SOMBART'S ANALYSIS 

Werner Sombart came to a startling conclusion in The Jews and 

Modern Capitalism:^^ 

"That which is called Puritanism is in reality Judaism." 
Sombart described the mid 1600s political activities of the English 
Puritans to support his point: 

"...the 'levelers' who called themselves 'Jews' in opposition to their 
opponents whom they termed Amalekites, advocated the adoption of the 
Torah as the norm of English legislation. Cromwell's officers suggested 
to him to appoint seventy members to his Privy Council. ..the number of 
members of the Sanhedrin. To the Parliament of 1653 general Thomas 
Harrison, the Anabaptist.. .clamored for the introduction of the Mosaic 
legislation into England. In 1649 it was Moved in the House of 
Commons that the Lords Day should be observed on Saturday instead of 
Sunday. On the banners of the victorious Puritans was inscribed the 
'Lion Of Judah'...not only the Bible but the Rabbinical literature as well, 

was extensively read in large circles of the clergy and laity. '"^^ 

and, 

"Those parts of the Puritan dogma which appear to be of real impor- 
tance for the formation of the spirit of capitalism are borrowed from the 
realm of ideas of the Jewish Religion. '"^-^ 

To some degree, Sombart may have mixed cause and effect, when 
he attributed a nation's prosperity to the presence of large Jewish com- 
munities in that nation: 

"Cannot we bring into connexion the shifting of the economic cen- 
tre from the southern to the northern Europe with the wanderings of the 
Jews?... Israel passes over Europe like the Sun: at its coming new life 
bursts forth; at its going all falls into decay. '"^"^ 

Troelstch thought Sombart overestimated Judaism's importance. 
Milton Friedman, commenting on Sombart wrote: "Indeed, if anything, 

I interpret the book as Philo-Semitic.'"^^ 

How did a condition so favorable to Judaism arise in 17^^ century 
England, where the Jews had been banned for almost 400 years? Chapter 
10 will discuss the "Great English Bible Flood." 

Puritanism is the form of Calvinism that landed in the new worid. 
Tawney wrote: 

"The discipline of Calvinist Church State was carried to its furthest 
extreme in the Puritan theocracy of New England." 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 201 



WEBER'S ANALYSIS 

Our fourth reformation theorist, Max Weber, is the most prominent 
of the four, and the one most likely to be read at the undergraduate level 
in American universities, especially his essay The Protestant Ethic and 
the Spirit of Capitalism. Weber formulated a split definition of capital- 
ism - one Jewish and one Puritan (Calvinist): 

"In fact the difference, in general, with the necessary qualifications, 
may be formulated: That Jewish capitalism was speculative pariah- 
capitalism, while the Puritan was bourgeois organization of labor. "'^^ 

Weber thus largely excluded the problem of usury within capitalism 
when he defined the "spirit of capitalism" as: 

"Naturally that of the modem rational enterprise peculiar to the 
Occident (West), not of the sort of capitaHsm spread over the world for 
three thousand years, from China, Babylon, Greece, Rome, Florence, to 
the present, carried on by usurers, military contractors, traders in offices, 

tax farmers, large merchants, and financial magnates."^^ 

Stressing what he regarded as the difference between the two forms, 
Weber noted that: 

"To the English Puritans, the Jews of their time were representatives 
of that type of capitalism which was involved in war, government con- 
tracts, state monopolies, speculative promotions, and the construction 
and financial projects of princes, which they (the Puritans) themselves 

condemned.'"*^ 

Using this distinction, Weber wrote, and convinced himself that 
Western Capitalism is: 

"(A) rational industrial organization attuned to a regular market and 
neither to political nor irrationally speculative opportunities for profit." 

Max Weber was an objective observer, a careful scholar and theorist 
and a transmitter of much valuable information, but the observed facts 
during the passage of time since his death in 1920 have stamped this 
view of capitalism as a kind of "Tooth-Fairy Capitalism" - a pleasant fic- 
tion. 

Had Weber lived fourteen years longer through the roaring twenties, 
the crash, and the Great Depression that followed (see Chapter 20), he 
would probably have admitted that those disasters were not isolated 
financial dealings, but involved the whole capitalistic economies of 
entire nations, especially their ruling financial and political establish- 
ments. 



202 The Lost Science Of Money 



Had Weber observed the destruction of World War II, he might 
have concluded that the representatives of the old capitalism were still 
very influential, and sometimes in the driver's seat. He could not be 
expected to foresee how international organizations such as the IMF 
would act as enforcement agencies for "lending" institutions (see chapter 
23). With the benefit of such facts, Weber might have redefined parts of 
his thesis, or changed its emphasis. Though already ill, his participation as 
an observer at the infamous Versailles Treaty negotiations after World War 
I probably hastened his death at an early age. 

It is now clear that "Capitalism" as we know it is a different animal 
fi-om the form of benign industrial organization Weber was describing. It 
is a creature which visibly dominates all industry and is based on usury 
as defined in this chapter - a structural misuse of the monetary mecha- 
nism. 

Weber didn't foresee the likely if not inevitable outcome of any 
serious contest between his two "capitalisms," or how "Pariah 
Capitalism," if unchecked, could act over time to assert its dominance. 
That it would not be seriously checked was assured by the deification of 
the Bible in the West, a process that continues to this day in America. In 
short, Weber did not fully appreciate the degree of power the private 
money issuing privilege concentrates in the hands of those who hold it. 

Weber says explicitly (in his footnote 12) that he has not underesti- 
mated the significance of the "pariah" capitalism. But world events 
show that he did underestimate the monetary power - the essence of pari- 
ah capitalism. In fact, he does not specifically discuss the money issu- 
ing privilege in The Protestant Ethic and the Spirit of Capitalism, his 
most widely read work. For that reason, and since that process is one 
of the main focus points of this book, this treatment of Weber has been 
kept sharp, though some objections were raised for the German language 
edition. It is understood that he was truly a great social scientist. 

It may be convenient to teach Weber's now outdated definition of 
capitalism in American schools, but as we enter the 3^^ Millennium 
perhaps it is time to drop this children's version so popular with bankers 
and their apologists and examine the money and banking systems for 
what they really are. 

In summary, economics attracted the sustained attention of the 
Church's greatest intellectual talent. Their insistence on a morally based 
business structure, and their focus on the problem of usury, raised 



7 THE SCHOLASTICS -THE MORAL ECONOMISTS 203 



earlier by Aristotle, probably spared later medieval European society the 
kind of ruin encountered by both Greece and Rome, in that regard. 

The complex logical structure which the Scholastics erected con- 
demning usury was damaged by Martin Luther who adopted an over- 
simplified, unworkable ban on taking interest. But it was Calvin who 
destroyed and cast their work aside. Luther attacked and blamed the 
Jews; Calvinism elevated them and Deified the Bible. 

The task of examining these concepts and questions is made much 
more difficult by our present day preconceptions. It should be clear 
enough, however, that neither of the simple "answers" are correct. 
Neither a complete ban on interest, mistakenly attributed to the Church, 
nor a laissez-faire approach would be correct in principal, or workable 
in practice. 

Nor is the solution some halfway mixing of these extremes. The 
question is complex and must be dealt with intelligently. Helping to 
identify the correct monetary approach to this question is a central theme 
of our work. Understanding the monetary concepts presented here is a 
pre-condition for resolving the usury problem. 

We saw that Calvin's bibliolatry, his deification of the Bible as the 
absolute word of God, set in motion forces that still afflict us, especial- 
ly in modem day America. The destructive effects of this Bible worship 
are visible in political discussions, especially, for example, on talk radio. 
To hear the voices of ill educated men and women confidently airing 
insane views, must rank among the most demoralizing things that the 
good intelligent youth of this nation endure daily. 

In leaving the Scholastics, we especially note their inability to 
understand the monetary importance of bank created credits. Thus later 
thinkers and legal systems, looking back to the scholastics for guidance, 
did not properly understand and limit the use of bank credits as money. 
Society continues to pay the price for that major oversight; but we make 
proposals in Chapter 24 to rectify it. 



204 The Lost Science Of Money 



Notes to Chapter 7 

^ Alexander Del Mar, The History of Monetary Systems, (1905, repn, New York; 
A.M. Kelley, 1967) pp. 276-7. 

^ Odd Langholm, The Aristotelian Analysis of Usury, (Oslo: 
Universitetsforlaget, 1984). 

^ Bernard Dempsey, Interest and Usury, (London: D. Dobson, 1948), pp.143-50, 
^ as quoted by Langholm, cited above. 

^ John Noonan, The Scholastic Analysis of Usury, (Harvard Univ. Press, 1957), 
pp. 171-8. 

^ Noonan, cited above, Ch.l. 

^ Sydney P. Homer, A History of Interest Rates, (Rutgers Univ. Press, 1963), 
pp. 53-56. 

^ Benjamin N. Nelson, The Idea of Usury, (Princeton Univ. Press, 1949). 

^ as quoted by Noonan, cited above, pp. 60-76. 

^^ as quoted by Noonan, cited above, pp. 42- 44. 

^^ Noonan, cited above, p. 49. 

^^ Henri Pirenne, Medieval Cities, transl. F. D. Halsey,(Garden City, NY, 
Doubleday Anchor, 1956), p. 88. 

^^ Noonan, cited above, pp. 58-65. 

^^ Langholm, cited above. Chapter 3. 

^^ As quoted by Langholm, cited above, p. 165. 

'^ As quoted by Dempsey, cited above, p.8. The full name of WickselFs book is 
Interest And Prices (Geldzins Und Guterpreise), 1936, translated by R. F. Kahn, 
and published by A.M. Kelley Reprints, in 1962, in the author's preface starting 
on page xxvi. 

^^Noonan, cited above, p. 35. 

^^ Page 381, decree 16 of De Vie, Letterae Monitariae, in Migne, Theologiae 
Cursus Completus, Cal.1081, as quoted by Noonan, cited above. 
^^ Von Kaffshandlung und Wucher 1524, quoted by Hartman Grisar, in Martin 
Luther, transl. by F.J. Eble, (Westminster Md: Newman Press, 1955), p. 81. 
^^ Grisar, cited above, pp. 89-91. 

^^ Nelson, cited above, pp. 30-50, from Luther Werke, Wermaier Ausgabe, 
XLVII, pp. 325-424, & XLVII, pp. 492-4. 

^2 George O'Brien, An Essay On The Economic Effects of the Reformation, 
(London: Bumes, Gates & Washboume, 1923), p. 19. 

^^ Hilaire Belloc, Cromwell, (New York: Putnam). 

^"^ John Calvin, Institutes, transl. John Allen, (Philadelphia Presbyterian Board 
of Publications, 1813), p. 91. 

^^ Institutes, Book 2, Chapters 2, 6. 



7 THE SCHOLASTICS - THE MORAL ECONOMISTS 205 



^^ Institutes, pp. 369-71 

^^ Hilaire Belloc, The Crisis of Civilization Lecture Series, Fordham University, 
(New York: Putnam, 1937), p. 116. 

^^ Kampschulte, I, 1869, p.430, as quoted by Grisar, cited above. 
2^ Brooks Adams, The Law of Civilization and Decline, (New York: Alfred Knopf, 
1943),pp.202-05. 

^*^ George O'brien, cited above, p. 126. 

^' John Calvin, Commentaries on the Epistle of St. Paul, (Edinburgh: 1853), 
translators preface to Hebrews. 

^^ Cambridge History of the Bible, edit. P. R. Ackroyd and C.F. Evans, 1 970, p. 1 70. 
^^ Roger Fenton, A Treatise on Usurie, 1612, p.61. 

^^ Thomas Wilson, A Discourse Upon Usury, (1925, reprint, New York: A.M. 
Kelly, 1960s). 

^^ Henry M. Holzer, Governments Money Monopoly, (New York: Books in Focus, 
1980), p. 19. 

^^ Ernst Troelstch, Protestantism and Progress, transl. Montgomery, (New 
York: Putnams, 1912), p.l39. 

^^ Hilaire Belloc, How the Reformation Happened, (New York: R. McBride, 1928), 
p.155-75. 

^^ R.H. Tawney, The Acquisitive Society, (New York: Harcourt Brace, 1 920), p. 1 98. 
^^ Troelstch, Cited above, p. 114. 

^^ Frederick C. Grant, The Gospels-their Origin and their Growth, (New York: 
Harper & Row, 1957), p. 8. 

"*' Werner Sombart, The Jews and Modern Capitalism, trans. Epstein, (New 
York: Free Press, 1951), p, 192. 
^^ Sombart, cited above, p. 250. 
^^ Sombart, cited above, p. 11. 
^^ Sombart, cited above, p. 13. 

^^ Milton Friedman, Capitalism And The Jews, in Morality Of The Market, edit- 
ed by Block, Brennan and Elzinga, (Vancouver, B.C.: Eraser Institute, 1985). 

^^ Max Weber, The Protestant Ethic and the Spirit of Capitalism, transl. by 
Parsons, (New York: Scribners, 1958), p. 271, (footnote 58). 
^'^ Weber, cited above, pp. 199-200, (footnote 22). 
^^ Weber, cited above, again p. 271, (footnote 58). 



206 The Lost Science Of Money 



207 



CHAPTER 8 



1500 - HISTORY'S PIVOT: 

Power Shifts from the 

Mediterranean 

to the North Sea 



The twin discoveries of America and the Cape Route - 
'The two most important events of economic history" 

Adam Smith ^ 



The Calvinist Reformation evolved in a manner that shattered the 
universality of Christendom and began to alter what was considered 
acceptable behavior in human relations, especially financial activity. Its 
seeds took root mainly in northwest Europe where it was nurtured by the 
effects of two epic discoveries. 

The Knights Templar had dominated European economic affairs in 
the 12th and 13th centuries thanks to their financial innovations and their 
strong trading links with the East, including the gold/silver ratio trade. 

The 16^^ to 18th centuries would be dominated by forces set in motion 
by two navigational feats of the Portuguese Knights of Christ, achieved 
in their efforts to capture control of this crucial East- West trade. 

Portugal's ruler, Prince Henry The Navigator(1393-1460), and 
Columbus were members of that Knighthood, which advanced the art of 
navigation and map making. Columbus' voyage to America in 1492 and 
Vasco De Gama's completion of the route to India around the African 
Cape Of Good Hope in 1498 became of overriding geopolitical 



208 The Lost Science Of Money 



importance. Both discoveries resulted from attempts to engage in the 
gold/silver ratio trade with the East and to establish an advantageous 
position in the spice trade. These discoveries diverted control over the 
East- West trade from the Mediterranean to northwestern Europe and 
shifted the balance of European power to the North Sea area. 




8a. Portuguese Prince Henry The Navigator's (1349-1460) passionate sup- 
port of exploration and map making led to the development of the Cape of 
Good Hope route to India, where Portugal tapped into the Eastern gold/ 
silver ratio, cutting Venice out of the trade, and shifting the balance of 
European power from the Mediterranean to the North Sea. 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 209 



Opening the Cape Route to the East gave Portugal control of the 
gold/silver ratio trade and the spice trade, making her a great power in 
Europe for several decades. 

Columbus' voyages to the West led to the plunder of vast amounts 
of gold and silver from the Americas, which overshadowed European 
supplies. The abundance of these metals had profound effects on Europe's 
money systems forcing great structural changes in her economies and cre- 
ating a '^Renaissance of the North." The Reformation is usually given the 
credit for the dynamic developments this influx of new ** money'' helped 
create in northern Europe by causing men to place more value on world- 
ly achievements. But Venice and others had been doing that for centuries; 
and these two great discoveries had been made after all by Catholics 
under arrangements sanctioned by the Popes. 



THE PLUNDER OF AMERICA 

"Is there a price of blood... Is there a price of anguish, of life, 

of death, of the extinction of races and of their inheritance of 

experience, invention, law, religion, and moral code?" 

Alexander Del Mar 

"The barbarities and desperate outrages of the so-called Christian 

race, throughout every region of the world and upon every people 

they have been able to subdue, are not to be paralleled by those 

of any other race, however fierce, however untaught, and however 

reckless of mercy and shame, in any age of the earth." 

W. Howitt^ 



As the Reformation reduced the power of the Catholic Church in 
Europe, the Church's hierarchy, while professing to view mankind as a 
brotherhood in Christ, condoned terrible crimes against humanity in the 
slaughter of untold millions of South American Indians (to say nothing 
about the church's treatment of Galileo and of Giordano Bruno). The 
instruments of the genocide were the conquistadors sent by the Spanish 
Crown to loot gold from them. 



210 The Lost Science Of Money 



PAPAL BULLS CONDONED GENOCIDE 

Pope Nicholas V had made it clear enough in 1450: 
"We after scrupulous reflection, are granting by our Bull full and 
entire freedom to King Alphonso to conquer, to besiege, to fight, and to 
submit all the Saracens, Pagans, and other enemies of Christ, wherever 
they may be; and to seize the Kingdoms the Dukedoms, the Princedoms, 
the Lordships, personal properties, landed properties, and all the wealth 
they withhold and possess; and to submit these persons to a perpetual 
slavery; to appropriate these Kingdoms, Duchies, Principalities, 
Counties, lordships, properties and wealth; to transmit them to their suc- 
cessors; to take advantage and make use of them personally and with 
their offspring." 

In 1493, Pope Alexander VI issued the Inter Caetera Bull dividing 
the world into spheres of Portuguese and Spanish influence. The West 
was awarded to Spain and Africa and the East went to Portugal: 

"And in order that you may enter upon so great an undertaking with 
greater readiness and heartiness endowed with the benefit of our apos- 
tolic favor, we. ..out of our own sole largess.. .and apostolic power by the 
authority of Almighty God.. .should any of said islands have been found 
by your envoys and captains, give, grant, and assign to you and your 
heirs and successors. Kings of Castille and Leon, forever, together with 
all their dominions, cities, camps, places, and villages, and all rights, 
jurisdictions, and appurtenances, all islands and mainlands found and to 
be found, discovered and to be discovered to the west and to the south..." 

COLUMBUS' GOLD FEVER 

Columbus' expedition was searching for a western route for Spain to 
engage in the gold/silver trade with China and Japan. The subject of gold 
quickly arose: 

"The first Indians he met with had some few gold ornaments about 
them. Poor wretches, if they had possessed the slightest gift of prophecy 
they would have thrown these baubles into the deepest sea! - and they 

were asked whence came this gold?" wrote Sir Arthur Helps. ^ 

Columbus' contract with the Spanish Crown gave him one-eighth of 
the spoil of the voyage and one of his first suggestions to Spain was to 
enslave the Indians. The Monarchy eventually acquiesced in his request 
as it did to most of the demands of the conquistadors. This Monarchy 
embodied strange contradictions. While it was truly concerned with the 
religious conversion of native souls, it was brutal in its quest for gold. 



8 1 500- HISTORY'S PfVOT: POWER SHIFTS NORTH 211 



The Conquistador's atrocities on the Indians became routine. They 
butchered, murdered, raped, hanged and burned them, usually on the 
initiative of the local conquistador operating within contracts structured 
by the Church's legal talent, which were licenses to murder. The instruc- 
tion from the Crown was literally: 

"Get gold: Humanely if you can, but at all hazards get gold; and here 
are facilities for you.'"^ 

The peaceful Indians reacted ineffectively to the aggression, usually 
trying to co-operate with the invaders, who were often viewed as fulfilling 
an Indian prophecy of the coming of white gods. When Columbus' 
demands in Hispaniola (Haiti) became unbearable, the Indians stopped 
planting food, even for themselves, in an effort to starve out the Spanish 
conquistadors. But the atrocities went on for a century. According to 
Abbe Reynal, when the English pirate Drake captured San Domingo in 
1586 he learned from the few survivors of what had once been a pop- 
ulous country that, rather than become the fathers of children who might 
be subjected to the treatment which they had endured, they had unani- 
mously refrained from conjugal intercourse."^. 

Sir Arthur Helps in The Spanish Conquest of America, estimated the 
original Indian population under Spanish control at 32 million souls and 





8h. Monarchs Ferdinand and Isabella of Spain somehow combined piety 
and a true concern for the souls of native Americans with very bloody 
policies, leading eventually to exterminations estimated in the millions. 



212 The Lost Science Of Money 



that within less than 40 years the Spanish conquistadors destroyed 15 
million of them, mainly by working them to death in silver and gold 
mines. For example, at a mine near Mexico City: 

"Motolina affirms that for half a league round it, 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."^ One of the great killing fields of Peru 
was the great silver mine at Potosi, discovered in 1535. 





8c, Silver coin of 8 Reales, minted at Potosi, Peru, in 1657, A good 
example of what Del Mar called a "crime stained" money. 



THE "REQUIREMENTO" 

The conquerors were legally required to recite the "Requiremento" 
to any Indians they were about to slaughter: 

"On the part of the King, (and)... Queen... we their humble servitors 
hereby.,. make known to you that the lord our God, living and eternal, 
created the Heavens and the Earth, and also one man and one woman, of 
whom you and we, and all mankind.. .are descendants... in the 5,000 years 
since the world was created... 

"Of all these nations God gave the charge to one man - St. 
Peter.. .that he should be the head of all the human race.. .This office of 
St. Peter was called Pontifex Maximus, or the Pope, One of these 
Pontiffs who succeeded St. Peter as lord of the world., .made donation of 
these Isles,. .and all contained therein to the aforementioned King 
Ferdinand and Queen Juana as is shown in certain writings upon the 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 213 



subject, which writings you may examine if you wish... 

"We ask and require you that you do consider what we have said to 
you and that you take the time that shall be necessary to... deliberate upon 
it, and that you do acknowledge the Church as the Mistress and superi- 
or of the whole World, and the high priest called the Pope, and in his 
name and stead the King Don Fernando and Queen Donna Juana, as 
superiors and lords and Kings of these Isles and terra firma... 

"If you do so, you will do well. .But if you do not do this... I certify 
to you that with the help of God we shall forcibly enter into your country 
and shall make war against you in all ways and manners that we can 
,„and shall take you and your wives and children and shall make slaves 
of them... 

"And we shall take your property, and shall do you all the injury and 
damage that we can. ..and we protest that the deaths and losses which 
shall accrue from this are your fault. ..and to prove that we have pro- 
claimed this to you... the Imperial Notary... will affix hereunto his certifi- 
cate in writing." 

The "Requiremento," which had been framed by the famous jurist 
Palacias Rubios, was normally read in Spanish to the trees, or mumbled 
by the attacking army. In one case it was actually translated to an Indian 
mler, Atahualpa of Peru, in 1532: 

"[Atahualpa] wondered, after seeing that the Spaniards pos- 
sessed glass, which he considered far more desirable than gold, why they 
had come so far and behaved so ill, for comparatively useless materials 
Hke gold and silver."^ 

"Pizarro's Priest Vicente De Valverdo read the 'requiremento' to 
Atahualpa. After hearing it he said 'Your Pope must surely be a most 
extraordinary man to give so liberally of what does not belong to him.' 
He asked Vicente where he got his title to command of the Earth. 'In this 
book' replied the monk, presenting his breviary to the Emperor. 
Atahualpa took the book, examined it on all sides, fell a laughing and 
throwing it away added 'Neither this nor any other writing conveys a 
title to the Earth. '"^ 

Pizarro murdered Atahualpa as soon as the Inca leader had a room 
filled with gold for his agreed upon ransom; totalling 185,000 ounces. 

Only in Chile did the conquistadors encounter a race that was able 
to withstand them. They were called the Arucanians and appear to have 
been culturally connected to the Egyptians for they venerated a "genius" 



214 The Lost Science Of Money 



of war called Epon-Ammon. These Arucanians despised superstition and 
had no temples or priests. It took the Spaniards almost 20 years to sub- 
due them. But they reasserted their independence a few years later in 
1553, captured the Spanish leader, and eloquently put him to death by 
pouring molten gold down his throat! 

ABORIGINAL AMERICAN MONEYS 

According to Del Mar, at the time of the European discovery of 
America the use of money was limited to four Indian nations - all in South 
and Central America: the Mexicans, Peruvians, Chimays, and Cibchas. 
Although all of them had gold and silver, none used them for money. In 
Peru gold was so abundant it was sometimes used for tanks, water pipes 
and even planking. The native Mexicans used chiseled copper and cocoa 
beans for money; with cocoa production being a Royal monopoly. One 
modem description of Mexican Indians using gold as money was, in our 
view, more as a medium in bartering. Montezuma's gold treasure was kept 
mainly in the form of exquisite artwork, not coins or bullion.^ 

BUDDHIST INFLUENCE IN PRE-COLUMBIAN AMERICA 

Del Mar observed that before the conquest the Mexican money sys- 
tem counted in twenties: 

20 cocoa beans = 1 olotl 
20 olotl = 1 zontl, and 
20 zontl ^ 1 xiquipili. 

He attributed this to the influence of a Buddhist missionary expedition 
to Mexico in 488 AD.^^ The habit of counting by 20s had existed in 
ancient India. In the Yucatan, the xiquipili or Xiqui was represented by 
a chiseled copper tool money form in the shape of a knife about 4 Yi 
inches long and 1/12 inch thick. Del Mar also noted the similarity of the 
Mexican term xiqui to the ancient Indian money denomination zicca, or sicca. 

CONQUISTADORS IN NORTH AMERICA 

Spain also penetrated deeply into North America. Cortez, searching 
for the fabled Seven Golden Cities of Cibola, reached as far north as 
Sante Fe, New Mexico, the oldest city in North America. Many fabu- 
lous stories are told in connection with those expeditions. 

Alexander Del Mar, in his first assignment as a mining engineer in 
the mid 1800s at Salisbury, North Carolina, 25 miles south of Winston 
Salem, had found "a number of Spanish relics such as spear heads, horse 
shoes, etc, of ancient types, picked up near the gold placers of Sahsbury, 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 215 



[which] testify to the presence of the early gold hunters much farther 

north than they are commonly supposed to have ventured."^ ^ 

This area was not productive for the Spaniards. Later it produced 
about $10-20 million in gold between 1824-49, and was recently 
reactivated in the 1980s in the Piedmont area. Had they found easy-to- 
work gold or silver mines in North America, we Americans would prob- 
ably all be speaking Spanish now (instead of just half of us!). 

Before the Spaniards actually began mining operations in South 
America, they had seized about £8,000,000 worth of existing gold and 
silver objects. They set up the first mint in America at Mexico city in 
1535. The total loot from America is estimated at 1,230 tons of gold and 
60,440 tons of silver, between 1493 and 1690; but only a part of it ever 

reached Spain. ^^ 

EUROPEANS RAIDED SPANISH SHIPPING 

While Spain did the "dirty work" on the ground, England and 
Holland adopted a simpler strategy - they hijacked the Spanish ships 
bringing the gold and silver back to Europe. Judging from the rise in 
prices in England and Holland, very large amounts of metals were inter- 
cepted. The British Crown gave charters to pirates, calling them privateers. 

The Dutch West India Company was established in 1623 specifical- 
ly to rob the Spaniards. The Company's initial capital was 7 million 
Florins; one half million of it from the King and Queen; about 3 million 
was held in Amsterdam and the remainder throughout Holland. 

Piracy was profitable: in its first 13 years the company equipped 800 
ships costing 54 million Guilders. During that period it captured 540 
ships with 72 million worth of cargo and stole another 36 million from 
Portuguese colonies. Its high point was in 1627 when Piet Hein seized 
22 out of 30 ships of a Spanish silver fleet, taking 11 to 15 million 

Guilders, This yielded a 50% dividend on the company's stock. ^^ 

The West Indies Company became an important factor in the slave 
trade. According to Barbour: 

"Of great interest to Amsterdam was the contract for supplying 
Negro slaves to the Spanish colonies of America. Curacao was the point 
of delivery by the company. From 1650 to 1700, Amsterdam seems to 
have been the business headquarters of the slave trade, and contracts for 
deliveries of Negroes were drawn up there."^^ Herbert Bloom, in the 
Economic Activities of the Jews of Amsterdam noted that the "Slave 
trade was one of the most important Jewish activities here [Surinam] as 
elsewhere in the colonies."^ ^ 



216 The Lost Science Of Money 



From 7 to 18 million slaves were brought to South America from 
Africa; about 400-500,000 were brought to North America. 

THE RENAISSANCE OF THE NORTH 

The inflow of gold and silver, especially to northern Europe, helped 
to forever shift the balance of power from the Italian city states on the 
Mediterranean to the cities of the North Sea. 

Jacob estimated that in 1492 the precious metals stock of Europe was 
35 million English Pounds, about 1 pound per person or approximately 
$5, based on the dollar's value in 1900. 

He estimated that by the end of 1599 the total European money sup- 
ply was 87 million Pounds; after taking into account the wear and tear 
on coinage, and the vast amounts sent to India and points east. By 1699 
he estimated the available stock of precious metals in Europe at £287 
million. Although the rate of growth of the money supply was much 
higher in the second hundred years, it did not produce as much inflation 
as the first hundred, for commerce was growing rapidly, more easily pro- 
viding new goods and services; and the population had increased by 
50% so that a greater money supply was needed. 

As this flow of precious metals into Europe increased the money 
supply, the economic effects were dramatic. Commerce was stimulated 
as never before. Industry began to develop and thrive. The population 
began growing dramatically. Wealth began to be distributed over a 
much larger portion of the population as wages rose faster than other 
prices. 

In the north, "industrialists" were able to buy land. Books on prop- 
er farming technique appeared. Mechanical devices such as saw mills, 
spinning wheels, and the steam engine were invented. This renaissance 
has been mistakenly attributed only to the Reformation! 

The growing money supply shook up the financial establishment of 
Europe, which was unhappy to see the relative value of wages rising. 
William Jacob estimated that in France between 1492 and 1589 prices 
rose 470%. Actual stated prices rose over 700%, but the coinage had also 
been getting lighter. Jacob based his calculation on a list of 18 com- 
modities such as rabbit, herring, candles, wine, wheat and oil.^^ 

In England, using the Oxford Tables, he found a 400% increase in 
com prices and about a 500%o increase in general prices. Jacob empha- 
sized that at no time was this price increase a great shock or acceleration, 
but was spread over the period. 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 217 



Thus, from ISOOto 1 600 gold and silver lost over 80% of their value, 
never to recover it. The present-day ''gold is money'' faction does not 
appear to be aware of this fact. 

THE CURIOUS EFFECT ON SPAIN 

While the effect of the precious metals imports created a "renaissance 
of the north," the effect on Spain was, if anything, negative. In two 
sentences: Spain plundered the Americas and mainly enriched her 
"Nobles." Europe plundered the Spaniards and mainly enriched the 
people.The monetary historian W.A. Shaw wrote: 

"[Spain] produced little, and manufactured less, and the ill-gotten, 
blood stained gain, which flowed to her shores from America, served 
only to feed an impractical vanity and to further unfit the nation for 
manufacturing and commercial life... Finding she could purchase any- 
thing and everything with this gold and silver, she threw herself into her 

work of conquest, and let commerce go."^^ 

This Spanish evidence provides additional support for the viewpoint 
that money is not productive capital. The mis-defmition of money thus 
has nation-shattering consequences. 

Gonzalez De Cellorigo summed it up in this way: 

"The cause of the ruin of Spain is that riches ride on the wind and 
have always so ridden, in the form of census contract deeds (see Ch. 7), 
or bills of exchange, of silver and gold, instead of goods that bear fruit 
and which because of their greater worth, attract to themselves riches 
from foreign parts; and so ruin our inhabitants. We therefore see that the 
lack of gold and silver money in Spain is that there is too much of it and 
Spain is poor because she is rich. The two notions are truly contradictory 
but while they cannot be properly joined together in one proposition, we 

must consider them both true in the case of our Kingdom of Spain."^^ 
Cellorigo 's two notions are harmonized when one considers that the 

riches were concentrated in the hands of the Spanish aristocracy. 

Thus the democratization and wider distribution of wealth in the 

north led to increased industry and prosperity, while the increased 

concentration of wealth in Spain led to stagnation and relative decline. 

In Spain the Nobles piled up more silver and gold plate in their closets 

and basements, and in financial instruments. 

The concentration of wealth in different epochs is often different as to 

its causes, but generally similar in its negative effects. Again we see that it 

is not simply the amount of money in existence that influences 



218 The Lost Science Of Money 



economic activity - it must be widely distributed to achieve good 
results. 

ABUNDANCE OF PRECIOUS METALS RETARDS 
MONETARY THOUGHT 

We noted in Chapter 4 that Naples and Venice had begun using 
milled copper coinage, the Bagattini and the Cavalli for smaller transac- 
tions in 1472 and 1473. However, the plunder of the precious metals 
from America retarded the development of money systems and thought 
away from Nomisma and backward to commodity money, which is 
essentially just an advanced form of barter, 

"[The] Conquest of the New World arrested the re-growth of the 
classical conception of money and instead developed the feudal concept 

into a more monstrous form," wrote Del Mar.^^ 

The classical concept of money was abstract, as an institution of law, 
often abused, but designed to equitably measure the exchangeable 
relation of commodities and services. In the feudal concept money was 
an actual concrete thing - a coin designed to measure an imaginary or 
abstract thing called value. By "Classical" Del Mar was of course refer- 
ring to Aristotle, not to Adam Smith's misnamed "Classical School." 

A CHANGE IN THE GOLD/SILVER DRAIN TO THE EAST 

The precious metals continued to flow eastward. In the 16th centu- 
ry, the ratio of gold to silver in India was still ranging between 6 and 8 
to 1, while in Europe it varied between 10 and 14 to 1. 

M. Forbonnais estimated that from 1492 to 1724 one half of all the 
gold and silver that came to Europe from America had been absorbed by 
the Levant, the Indian, and the China trade. M. Gerboux made a slight- 
ly higher estimate and Von Humboldt thought it was two thirds. Jacob 

thought that about 40% flowed to the East.^^ 

In the late 1600s John Locke, analyzing this transfer of metals east- 
ward, mistakenly concluded that: 

"The European world would not be at all enriched by the discovery of 

the Spanish West Indies were it not for the trade we carry on in the East."^^ 
In Locke's view, only by exporting the metals to the East for luxury 
items was any benefit derived. But this ignored what was happening 
regarding the greater distribution of economic power. Locke was able to 
encompass the brutal slaughter of millions and the theft of their heritage 
in the innocuous phrase "the discovery of the Spanish West Indies." 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 219 



Were there no limits to Locke's "Toleration"? 

The amounts being plundered from the American Indians were so 
immense that a change was starting to occur. Even after the East drained 
vast amounts of gold and silver, there was still enough money left circu- 
lating in Europe to stimulate industrial production. Europeans could 
obtain more goods produced locally rather than in the East, so that the 
merchandise component of the East- West trade became a decreasing 
drain on money sent from west to east. With the buildup of "capital" in the 
west, a growing part of any usury element of the drain would also remain 
in the West. 

A "CRIME STAINED" MONEY SYSTEM 

How Europe obtained its new supply of precious metals - its money 
supply - shouldn't be ignored. In 1902, Del Mar, in The History of 
Precious Metals estimated: 

"About 1/2 the existing stock of precious metals was obtained 
througti conquest and slavery." 

This connection of gold and silver money to genocide is fascinating. 

Even in the 19^^ century in the United States, the California gold rush of 
1849 led to the worst slaughter of Indians in our nation's history. E.D. 
Townsend's book on that event relates that 80% of the California Indian 
population disappeared. In 1848 they numbered 150,000 and in 1870 
there were under 30,000. 

As in Charlemagne's time, using precious metals money depended 
on plunder, theft and murder on a grand scale. This vicious activity 
reduced the value of ail who labored: 

'The value at which this crime-stained metal has entered the 
exchanges of the world keep down the value of the portion produced by 
free labour; so that the latter is sold to the minter at less than its average 

cost," wrote Del Mar.-^^ In fact such slavery has reduced the value of all 
free labor, not just that engaged in mining. 

Yet the Adam Smith school, squatting comfortably in their counting 
rooms, blandly asserted that the value of gold and silver money was 
based on the cost of production. Del Mar challenged them, noting that 
none of them ever bothered to check the cost of production, as he had. 
He asked: 

"Is there a price of blood... Is there a price of anguish, of life, of 
death, of the extinction of races and of their inheritance of experience, 

invention, law, religion, and moral code?"^^ 



220 The Lost Science Of Money 



Without this anchor of the price of production determining the value 
of money, the monetary theories of the Political Economists and their 
whole theoretical basis is set adrift and sinks. Then the role of the law in 
creating the value of money must be recognized. 

THE CAPE ROUTE SHATTERS 
TRADE RELATIONS 

''You will soon hear great news... now spices will go from 

Portugal to Alexandria instead of as hitherto 

from Alexandria to Portugal." 

Amerigo Vespucci 

CONTROL OF THE EAST-WEST TRADE MEANS POWER 

From at least the time of Alexander The Great, whoever controlled 
the gold/silver ratio trade with the East was paramount in the West. We 
have seen how it consecutively benefited the Ptolemies, Rome, 
Constantinople, Venice, the Jews, and the Knights Templar. 

After the 1307 suppression of the Templars, Venice once again 
dominated the ratio trade up till 1500 and was again paramount in 
Europe. Opening the Cape Route allowed Portugal to dominate trade 
with India and points east from the beginning of the 1500s. 

Between 1565 and 1625 Portuguese traders stripped Japan of two- 
thirds of its gold, approximately 250 tons, Japan, valuing the gold/silver 
ratio at 6 to 1, was unaware that the ratio in Europe was high (15 to 1 at 

that time). 

The Portuguese channeled the pepper trade through the city of 

Antwerp, which quickly became Europe's greatest trading port. Venice 
suffered the loss, and then Italy was repeatedly invaded from France, 
Spain, and Austria. The Cape Route also reduced Moslem economic 
power as a go between for Venice and India, 

As fate would have it Amerigo Vespucci, America's namesake, was 
reputedly on the Isola Do Sol when remnants of a Portuguese Indian 
expedition were returning home in June 1501. Amerigo saw the signifi- 
cance immediately and wrote a letter to his former employer Pietro Di 
Medici, the Florentine banker: "You will soon hear great news from 
Portugal... now spices will go from Portugal to Alexandria instead of as 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 221 



hitherto from Alexandria to Portugal. Cosi va el Mundo!" ^^ 

The Isola Do Sol is a tiny speck of an island among its even smaller 
Cape Verde companions. Their main activity today is the same as in the 
1500s - a stopover point in the South Atlantic; though recently it was for 
Boeing 747s flying from New York to South Africa, rather than sailing 
ships. One can imagine Amerigo Vespucci's shock at making such a 
momentous discovery in such an out of the way outpost. 

THE RISE OF ANTWERP TO COMMERCIAL SUPREMACY 

With the opening of the Cape route, Antwerp exploded on the scene 
and "developed into a trading center such as the world had never seen 
before or since," wrote Ehrenberg. 

"For most of the 1 6th century, Antwerp was the principal entrepot 
for the Lisbon pepper, whence it was redistributed to the various coun- 
tries of northwest Europe, German and Italian merchant bankers, the 
Fuggers, the Affaitadi... competed with each other or else combined 
together to buy pepper and other spices from the Portuguese 
Crown,.. [They] were allowed to station their own representatives at Goa 
and Cochin in order to supervise the purchase and shipment of the spices 

for which they had contracted," wrote C. R. Boxer. ^^ 

The Kingdom of Portugal had been created by Burgundian Knights 
during the Christian re-conquest of Spain. How did little Portugal gain 





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8d The Antwerp Bourse was the first built in Europe after Portugal made 
Antwerp its staging area for the round the cape trade. Gresham negotiated 
loans there for England, and the London Exchange was later modeled on it. 



222 The Lost Science Of Money 



and secure her hold on this trade? 

"The Portuguese immediately realized that they could only break 
[the trading relations of the Arabs and Indians] by brute force and not by 
peaceful competition. This they proceeded to do with complete mthlessness 
and astonishing speed.. They needed a few fortified harbors to serve as 
bases and commercial depots. ..The island of Goa was taken in 
1510.,.Ormuz in 15 15... Malacca in 15 11... Portuguese naval supremacy 
on the east African coast was already assured by their constmction of 
forts at Sofala (1505) and Mozambique (1507)."26 

Their one failure was their inability to close the straits of the Red sea 
so some pepper continued to reach Venice through Alexandria. But the 
Portuguese initially took three-fourths of the Venetian pepper trade and 
also restricted her metals trading. 

The King of Portugal, through Francesco Pesoa, his power of attorney 
in Antwerp, sold the cargoes as a whole to large syndicates who obtained 

a monopoly and concentrated trade in Antwerp to keep prices up.^^ 
Antwerp was a free port and by 1542 was becoming extremely well 
fortified. Even today you can see extensive sections of red brick fortifi- 
cations that survived the bombardments of World War Two. 

Today, these embattlements strike the visitor as strangely purpose- 
less, for the port is now spread over perhaps a hundred square miles. 
Antwerp is still the greatest port in Europe when allowance is made for 
Rotterdam's large bulk oil shipments. 

It was in Antwerp in the 1500s that Sir Thomas Gresham floated 
loans for Queen Elizabeth I. He later erected the London Exchange as a 
more or less exact copy of the Antwerp Bourse. In 1522 the Antwerp 
pawnbrokers asked for the City of London to be put up as collateral for 
a loan, but the English declined. Audacious as that sounds, in 1976 New 
York City was put up as collateral for loans to bail out the municipality. 

THE FALL OF ANTWERP AND THE RISE OF AMSTERDAM 

Antwerp's dominance was to^be short lived. When Charles V abdi- 
cated the throne of France in 1555, he gave his Netherlands possessions 
to his son Philip II of Spain, Philip's foolish taxation policies in the 
Netherlands sparked a revolt in 1565. Calvinism generally supported the 
revolt and Calvinists flocked to the northern Netherlands, which became 
Holland. The southwest sections, mainly Catholic, later became 
Belgium. 

Antwerp's fortifications were not effective, for she is 80 miles from 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 223 



the North Sea, connected by the meandering Schelde river. In 1585, the 
Prince of Parma didn't attack Antwerp's wonderful battlements. Instead, 
he secured the mouth of the Schelde river and strangled her. 

When Antwerp's port closed, about 19,000 of her merchants quickly 
migrated to Holland. Overnight, Amsterdam became the dominant trading 
capital of the north. Her position would not be as transient as Antwerp's 
was, for Amsterdam had been building an industrial infrastructure, large- 
ly in shipping, and was poised for dynamic growth. 

In 1595 the Dutch rounded the Cape of Good Hope with four ships 
commanded by Cornelius Houtman, who had learned the route from the 
Portuguese. Six Dutch companies were quickly formed to engage in the 
trade. But the competition was considered destructive, and in 1602 they 
consolidated into the Dutch East India Company and were given the 
monopoly of the Eastern trade. 

Trading in the East required the backing of force against the 
Portuguese; merchant ships could not venture there unarmed. However, 
once the Dutch entered the fray, their numbers would eventually over- 
whelm the Portuguese, who had only 300 ocean going vessels at the 
height of their maritime power. Portugal was also short of manpower. 
Most of her crews came from Africa or Asia and sometimes the captain 

was the only Portuguese on board.^^ 

The Dutch warred with the Portuguese over the eastern trade from 
1605 to 1665. They launched thousands of ships compared with less than 
100 for the Portuguese in the same category. According to Boxer the 
Dutch navy had 250,000 sailors compared to the Portuguese's 4,000. 
Roughly one of every three Dutchmen would have been in the merchant 
marine. 

But the Portuguese were well acclimatized to the east, offered better 
employment and less harsh trading terms. As a result it took the Dutch 
about 60 years to displace them and seize control over the East- West 
trade routes and the still important gold/silver trade. 

In summary, the gold/silver ratio between East and West worked, in 
a way, like electric voltage. It provided a difference in potential to a cir- 
cuit that could "run" all sorts of activity. It created so much desire to par- 
ticipate in the metals trade between India and Europe that it helped spur 
the voyages leading to the discovery of the Americas, and the Cape of 
Good Hope route to India, events that dramatically changed the world at 
the pivotal 1500 time period. 

Control of the East- West trade moved from Venice to the North Sea 



224 The Lost Science Of Money 



area, shifting the relative power of Europe from Catholic to what would 
become Protestant lands. 

That trade and the inflow of gold and silver from the plunder of the 
Americas sparked a "renaissance of the north." But instead of advancing 
monetary thought, the entrance into Europe of vast amounts of 
crime-stained money" actually retarded it. 



ii 



8 1500 -HISTORY'S PIVOT: POWER SHIFTS NORTH 225 



Notes to Chapter 8 

'Adam Smith, Wealth of Nations, (1776. Chicago: Great Books, Encyl. 
Brittanica, Univ. of Chicago Press, vol.39, 1952), pp. 303-358, 

2 W. Howitt, Colonialism and Christianity^ p. 9. 

3 Sir Arthur Helps, The Spanish Conquest in America, (London: John Parker & 
Sons, 1855), pp. 121-2. 

^ Alexander Del Mar, History of Money in America, (repr. New York: Burt 

Franklin Press, 1968), quoted on pp. 6-9. 

^ Alexander M Mar, History of Precious Metals, (1902, repr: New Yoik: A.M. Kelley, 

1969),p.l47. 

M541 letter from Fray Toribio Motolina de Paredes, to Dan Antonio Pimental, 

as quoted in Del Mar, History of Precious Metals, cited above, p. 178. 

^Del Mar, History of Precious Metals, cited above, p. 197. 

^ Del Mar, History of Precious Metals, cited above, p. 198. 

^ Del Mar, History of Money In America, cited above, Ch. 6 & 7. For the view 

that Mexican Indians used gold as money, see Don Taxay's Money of the 

American Indians, {Tlushing, NY: Nummus Press, 1970), Part 1. 

"*Del Mar, History of Precious Metals, cited above. Chapter 6. 

^' Del Mar, History of Precious Metals, cited above, p. 153. 

*2 Alexander Del Mar, Money and Civilization, (1867, repr.. New York: Burt 

Franklin Press, 1969), pp. 102-105. 

*^ Herbert Bloom, Economic Activities of the Jews of Amsterdam, (Port 

Washington, NY: Kennikat, 1935), pp. 120-37 

^^ Violet Barbour, Capitalism in Amsterdam in the 17th Century, (Baltimore: 

John Hopkins Univ. Press, 1950), p. 110. 

'^ Bloom, cited above, p. 159. 

^^William Jacob, The Precious Metals, (1831, repr. New York: A.M. Kelley, 

1967),pp.68-195, 

17 W.A. Shaw, The History of Currency 1252-1896, (1896, repr. New York: 

A.M. Kelley, 1967), p. 107. 

1^ as quoted by Thomas Guggenheim, Pre-Classical Monetary Theories, 

(Geneva: Graduate Institute of International Studies, 1989), Ch,2. 

•^ Del Mar, Money and Civilization, cited above, pp. 209-10. 

^^ Jacob, cited above, pp. 195-196. 

^1 John Locke, Essay on Money and Bullion, (London: printed for B. Lintot, 

1718), p. 10. 

^^ Del Mar, History of Precious Metals, cited above, p. vi. 

^^ Del Mar, History of Precious Metals, cited above, p. vi. 

2^ as quoted by Alexander Von Humboldt, Fluctuations of Gold, (NY: Cambridge 

Encyl., 1900), p. 44. 

2^ C.R. Boxer, The Portuguese Seaborn Empire, 1415-1825, (London: 



226 The Lost Science Of Money 



Hutchinson, 1969), p. 61. 

2^ Boxer, cited above, pp. 46-48 

^^ Ludovico Guicciardono, Antwerp the Great Market^ in Discrittione Di Tuttil 

Pass! Bassi, 1567, translated by Pennock. 



227 



CHAPTER 9 



THE RISE OF CAPITALISM 
IN AMSTERDAM 



"The Bank of Amsterdam's most vital feature 

was that it was a civic and not a privately 

owned or managed institution." 

Jonathan Israel 



Amsterdam in the 1600s was a remarkable time and place in world 
history. She wrested control of the India trade from Portugal, developed 
Europe's most powerful financial markets, and laid the exact foundations 
of modem capitahsm. 

Fishing income was the backbone of Holland's commercial rise. By 
1636 her fleet numbered 2,300 - 2,500 ships, plus 2,000 herring fishing 
boats. The Dutch ship the "Flute" was the leading merchant vessel of the 
day, surpassing the Hanseatic's Cogge in both speed and ease of opera- 
tion. Dutch technology also excelled in preserving the herring catch. 

Holland's bulk fish trade made it easy to carry along additional low 
bulk luxury items when the opportunity arose. The Dutch fleet became 
the carrier of the North as Venice was in the South. The completion of 
Holland's sea works gave her the ability to flood the country in an 
emergency - a great strategic value. 

Amsterdam sprang to the fore with the closure of Antwerp in 1585: 

"Foreigners observed Amsterdam's rise to supremacy in world trade 
with surprise not unmixed with resentment. Suddenly as it seemed, the 

city was there. "^ At the time there were 1.5 to 2 million Dutch; 6 milhon 
English; and 20 million French. 



228 The Lost Science Of Money 



Zaandam became Europe's premier shipbuilding center. Holland 
could produce competitively even after importing raw materials. 
Warehouses were as important to Dutch success as ships "and may have 
represented a comparable investment of capital... They bought at seasons 
when prices were lowest and stored the merchandise to await a sellers 
market," wrote Barbour.^ 

DUTCH INTELLECTUAL FREEDOM 

Intellectually, Holland was as free-thinking a community as existed 
at the time. Jacobus Arminius, the Dutch theologian, proclaimed the 
doctrine of free will, religious toleration and natural law, in opposition 
to the Calvinist doctrines of predestination and the state enforcement of 
religion. Jacobism became a symbol of free thought throughout Europe 
for centuries. The Calvinists allied with the Orangists (William I of 
Orange) against Holland's republican confederation and overthrew 
Holland's republican constitution by 1619. 

Holland had three great Universities: at Ley den, Utrecht, and 
Franeker. Many early political economists spent years in Amsterdam 
including William Petty and John Locke. William Paterson lived there 
before founding the Bank of England. Dutchman Matthew Decker was 
said to have influenced Adam Smith. The small cult that was to form the 
Pilgrim's Mayflower expedition spent some years in Dutch exile before 
setting sail for New England. 

Amsterdam was also home to the great jurist Grotius (b. 1583), who 
developed the doctrine of Freedom of the Seas, and the philosophers 

Descartes and Spinoza in the mid 1600s. 

THE BANK OF AMSTERDAM 

The Bank Of Amsterdam is the world's best known deposit bank, 
though it is usually misunderstood. The main source we have on this 
bank's history is J.G. Van Dillen's History of the Principle Public Bank, 

ORIGINS 

Some of the Jews emigrating from Antwerp (see p. 234) had set up 
an exchange banking operation, a "wissell bank," changing money and 
discounting bills of exchange, taking deposits and making loans. 
Exchanges were disorderly with high and widely varying rates. Still, 
Amsterdam's merchants affirmed their need for a banking institution. 



9 THE RISE OF CAPITALISM IN AMSTERDAM 229 



The city' fathers stepped in and created the Bank of Amsterdam in 
January 1609 and forbade the Jews and all others from engaging in 
banking: 

"Simon Lus had been operating banks in Amsterdam probably from 
1602... When around 1608-9 he asked the Amsterdam Burgomasters to 
allow him to continue operating his Amsterdam branch, they demanded 

a list of his creditors..." wrote Herbert Bloom.^ 

"The principle reason for setting up [the Bank of Amsterdam] . . .was 
not to provide credit but to prevent unscrupulous money changers ruling 
the course of exchanges for all places and to provide fast efficient and 
reliable exchange facilities. The Bank^s most vital feature was that it 
was a civic and not a privately owned or managed institution, " wrote 

Jonathan Israel."^ In theory it was not a bank of issue, was not supposed 
to make loans and was considered a precious metals system. 

The city required that all bills of exchange above 600 Florins (later 
300) had to be changed at the Bank, effectively monopolizing money 
changing in the bank's hands. Clients' accounts at the bank could be 
credited with the deposit of coinage or by a transfer from the Bank. 
Accounts could be debited by withdrawing coinage, but mainly by trans- 
ferring it to another account at the Bank. 

No interest was paid and no overdrafts or loans were made. The 
Bank did not discount bills - that is, accept bills on other institutions or 
merchants at a discount, and then send them for collection. 

Deposits at the bank could not be attached. The City itself was 
responsible for the deposits. The management of the bank was in the 
hands of a board of three commissioners elected by the town council 
with the Bank's main vault under City Hall. The cashier side of the busi- 
ness - crediting and debiting various accounts - was conducted free of 
charge (until 1683). The bank made profits on money changing and gold 
and silver purchases, charging up to 2.5%. It was responsible for sup- 
plying the city mint with gold and silver bullion. 

All profits of the Bank belonged to the City of Amsterdam. The mes- 
sage to merchants was clear: make profits in commerce and industry^ not 
by money-changing games or picking and culling or clipping the 
coinage. And the Bank helped them earn money, removing one of the 
uncertainties in trade - the quality of payment. If a merchant was paid by 
a transfer at the Bank Of Amsterdam for so many gold florins, he need- 
n't examine the coins for authenticity or full weight. The Bank guaran- 
teed this, and in accepting coinage from depositors took care that such 



230 The Lost Science Of Money 



deposits were in acceptable form. Apparently the bank did not use 
checks; clients had to go to the bank to make transfers to other 
accounts. 

The Bank thus removed any temptation - or possibility - to clip 
Dutch coinage, automatically promoting commerce and discouraging 
domestic usury - the misuse of the money system. 

THE AGIO 

Payment through the bank was so convenient that for most of its 
history Bank money was at a 4 to 5% premium over coins; and coinage 
ceased to circulate in Amsterdam. This premium was called the "agio," 
from the Italian "vantagio" - advantage. 

The Bank attracted large deposits from all over the Netherlands. In 
1611 there were 708 depositors, with 925,000 Florins deposited. By 
1701 there were 2,698 depositors with 16,280,000 Florins deposited. 

The Bank generally separated credit from banking with very good 




9a. The Bank Of Amsterdam was publicly owned by the city of Amsterdam 
with its vault in the basement of the old Town Hall. The control and 

profits of banking belonged to the city. 



9 THE RISE OF CAPITALISM IN AMSTERDAM 231 



results and prevented the money changing classes from turning into 
bankers as they were to do in England. 

The Bank made three exceptions in granting overdrafts: to the City 
of Amsterdam; to the Dutch East India Company {abbreviated DEIC); 
and to jfund a city loan bank, the Bank Von Leening in 1614. Some 
observers claim that this bank was a bank of issue, creating money. 
However if that were the case its size and scope were small. 

The overdrafts to the City began in 1624. At first Amsterdam paid 
interest of 3 to 4% on its debt to the bank, then reduced it to 0% when 
they realized they were paying interest to themselves. By 1685 the city 
owed the Bank 2,976,000 Florins. They subtracted the accumulated 
earnings the Bank had made, which amounted to 2,340,000 Florins, 
leaving a net debt of about 600,000 Florins. This provides an example of 
how monetary and banking operations have been used to help finance 
government. 

But the large secret overdrafts to the Dutch East India Company 
changed the nature of the bank into a covert bank of issue. It was really 
a mixed system of precious metals and bank credits, pretending these two 
were the same. These overdrafts began as early as 1615 but caused no 
difficulty for over a century until the 4th Anglo Dutch war in 1780: 

Holland's fleet had suffered defeats and war losses threatened the 
DEIC's existence. The Company had been allowed 7,5 million Florins in 
loans based on a pledge of its bonds, guaranteed by the States of 
Holland. During this war, loans had also been extended to Amsterdam's 
Municipal Loan Chamber to avert the ruin of Amsterdam's commerce. 
By 1784 neither were in a position to repay and in 1790, 181 years after 
its founding, for the first time the "agio" on bank Florins went to a 
discount to coinage. 

Now people wanted coinage instead of Bank money. The Bank's 
redemption of coinage, discontinued fi*om disuse in the early 1700s, was 
so much forgotten that the question arose whether it had ever been a part 
of the Bank's policy. 

A Dutch lawyer, Nicolas Bond, sued the Bank to resume coin pay- 
ments, arguing that the right could not be lost through disuse. He won 
and in January 1794 the Bank resumed paying out coinage on demand. 
However 2 million Florins were quickly withdrawn and redemption had 
to be suspended after a few weeks. The City of Amsterdam issued a 
loan to support the bank but later in the year Napoleon's invasion 
sparked a revolution in Amsterdam and representatives of the people 



232 The Lost Science Of Money 



replaced the town's Regency. 

Their report showed deposits of 11.7 miUion, gold coinage of 2.5 
million, and other securities of 9.2 million. 

In 1802 the City and the New Batavian Republic, through a forced 
loan, re-established full coinage cover for the deposits. The Dutch East 
India Company's debt to the Bank, which was 3.17 miUion in 1802, was 
paid off by 1803. The Loan Chamber, which owed 845 thousand in 
1802, owed nothing in 1803. 

In 1804 the Bank had 7.1 miUion in deposits and 7.1 million in gold. 
This declined gradually, as King William I of Holland founded the Bank 
of the Netherlands in 1814, a bank of issue on the Bank Of England 
model which paid interest on deposits. He ordered the Bank of 
Amsterdam dissolved. At the time of its liquidation in 1820 there were 
214 thousand in deposits exactly balanced by 214 thousand in gold. 

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. As such, its 
operation and policies were generally fair - but only to the Dutch. 

THE DARK SIDE OF THE BANK 

The Bank engaged in nefarious activities similar to Venice's vicious 

14^^ and 15* century exportation of Europe's silver money to India (see 
Chapter 4): 

"Yet already in the 1620s we see the Amsterdam Bank carry on the 
prohibited trade in precious metals," wrote Van Dillen.^ The Netherlands 
attracted the silver coinage of her neighbors by frequent changes in her 



9 THE RISE OF CAPITALISM IN AMSTERDAM 233 



gold/silver ratio, just enough to make it profitable for the silver coins to 
be sent to her. The laws announcing the changes were called "Placcats" 
and were common from 1516 to 1615. 

Above average weight English or French coins, as well as the 
clippings from them, also found a market in the Netherlands, where they 
were re-minted into underweight coins and sent back abroad. Officials 
of the French Mint complained of: 

*'. . .the malice of several who turn into bullion the best of your coins 
in order to fill the Kingdom with others of less goodness, enriching 

themselves with the blood and misery of the people." ^ 

The English Privy Council complained: 

"They send away her Majesty's coin and bullion by reason of the 
Hollanders trading with the East, and by which means the realm will be 

secretly robbed if it be not prevented."^ 

Van Dillen noted that "In a memorial of the General Masters [of the 
Dutch mint] of 9 December 1680, it is stated that the Banks of Exchange, 
especially that of Amsterdam purchase nearly all the imported minting 
material, whereas they deliver only a very small quantity to the mints, 

but sell the greater part for exports to the Indies."^ 

Assisting these coinage operations was Holland's enactment of the 
first "free coinage" law in Europe just after 1575. This allowed metal to 
be passed easily between bullion and coinage. 

Someday this area of the Bank's activity can be fully documented as 
the raw data on the Bank is still gathering dust in Amsterdam. We should 
know to what extent the Bank's success depended on defrauding 
Holland's neighbors through the molestation of their coinages. 

DUTCH COLONIES 

Compared to the Portuguese and the English, the Dutch did a poor 
job of establishing colonies as Holland needed immigrants herself 
Colonies that formed in Brazil, New York and Capetown were quickly 
taken over by the Portuguese and the English. The Dutch discovered the 
Hudson River valley in 1 609,^ but surrendered New Amsterdam (New 
York) to the British in 1664. Capetown was founded in the late 1500s 
and surrendered to the British East India Company in 1620. 



^ It was in 1610, a decade before the Pilgrims arrived in the New World, that 
the Dutch settled Kinderhook NY, where this book is being written. 



234 The Lost Science Of Money 



THE ADVENTUROUS JEWS OF AMSTEPIDAM 

Amsterdam's Jews played key roles in developing the present form 
of capitalism and spreading it westward to England. In 1492 Ferdinand 
and Isabella had expelled all unconverted Jews from Spain. Many went 
to Portugal and then on to Antwerp when the Portuguese set up their 
trading depot there. When Portugal introduced its inquisition in 1535, 
many more "Marranos," as the Portuguese Jews were known, and 
"nominal" Christians emigrated to northern Europe and engaged in trade 
with the Levant. 

In the 1579 treaty uniting Holland's northern provinces, article 13 
ruled out religious persecution and Amsterdam allowed many Jews to set 
up residence after Antwerp collapsed. Soon they were coming directly 
from Portugal. 

In 1609 there were 200 Portuguese Jews in Amsterdam and then 
1 ,000 out of a total population of 1 15,000. But the financial power of the 
Amsterdam Jews was substantial because of their connections to 
wealthy Marranos living abroad. In 1615 Grotius drew up 49 regulations 
for Jews allowing 300 families residence; no distinguishing marks were 
required; but no marriage with "white women" was allowed! The regu- 
lations were altered over time and in 1796 Jews were accorded full citi- 
zenship rights in Holland. 

THE LEVANT TRADE 

With their connections to the Levant, Amsterdam's Jews at first 
specialized in that Middle-Eastern trade. However, the established 
Dutch traders first used the Jews as their mentors in international busi- 
ness; after learning it and establishing connections, using their own large 
capital reserves, they forced the Jews into relatively subordinate posi- 
tions. 

None of the Directors of the Levantine Trading Company were 
Jewish. According to Bloom, the largest Jewish import/export firm did 
2/7 of the importing business and 1 15 of the exporting business of the 
largest Christian firm.^ 

The Jewish community did dominate New Holland, the Dutch 
colony in Brazil Bloom noted that when the colony was at its peak in 
1642, the "Wealthy Jewish residents controlling the sugar trade gave all 

the best positions to their newly arrived co-religionists."^^ They also 
became involved in the slave traffic associated with Holland. 

"The most important current undertakings of the Dutch West Indies 



9 THE RISE OF CAPITALISM IN AMSTERDAM 235 



Company consists in the obligation of a few Dutch merchants to take at 
a fixed price in Curacao as many Negroes as the company is able to carry 

from the coast of Guinneau," wrote Joseph De La Vega in 1688.^^ 

Amsterdam's Jews were not made welcome in Holland's North 
American colony and Governor Peter Stuyvesant tried to forbid the 
settlement of Jews in New Amsterdam (New York), citing "their usual 
usury and deceitful business towards the Christians," but the Dutch West 
Indies Company rejected his pleas. The first group of Jews arrived in 
New Amsterdam from Brazil. Records show that Asser Levy, on the first 

ship, filed a law suit against a shipmate within a week of arriving! ^^ 
There is a tiny street next to the 23rd Street yacht harbor in Manhattan 
named after Asser. 

In 1631 the Bank Of Amsterdam had a total of 1,348 accounts 
representing 1.1 % of the populafion. Eighty nine of the accounts were 
held by Jews, representing 9% of the Jewish population, underscoring 
their economic activity. 

GROWTH OF AMSTERDAM'S JEWISH POPULATION: 

1609 1630 1655 1674 1743 1780 

Sephardic 200 1,000 1,800 2,500 3,000 3,000 

Ashkenazi 5,000 10,000 19,000 

Amsterdam Totals: 115,000 241,000 217,000 

The Jewish community was entirely Sephardic until at least 1655, 
but by 1674 the Ashkenazi Jews from Eastern Europe outnumbered them 
by two to one: 

"Upon their arrival in Amsterdam the Ashkenazi found their main 
occupation limited by the Bank's monopoly," wrote Bloom, but they 
engaged in it anyway; and did not use the Bank of Amsterdam much, for 
although there were 5,000 of Askenazi compared to 2,500 Portuguese 
Jews, in 1674 there were only three Ashkenazi accounts in the Bank, 

whereas the Marranos held 13% of all the accounts in the bank.^-^ 

REPACKAGING PIRATE BOOTY 

The most adventurous of Amsterdam's Jews became known for 
re-selling the loot from pirated ships. J. Savary des Bruslons' Dictionaire 
Universel de Commerce noted: "The Jews of Amsterdam are so expert 
that after disguising the merchandise by mingling it with other goods or 
packing it in another way or remarking it, they are not afraid to go to cer- 
tain Portuguese ports and resell the goods there. Very often they even 

dispose of it to the same merchants from whom the booty was taken."^"^ 



236 The Lost Science Of Money 



WAR PROFITEERING NURSES CAPITALISM'S BIRTH 

When there was factional fighting in Morocco, Amsterdam's Jewish 
merchants suppHed both sides of the battle. Later, both factions in 
England's civil wars borrowed in Amsterdam: 

"During the English civil wars grain was occasionally imported [by 
both sides] from Holland... In the 2nd half of the century the provisioning 
business was full blown in the hands of Jewish provideurs. During the 
Franco -Dutch War, Machado and Periera of Amsterdam supplied the bread 
wagons of both Dutch and [their enemy] Spanish armies...," wrote Barbour. 

"In the war between Denmark and Sweden in 1644-45 both 
belligerents chartered, equipped and manned whole squadrons in 
Amsterdam to assist their fleets."^ ^ 

According to Barbour, even in wars in which Holland was involved, 




The SyhagoguBj Amsterbam 
Engravings X693 



9b. An indication of the importance of Amsterdam's Jewish community in 
the 1600s and 1700s can be seen in this 1693 engraving of its Synagogue. 
With banking off limits, the early Sephardic community concentrated 

on the Stock Exchange and Bible printing. 



9 THE RISE OF CAPITALISM IN AMSTERDAM 237 



Amsterdam's merchants traded with the enemy, financed the enemy, and 
withheld supphes from Holland, except at monopoly prices. This aspect 
of capitalism has continued to the present day, unfortunately giving 
major financial interests a motive to foment warfare. 

DUTCH JEWISH PUBLISHERS 

Publishing books was a major activity of Amsterdam's Jewry, and it 
had a decisive political effect on England and the development of both 
Protestantism and capitalism. As early as 1617 a Jewish school owned a 
printing press. Around 1743 there were 40 presses in Amsterdam, using 
all languages including Greek, Hebrew, Syriak, Arabic, Pessick, and 
Chinese. The larger part of the output was religious and was mostly for 
export. The first English language newspaper was printed in Amsterdam 
in 1620, called the "Courant," with reports from Italy, Germany, and 
other countries. 

THE GREAT ENGLISH BIBLE FLOOD 

The Jewish press of Joseph Athias "claimed to have printed so many 
Bibles in English that every servingmaid and ploughboy might aspire to 

own one," wrote Van Dillen.^^ Herbert Bloom puts the number of Athias 
Bibles at one million, with destinations of England and Scotland. 

Sending a million Bibles to England had far reaching political 
effects and Athias was not the only Bible printer. The most notable was 
Rabbi Manasseh Ben Israel (1604-1657), who began printing in 1627. 
According to Tovey, Manasseh had converted to Judaism; his wife was 
of the Arabanel family, which claimed a direct line to David of Biblical 

fame.^^ But this may have been put out for English consumption, as it is 
not mentioned in the modem Jewish Encyclopaedia, 

Manasseh is credited with printing the first Hebrew book and printed 
mostly Bibles. He engaged in grandiose geopolitical operations, 
especially in his relations with Oliver Cromwell. In Chapter 10 we discuss 
how he led efforts to gain re-admission of the Jews to England, who had 
been banned there since 1290 for clipping the English coinage. 

Bloom counts 318 Jewish printers from Manasseh up to 1732. The 
average published edition was 3,000 copies, a high number even by 
today's publishing standards, considering the populations involved. But 
this "average" figure could be skewed because of the great number of 
bibles printed. 

According to Van Dillen, from 1625 various "seditious" books were 
smuggled into England, attacking her social order, including such titles as: 



238 The Lost Science Of Money 



1634 — Flagellum Pontiflcum by John Bastwick 

1652 — Apologetical Narration by John Lilbume 

1657 — Killing no Murder by Colonel Titus & Sexby 

1673 — England's Appeal ftvm the Private Cabal at Whitehall by Lisola 

The printing business in Amsterdam was not very profitable. 
Discount sales by peddlers, auctions of unsold books, putting books out 
on consignment, and consignment pledges not being kept ruined the 
business and rules out the profit motive as the main reason for publishing 
in Holland. 

SPINOZA WAS IGNORED AND EXPELLED 

The political nature of Jewish publishing was evident in the refusal 
to publish the works of Baruch Spinoza (1632-77), among the great 
philosophers of his day, a member of Amsterdam's Jewish community 
and former Talmud student of Manasseh Ben Israel: 

"Despite his clear rejection of the fundamental dogmas of their reli- 
gion, the Jewish community offered him a pension of 1,000 Florins a 
year if he would conform in public to the Jewish rules of life, but 
Spinoza refused to compromise and was formally cursed and expelled 

from the community in 1656," wrote J. L. Price. ^^ Amsterdam's 
Christian community accepted him but he soon died at only age 35, 

While the publishing business was Jewish dominated, it was the 
Amsterdam Stock Exchange that mainly attracted the attention of the 
Jewish community, particularly since banking was off limits. 
"Ultimately, they controlled no less than 25% of the shares of the 

(Dutch) East India Company," wrote Prof Roth.^^ 



THE AMSTERDAM STOCK EXCHANGE 

The Amsterdam Exchange was built in 1611, modeled on that of 
Antwerp from 1531. Commodities as well as stocks were traded, with 
specific areas ("pits") designated for trading in different items. 
Amsterdam from the 1600s onwards was the direct origin of our pres- 
ent exchange mechanisms and procedures. She got them from 
Antwerp, which is said to have gotten them from the Levant. 

In the 1980s and 90s attention often focused on the "innovations" 
known as "derivative products": stock market indexes and futures and 
options contracts based on them. Nearly all of these "innovations" were 
in use on the great Amsterdam Stock Exchange in the 1600s and 1700s. 
We find the same types of contracts, the same general rules of trading, 
the same methods of cheating the public and of manipulating markets! 



9 THE RISE OF CAPITALISM IN AMSTERDAM 239 



The Exchange offered many types of transactions: 

* Stock sold for immediate cash. 

* Stock sold on margin up to 80%. 

* Monthly settlement dates - the 20th of the month, payment due the 25th. 

* Future settlement dates. 

* Put and call options, with premiums payable immediately at the 
Bank of Amsterdam. 

* The "Ducatoon" - an imaginary share representing 1/10 of a Dutch 
East India Company Share, with a monthly settlement price. 

Agreements on trades were signaled by handshakes or hand clasps. 
Trading in various items could be extremely thin or very hectic. During 
speculative periods "Feverish buying and selling and gambling were 
continued until 4 o'clock in the morning in the French Coffee House" 

adjacent to the Exchange, wrote historian Charles Wilson.^^ 

DUTCH EAST INDIA COMPANY SHARES 

The primary security traded in Holland was the Dutch East India 
Company (DEIC). It was capitalized at 6.4 million florins, which was 
over 64 tons of gold. In its first six years it paid a dividend of 25-30% a 
year. Then in 1612 it paid 57% and in 1613 another 42%. 

The Company was composed of six chambers representing the cor- 
porations originally merged to form it. These DEIC shares were registered 
and traded in their six separate cities. Though the shares and dividends 
were identical, shares registered in one city could not be traded or deliv- 
ered in another city. Over half of the shares were registered in Amsterdam. 
Once the market got going, the Amsterdam shares traded at a large premi- 
um over the other cities - 30 to 60 %> higher for the same company! 

The Company had been formed in 1602. By 1607 its shares had 
risen to 100%) over their original par value. However, by 1609 they fell, 
from that level, down to only 30% over par value. The blame for the drop 
was placed on short selling tactics, and in 1610 laws were passed against 
short selling. By 1688 thanks to the success of the company the DEIC 
shares rose to 580% over their original par value, not counting the tremen- 
dous dividends paid on the stock, which totaled 1,482%) of the par value. 

SHORT SELLING "NULLIFIED" 

Short selling continued to be a problem and in 1687 a lawyer, 
Nicholas Muys Van Holz, wrote a book condemning it and asserting that 
the Jewish brokers were playing a large part in this speculation. 
According to De La Vega, this was especially connected to the 



240 The Lost Science Of Money 




9c. Staadtholder 
Frederick Henry 
discouraged short 
selling manipulations 
on Amsterdam's 
Stock Exchange by 
absolving any losses 
of buyers to whom 
stock had been sold 
short (i.e. when the 
seller hadn't really 
owned the stock). 



"Ducatoon" shares (see below), and the problem was considered serious 
enough for Staadtholder Frederick Henry to pass a law that excused the 
buyer of a contract, that had been sold short to him, from responsibiUty 
for any loss on the trade. 

EXCHANGE TRADING LORE 

The trading lore of the Exchange reads like present day descriptions. 
There were Bulls - "Liefhebberen;" and Bears - "Contremines" (against 
the "mine" of India) and Butterflies - "Bichelle," who fluttered between 
Bullish and Bearish. Some of the trading "rules" from the 1600s can be 
found on the guidelines that clearing houses hand out to their floor 
traders today: 

"Take every gain without showing remorse about missed profits." 
"Never give anyone advice to buy or sell shares." 
"Whoever wishes to win in this game must have patience and money." 
"The expectation of an event creates a much deeper impression upon 

the exchange than the event itself."-^^ 



9 THE RISE OF CAPITALISM IN AMSTERDAM 241 



CHEATING THE PUBLIC 

As with today's Exchanges, cheating was an inseparable part of the 
Amsterdam Stock Exchange's activity, and as today, it occurred on three levels: 

a) Broker's abuse of client's orders, 

b) Behind the scenes manipulation of prices, and 

c) Using structural faults in market mechanisms to fleece participants. 

BROKERS ABUSE OF CLIENT OPIDERS 

There were two types of brokers on the Amsterdam Exchange: offi- 
cially appointed or "sworn" brokers, of which there were 375 Christians 
and 20 Jews; and more than 700 unsworn brokers, or "free" brokers, 
who were mainly Jewish. The free brokers were somewhat wild and not 
proscribed by law from certain practices that took advantage of the 
clients. 

In particular, the sworn brokers were forbidden to engage in "dual 
trading." This means they were to execute orders for their clients 
accounts but were not to trade for their own accounts. The free brokers 
traded their own accounts as well, and would "front run" their clients 
orders, as well as orders that they could see entering the pit through the 
sworn brokers. 

"Dual trading" was an important issue in the commodity trading 
scandals of the late 1980s in America. Though public prosecutors sug- 
gested forbidding it, the public never understood the process. The polit- 
ically powerful commodity Exchanges, with their large contributions, 
blocked legislation against it. 

Dual trading should be banned because it represents a conflict of 
interest. If a broker holding a client's order to buy or sell, is allowed to 
trade for his own account at the same price, or just in "front" of it, to 
"front run" it, as it is called on the Exchanges, the market mechanism 
ceases to function in a fair maimer. For the "front miming" broker has been 
given an unfair advantage over other market participants. 

For example, suppose a broker has an order to buy at a certain price. 
If he "front runs" it and before filling the order buys for his own account 
at, or just above the order price, he then controls the client's order which 
will buy it back from him, that is, protect his trade from a loss. The same 
holds true for selling in front of a clients sell order. Just knowing of the 
orders' existence gives a big advantage. 

This is serious because with Members' margin requirements (the 
cash deposit they must put up) being only about 1%, the front running 



242 The Lost Science Of Money 



brokers have a possibility of great gain in a short time period with almost 
no possibility of loss. If the broker enters and exits the trade on the same 
day, the margin requirements are generally even lower than 1%! 

The client loses the opportunity to gain, where his order is never 
filled and the market rises or falls from his order point. Second, if the 
broker lets the order get filled because he can see that the market is going 
to go through it anyway, the client's order is being filled in an obviously 
(to the broker) losing situation. 

Third, any market that systematically gives an advantage to par- 
ticular participants over time will harm the relative position of all others. 
If some participants can trade with little or no risk, over time everyone 
else will be hurt. 

Some modem exchanges put limitations on brokers trading for their 
own accounts, but they are not always effective because the brokers use 
what are called "bag men" who they signal to do the offending trade; 
while they hold back the client's order, to protect the accomplice's trading 
position, and they divide the profits later. 

Efforts made by the Amsterdam Stock Exchange to curb dual trad- 
ing and front running were not effective, as they have not been in mod- 
em times. Computerized trading, as opposed to an "open outcry" sys- 
tem, would largely solve this problem (and perhaps introduce a different 
form of cheating by the computer literati). 

MANIPULATING MARKETS: BEAR RAIDS 

In 1688 Joseph De La Vega, a Jewish stockbroker in Amsterdam, 

wrote a book called Confusione de Confusiones}^ vividly describing 
exchange activity. He gave a detailed roadmap of how manipulators 
would launch a bear campaign (to lower prices), outlining 12 stratagems, 
which I'll summarize: 

At the beginning of the campaign the syndicate borrows all the 
money available at the exchange and makes it "apparent" it wishes to 
buy (!) shares with the money. When they start their campaign to drive 
prices down, the bears actually begin with purchases (which raise prices) 
and take all items offered! Then, having driven prices up as high as they 
can, they start selling: 

They strike the first blow with time sales (futures), reserving the 
cash sales for the moment of greater distress. 

5^^ stratagem - sell the largest possible quantity of call options 

6* strategem - buy the largest possible quantity of put options 



9 THE RISE OF CAPITALISM IN AMSTERDAM 243 



7* " - loan the bulls money, taking their shares as collateral, 

then sell their shares. 

8* " - spread false news by dropping a letter: "They have 

a letter written and arrange to have the letter dropped 
as if by chance at the right spot." 

9^*^ - They get some new person to sell, ^d finance his loss, if 

any, in the belief that anything new gets more attention. 

10^^ " - Whisper loud enough to be heard. 

12* " - Sell government bonds to shock the general situation. 

The manipulation of news was also important: "The small boats 
which were supposed to meet the English ships and speed back to 
harbour with the news, in reality merely took a turn outside the harbour 
and having invented their own plausible gossip, came back and sold it to 

the feverish crowds of speculators," wrote Wilson.^^ 

USING STRUCTURAL MARKET FLAWS 
TO FLEECE PARTICIPANTS 

The "ducatoon" trading introduced structural flaws in the market. 
They were not real shares but were fictitious or imaginary units, kept as 
account book entries by a cashier. Each Ducatoon represented 1/10 of 
the value of a Dutch East India Company share. 

The Ducatoons were a monthly phenomenon with a new series of 
Ducatoons each month. They attracted the smaller investors and specu- 
lators, and the market makers were mainly Jewish brokers. While each 
Ducatoon represented 1/10 of a DEIC share, the market price of the 
Ducatoons fluctuated independently and the only time they were offi- 
cially valued at the 1/10 of a DEIC share was on settlement day, the first 
of each month at 1 pm, as signaled on the floor of the Exchange by an 
appointed person "raising the stick." This settlement price would then 
determine whether speculators had made or lost money on their 
Ducatoons and accounts would be settled, debiting and crediting 
accounts. 

Readers familiar with modem stock index futures will immediately 
see the Ducatoon was similar to a stock index future, except it was based 
on only one company, and for one month at a time; whereas stock indexes 
are based on an index of many companies, and futures expirations are 
more extended. 

The same type of riskless arbitrage was engaged in then as now. The 



244 The Lost Science Of Money 



market makers in the Ducatoon would sell the Ducatoons to speculators 
at a premium over the DEIC stock, and purchase the underlying stock to 
guarantee a profit to themselves on expiration day. Alternatively, they 
would purchase the Ducatoons at a discount, and sell short the underlying 
DEIC shares. "The members initiate action only when they can foresee 
its result so that apart from unlucky incidents, they can reckon on a 

rather sure success," wrote De La Vega.^^ 

Such trading is structurally defective because it allows the price of 
an item (the Ducatoon, or index future) to be artificially determined by 
the supply and demand of an entirely separate item (the DEIC share or 
in modem times the stock index). When a large enough position (open 
interest) is established in the artificially dependent item (the Ducatoon or 
index future), it will attract and encourage market manipulators to 
attempt to fix or rig the independent price determining item at the 
moment of price determination (expiration date or settlement time). The 
one factor that makes this manipulation and cheating possible or easy 
is that the dependent contract is settled for cash rather than for delivery 




9d The Amsterdam Stock Exchange, where most of the "modern" instru- 
ments such as puts and calls and even a type of "index" futures contract 
were already in use from the early 1700s, and of course the very 

same tricks were used to fleece the public! 



9 THE RISE OF CAPITALISM IN AMSTERDAM 245 



of the underlying item. 

In modern commodity markets this structural defect is unique to 
futures contracts settled in cash - primarily the stock indexes andflnan- 
dab. For example, a com futures contract couldn't be so easily manip- 
ulated because of the threat that those who were "long" com futures 
might demand delivery of com. Supplying com on a particular date, to 
fiilfili the contract, is a completely different matter than coming up with 
cash. Cash can always be borrowed in an emergency, allowing the 
manipulators wide leeway in their machinations. 

The Ducatoon was settled for cash, not the underlying DEIC shares, 
making the Ducatoon the first known example of this type of stmcturally 
flawed futures instmment which have now been made even easier to 
manipulate by the existence of cash-settled options on the futures. These 
types of contracts are primarily a gambling activity and could be 
outlawed without loss to society. 

ENGLAND'S INEFFECTIVE NAVY 

From 1609 to 1667 the Dutch became more internationally oriented, 
creating a trading empire on the heels of the Portuguese decline. This 
brought them into conflict with the English, with whom they engaged in 
on and off fighting from 1652. This culminated in the humiliating expe- 
dition of a superior Dutch fleet up the Thames river in 1667, which 
towed away many British warships down the Thames! As a result there 
was a general peace with England from 1667. 

FRENCH INVADE IN 1672 

In 1672 the French invaded Holland, partly out of concem for her 
growing power. Holland was in turmoil and the flight of capital became 

a panic, with a 16% discount on money in Holland. ^^Bloom relates that 
the Jewish community offered the French 2 million guilders if they 

would spare the Jewish quarters of the city!^^ However, Holland held a 
strategic advantage - the ability to flood sections of the country. She used 
her sea works infrastmcture to hold off France. 

THE DUTCH NEGLECTED INDUSTRY 

The development of a pervasive speculative psychology had bad 
effects on Amsterdam. While Christians were active speculators, and the 
largest Dutch financiers were Christian, the Jews had concentrated their 
activity on the Stock exchange: 

"One of the most important developments of the 18^^ century is the 
way in which [Jews] came to dominate the [brokers] guild... Portuguese 



246 The Lost Science Of Money 



Jewry had completely forsaken trade in order to take up gambling on the 

share market," wrote Wilson.-^^ 

This concentration in finance eventually led to commercial decline 
for the majority of Dutch, beginning around 1660-80: 

"A few old merchants can still remember the days when 
Zwaanenburger Straat here in the City was every day strewn with casks 
and bales of merchandise, humming with work people... now grass grows 
there so to speak, and amongst the whole population of Portuguese Jews 
there is not so much commercial activity. Could a more apposite picture 
be painted of the grievous effects of share gambling on a people?" wrote 

De Koopman.-^^ 

The Bank of Amsterdam's monopoly on money changing and banking 
had effectively stopped the manipulation of Holland's medium of 
exchange. However, the Stock Exchange became a great mechanism of 
international finance, with its accumulation of capital and relatively 
efficient operation. Foreign governments, especially England, were able 
to float loans there at half the interest rate that was possible at home - 
about 3% compared with 6% in England. According to Barbour, the 
Dutch were actually forbidden by their government to loan to foreign 

powers or invest in foreign companies, but they ignored the law.^^ 

And it was not just the moneyed classes that participated. For the 
first time ordinary citizens, as distinct from professional financiers, had 
been drawn into international finance on a large scale. 

COSMOPOLITANISM HARMED HOLLAND 

Specializing in international finance led to a developing cosmopolitan 
outlook, which led to a disregard by the richest Dutch for their own 
society and fellow Dutchmen: 

"...The increasing importance of the financial sector of the Dutch 
economy seems to have brought with it an increased concentration of 
wealth in the hands of a small group of wealthy rentiers. Moreover the 
heavy involvement of wealthier classes in foreign investment led to a 
certain dissociation from the national interest, as the interests of these 
groups were often as closely bound up with those of foreign countries as 
with the Republic. ..There was a growth of large scale structural unem- 
ployment. After 1715 the Republic ceased to play any role of significance 
in European affairs. The dominant groups in Dutch politics preferred to 
accept the fall in international influence of the Republic, rather than 
embark on reforms which would have undermined their vested 



9 THE RISE OF CAPITALISM IN AMSTERDAM 247 



interest... The tax system placed the burden on those least able to support 
it and the resources of the wealthier sections of society were hardly 

tapped at all," wrote Price. ^^ 

A patriotic revolt in 1780 failed. It took Napoleon's invasion to shatter 
the power of the Regents allied to the House Of Orange, but by then that 
house had seized the British Crown. 

HOLLAND FINANCED ENGLAND 

The British borrowed heavily from the Dutch from at least 1642 
when Queen Henrietta Maria of England personally brought the Crown 
jewels to be pawned in Holland in order to buy arms. Never mind that 
the arms would be used in the English wars against Holland! 

"Dutch money was important and even indispensable to the British 
Government roughly from the latter years of the 17th century until 1780 

at least," wrote Wilson.-^^ The biggest Dutch financiers were the 
Christian houses of Hope, and Pelse, which specialized in bill brokering. 
The Jews made more political loans, such as to the Dutch House Of 
Orange's William III to enable him to become King of England. 

From 1750 on, Dutch capital penetrated everywhere. About one- 
third of the British national debt was held in Holland, paying 1.4 million 
pounds annual interest: 

"Dutch speculators helped to reproduce the intricate apparatus of 
speculation (in London) which had already been perfected at Amsterdam 

a hundred years before," wrote Wilson.^^ 

"The shares system was introduced on the London Exchange 
towards the end of the 17th century by Portuguese Jews from 

Amsterdam," wrote Van Dillen.^"^ 

"The migration to London of a small but important group of Dutch 
traders and financiers. Christian and Jew together with Huguenots who 
came via Holland, and... rivaled the Jews in their cosmopolitan financial 
competence.. .The system of government finance.. .was molded on the 
Dutch pattern and in the process not a few Dutch hands were employed. 
Now we begin to encounter the names of some of the famous Portuguese 
Jewish families who had taken refiige in Holland a century earlier - the 
Medinas, the Suassos, and the Pintos as well as Dutch Christian names 

- the van Neckers, Von Nottens, Van Hemerts," wrote Wilson,^^ "Was 
not the Bank Of England floated with Dutch capital? And were not the 
Dutch bankers still among its largest stockholders and customers in the 
1760s?"36 



248 The Lost Science Of Money 



DUTCH SHIFTED SUPPORT TO THE UNITED STATES 

In 1780 the Dutch held 3/7 of the EngHsh national debt. However, 
as a result of England's war with the American colonies, they began shift- 
ing money from England to France and America. The Dutch lost big in 
this decision.^ '^ After the American revolution, Dutch neutrality and con- 
fidence in the English expired. They loaned 29 million guilders to 
America between 1782 to 1790. In 1785 there was very heavy selling of 
British securities on the Amsterdam Exchange. By June 1802 American 
securities topped the most active list at the Amsterdam Stock exchange, 
and in January 1818 Holland held almost as much in American loans as 
the British did: $11 miUion compared to $12 million. 

To summarize, on her ascent to dominance of northem Europe, 
Holland took control of the Cape route to the East, including the ever 
important gold/silver ratio trade, A key internal engine of her develop- 
ment was the Bank of Amsterdam. As a city owned and run institution, 
it removed the temptation to molest the money supply, encouraging mer- 
chants to engage in more productive activities. The Bank's high reputa- 
tion demonstrated the ability of public officials to professionally manage 
the money system. 

Though based on gold and silver, the bank money it provided was a 
more abstract form than coinage, and that further helped trade and indus- 
try. The Bank generally separated money from credit. When it failed to 
do so, in regard to the Dutch East India Company, its defining feature as 
a public institution facilitated its rescue. 

That the Bank found it necessary to create credits for the Dutch East 
India Company, even though gold and silver poured into Holland in 
unprecedented amounts from the plunder of the Americas, strongly indi- 
cates the inadequacy of "precious metals" money systems. 

The Jews were relatively welcomed by Holland, but were banned 
from engaging in banking. Some were involved in what turned out to be 
a deeply political form of publishing, and many others became influen- 
tial on the great Amsterdam Stock Exchange. There we saw developed 
many of the instruments, and the problems, that today are thought of as 
modem innovations. 

One effect of the success of the stock exchange was to direct the 
Dutch away from industry into a form of cosmopolitan finance which 
ignored the welfare of the general population, and of Holland. 

Thus in the 1800s, Dutch trade and finance was dwarfed by British 
industrial production. England's policy according to Wilson was that 



9 THE RISE OF CAPITALISM IN AMSTERDAM 249 



economic supremacy could only be grounded in political power, while 
the Dutch overlooked that fact. 



Notes to Chapter 9 

' Violet Barbour, Capitalism in Amsterdam in the 1 7th Century, (Baltimore: 

John Hopkins Univ. Press, 1950), p. 17. 

2 Barbour, cited above, p. 88. 

^ Herbert Bloom, Economic Activities of the Jews of Amsterdam, (Port 

Washington, NY: Kennikat, 1935), p. 172 

^ Jonathan Israel, Dutch Primacy In World Trade (NY: Oxford Univ. Press, 

1989), p. 77. 

^ J.G. Van Dillen, History of the Principle Public Banks, (International Comm. 

for study of History of Banking and Credit, 1934, repr New York: A.M. Kelley, 

1965, 1964), pp. 92-93. 

^ From messages delivered to the 1575 States General assembled by Henry III, 

as quoted by Shaw, cited below, pp. 84-86. 

^ As quoted by W. A. Shaw, The History of Currency 1252-1896, (1896, repr. 

New York: A.M. Kelley, 1967), p. 73 

^ Van Dillen, cited above, p. 93. 

^ Bloom, cited above, pp. 78-98. 

'^ Bloom, cited above, p. 137. 

'^ Joseph De La Vega, Confusione de Confusiones, (1688, Harvard Graduate 

Business School, u.d., 1960s?), p. 19. 

^^ Bloom, cited above, pp. 167-171. 

^^Bloom, cited above, p. 176. 



250 The Lost Science Of Money 



^^ J. Savary des Bmslons' Dictionaire Universe! de Commerce, Paris, 1748 

(II,coll757) as quoted by Bloom, cited above, p. 78. 

^^ Barbour, cited above, pp. 31-32. 

^ ^ Van Dillen, Die Economische Positie en Betekenis der Joden, Sescheidenid 1, 576. 

*^ D'Blossiers Tovey, A History of the Jews of England, (1738, repr. London: 

Weidenfield & Nicolson, 1990), pp. 151-153. 

'^ J. L. Price, Culture and Society in the Dutch Republic During the I7th 

Century, (London: Batsford, 1974), p. 176. 

^^ Cecil Roth, A History of the Marranos, (Jewish Publication Society of 

America, 1932), p. 244. 

^^ Charles Wilson, Anglo Dutch Commerce in the 18th Century, (Cambridge 

Univ. Press, 1941), pp. 103-4. 

^^ De La Vega, cited above. 

22 De La Vega, cited above. 

2^ De La Vega, cited above, pp. 30-32. 

^^ Wilson, cited above, p. 104. 

25 De La Vega, cited above, p. 30. 

2^ as quoted by Barbour, cited above, pp. 57-58. 

2^ Bloom, cited above, p. 205. 

^^ Wilson, cited above, pp. 14-15. 

^^ Wilson, cited above, quoting De Koopman, Ch. 5. 

^^ Barbour, cited above, p. 126. 

^' Price, cited above, pp. 213-219. 

^2 Wilson, cited above, p. 78. 

^^ Wilson, cited above, p. 240. 

^"^ Van Dillen, History of the Principle Public Banks, cited above, p. 107. 

^5 Charles Wilson, Holland and Britain, (London: Collins, 1946), p. 25. 

^^ Wilson, Anglo Dutch Commerce..., cited above, p. 238. 

^^ Wilson, Anglo Dutch Commerce..., cited above, Ch. 7. 



251 



CHAPTER 10 



THE TRANSFER OF 
CAPITALISM TO ENGLAND 



"What have we then gotten by our deUverance from the Pope's tyranny, 
if these petty men succeed in the place of it?" 

Thomas Hobbes 



The Dutch House of Orange, with Calvinism as its ally, was over- 
whelming Holland's republican constitution from the mid 1600s, but 
faced the problem that even as it outgrew Holland it was still vulnerable 
to attack from largely Cathohc France. According to Disraeli, this need 
for a larger power base was the motivation behind William III of 
Orange's campaign to seize the English Crown in 1688, transferring cap- 

itaHsm to England in the process.^ 

THE BREAK WITH ROME 

England was a Catholic nation until Henry 8th (1491-1547) broke 
with the Roman Church, He was madly in love with Ann Boleyn and 
asked the Pope to grant him an annulment . The Pope would likely have 
complied but Henry's wife Catherine appealed, forcing a bureaucratic 
delay, and Ann Boleyn was pregnant. Henry caused the Church Of 
England to be founded and married Ann who had their child, Elizabeth I. 

There was also a financial motive: 

"When Henry 8th broke with Rome it was on persuasion of a man 
Thomas Cromwell [a moneylender and Oliver's grandfather]..." wrote 
Belloc. On Cromwell's suggestion he began the dissolution of the 
monastery lands. Henry nullified Papal appeals, and a key leader, 

Thomas More, was executed.^ 



252 The Lost Science Of Money 



From 1536 to 1553 the vast monastery lands were seized, first the 
small and then the large, creating a class of new millionaires. Henry VIII 
legalized usury in 1545, setting a limit of 10% per year. 

It remained to convert the general population and apparently that 
didn't take very long. 

"It was the prime business of the new millionaires with William 
Cecil (Lord Burghley) at their head to root out the Catholic Church and 
after more than half a century of work the comer was turned," wrote 

Belloc.^ The break with the Church was also at that time important, per- 
haps crucial, to the need of strengthening local sovereignty within 
England. 

ENGLISH MONETARY BACKGROUND 

England had two advantages over continental Europe: as an island 
there was a degree of isolation and oneness resulting in a kind of unity; 
and as the westernmost outpost of the Empire, distance made her less 
subject to the whims of the Imperial, and later the Papal, will 

When the Western Roman Empire had degenerated, England's 
money system had totally collapsed back to barter with no coinage 

circulating for two hundred years from about 430 to 630 AD."^ 

As silver reappeared in Europe, coinage also revived in England. 
Many mints were established from 800-900 AD. Consistent with the 
sacred control of money, "Early Anglo Saxon mints seem to have been run 

mainly under ecclesiastical dominion," wrote Craig.^ But there was some 
central control: all the dies for stamping coins had to come from London. 










--^wsj^aSjjjSa™^- 




10a. An English silver penny of Offa, King of Mercia from 757 to 796 AD, 

struck in Canterbury (1.277 grams, 18.2 mm). 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 253 



In 930 AD Athelstan's Law decreed that only one coinage should 

circulate in England. Minting thrived in the 10^^ century and the abun- 
dance of silver is indicated by the large tribute payments of "Danegeld" 

to Denmark - 10,000 pounds in 991 AD and 82,800 pounds in 1018 AD.^ 
The Anglo Saxon kings had as much control over the money of their 
realm as the Emperor in Byzantium had over his. The main Anglo Saxon 
coinage was the silver penny: 

"Anglo Saxon pennies were of token value rather than intrinsic 
value,.. They fluctuated quite considerably in weight and fineness from 
one issue to the next and yet their value remained constant, since it 
derived not from their intrinsic worth but from the word of the King," 
wrote Spufford, estimating they were valued about 1/3 over their metal 

content,^ 

A MONETARY FORM OF TAXATION 

The Anglo Saxons kings re-coined the money about every six years, 
calling in all the coins and issuing three pennies for every four taken in. 
This represented a 25% tax or about 4% a year. Spufford maintains that 
this revenue provided the strength of the late Anglo Saxon and early 
Norman kings, who adopted their money system. 

After the Norman conquest in 1166 AD, the Crown *s coinage 
prerogative was strengthened. The re-coinage of 1279-81 indicates a 
circulation in England of 120 million pennies, or £500,000 - more than 

she would have in circulation at any time in the next 500 years. ^ 

Some religious officeholders attempted to continue exercising the 
money power; we hear of them mainly through the record of their 
arrests. In 1362 the Abbot of Missendon was convicted of clipping and 
forging coins; in 1369 the Canon of Dunsmore was accused of counter- 
feiting Gold and silver coins; in 1371 the Canon of St. Gilbert de 
Sempingham was charged with smuggling coins abroad.^ But they 
appear to have acted more for personal gain than in the belief that they 
held the coinage power. 

ENGLAND'S GOLD COINAGE 

The first English gold coinage was by Henry 3rd in 1257. It weighed 
43 grains and was valued at 20 silver pennies, at a gold/silver ratio of 1 
to 1. The coin didn't achieve widespread acceptance and was withdrawn 
and followed in 1343 by the "Noble," weighing 134 grains, at a 
gold/silver ratio of 1 1 to 1. Nobles were exactly double the weight of the 
Bezant and were the first English coins minted "By the grace of God" 



254 The Lost Science Of Money 



instead of "By the grace of Caesar." Silver, however, remained the 
mainstay of England's coinage. 

A DIFFERENT PERSPECTIVE 

Most discussions of English monetary history focus on the 17th cen- 
tury goldsmith/bankers and how they supposedly invented banking and 
paper money and were taken advantage of by an immoral Monarch. This 
chapter examines that history from a very different perspective to gain a 
deeper understanding of the forces at work. With additional research and 
corroboration, this chapter, with Chapter 1 1 , should provide the structure 
for a book-length work. 

THE CROWN'S MONETARY PREROGATIVE 

The key monetary feature of England as it emerged from medieval 
times was that the monetary power was concentrated in the Kings' hands 
and had not been divided among other nobles. As a result she suffered 
less from monetary chaos than the nations emerging on the European 
continent. 

In the ongoing power struggle between King and Parliament the 
fight over the monetary power was relatively mild: 

Under Henry 2nd (1154-89), taxation, which had been considered a 
gift to the king, was nationalized. 

Under Edward 3rd (1326-77), the Commons obtained three powers: 
Parliamentary consent to all taxation; both houses to concur in all legis- 
lation; and the right to investigate and amend administrative abuses. 

In 1346 Parliament attempted 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. 

''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," wrote 

Breckenridge.^*^ 

For despite modem day prejudices, the English King's long standing 
monetary prerogative had been used in a responsible manner for the benefit 
of the nation. Writing in 1896, Shaw 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%.^^ 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 255 



STRUGGLE FOR CONTROL OF ENGLAND'S MONEY:THE 
MIXT MONEYS CASE - REGAINING THE SCIENCE OF MONEY 
The landmark Mixt Moneys of Ireland Case arose during the reign 
of Queen Elizabeth I, known for her efforts to put the coinage on a sound 
footing. It's still cited in 20th century court decisions. Elizabeth issued 
base metal coinage as legal tender in Ireland in May 1600, annulling all 
other coins there and requiring they be returned to the mints. An 
Irishman then paid a £100 debt to a London merchant in the new 
coinage. The merchant sued for the £100 in gold and silver coin. 

The case was argued at the highest levels and decided in favor of the 
Irishman. It formally re-stated many of the concepts of money, lost in the 
dark and medieval ages. Paraphrasing key elements of the decision: 

The nature of money was identified as a societal institution rather 
than merely metal 

*Money is a public measure. ..and every commonwealth has adopt- 
ed its own monetary system... 

*The sovereign, or those licensed by him, has the authority to create 
the money of his dominions and it is treason for any other to do 
so.,.When the sovereign declares a piece of money to be a penny, groat, 
or shilling, that makes it so. 

*The Sovereign has the authority to increase or diminish, to raise or 
lower moneys, to enhance or depreciate their legal value, to decry them, 
and to reduce them to bullion, in which condition they may be prohibited 
to be used as money... This is a power that the state reserves for its own 
safety and welfare. 

*Coins have intrinsic and extrinsic qualities. The intrinsic qualities 
consist of weight and fineness; the extrinsic of denomination and value. 
Intrinsic qualities are conferred by nature; the extrinsic by the sovereign 

or state, ^^ 

According to Del Mar the decision was so detested by the merchant 
classes, the goldsmiths, and later the British East India Company, that 
they worked incessantly to destroy it. 

This occurred in two stages: 

The first stage was to destroy the British Crown s monetary pre- 
rogative, throwing the control of money open to the merchants and fin- 
anciers. This was done by undermining the Crown and then passing the 
free coinage act of 1666. But it ultimately destroyed the Monarchy, 
opening the way for the foreign element to establish a new Monarchy, 
and to reconstitute the money prerogative in the hands of a specific 



256 The Lost Science Of Money 



group of financiers - not elected, not representing society and in large 
part not even English. 

THE RELIGIOUS UNDERMINING OF THE MONARCHY 

Thomas Hobbes, the renowned 17th century theorist on government 
power, provides rare insight on the destruction of the monarchy in his 
major, though suppressed work. Behemoth (not Leviathanl), In Socratic 
dialogue style, Hobbes has a participant in the discussion pose questions, 
which we underline: 

"[Charles I, 1600-49] A man that wanted no virtue, either of body or 
mind, nor endeavored anything more than to discharge his duty towards 
God, in the well governing of his subjects. ..But the people were 
corrupted generally... 

" But how came the people to be so corrupted? And what kind of people 
were thev that did so seduce them?" 

"The seducers were of divers sorts. One sort was the ministers, 
'Ministers of Christ' (as they called themselves)... and sometimes 'Gods 
Ambassadors' (commonly called Presbyterians) 

"(others) were papists. ..independents for religious freedom. 
Anabaptists... Fifth Monarchy Men... Quakers, Adamites, etc. "And these 
were the enemies which arose against his majesty from the private inter- 
pretation of the scripture, which had been exposed to every man's scan- 
ning in his mother tongue." 

*Tor after the Bible was translated into English every man, - nay 
every boy and wench that could read English, - thought they spoke 
with God almighty...and every man became a Judge of religion and 
an interpreter of the scripture for himself." 

"But vou have not told me bv what art, and what degrees thev (the 
preachers! became so strong. " 

"They had the concurrence of a great many gentlemen. These by 
continually extolling of liberty and inveighing against tyranny... draw 
people to a dislike of the Church, government, canons and common 
prayer book." 

"They did never in their sermons, or but lightly, inveigh against the 
lucrative vices of men of trade or handicraft; such as are feigning, lying, 
cozening (cheating, fraud, deceit), hypocrisy, or other uncharitableness, 
except want of charity to their pastors and to the faithfiil; which was a 
great ease to the generality of citizens and the inhabitants of market 
towns." 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 257 



"They did with great earnestness and severity inveigh against carnal 
lusts and vain swearing... but the common people were thereby inclined 
to believe that nothing else was sin, but which is forbidden in the 3rd and 
the 7th commandments... for men are not ordinarily said to lust after 
another man's cattle, or other goods or possessions, and therefore never 
made much scruple of the acts of fraud and malice." 

"What have we then gotten by our deliverance from the Pope's 
tyranny, if these petty men succeed in the place of it, that have 
nothing in them that can be beneficial to the public, except their 
silence? For their learning, it amounts to no more than an imperfect 
knowledge of Greek and Latin and an acquired readiness in the Scripture 
language, with a gesture and tone suitable thereunto; but of justice and 
charity, the manners of religion, they have neither knowledge nor prac- 
tice, as is manifest in the stories I have already told you: nor do they distin- 
guish between the Godly and the ungodly, but by conformity of design 
in men of Judgment, or by repetitions of their sermons in the common 

sortofpeople."^^ 

Hobbes had little respect for the Papacy. He loved women, and lived 
to 93 with mistresses until near the end. Observing how the Church 
attempted to create guilt for even enjoying looking at a beautiful woman, 
something Hobbes considered automatic, he summed up the Catholic 
Church's position in one phrase: "God! A monopoly of women!" 

The degree to which morality became separated from law under 
Protestantism is evident in the error that even Hobbes made about contracts: 

"Covenants entered into by fear... are obligatory... If I be forced to 
redeem myself from a thief by promising him money, I am bound to pay 

it, till the civil law discharge me."^^ 

Reading Hobbes' Behemoth, the author is struck by similarities to 
the present day religious undermining of American democracy. 

EXPULSION OF THE JEWS FROM ENGLAND 

The Jews had lived in England as moneylenders sanctioned by the 

English Crown during the 12^^ and 13^^^ centuries. Their situation 
throughout Europe had grown ever more tenuous as centralized Roman 
power had declined: 

"By the 8^^ century their legal status as Roman citizens under the 
Theodosian Code had ceased to give them any protection," wrote James 

Parkes in his definitive work The Jew in the Medieval Community}^ 
Chapter 5 noted the dominant Jewish role in the European slave 



258 The Lost Science Of Money 



trade from the 8^^ to the 11^*^ centuries and the terrible vengeance exacted 
upon many Jewish communities by the Crusaders as they gathered for 
the 1st march to Jerusalem. Chapter 7's discussion of the Reformation 
outlined how Calvinism elevated the status of the Jews for Biblical 

reasons in the 1500s. But from the 9^^ to the 15^^ century their status 
emerged as special exceptions to the common law, under the protection of 
the Princes. These conditions were often set forth in formal "charters" 
between the Prince (or King) and the organized Jewish community in his 
domain, and both sides expected to draw advantages from the arrangement, 

The Jewish charters ^^ 

The Jews were often considered as the property of the Prince, and in 
some times and places, when they died their property went to the Prince. 

The charters licensed the Jews to practice usury except against 
Church property as collateral, in order to minimize friction with the clergy. 
The Jews were to sue and be sued in the Royal courts, but at some times 
and places they refused to appear in ecclesiastical courts, setting off 
skirmishes between the Princes and the Bishops. For example, around 
1220 AD the Archbishop of Canterbury and the Bishop of Lincoln tried 
to enforce their authority by forbidding Christians to sell food to Jews 
who had refused to appear in Church courts. The Crown countered by 

ordering any such Christians to be imprisoned. ^^ 

Kings and Princes generally protected "their" Jews in order to 
protect the substantial revenues they got from them. When Pope 
Alexander IV added usury to the activities prosecuted by the Inquisition 
in 1257, James II of Aragon informed the Inquisition that his Jews were 
not to be tried for heresy. Around 1293 Philip the Fair of France forbade 
the Inquisitors from acting in matters that affected his Jews,^^ but in 
1306 he would expel them. The Jews were re-admitted to France in 
1315, expelled again in 1322, readmitted in 1361 and again expelled in 
1395. The Jews were banished from Spain in 1492, from Sicily in 1493 
and from Portugal in 1496. For a time only the region that became 
Poland was open to them. 
The charters set the Jews in opposition to the general populace 

Parkes pointed out that: 

"...as chartered royal usurers their interests were likely to be 

diametrically opposed to those of the rest of the population."^^ 

The Charters of the towns of Worms and Speyer had an especially 
discordant provision: goods stolen by Christians from Jews were to be 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 259 



replaced at double value, however, if Jews possessed stolen goods the 
Jews were to be re-imbursed the amount that they swore they had paid 
for them. Christians holding stolen property simply had to give it up. 
This provision would appear to encourage the Jews to act as "fences" for 
stolen goods, setting them at odds with the community. At the request of 
Jewish leadership, in 1236 AD, Frederick II extended the charter of 

Wonns to all the Jews in Germany.-^^ 

Such "mistakes" guaranteed an adversarial relation between Jewish 
and Christian communities. They bring to mind Harwood's view of the 
motivation of the Torah's final editor known to Bible scholars as the 
"Priestly" author, or "P" (perhaps Ezzra, around 434 BC). He instituted 
an abundance of religious rules during the Babylonian captivity, 
Harwood believes, in order to stop the assimilation of the Jews into 
Babylon. 

"The Priestly author instituted his policy of planned incompati- 
bility...," wrote Harwood.^ ^ 
Medieval England's Usury Rates 

The going interest rate with good collateral was 2 pence per pound 
per week, making it 43 1/2 % per year. Without good collateral it was 
double - 87% per year. 

By the late 12th century the harmful concentrating effects of usury 
were being severely felt. Professor Cecil Roth in his study History of the 
Jews of England wrote that; 

"When he died in 1 1 85, Aaron of Lincoln (a Jewish moneylender) was 
probably the wealthiest person in England, in liquid assets," And 

"...In 11 88. ..the Jewish capital was estimated to constitute more than 
one-third the mobile wealth of the nation - certainly an exaggeration, yet 
at the same time indicative of their relative importance to the exchequer" 
...and inevitably: 

"...In 1190 anti Jewish feeling was intense. It was popular, not from 

above. "-^^ 

Apparently it was worst in York, where Aaron of Lincoln's operations 
had been centered. 

"A century of such a system was more than any community 
could stand and the story of Jewish usury is a continuous alternation 
of invitation, protection, protestation and condemnation. Jewish 
money lending reached important proportions in England in the 

middle of the 12*** century; in 1189 and 1190 there were massacres 
throughout the country.. .the rioters often (sought) out and 



260 The Lost Science Of Money 



(destroyed) the Jewish records of their indebtedness," wrote 

Parkes.^^ 

The massacres of 1190 didn't end the problem. In 1215 AD, the 
Magna Carta's 10th and 11th clauses contained mild provisions hmiting 
Jewish usury. In 1218 Jews in England were forced to wear a pre- 
scribed mark on their outer garment. 

In 1194 AD the English Crown had established an Exchequer to 
oversee Jewish matters and collect the tallages they were required to pay 
to the Crown. According to Professor Roth these totaled 250,000 marks 
of silver from 1227 to 1259: 

"In order to support these constant calls upon their purse, they were 
compelled to exercise still greater acquisitiveness in their business 
affairs, grinding desperately out of their clients the amounts that they 

would be compelled so inexorably to surrender to the Crown."-^"^ 

Parkes admitted that there was a mutual responsibility for most 

anti- Jewish incidents^^ but laid the blame for this constant friction upon 
the society's intellectual leadership: 

"The main responsibility not merely for Jewish usury, but for all 
medieval usury, must lie with the intellectual leaders of the age, who 

made no proper provision for a universal social want."^^ 

At the bottom of this failure - then and now - was the error in their 
concept of money: viewing it as a commodity, failing to recognize the legal 
nature of money, and to act upon that knowledge and set up honest 
money systems based in law. Even today one anticipated side effect of 
healthy monetary reform would be a meaningful reduction in the still 
continuing tension between Jewish and non Jewish communities. 

If one now finds it important to determine on which side the greater 
blame lay, in fairness one would have to weigh who had the greater 
understanding of money and of the results of usury (especially if that 
knowledge was being obscured), with who had greater freedom of choice. 



THE CROWN TAKES ACTION AGAINST USURY 

AND COIN CLIPPING 

Problems with coin clipping were endemic in England: 

"In 1205 King John decried [demonetized] all the clipped coins over 

1/8 clipped. He threatened all clippers, especially the Jews who he 

thought were the chief offenders," wrote Del Mar.^^ 

As elsewhere in Europe, the Jews in England were under protection 
of the King, who made heavy financial demands upon them. They in 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 261 



turn got the money from the people through a royal license to practice 
usury. But coin clipping wasn't considered part of the bargain. 

The clippers would proceed gradually, clipping perhaps 5 to 10% of 
a coin. With large numbers of coins passing through the moneylenders 
hands, eventually all of the coinage ended up 10% clipped (lighter). 
Then the clipped coins are clipped another ten percent, etc. Time and 
again, England's coinage ended up 50% clipped. 

In 1275 Edward I issued his Statutum Judaico, revoking the Jewish 
license to practice usury: 

"The King has observed that over the years a great many honest men 
have lost their entire inheritances because of the usurious practices of the 
Jews. Indeed many sins have been committed as a result of these 
practices. Thus despite the fact that the Jews have been very profitable 
to the King and his predecessors, the King now ordains for the honor of 
God and for the general welfare of the people that Jews shall no longer 
practice usury in any form." 

"...The King also grants that they may conduct business as mer- 
chants, or live by their own labor.. .the liberty to buy houses.. .in the cities 
in which they live. ..those who are not skillful in business and cannot live 

by their labor may rent lands on which to farm."^^ 

Tovey wrote that the Jewish reaction was bitter: 'They soon began 
to speak out openly against Christianity itself for permitting such inhu- 
manity and they vilified our savior and his apostles with such outrageous 
blaspheming that.. .Edward was eventually forced to put a stop to them. 
He issued a proclamation threatening death or dismemberment if they 
continued." 





Wb. A 13th century English silver penny of the type that would end up 
50% clipped. The clipping of this coinage led to the 350 year expulsion of 

the Jews from England by Edward P* in 1290 AD. 



262 The Lost Science Of Money 



Roth reports that only small numbers of Jews went into trade or farming: 

"Some are said to have taken to highway robbery," some converted. 

"Large numbers saw no alternative but to carry on their old profession 

clandestinely."-^^ 

On Nov. 17, 1279 many Jews throughout England were arrested. A 
house-to-house search found large amounts of silver clippings. 
According to Roth, 680 Jews were imprisoned out of whom 273 were 
hanged along with three Christian goldsmiths. But the problem persisted 
and in July, 1290 Edward expelled all of the 16,511 Jews from England. 

The expulsion was orderly. Ship captains were ordered not to over- 
charge on fares to transport the Jews to the continent. In a celebrated 
case, a captain who had allowed a number of Jewish passengers to 
drown in an incoming tide was sentenced and hanged. 

THE JEWISH DRIVE FOR RE-ADMISSION 

In the mid 1600s lifting this ban became the main objective of sev- 
eral European Jewish communities acting in concert. Their advance 
landing party was the over one million Bibles that Amsterdam s Jewish 
printers sent into England during the prior 30 years, described in 
Chapter 9. As Hobbes indicated, the Bibles played a major role in 
undermining the monarchy. 

MENASSEH BEN ISRAEL 

The Dutch contingent was led by Rabbi Menasseh Ben Israel (see 
Chapter 9), accompanied by some of the wealthiest Jewish merchants. In 
their 1649 petition to the English Council to revoke the banishment, they 
offered £500,000 to repeal the laws against Jews; to receive Oxford's 
Bodlerian Library; and to turn St. Pauls Cathedral into a Synagogue. 
Negotiations broke off when the English government demanded 

£800,000.3^ 

Menasseh had written a short treatise, the "Hope of Israel," to be 
used by the delegation. The title appears based on St. Paul's conciliatory 
statement to Jewish examiners while he was imprisoned in Rome: "It is 
for the sake of the hope of Israel that I am bound with this chain," 
Menasseh 's book reads strangely today, as a combination of threat, 
enticement, insult, and an attempt to create guilt in the English 
consciousness. 

After fawningly dedicating the book to Parliament, he warned that 
those who act against the Jews are punished by god and gave the 
examples of King Ferdinand and Isabella of Spain; Pompey of Rome; 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 263 



andNebuchadenezzar of Assyria. Menasseh said the Messiah will come 
when Jews are dispersed all over the Earth. He said that some new world 
Indian tribes were Jewish related; and so only England banned them. 
Therefore, he argued, the Jews should be admitted to England to allow 
the coming of the Messiah! 

The second half of the book is written by a Christian, Moses Will, 
who cited Biblical passages as "Reasons we ought to love the Jews: 
...their root is holy; God's covenant with the Israelis is surer than the 
laws of Nature.. .We gentiles were gainers by the casting away.. .They 
were children and we were doggs, and we doggs have got the childrens 
meat before their bellies were full... The knowledge of Christ shall 
stream through the Jewes to the Gentiles.. .It is a duty which we owe to 

God's express command.. .They minded our conversion to God.,.etc."^^ 
This compilation of superstition and insults, being considered as a 
diplomatic appeal, shows how the Bible was used for political conquest. 
Calvinism's deification of the Old Testament had far reaching, nation 
busting consequences. 

OLIVER CROMWELL AS THE MESSIAH! 

Concurrently with Menasseh 's delegation, a group of "Asiatic Jews" 
led by Rabbi Ben Ayabel arrived "on a secret mission to conduct an 
undercover investigation into whether or not Oliver Cromwell was the 

Messiah," wrote D'Blossiers Tovey.^^ Tovey reports that for some rea- 
son they weren't very discrete and it became the talk of London. 
Cromwell, the leader of the Puritans and referred to as "The Protector," 
had been the main cause of the beheading of Charles I in 1649. 

England proceeded cautiously. The opinions of important English 
Jurists were consulted including John Dury (1596-1680), who had been 
Mary Princess of Orange's domestic chaplain. He was residing in 
Kossel, Germany, and was asked by Milton's protege Samuel Hartlib for 
an opinion in the light of the Continent's experience with the Jews. First 
he said "no" based on experience: 

"In the Cantons of Switzerland they are not admitted, no not so 
much as to travel through the country or to come into a town or city 
without leave and paying a certain duty, or to stay in a city overnight; 
which is said to befall them by reason of some heinous conspiracies to 
do mischief to the country where they had liberty to live, attempted by 
them." 

Then he said "yes" based on the Bible: 



264 The Lost Science Of Money 



"Therefore I would suggest this that to open a door in their hard 
hearts for doing good unto them... for the good which through their 
miserie is befallen to us gentiles VIZ: that we have the oracles of God 
by their meanes, preserved and conveyed to us." 

Finally he concluded "no" based on the danger: 

"Concerning the Jewes...our state doth wisely to go warily and by 
degrees in the business of receiving them. Menasseh Ben Isreal's 
demands are great, and the use they make of great privileges, is not much 
to their commendation here, and elsewhere. They have wayes beyond all 
other men to undermine a state and to insinuate into those that are in 
offices, and prejudicate the trade of others; and therefore if they be not 
wisely restrained they will in short time be oppressive, if they be such as 
are here in Germany...! can draw no argument from thence for any 

particular admittance of them at this time."^^ 

The petition stirred up much popular resentment against the Jews 
and many essays appeared against their re-admission. Tovey cites 

Wilham Prymme's, "^ Short Demurer to the Jews'''?^ 

"They (the preachers) have all turned into devils already, and now 

we must all turn Jewish." 

Menasseh Ben Israel's efforts failed and Cromwell was severely 

criticized over the Messiah farce. The Jews were not formally allowed 

re-admittance, but began quietly returning to England from around 1650, 

with Cromwell tolerating their return. 



THE TALLY STICKS 

An interesting device, especially in English financial history, is the 
tally stick. These were thin pieces of hazel wood usually 8 or 9 inches 
long which initially served as record keeping devices, from at least the 
12th century. Deep notches were cut across the sides of the tallies, to 
record a transaction. Then they were split in half lengthwise (each half 
bearing the identical notches), so that both parties had a precise record 
of the transaction. Refitting the split pieces together protected against 
tampering. 

Tallies were used in several distinct ways. At first, as tax receipts - 
the Crown used them to make sure that county sheriffs had indeed remit- 
ted all the taxes they collected. Later the Crown used certain tallies to 
purchase goods and services, and sold others for coinage in advance of 
taxes. Some varying discount was normally applied to such "sales." The 
Crown would then accept these tallies back in payment of taxes at foil 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 265 



value. Some were accepted for the taxes of specified persons and prop- 
erty, and later for the payment of taxes in general. 

Because the Crown accepted these wooden tallies in payment of 
taxes, these tallies were thus given the value of coinage, when taxes 
were due. This meant that they functioned as a form of money. 

Private parties used tallies as bills of exchange, like modem day 
checks. But such private tallies were not a money form, any more than a 
personal check is today. A government or private debt could also be rep- 
resented by a tally device; so could shares in a company. 

Tallies could also be used as records of debit and credit, where a 
clearing mechanism then adds them up and determines the net position 
of persons, as was done (without wooden tallies) at the great trade fair 
of Champagne (see Chapter 6). There is still a need for a comprehensive 
and detailed history of the tally stick, 

MONETARILY UNDERMINING THE MONARCHY 

Focusing on the monetary cause of the Monarchy's decline, W, A. 
Shaw wrote: 

"The whole reign of James I (1603-1625) was a period of inefficient 
attempts to rate the English coinage to the incessant rise in the conti- 
nental coinages, a consequent drain of specie to the Netherlands, and of 
practical closing of the mints at home." Chapter 9 discussed how the 
Dutch continually changed their ratio just enough to draw away silver. 
Indicating that the English mint was out of control, Shaw quoted an 
Amsterdam correspondent of Sir Robert Stone: 

"When the state does not keep extraordinary watch against [coin 
clipping and culling], all your silver money is thus abused by goldsmiths 
and others. And when the state does not employ such as can discover 
those offenders, but puts persons in the mint who have had no experience, 

great damage must foUow."^^ 



■'■■■■:■"■■ ■^ '■ ^\'.? '• '■5^.-!y^- •^i'-^ii-^h^:-' 



^K^ 



M/.e;;fi> 






b ':, s\ 



^-^O^M^^^ft'^ft'fi.'^i^' 





, ..,-«■ ^^-^« -^^- " r^ . O . >0^^' 

. .. j^ ° .■^'i-?"^'^^'.fi:'R?^ ■. 

. -r ,- f^ .n ^ ^...^/^'^^ .ur^c^^i^ ,or |.^.iO/,^/,,C(jU., u.<-' 

■■„■■ „' '.Rf-^.- '«<s'"&yi,.v'^"i;,;.-w\ ''''•■ 






lOc. Examples of tally sticks from the Bank of England Museum. Notches 
cut in the sides indicate the amount and type of the transaction. 



266 The Lost Science Of Money 



THE BLONDEAU INCIDENT 

The pervasive corruption v^ithin high offices of State and the Mint 
is show^n by Frenchman Pierre Blondeau's experience after he invented 
a machine that made clipping impossible, by producing a milled-edge 
coin. France quickly adopted the process. Feavearyear tells what 
happened in England: 

"In 1649 Blondeau arrived in London and placed his process before 
a parliamentary committee, who reported favorably on it; but for seven 
years the Council of State continually delayed their decision regarding 
its adoption. Meanwhile, Blondeau had to face the uncompromising hos- 
tility of the money ers. He published a pamphlet accusing them of 
making the coins of different weights, some heavy and some light, so 
that their confederates outside the Mint might take out the heavy ones 
and share the spoil with them. 

"They replied by attempting to have him arrested for counterfeiting 
when he struck off specimens of his workmanship. At last in 1656, 
Thomas Symon, a renowned engraver, prepared some dies for coins with 
the Protector's head, and these Blondeau was permitted to stamp in the 
Mint. But Cromwell decided, probably for political reasons, not to issue 
them, and Blondeau seems to have returned to France in disgust."^^ 

THE FISCAL STRANGULATION OF CHARLES 2ND (1630-85) 

England eventually threw off the Cromwellian dictatorship, 
exhumed his corpse from Westminster Abbey and hung it from Tyburn 
tree. Charles II was invited to return in 1660, but Parliament intended 
keeping him on a short leash. 

The sanitized Whig histories of this period misrepresenting Charles 
II as a spendthrift, and London's goldsmiths as good businessmen, are 
still swallowed by economists. Christopher Hollis presents a very dif- 
ferent picture in his book The Two Nations. 

When Charles II returned to England, one of the first things he did 
was send for Blondeau, and designate him the Engineer of The Mint. 
New milled edge coinage began to be produced in 1663. 

Charles needed a standing army to ward off continental threats, but 
Parliament refused to vote the funds and delivered only £800,000 of the 
£1,200,000 money that was voted, forcing Charles to use his wife 
Catherine's dowry, for expenses of state. 

Dutch financiers appeared willing to finance him but when he 
allowed legislation to pass that was counter to Dutch merchant desires, 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 267 



(hey concluded that 'The King could not be made serviceable to his 

creditors," wrote Barbour.^^ Charles was forced to borrow from the 
English goldsmiths at 8%, giving as security the first taxes later to be 
voted by Parliament. As this "security" became postponed to a more 
distant time, they demanded 20 to 30% per year. 

Charles considered issuing debased coinage to pay for the army, but 
the merchants immediately raised their prices 10% "in anticipation" of a 
debasement! He offered to drop all talk of debasement if they would loan 
him £200,000 They refused. 

"These merchants were the most unfaithful least devoted city 
merchants who refused to lend him money, showed no eagerness to pay 
taxes and in the approaching struggle were to be the strongest allies of 

his enemies," wrote Andreades.^^ 

The merchants kept some of their money stored at the Tower of 
London. Charles finally blocked the funds - £130,000 - refusing to 
release it until they agreed to lend him a pitiful £40,000. This led to a 
flight of coinage to the goldsmiths, who had secure premises and accepted 
deposits from people who no longer trusted Royal safekeeping at the 
Tower. 

Five or six of these goldsmiths were large enough to be considered 
bankers. They issued receipts for the deposits which came to be used as 
currency between merchants and others. 

GOLDSMITHS WERE BACKED BY THE DUTCH 

The goldsmiths were cheats - clipping England's coinage and 
exporting the clippings; sorting out the heavier coins for export to 
Holland for reminting into underweight coins. By the mid 1600s the 
coinage was again in dreadful condition, approaching 50% underweight. 
What has not been understood, according to Hollis, is that: 

"...the London goldsmiths who play such a large part in he story of 
Restoration England were to a very great extent mere agents, operating 
with Dutch money." 

From a Parliamentary committee report, Hollis lists four of the 
largest Goldsmiths and the amounts they owed to their Dutch backers: 
Bucknill - over £100,000; Meynil - over £30,000; Vandeput - £60,000; 

Dericost - always about £200,000.^^ 

CHARLES 2nd PAPER MONEY EXPERIMENT 

Finally in 1667 Charles 11 began to issue a kind of paper money to 
pay state expenses. They were almost a true money, and took the form 



268 The Lost Science Of Money 



of Royal Exchequer Orders to Pay, good for coinage after one year, by 
whoever held them. Taking one more step would have made them a true 
money - that is not having them payable in "money," but be the money 
themselves. Had it succeeded it would have had far reaching effects: 

"Had it come to be recognized that, when new money was 
required, it was the business of the King to issue it," HoUis noted, it 
would have changed world history. 

But HoUis contends that the goldsmith/bankers blocked this mone- 
tary experiment. Charles made the mistake of issuing his new money 
only in large denominations, so the recipient usually had to change it 
into smaller amounts. The Banker/goldsmiths offered to exchange the 
large notes for their own smaller promissory notes, which promised to 
pay coinage on demand. 

Acting in concert, the goldsmiths heavily discounted Charle's notes. 
HoUis wrote: 

"Now by refusing to make the exchange, except at a large discount 
the goldsmiths were able to bring Charle's orders into a certain discredit. 
Thus in the year 1672 - in the middle of the Dutch War - Charles, sad- 
dled with heavy expenditures which Parliament refused to meet out of 
taxation, found his creditors reluctant to accept more of their payments 
in paper orders. Therefore he said most reasonably that, since it was the 
goldsmiths who were the cause of that reluctance, it must be they who 
should be inconvenienced rather than the whole country suffer by defeat 
in war, by defeat at the hands of those who were in fact the goldsmith's 
paymasters. He therefore postponed for a year his repayment of his past 
debts to the goldsmiths. . . 

"An exception was made for the paper orders that were in the 
possession of contractors, suppliers of stores, or servants; they were to 
be redeemed... 

"The holders of the goldsmith's 'promises to pay'... went to the 
goldsmiths and demanded their cash. Of course the goldsmiths had not 
got it, for they had been promising to pay cash... to the extent often 

times what they possessed."^^ 

The goldsmiths immediately suspended payments to their depositors 
and hoarded their substantial coinage reserves. About 10,000 of their 
merchant depositors declared bankruptcy. However, the goldsmiths were 
hoarding enough money to avert a commercial disaster. Charles con- 
vinced them to resume payments to their depositors, promising them the 
Treasury would pay them in six months; but Parliament later refused to 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 269 



honor his promise and continued paying them 6% interest on the debt. 

HolHs' view of this "stoppage of the exchecquer" differs substan- 
tially from the usual descriptions. But his knowledge of the goldsmiths 
gives it enough credence to call for much more research along those lines. 

THE FREE COINAGE ACT OF 1666 

According to Del Mar, the British East India Company carrying on 
the metals trade with India used heavy bribery to help pass the 1 666 Free 

Coinage Act."^^ 

The mechanism was deceptively simple. The Act provided that 
anyone could bring gold or silver bullion to the mint and have it refined 
and stamped into coins for free. 

In practice this placed the power to increase or decrease the money 
supply into the hands of the merchant/financial classes rather than the 
Crown (i.e. the Nation). Thus if the merchants were in debt they could 
reduce the value of money (reduce the value of their debt) by having 
more bullion turned into coins. If they were creditors and had extended 
loans they could increase the value of what was owed to them by hoarding 
coinage or melting it into bullion and have it turned into coins again 
later, free of charge. 

Del Mar considered this act a watershed event in monetary history: 

"The Free Coinage Act specifically destroyed the royal prerogative 
of coinage, nullified the mixt moneys case and inaugurated a future 
series of commercial panics and disasters which to that time were 
unknown.. ..The conception of money which has grown up since the 
English Mint Act of 1666 and the French Mint Act of 1679 is that of two 
different things designed to measure one relation called value. The two 
things embraced in the confused conception of money which those acts 
are responsible for are: 

1) A commodity whose value conforms to an unknowable cost of pro- 
duction; and 

2) A series of coins, notes, etc. the value of each of which is in inverse 
ratio to their aggregate number and which can therefore have no relation 

to the cost of production.'"*^ 

"The appropriation of the Goldsmith class of the Royal prerogative 
has been accomplished in so stealthy a manner that scarcely a trace of it 
appears in historical works, and none at all in works devoted to political 
economy... a glaring proof if any were needed of the prejudice and one 
sidedness which have hitherto animated the teachers of that science. Of 



270 The Lost Science Of Money 



all the elements of political economy, money is the chiefest; of all the 
institutions of money, the right to create it is the most important; yet not 
a word concerning this once sacred right by the state is to be found in 
any of the economists''"^^ 

Del Mar is right. One finds almost no mention of it anywhere, not 
even in authoritative chronological listings of English monetary events. 
The only other source this author has found, which discusses it mean- 
ingfully is W. A. Shaw's History of Currency, 1252-1896. 



lOd. The artist has captured a twisted character element in this eerie 

candlelight portrait of William 3rd of Orange, 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 271 



THE BRITISH EAST INDIA COMPANY 

The British East India Company was the largest company on 
England's stock exchange in the 1600s and 1700s with an initial capital 
of £740,000. Next largest were the Africa, or Guinea Company, and the 
Hudson Bay Company, both capitalized at £110,000. All these were 
dwarfs compared to the Dutch East India Company, In the early 1600s 
business was going badly. Even though its book value was estimated at 
130% of par in 1664, the shares were trading at only 70% of par value. 

Then in 1677 the French Army besieged their main competitor - 
Amsterdam and the Dutch East India Company. The shares of the British 
East India Company quickly rose to 245% of par, and three years later 
to500%ofpar.44 

In 1681 numerous complaints were made to the King that very few 
people got the benefit of this: "There were 550 shareholders but most of 
the company was held by 40 persons. Shares seldom came to the market, 
and tended more and more to get into the hands of a few individuals... in 
1681 there were no regular dealings in East India Company 

shares.. .(though) there was a general lively desire to buy (them).'"^^ A 
substantial portion of the shares were owned by foreigners. 

THE COMPANY EXPORTS ENGLAND'S 
SILVER MONEY SUPPLY 

The gold/silver ratio mechanism between East and West enters our 
study again for the last time. The British East India Company was sending 
British silver coinage to India and bringing back gold, among other 
things. John Locke complained about it in 1718: 

"I am told, (they) do sometimes import (gold) from some parts of 
India at 50% profit..." 

"My author has... traced this destructive plague to the right house 
(the British East India Company), though he seems very cautious of fix- 
ing his seal upon the door. . .But the solid wealth of the Kingdom is sink- 
ing into the Indian seas, and tis high time for somebody to speak plain- 
ly and show the nation this true cause of this never before (in our time) 

heard of scarcity of silver. "^^ 

The company promoted the Free Coinage Act of 1666 because they 
wanted to monetize their imported gold bullion directly into coinage, rather 
than selling it on the market, which would have had very different results. 

WILLIAM III OF ORANGE GRABS THE ENGLISH CROWN 

William Ill's wife Mary was the Protestant daughter of the Catholic 



272 The Lost Science Of Money 



James 2"*^ (1633-1701) of England. William was invited by elements in 
England to mount a campaign to temporarily take the Monarchy. After 
years of planning, the assault, misnamed the "Glorious Revolution" 
landed in November 1688. 

William's attack had heavy Jewish financing. Isaac Lopez Suasso of 
the Hague advanced him two million gold crowns, interest free; Suasso 

was later made the Baron d'Avemas le Gras.'*^ 

From the reign of William 3rd of Orange we see the precise origins 
of the primary destructive mechanisms operating upon society at the 
present time. 

Sir Archibald Alison's History of Europe noted: 

"The Prince of Orange brought from the Republic of Holland where 
it had been already practiced and thoroughly understood the secret of 




lOe. Philosopher 
John Locke became 
part of William 3rd 
of Orange's revolu- 
tion, returning to 
London with 
William's wife. He 
wrote a book pro- 
moting toleration, 
with some excep- 
tions, including that 
it was all right for 
the Jews to remain 
religiously intoler- 
ant. This double 
standard reduced 
the seriousness of 
Locke's philosophic 
system. 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 273 



governing popular assemblies and extracting heavy taxes from popular 
communities. ..his whole effort was directed to gain the majority of the 
constituencies by corruption and of votes in Parliament by patronage.. .It 
was then that the national debt began; and government was taught the 
dangerous secret of providing for the necessities and maintaining the 
influence of present times by borrowing money and laying its payment 

on posterity. "^^ 

Taine wrote: "William 3rd's reign had been one long series of wars 
and commercial crises which had so disturbed the country... There is a 
deadness and want of spirit in the nation universally.... There was noth- 
ing to be seen but corruption in high places and brutality among the 

common people - a group of intriguers leading a populace of brutes."^^ 

Wilson wrote: "William himself arrived backed by Dutch Guilders: 
a few years later Britain found herself with a funded national debt on the 
Dutch model, and a Bank of England set up with capital assistance from 
Amsterdam. All this did not go unopposed. The bank was a Whig Bank 
supplying a Whig government with money for a whig war. Small wonder 
that the Tory country gentlemen looking on in helpless frustration bit- 
terly dubbed the system Dutch Finance."^^ 

John Locke's five-year exile ended when he returned to England 
from Amsterdam on the same boat with William's wife. Locke busied 
himself as an official of the British East India Company and wrote a 
widely circulated treatise on "Toleration" which went into six editions 
over the years. The book preached a universal toleration except to four 
groups: those who would undermine society; the intolerant; those with for- 
eign allegiance; and athiests. Locke also stretched logic to make the case 
that it was all right for Jewish society to generally practice intolerance. 

In an anti-climax, the Jews were allowed back into England by 
Royal decree, without Parliamentary action. Roth says the first Jewish 
"settlers," he calls them, brought £1.5 million of gold with them. The 
Jewish Encyclopedia remarks: "The reign of William 3rd marked a peri- 
od of exceptional prosperity for the Jews. . .the Prince employed Jews in 
his negotiations with foreign Kings, and Isaac Lopez Suasso who lent 
2,000,000 Guilders to William for his descent upon England." 

While the large Jewish moneylenders had the King in debt, the ben- 
efits don't seem to have trickled down to the average Jew, By the middle 
of the 1700s the number of Portuguese Jewish stockjobbers working in 
London for correspondents in Holland was considerable but "only the 2 



274 The Lost Science Of Money 



most prominent - Gideon and Salvadore - were on the Governments 

approved list for govemment underwriters," wrote Wilson.^ ^ He continued: 
"In spite of the emphasis laid by eighteenth century writers in 
England and Holland on the part played by the Jews in finance it is clear 
that individually the Christian firms - the Van Necks, the Stapels, the 
Barings, the Van Nottens and Muilmans, the Bosanquets, the Dorriens ■ 
were bigger and more important. It is they who moved from trade in 
commodities into legitimate banking: on the whole the Dutch 
Portuguese Jews who came to England did not find a permanent place in 
British finance." 

From this point it becomes more difficult to separate the financial 
activities of the major Jewish, Dutch and English financiers, who all 
used similar financial methods. Those responsible for the treachery of 
war finance, privately owned and controlled central banking, creating 
impossible govemment debts, with correspondingly harsh taxation, are 
not always identified with any one national, religious or racial body. 
They are more appropriately identified as a financial group or gang, not 
really large enough to be called a class. 

HoUis gets the last word on the transfer of Capitalism to England: 

^'At the turn of the century, London established itself as all that 

Amsterdam was.. .or, to put the truth with more exact accuracy, an 

international gang, which had up till then operated from 

Amsterdam, found it more convenient to operate from London 

instead."^^ 



10 THE TRANSFER OF CAPITALISM TO ENGLAND 275 



Notes to Chapter 10 

•SeeDisreali'SiSjZ?//. 

^ Hilaire Belloc, How the Reformation Happened, (New York: R. McBride, 

1928), p. 95. 

^Belloc, cited above, p. 175. 

* Glyn Davies, A History of Money from Ancient Times to the Present Day, 

(Univ. Wales Press, 1994), pp. 110-120. 

^ John Craig, The Mint - a History of the London Mint from 287 to 1948, 

(Cambridge Univ. Press, 1953), p. 4 

^ Peter Spufford, Money and its Use in Medieval Europe, (Cambridge Univ. 

Press, 1988, 1993), pp. 83-93. 

^ SpufFord, cited above, p. 94. 

^ Spufford, cited above, p. 204. 

^Alexander Del Mar, Middle Ages Revisited, (New York: Cambridge Encyl., 

1900), Ch. 22. 

^^ Sarah Breckenridge, Legal Tender. . ., (Univ. of Chicago Press, 1903), Ch. 5 

>' W.A. Shaw, The History of Currency, 1252-1896, (1896, repr., New York: 

AM.Kelley, 1967),pp. 121-2. 

^^ Alexander Del Mar, The Science of Money, (New York: Cambridge 
Encyl., 1904), pp. 97-98. The decision is found at length in Davies Reports, and 
the State Trials. 

'^ Thomas Hobbes, Behemouth, (not Leviathan!) in Francis Maseres, Selected 
Tracts Relating To The Civil Wars In England Under Charles I, Part li, pp. 458- 
59, 476, 480, 622. This can also be found in The English Works Of Thomas 
Hobbes Of Malmesbury, Collected and Edited by Sir William Molesworth, 
Bart, in 11 volumes, 1840, reprinted in 1962 by Scientia Allan. 
^^ Thomas Hobbes, Leviathan, edited by Frederick Woodbridge, (1651, New 
York: Scribners & Sons, 1930), p. 268. 

'^ James Parkes, The Jew in the Medeival Community, (New York: Hermon 
Press, 1938, 1976), p. 3. 
'^ See Parkes, cited above. 
*^ Parkes, cited above, p. 132. 
^^ Parkes, cited above, p. 140. 
'^Parkes, cited above, pp. 222-3. 
^^ Parkes, cited above, p. 163. 

^^ William R. Harwood, Yahweh and Jesus, Mythology s Last Gods, (1983 doc- 
toral thesis, accepted by Columbia Pacific university), Ch. 10, p. 155. 
^^ Roth, cited above, pp. 15-18. 
^^ Parkes, cited above, pp. 361. 

2^ Cecil Roth, History Of The Jews Of England, (Oxford: Clarendon, 1941, p. 32-52. 
2^ Parkes, cited above, p. 5. 



276 The Lost Science Of Money 



^^ Parkes, cited above, pp. 385-6. 

^^ Del Mar, Middle Ages Revisited, cited above, chapter 23. 

^^ D'Blossiers Tovey, A History of the Jews in England, (1738, repr. London: 

Weidenfeld & Nicolson, 1990), pp. Ill, 112, 114. 

^^ Roth, History of the Jews of England, cited above, p. 74. 

^^ Andreas Andreades, History of the Bank of England, (London Univ., 1 909), p, 29. 

^^ Manesseh Ben Israel, The Hope of Israel, 2^^ edition, pp. 50-52, call # 

*KC1651, rare books room, main New York Public Library . 

32 D'Blossiers Tovey, cited above, p. 153 

^^ Letter of John Dury to Samuel Hartlieb, from Kossel, reprinted in 'A Case of 

Conscience*' by John Dury, (London: Printed for Richard Wodenothe, 1656) 

^^ D'Blossiers Tovey, cited above, p. 151. 

^^ Shaw, cited above, pp. 133, 145, 150. 

^^ A.E. Feavearyear, The Pound Sterling, (Oxford, 1963), pp. 86-87. 

^^ Violet Barbour, Capitalism in Amsterdam in the 1 7th Century, (Baltimore: 

John Hopkins Univ. Press, 1950), p. 108. 

^^ Andreades, cited above, p. 20. 

^^ Christopher HoUis, The Two Nations, (1935, repr.. New York: Gordon, 1975), 

pp. 19-22. 

^^ Hollis, cited above, pp. 19-22. 

^^ Alexander Del Mar, History of Monetary Crimes, (Washington: Del Mar 

Society, 1899) 

^'^ Alexander Del Mar, Money and Civilization, ( 1 886, repr., New York: Burt Franklin, 

1969),pp,209-10. 

^^ Del Mar, The Science of Money, cited above, p. 79. 

^^ Richard Ehrenberg, Capital And Finance in the Age of the Renaissance, 

(repr., New York: A.M. Kelley, 1967), pp. 360-70. 

"^^ Ehrenberg, cited above, p. 364. 

^^ John Locke, Remarks Upon a Late Ingenious Pamphlet by an Impartial Hand 

(Anonymous), p. 19. 

47 Cecil Roth, cited above, pp. 184-185. 

4^ Archibald Alison, History of Europe from Fall of Napoleon to Accession of 

Louis Napoleon, (Edingurgh: WiUiam Blackwood & Sons, 1852) 

^^ Hipolyte Taine, Histoire De La Litterature Anglaise, vol. 3, 1709. 

^^ Charles Wilson, Holland and Britain, (London: Collins, 1946), pp. 1-20. 

^' Charles Wilson, Anglo Dutch Commerce in the I8th Century, (Cambridge, 

1941), pp. 110-17, 

^^ Hollis, 77?^ Two Nations, cited above, p. 63. 



277 



CHAPTER 11 



HATCHING THE 
BANK OF ENGLAND 



*'Very few foreigners have understood the Bank... 
They have always considered their notes as Government paper." 

Sir Francis Baring 



The "Renaissance of the North" transformed European economies in 

the 16^^ and 17*^ centuries, but didn't create a corresponding awareness 
of monetary principles. The operators on Amsterdam's Stock Exchange 
grew more powerful based on a metallic money system, obtained in 
large part by two centuries of genocide against the Central and South 
American Indians. Still, the inadequacy of this abundant gold and silver 
money was indicated by the Bank of Amsterdam's secret credits to the 
Dutch East India Company for over a century, 

England's Free Coinage Act of 1666 removed the control over 
money from the Crown and the Nation, and placed it in the hands of 
merchants. However, the intention of those able to influence history was 
not to have this power so scattered, but to re-constitute it in the hands of 
a new and different kind of sovereign, one that would take the institu- 
tional form of a privately owned and controlled central bank. 

SCIENCE OF MONEY IS RECOVERED - BUT PRIVATELY 

While the Bank of Sweden was the first western bank of issue, in 
1661, it was the formation of the Bank of England that would be of historic 
importance. It signaled a recovery of the lost science of money. However, 
since it was organized for the private power and profit of a small group, 
it was an illicit misuse of the science for private gain, instead of for 



278 The Lost Science Of Money 



societal use, as its true nature requires. In this important sense, it repre- 
sented a terrible regression in monetary development and was like plac- 
ing a high powered weapon in the hands of a potential sociopath. 

Furthermore, those behind the Bank promoted a false concept of the 
nature of money in their efforts to obscure the real nature of the Bank 
and its source of power. While creating abstract money, they put forward 
a backward commodity concept of money as gold and silver, pretending 
the necessity (and possibility) of converting the abstract money into 
metal. Openly defining money as a creation of the law - as Nomisma- 
would have probably brought an end to the Bank's privileged position. 

Instead, the Bank of England institutionalized usury in the modem 
world, usury as defined in Chapter 7 - a calculated misuse of the money 
system for private gain. 

THE VEIL OF OBSCURITY RISES 

From the formation of the Bank of England in 1694, we have a 
complete history of its structural elements and regulations and we have 
informed sources presenting the attitudes towards the Bank, including 
some opposing viewpoints. There are over 200 entries on the Bank of 
England at the great New York Public Research Library, but hardly an 
entry on the Bank of Amsterdam. 

The first serious work on the Bank was Greek Professor Andreas 
Andreades' The History of the Bank of England in 1909. While facts 
abound on the Bank, the glue that holds them together - the motivations of 
those pulling the levers of power from behind the scenes - are still elusive. 

THE REAL NEED FOR A BANK 

London had no official institution in charge of currency exchange, 
bill depositing, and payments clearing, but had hundreds of independent 
unregulated goldsmith/bankers. The money market was chaotic with 
varying rates of exchange, as it had been in Amsterdam prior to the 
founding of the Bank there. 

Coin clipping was almost non-existent in Venice but appears to have 
been a primary activity of merchants in Northern Europe. Amsterdam's 
bank protected her coinage from the clipper, but in England the societal 
purpose of money was submerged to the illicit activities of the gold- 
smith/bankers from whom better behavior could have been expected. 

In the mid 1690s the English coinage was again in dreadful condi- 
tion, being clipped and about 50% underweight. There was a £40 reward 
for denouncing a clipper, and the clipper could go free if he denounced 



11 HATCHING THE BANK OF ENGLAND 279 



two more clippers. Hangings were held regularly. On just one day, seven 

men were hanged and one woman burned at the stake for coin clipping! ^ 
The goldsmiths were charging 30 to 80% yearly on small loans. 

According to Andreades, their greed and flagrant anti-social behavior 

made them "hopelessly unpopular." The public therefore wanted a bank 

to regulate the currency and to lower interest rates: 

"The promoters could point.. .above all to the Amsterdam Bank.. .at a 

time when imitation of the Dutch and their institutions was exalted into 

a regular system.'*2 

The Bank of Amsterdam's exact workings were not widely known 

in London, and several misapprehensions about it existed at the highest 

levels. For example, they thought that it regularly made loans. 

NUMEROUS PROPOSALS FOR A BANK 

From about 1650 to 1710, J. Keith Horsefield's study, British 
Monetary Experiments, counts at least 60 monetary proposals of various 
types including nominal money, land banks, glorified pawnshops, and 
tax anticipation notes. There were even two proposals for paying a 
negative rate of interest, anticipating some theories of Silvio Gesell. 

William Paterson had made at least four proposals.^ 

PATERSON'S PROPOSAL, MONTAGU'S BANK 

However, it was not until the takeover of William 3rd that the plans 
for a bank by the Scotsman William Paterson, a relative of John Law, 
were adopted in 1694. Paterson was bom in 1658 to moderately well off 
parents. Though brilliant, he received little education. In 1685, in 
Amsterdam, he became involved in William 3rd's 1688 revolution. 
Returning to London with Williams army, he became rich and influen- 
tial organizing the North London Water Company, with the help of 
Montagu. 

"That Paterson's plan was even adopted can be explained only by 
its. , .being sponsored by two men of unusual influence and determination - 
Charles Montagu (1661-1715), Chancellor of the Exchequer; and Michael 

Godfrey, nephew of Sir Edmundbury Godfrey," wrote Horsefield."^ 

Montagu's family name originated in the local conical hill (mount 
acute) on which their castle was built and they continuously held 
various positions of importance in England for five centuries, back to the 
Norman invasion. Montagu should be considered the true founder of the 
Bank of England. He put the plan through Parliament and Godfrey got it 
past London's merchants. In that process Montagu pointed out that over 



280 The Lost Science Of Money 



the previous ten years the public lost two to three million pounds by 
goldsmiths going bankrupt. 

Paterson was more than a front man, though. His biographer Saxe 
Bannister says he enjoyed "intimate relations with the rich Hebrews of 

London and probably Amsterdam and Germany."^ Paterson had infor- 
mation about the Bank of Amsterdam's real position: 

",..if very good intelligence doth not lie there is but one full fourth 
part in money to what in truth and justice there should be, the other three 
fourths parts having been taken out by the magistrates to maintain the 
wars against the King of Spain, and so risking (if every bird should call 

for his own feathers) the public faith of the City."^ 

Paterson was an interesting man and not the "evil genius" some have 
made him out to be. He was trying to aid English society and to make a 
fortune doing it. It would be interesting to know Montagu's motives. He 




J I a. 

William Paterson, 
reputed "founder" 
of the privately 
owned Bank of 
England, had put 
forward four plans 
(among at least 60 
proposals from oth- 
ers) for a new bank, 
after the so called 
Glorious Revolution 
ofWilliam3rd.But 
Charles Montagu 
and Michael 
Godfrey were the 
powers behind the 
Bank. Paterson 
later condemned 
the Bank's 
Directors and 
stockholders and 
tried to dismantle 
the national debt it 
was building. 



11 HATCHING THE BANK OF ENGLAND 281 



was a friend of Isaac Newton, and of Edmund Halley (of comet fame). 
Montagu may have had convoluted reasons for inviting a Dutch Prince 
to take England's throne, and for creating the bank that would finance 
his wars and allow foreign money lenders to dominate England's money 
system with corrupt eastern techniques. Was he being to England what 
Alcmeonides was to Athens as postulated in Chapter 1 - the paid insin- 
uator of eastern influence? Probably the situation was more complex, as 
is often the case in money system questions. 

BANK OF ENGLAND FOUNDED IN STEALTH 

Recounting the stealth with which the "revolution bank," as it was 
called, was pushed forward, Paterson remarked: 

"All this while, 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, to prevent, or at least gradually to soften and remove, the 
prejudices and bad impression commonly conceived in the minds of men 
against things of this kind before they are understood. But the sort of 
people who ought, and in whose power it was to encourage this under- 
taking, could no ways understand it. So others seemed to understand it 
too much and would only have it proposed at 4 or 4 1/2 % (paid to 
depositors)... 

"But afterward it was found convenient to put it to hazard and 
expose so much of the nature of the thing, and its constitution as was 

needful to have it espoused in Parliament."^ 

In a manner that would later set the pattern for the enactment of 
monetary laws in the English speaking world, the Bank of England's 
authorizing legislation was quietly passed, as a rider to a tax bill on 
shipping tonnage! 

ORGANIZING THE BANK 

The ostensible reason for chartering the Bank was to obtain a loan 
of £1.2 million in gold for William 3rd's government. The £1.2 million 
of shares were to be subscribed by the public in gold coin or bullion. The 
entire proceeds were to be loaned to the Crown at 8% interest. Once 
operating, the Bank would accept deposits, paying 4% on them and 
would issue its own bank notes which would circulate as money and 
which the Bank would keep redeemable in gold. 

At first these notes were to have no legal tender power but were 
to be acceptable and payable by the Crown for all things. 



282 The Lost Science Of Money 



The Bank was to be allowed to create bank notes in an amount equal 
to the money it lent the Government. This is another way of saying it 
could use government debt as its reserves or collateral. For example: the 
Crown wants a loan from the Bank; the Bank has no money of its own, 
but creates the money for the loan out of thin air, based on the reserve 
asset of the Crown's resulting debt to it. 

This kind of reserve asset was really better than gold or silver and 
the promoters correctly argued that the Bank would be "founded upon a 

reserve that cannot fail but with the Nation."^ 

What they did not point out was that although the Bank would 
be paid interest on this created loan, the Bank was completely 
unnecessary in this money creation process. The Government could 
have created its own paper notes based on the same security and not 
paid any interest on it to anyone! And unlike the Bank of Amsterdam, 



lib, Charles Montagu, the real force behind the founding of the Bank of 
England. His family had played an important role in England from 

the time of the Norman Conquest 



11 HATCHING THE BANK OF ENGLAND 283 



which was owned by the Government, the Bank of England was 
owned and controlled by private individuals. 

IMMEDIATE OPPOSITION TO THE BANK 

Substantial opposition to the Bank arose immediately. Some came 
from coin clippers such as the goldsmiths, who wanted no competition 
from the Bank. The Tories, England's landowners, opposed it as they 
saw the power it would give to their commercial political opponents - 
the Whigs. Others opposed it for sound economic, or moral reasons. 

The Lower House of Parliament objected that this would be a bank 
in the State without being under the control of the Government.^ 

One of the monetary thinkers of the time, William Lowndes, argu- 
ing against the Bank, said: 

"...who can think that posterity will be willing to pay a tax of 
£110,000 per annum (on the original loan) not for the support of their 
own government, for the time being, but to go into the pockets of private 
men, strangers as well as natives for money advanced to their ancestors, 
when it will be in their power to acquit the public of such a burden?,.. 

"Future Parliaments will always have power, and may be told it is in 
their interest to exonerate the Nation of such endless burthen as this will 

otherwise be."^^ 

Lowndes didn't realize that through constant warfare vast amounts 
of new debt would be piled onto the original, making it impossible to 
pay in gold and silver. 

THE BANK'S CHARTER 

The Bank was given a charter to operate for 12 years, starting July 
27, 1694, Of the £1.2 million share subscription, no one person was to 
own over £10,000 (later 20,000) though nominee ownership through 
another person couldn't be stopped. 

There were at first 1300 shareholders. The whole capital was subscribed 

in gold within three days, 1/4 of it on the first day.^^ 

The shares had a provision whereby an additional 40% of par value 
could be called from the shareholders in gold, by the Bank's Directors. 

At first it would only lend its paper notes to the Government at 8% 
interest, plus £4,000 annually for expenses. 

The Bank also took deposits, paying 4% on them, and discounted 
bills for merchants. Godfrey always emphasized this activity, though it 
was a small part of the Bank's business. 

The Bank of England was not even given the monopoly of note issue 



284 The Lost Science Of Money 



in England until 1844. Other private banks could issue their own paper 
notes until then. 

The Bank's notes had the one supreme advantage of being 
accepted by the Government for all payments due, and of being paid 
out by the Government for all state expenses. Thus they came to be 
identified with the Government: 

"Very few foreigners have understood the Bank.. .They have always 
considered their notes as Government paper," wrote Sir Francis 
Baring. ^^ Probably most Enghshmen did also. Adam Smith, the "father 
of political economy," wrote nothing to dispel this image in the section 
describing the Bank's history in The Wealth of Nations (1776): 

"The stability of the Bank of England is equal to that of the British 
Government. . .It acts. . .as a great engine of state."^-^ 

THE TORIES' "LAND BANK" FIASCO 

Opposition to the Bank continued. The Tories formed a competing 
bank in April 1696 - Chamberlain's Land Bank. The Chamberlain family 




lie. The Bank of England moved into these premises on Threadneedle 
Street in 1734. The complex includes two buildings in the rear. 



11 HATCHING THE BANK OF ENGLAND 285 



had been advocating such a bank since 1649, and the idea was that it 
would use land as a reserve asset. It would liquefy the Tories' main holding, 
by issuing an equal amount of paper notes for the value of pledged land. 
This was based on the flaw^ed concept of liquifying property, which 

arises from time to time.^ 

Bank of England shares plunged from £108 to £83 in 2 weeks on this 
development. But in the financial battle between landowners and finan- 
ciers, the landowners were hopelessly out of their element. By August 
1696, subscriptions only attracted a few thousand pounds and the 

Chamberlain Bank was abandoned.^'* 

The "landed interest" may have known all about land grabbing and 
squeezing peasant farmers off the land, but had few clues to the dark arts 
of banking. They had attempted to establish the bank in the middle of a 
general re-coinage, when coin was extremely scarce. 

But on a deeper level, the landowners had wanted the bank in order 
to get money from it, not to invest money into it. While they were land 
rich, they were cash poor and generally wanted to borrow money. This 
historical case was an important indication of the eventual dominance of 
the landed interest by the money power. 

With the Chamberlain Land bank out of the way. Bank of England 
shares quickly rose from 83 to £148 by the year 1700. 

FIRST FAILURE OF THE BANK OF ENGLAND 

Also affected by the re-coinage, in 1696 the Bank failed for the first 
time, just two years after its founding, when it could no longer redeem 
its paper notes in coinage. Paterson insisted that the Directors use their 
power to call for more gold from the shareholders, and he scolded them: 

"Would they be indulged at the price of the Nation's suffering?...! 
am sure they deserve no indulgence at all. ..It is not impossible that they 
may return to their senses and act as becomes men... therefore as we usu- 
ally bid beggars work, so must I bid those men pay.. .They are opulent 
and can do it.. .they ought upon the first sense of distress to have called 
in the forty percent fi-om each of their members.. .instead of calling for 

it,.. .they have borrowed 20% of their members as a favor,"^^ 

Paterson had resigned as a Director over such disagreements after 
about a year. 

A) The flaw: as new money is created to liquefy property, the value of property 
keeps rising with the additional liquidity, so even more money is created, etc. 
Eventually the bubble must burst, as interest costs grow. 



286 The Lost Science Of Money 



THE GOLDSMITHS ATTACK 

In 1707 a conspiracy of goldsmiths, lying in wait, engineered a 
major run on the Bank just before its charter was to be renewed. First, 
Sir Francis Childs, one of the largest goldsmiths, refused to accept Bank 
of England notes. Then they tried to break the Bank by redeeming 
£30,000 of its notes which they had hoarded, knowing the Bank could 
not pay in coinage. The Goldsmiths had found it easy to financially 
bludgeon the old Monarchy but this time they were up against an oppo- 
nent more experienced in the tactics of monetary brawling. 

The Directors of the Bank adopted a brilliantly simple strategy: they 
refused to redeem the Bank's notes that were held by the goldsmiths but 
continued the redemption for all of their other customers! 

The directors made a 20% call on their shareholders, weathered the 
crisis, and had their charter renewed for 21 years. The capital of the 
Bank was raised to £14.4 million, and they were given a monopoly on 
banknote issue within 65 miles of London. 

The lesson is that one need not let a money system - even a bad one 
- be destroyed by concerted private attack if one has the ability to isolate 
the monetary aggressors and treat them appropriately (computers have 
now made that even easier). 

GRADUAL DEVELOPMENT OF THE BANK 

The Bank of England succeeded where others failed because it took 
on each new situation as it came, without ideological commitment. It did 
not hesitate to break its own rules and promises when survival dictated; 
and it fit the Kings need for war finance. 

The bank's main protection was that its complexity kept people 
from understanding the true source of its power - the money cre- 
ation process. The Bank of England accumulated power very gradually. 
For many years its notes circulated only in London. Between 1694 and 
1870, 25 years never passed without a crisis at the Bank. 

The Bank's slow growth in privileges indicates that aUiances with 
other political powers which might have speeded its development were 
not sought or were not possible, keeping its power base and riches with- 
in a very small circle: 

"A favorite accusation was that the Bank had fallen into the hands of 
a close ring of related families which put their interests above those of 

the commercial world generally," wrote Horsefield.^^ 



11 HATCHING THE BANK OF ENGLAND 287 



RICARDO ATTACKS THE BANK'S 
MONEY CREATION POWER 

One man who exposed the Bank's essence was an EngUsh Jew 
named David Ricardo (1772-1823). His clear thinking (on the Bank, not 
economics), simplicity of statement and courage stands out as an impor- 
tant contribution to understanding the Bank. In 1815 Ricardo wrote to 
Malthus: 

"I always enjoy an attack upon the Bank and If I had the courage I 
would be a party to it." 

In 1816 he attacked the basis of the Bank's existence: 

"They have the power, without any control whatever of increasing 
or reducing the circulation in any degree they may think proper: a power 
which should neither be entrusted to the State itself, nor to any body in 
it...When 1 contemplate the evil consequences which might ensue from 
a sudden and great contraction of the circulation as well as from a great 
addition to it, I cannot but deprecate the facility with which the state has 

anned the Banks with so formidable a prerogative."^ '^ 

By 1823, Ricardo worked up the courage to propose establishing an 
English National Bank. He explained why the government should issue 
its own money: 

"Suppose that a million of money should be required to fit out an 
expedition. If the state issued a million of paper.. .the expedition would 
be fitted out without any charge to the people; but if a bank issued a 
million of paper, and lent it to the government at 7%,.. .the country would 

be charged with a continual tax of 70,000 per annum. . ."^^ 

Ricardo favored a government bank because: 

"It is evident therefore that if the Government itself were to be the 
sole issuer of paper money instead of borrowing it of the bank, the only 
difference would be with respect to interest: the Bank would no longer 
receive interest and the government would no longer pay it... It is said 
that Government could not with safety be entrusted with the power of 
issuing paper money - that it would most certainly abuse it... I propose to 

place this trust in the hands of three Commissioners."^^ 

As a member of Parliament and successful stock trader, Ricardo 's 
observations on the Bank were hard to ignore. Notwithstanding that the 
Bank had become entrenched, in 1 844 several factors forced the note 
issuing function to be placed under a separate department of the Bank 
under some safeguards, and England was no longer required to pay 
interest on her debt to the Bank. 



288 The Lost Science Of Money 



Professor Henry Dunning Macleod attacked the Bank's subterfuge 
in 1855: 

"It is perfectly clear that its principle is utterly vicious... Stated in 
simple language it is this: that the way to create money is for the 
Government to borrow money. That is to say A lends B money on 
(condition) A is allowed to create an equal amount of money to what he 
has already lent. As a general principle what can be more palpably 
absurd!"20 

And yet this same absurdity operates through the banking mechanism 
of the Federal Reserve System today. 

SCIENCE OF MONEY MISUSED 

The founding and operation of the Bank of England demonstrated 
the essential elements of the science of money were known to the Dutch, 
Jewish, and English moneylenders who organized and controlled it, for 
those principles were relied upon in the functioning of the Bank. 

Two of those essential principles are that the value of money 
doesn't depend on the value of the material of which it is made, but 
on the law. "Anything may become a circulating medium; paper is 
as good a representative sign as gold, and in many instances it is 
better../' wrote Sir Francis Baring.^* 

Secondly, the law can normally confer the power of money onto 
something by making it acceptable in payments due to the 
Government for taxes and duties. A full legal tender declaration is 
not needed to make something money. 

Legal tender status, meaning that it also had to be accepted by 
private individuals, wasn't insisted upon by the Bank's founders and 
wasn't conferred on the Bank's paper notes until 1833, one hundred and 
thirty nine years after its founding, the same year in which it was 
required to publish reports on its activity. 

The paramount monetary principle, calling for justice in monetary 
structures, was ignored. 

A CORRUPTED SCIENCE OF MONEY PRODUCES 
DEFORMED RESULTS 

Using the correct principles of money in this immoral manner was 
bound to produce results harmful to humanity. The major effects of the 
malformed Bank Of England were continuous warfare, an unpayable 
debt, and excessive taxation. It spawned a speculative financial order, 
and led directly to horrors such as the Irish Potato Famine. 



11 HATCHING THE BANK OF ENGLAND 289 



CANTILLON'S 1759 OBSERVATIONS ON THE WARS 

Philip Cantillon, a Physiocrat who emigrated from France to 
England and was one of the more outspoken and refreshing economic 
minds of the mid 1700s, wrote: 

"The Consequences of our present Burdens on trade are opposite to 
what the public was made to believe: the fallacies lay in what monied 
schemers and stockjobbers asserted, to wit, that profits in trade would 
increase in proportion to their projected taxes and paper credit 

"...but the views of these persons, were their own private interests, 
and that of supplying the temporary Exigence of the State for carrying 
on a ruinous system of war, in compliment to a Sovereign Prince, who 
to indulge his resentment to Louis IX of France, and his attachment to 
the interest and profit of his native land [Holland] laid the foundation of 
those measures which have made the blood and Treasure of this country 
subservient to almost every Quarrel on the Continent 

"...confining ourselves to our proper and natural strength at sea 
...would not answer the selfish views of ..Holland, nor give opportunities to 
the money-schemers of those times realizing the immense sums they 
acquired at the expense of the public;... hear the words of the late Dr. 
(Jonathan) Swift: 

"'Most of the Nobility and Gentry who invited over the Prince of 
Orange.. .out of regard to the necessity of the Kingdom, and the Safety 
of the People but without intention of... making it a standing 
measure.. .soon after, a set of men who had nothing to lose... to fasten 
wealthy people to the new Government proposed those expedients of 
borrowing money at great premiums and exorbitant interest. It was 
argued that the war could not last three campaigns but while the war 
continuing and growing more expensive, taxes increased and Funds (the 
debt) multiplied every day until they have arrived at the astonishing 
height where we now behold them; and that which was at first a corrup- 
tion is at last grown necessary. 

"'...there has been brought in such a complicafion of Knavery and 
Cozenage [fi'aud, cheating] such a mystery of iniquity, and such a jargon 
of unintelligible terms to involve it in, as were never known in any age 

or country of the World,., '"^^ 

Cantillon died in 1759, and was spared the further refinements in 
this "iniquity and jargon of unintelligible terms" that were loosed upon 
the world by Adam Smith's Wealth of Nations. The edifion of CanfiUon's 
book read by your author was self published, posthumously. He arranged 



290 The Lost Science Of Money 



for the printing and for five London bookstores to carry the book, and 
printed their addresses near the title page. 

WARFARE EXPANDS THE DEBT 

The Bank continually supported the quarrels of the Orangist 
Protestant Dynasty, and supplied the Government with the means of car- 
rying on war: 

"The Bank... became the principal means of the success of the campaign 
in the following year, 1695, particularly in reducing the important city 

and fortress of Namur," wrote Andreades.^^ 

(Godfrey was blown away by a cannon ball while at Namur on Bank 
business.) 

Andreades' 1909 summation of England's national debt showed its 
relation to warfare: 

ENGLAND'S NATIONAL DEBT (in millions of £) 

War period 

1688-1697 
1702-1713 
1739-1748 
1756-1763 
1776-1785 
1793-1815 



cost of the war 


accrued national debt 


32.6 million 


14.5 


50.7 


21.5 


43.7 


29.2 


82.6 


59.6 


97.6 


117.3 


831.5 


504.9 



PATERSON ATTACKS THE DEBT 

William Paterson saw the inequity of the National debt. In 1715 he 
had been living in poverty when Parliament voted him a huge £18,000 
payment in appreciation for his contribution in founding the Bank. 
Nevertheless he remained opposed to the Bank's building up debt and in 
1717, no doubt using some of the money Parliament gave him, he 
published a proposal for paying off the national debt: 

"It gave so much offense to the stockjobbers that some of the mean- 
er sort caused the book to be burnt before the Royal Exchange.. .Several 
of them of late not only applied themselves but brought up their children 
wholly to this present traffic in the public securities; and if that were once 

taken away they should thereby lose their livelihood," wrote Bannister.^^ 
A century later in 1819, David Ricardo also put forward a plan to 
pay off the national debt. At the time of Paterson's proposal, it was really 
feasible to do it. By Ricardo 's time, the debt had grown so immense that 
his plan calculated that a necessary contribution of 15% of the private 



11 HATCHING THE BANK OF ENGLAND 291 



property of all Englishmen would be required to pay off the debt! 

Needless to say his plan was not acted on.^^ 

The Bankers did not want the debt paid. Just the opposite. They 
wanted to build up a real interest charge into perpetuity on the 
"money" they had created out of thin air and loaned to the 
government. 

RICARDO IDENTIFIES THE BANK'S WAR MOTIVE 

David Ricardo diplomatically made it clear that, while England and 

Englishmen suffered from the wars, the Bank gained greatly by them: 
"The war, which has pressed heavily on most of the classes of the 

community has been attended with un-looked for benefits to the Bank; 

and that in proportion to the increase of the public burdens and difficulties 

have been the gains of that body."^^ 

Of course he was aware that these "un-looked for benefits" after a 
century of constant warfare, were quite premeditated. 

A deadly example of the public relations work the economists would 
do for their masters is the way Adam Smith glorified warfare: 

"The art of war, however, as it is certainly the noblest of all arts..," 

Adam Smith stressed the desirability of keeping an expensive stand- 
ing army and grossly insulted all Englishmen by falsely blaming 
England's continuous warfare on the English people: 

"Wars would in general be more speedily concluded and less 
wantonly undertaken.. .The foresight of the heavy and unavoidable burdens 
of war would hinder the people from wantonly calling for it when there 

was no real or solid interest to fight for."^^ 

PETTY CORRUPTION AT THE BANK 

The Bank of England's accounting records were not made public 
until 1833. EarUer, Ricardo made estimates of the expenses and income 
of the Bank and concluded that it was overcharging the Government for 
administrative functions. He wrote: 

"Is it not lamentable to view a great and opulent body like the Bank 
of England, exhibiting a wish to augment their hoards by undue gains 
wrested from the hands of an over burthened people?" 

The key to the bank was not the ownership but the control of it, for 
the Bank even abused its shareholders: 

"...not only do the Bank refuse, in direct contradiction to an act of 
Parliament, to make a division of their accumulated profits, but they are 
equally determined not to communicate to the proprietors what those 



292 The Lost Science Of Money 



profits are, notwithstanding that their bye-law enjoins (it).. .twice a year...Since 

1797 no statement has been made of the condition of the Bank."^^ 

Ricardo related the story of one shareholder, Mr. Allerdyce, who 
made a written demand at the meeting of March 19, 1801 that the 
accounts should be produced, and who was apparently ready to take the 

matter to the Kings Court, but died suddenly.^^ 

RICARDO'S UNTIMELY DEATH 

And so too was David Ricardo dead, of an ear infection in 1823, at 
only age 5 1 , within a year of putting forward his plan for the National 
Bank, which would have ended the privileges of the Bank of England. 

THOMAS PAINE'S ATTACK ON THE BANK 

America's Tom Paine also attacked the warfare operations of the 
Bank of England in a 1796 pamphlet optimistically called The Decline 
and Fall of the English System of Finance. Paine discovered that each of 
England's successive wars was costing the nation about one and one-half 
times the previous war, and that there was a corresponding buildup of the 
national debt. Paine demonstrated that the Bank never had enough gold 
to cover its notes, and attempted to force a crisis there, triumphantly 
concluding his expose: 

"I have now exposed the English system of finance to the eyes of all 
nations; for this work will be published in all languages. In doing this 1 
have done an act of justice to those numerous citizens of neutral nations 
who have been imposed upon by that fraudulent system...! have 
revenged the. . .piratical depredations committed on the American com- 
merce by the English government." 

Thus even Paine was misled into thinking the Bank to be a govern- 
ment institution, but in 1797, within a year of publication of his pam- 
phlet, convertibility of the Bank of England's notes had to be canceled 
and it was once again disgraced in crisis. 

THE SOUTH SEA BUBBLE - "FROM CADIZ TO THE DAWN" 

The Bank of England's money system and the Whig party's version 
of free enterprise helped create financial and cultural conditions in 
which widespread speculation and dishonesty thrived. The first such 
wave of fraud engulfed England in 1720, thirty-two years after the 
Bank's founding, and became known as the South Sea Bubble. At the 
center of the storm was the South Sea Company (the SSC) founded on 
August 1, 1711 to trade with Spanish colonies in South America. 



11 HATCHING THE BANK OF ENGLAND 293 



Ud. John Law's 
monetary program 
for France initially 
had highly positive 
results. But when 
the fugitive English 
gambler turned to 
grandiose schemes 
of power and 
monopoly, he quick- 
ly brought France's 
economy crashing 
down. 




The company was originally a Tory creation of the Earl of Oxford, 
James Harley, and was referred to as the Earl of Oxford's masterpiece, 
or by Whigs as "Oxford's brat which must be starved at nurse." ^^ 

England had been at war for 20 years. Contrary to Adam Smith's 
propaganda, the popular sentiment for peace was being ignored as the 
Bank of England dictated war policy. Lord Godolphin's request for a 
new war loan of £600,000 was granted, but as he was leaving the meeting, 
the Governor of the Bank, Sir Gilbert Heathcote remarked: 

"Pray, my Lord, don't let us have a rotten peace." 

"Pray, tell me, what do you call a rotten peace?" asked Godolphin. 

"I call anything a rotten peace unless we have Spain..." Gilbert 
answered. 

"But, Sir Gilbert. . .we are railed at every day for having a mind. . .to 
perpetuate the war, and we are told we shall be worried next winter 
(elections), for refusing a good peace, and insisting upon terms which it 
is impossible for France to perform." 

"They are a company of rotten rogues that tell you so," replied Sir 



294 The Lost Science Of Money 



Gilbert. "I'll warrant you, we'll stand by you."-^^ 

Harley hated the Bank of England and when the Bank's impossible 
terms scuttled peace with France in 1708, the Tories were able to 
temporarily oust the Whigs, winning the election by a two to one major- 
ity. Harley's protege Daniel Defoe then devised the idea for the South 
Sea Company. The company would assume £10,000,000 of annuities 
debt of the British Government, on which the government would con- 
tinue to pay interest to the company but at a slightly reduced rate. 

The founders' notion was that, with success, those holding the 
debt/annuities could be convinced to exchange them for shares in the 
SSC. In addition to the financial benefits from converting the debt and 
from trade, was that this trade required peace with Spain. The landown- 
ers knew they were more vulnerable to warfare than Whig merchants. 
The landowners would be forced to pay for warfare while the merchants 
could more easily profit from it. 

But the Company soon faltered. There was a six-year delay before 
the first slave ship sailed in 1717, and its slave trade proved unprofitable. 
The Company was four years old when King George I reluctantly 
arrived in England from his beloved Hanover, to assume his reign over 
about five million Englishmen. 

Unable to interest George in the Company, the Directors brought the 
Prince of Wales in as a shareholder and Deputy Governor from 1715 to 

1718. King George himself became Governor of the company in 1718.^^ 

ENTER JOHN LAW (IN FRANCE) 

Scotsman John Law, son of an Edinburgh goldsmith, had made a 
fortune in gambling by understanding mathematical probabilities at a 
time when few did, and by playing the odds. He had a standing offer to 
bet 1,000 pounds against 1 shilling, that no one would be able to throw 
the dice and get double sixes for six throws in a row. 

John Law was in exile in France after killing an Englishman in a 
duel over a woman. He cultivated a sophisticated high profile image in 
Paris society's gambling establishments, displaying no emotion whether 
winning or losing. He had studied the Bank of England and working 
through the French Regent, the Due d'Orleans, had a plan to establish a 
French state-owned bank to extend credit throughout the realm. 
However, we are told that the French Council of Finance would only 
allow a privately owned bank, with John Law as manager, in 1717. 

The introduction of Law's system of credit at first had excellent 



11 HATCHING THE BANK OF ENGLAND 295 



results, as the introduction of bills of credit had done 27 years earlier in 
the Massachusetts colony (see Chapter 14). However, John Law had a 
much more grandiose vision called the Mississippi Company (the MC) 
and its purpose was to develop the rich French lands in North America. 

The MC was established in August 1717 and one hundred million Fr. 
Livres (5 million British Pounds) were raised at 500 Livre per share. 
Later that year the foundations for the present day city of New Orleans 
were laid in the new world. 

Development proceeded slowly in spite of Law's creative efforts 
promoting emigration. But Law's activities also included financial 
manipulation of the type that recently constituted much of Wall Street's 
activity. He got control of France's colonial trade by acquiring the tobacco 
monopoly in 1718 and absorbing the (French) East India Company, the 
China Company, and the Africa Company in 1719. 

The shares went from 300 in May 1919, to 1,000 Livres in June. In 
July he got the monopoly of minting the coinage and the shares rose to 
2,000. In August the MC obtained the franchise of farming the taxes. 




He. Crowds of speculators gathered daUy on Paris Rue Quincampoix to specu- 
late in shares of John Law's Mississippi scheme until the bubble broke in 
January 1720. Speculative fever and market manipulation then swept London, 
fueling the South Sea bubble, which burst in August. The "kid glove" treatment 
of the criminal South Sea Directors would set the standard for non-punishment 
of financial crime in the English speaking world ever since. 



296 The Lost Science Of Money 



The shares rose to 5,000. These acquisitions were purchased by issuing 
more MC stock, at the advancing prices. 

Then, taking a cue from the earlier partial English debt buyout of the 
South Sea Company, the MC proposed to take over the French national 
debt of 1.5 billion livres, by loaning that amount to the government, 
leaving only the MC as the government's creditor, at a reduced rate of 
interest. Where would the company get the money? Law knew that most 
of the creditors being paid off by the French Government would buy new 
issues of the MC with this money. The shares continued climbing to 

10,000; 13,000; 15,000; as high as 18,000 Livres (or 900£) per share.^^ 

New fortunes, both apparent and real, were being made by the crowd 
that gathered daily on the rue Quincampoix from all parts of France, and 
even Holland, Germany, and England. However, the shares had been 
advancing thanks to public frenzy buying on margin using an installment 
plan of 12 monthly payments. 

Meanwhile the bank issued at least 60 million livres of currency in 
1719: five million in Spring; 15 million more in June and July; another 
40 million through December. These notes were loaned out at 1 to 2 %, 
not to finance new production, but to buy existing assets, mainly the MC 
shares, forcing all prices up. Bread, meat and milk prices rose six to 
seven times; cloth rose 300%. 

Both John Law and the Mississippi Company peaked in January 
1720, when he converted to Catholicism and was made Comptroller 
General of France. The Company reached its zenith, faltered and began 
its fall. The Due d'Orleans, acting as Regent for the six-year-old King 
Louis XV, regularly led a wild night life which surprisingly did not pre- 
vent him from being at work at his desk the next morning. However, he 
gave John Law a free hand with France's finances. 

Law's private bank had always maintained a substantial reserve of 
gold; but on its conversion into a state bank, he confidently advised the 
new managers to dispense with holding reserves. Consequently by 
January 1720 the bank had only 2% gold reserves with which to main- 
tain convertibility of its notes. Large MC shareholders began selling in 
January, and converting banknotes into gold, or using them to purchase 
other tangible assets, A desperate John Law convinced the Regent to 
issue draconian edicts to support both the Bank and the Company, 

including banning gold.-^^ Informants were rewarded and gardens were 
dug up searching for the forbidden metal. 

Law tried to bolster the price of MC stock by merging it with the 



11 HATCHING THE BANK OF ENGLAND 297 



Bank and fixing the stock price at 9,000 livres each (450£). He was 
hopelessly gambling that stock holders would treat the shares as a long 
terni investment and patiently await the development of the North 
American lands. But the stock had been promoted as a short term vehicle 
and most people were sellers. The new money created by the bank to 
repurchase the shares just caused more inflation. A devaluation act 
proved so unpopular it was rescinded and the Regent finally dumped 
John Law. In July France went back to her former money system of gold 
and silver. It would take nearly a century for France to sell her North 
American lands to the U.S., in the Louisiana Purchase. 

John Law's activities thus seriously regressed the development of 
sound monetary theory and practice. Even today this sorry episode of a 
gambler in control of a nation's money system, low level bribery, and 
crass stock manipulation is still used as an arguing point by certain types 
of economists - as an excuse to keep governments from exercising a rea- 
sonable control over the money systems of their people. They use it to 
create a mythology against government-controlled money. 

There are several lessons apparent from the John Law experience. 
First, neither credit nor money can be created in unlimited amounts, but 
must be within reasonable useful limits defined by the situation. Second, 
it is necessary to distinguish between credit or money created and used 
for production (creating new things), or used for mere speculation (buy- 
ing existing assets). Third, a Solonic reasonableness must be observed 
("Nothing too much"). But these "lessons" are so obvious that perhaps 
the main thing to be learned from John Law's fiasco is to never let an 
English gambler/part time monetary theorist, in exile for murder, run 
your country's money system! 

MISSISSIPPI FALLING; SOUTH SEAS RISING 

"... One of the curious features of the South Sea boom is that it took 
place during the exact seven months that Law's system disintegrated," 

wrote Cowles.-^^ 

Law had promised he'd make France the premier power at 
England's expense, so the English foreign office watched him closely. 
War with Spain in 1718 made it clear that the South Sea Company would 
not be doing business with Spanish colonies. Taking their cue from John 
Law's activities, and with the English Government and the Company in Whig 
hands, the Directors decided to concentrate on financial operations instead. 

John Blunt, a Bible thumping director who had enviously watched 
Law's operations, promoted a plan to Stanhope, Sunderland and finally 



298 The Lost Science Of Money 



the Chancellor of the Exchecquer Aislabie, for the SSC to take overall 
the government's debt of £30 million to the general public. He dropped 
his idea of also taking over the £20 million ow^ed to the Bank of England, 
on Aislabie 's advice that the Bank w^ould block it. 

The Company would issue shares to the annuitants in place of their 
holdings of government debt. The idea v^as that they could artificially 
force up the company's shares and then use the company's surplus shares 
to pay the debt holders. On January 22, 1720 the plan v^as introduced in 
the lov^er House. It passed thanks to bribery totaling £1,250,000 in the 
form of low^ priced SSC shares (£100 each) promised to officials. 

The shares quickly rose from £100 to £400 each! By the morning of 
June 2, 1720 they were at £ 890; by afternoon they were down to £ 640. 
Planetary physicist Sir Isaac Newton, who became Master of the English 
Mint, when asked whether the stock would continue rising, answered 
that "he could not calculate the madness of the people."^^ 

The feverish speculation had warped the mentality of the people, 
even women, as these lines, penned by Molesworth indicate: 

"The gentle passions of the mind, 
How avarice controls, 
Ev'n love does now no longer find 
a place in female souls." 

Melville reports that few "investors" really believed in the prospects 
of the Company. Most just wanted to buy something cheap and quickly 
sell it for more. In the present day this is called "the greater fool theory" 
of investing - that the buyer will be able to find an even greater fool to 
sell out to, at a still higher price. 

"In vain did newspapers point out the folly of it all," he wrote.^^ 
But the British public was purposely kept ignorant of the disastrous 
developments in France. This crucially needed information was missing! 
Setting the tone for future generations of Anglo-American journalism, 
the English press misled their readers. On June 11, 1720, The Weekly 
Journal falsely reported: 

"Nothing is more evident than that Mr, Law has been of universal 
service to France and that by his genius alone he has. . ,put the sinking credit 
of the nation in such a flourishing condition as was never known before. . ."^^ 

On June 15^^ the SSC sold 50,000 shares to the public at £1,000 a 
share. By the end of June it reached its peak at £1,050. One percent margin 
was not unusual. In effect the Company loaned the money to buy its shares. 



11 HATCHING THE BANK OF ENGLAND 299 



It had taken in £8.5 million for stock subscriptions and was owed £60 mil- 
lion by its stock buyers. In France the loans had come from the bank. 

The SSC then attempted a hostile takeover of both the Bank of 
England and the British East India Company, but was rebuffed. It did 
succeed in taking over England's national debt, essentially using its 
inflated stock price to purchase the debt. 

A FRENZY OF SPECULATION 

In the speculative frenzy that arose, over a hundred additional 
companies were launched by various promoters for an estimated 300 
million pounds. These companies were for the most part fraudulently 
floated stocks whose prices were manipulated, sometimes by paying 
dividends out of non-existent earnings, using money from new stock 
subscriptions to pay prior investors. 

John Blunt, now rich but still envious, wanted to stop these companies 
from sapping investors away from the SSC. On June 24, 1720, with 
support from Charles Townshend, Parliament passed a bill that limited 
the wild stock promotions. Many smaller companies collapsed; others 
continued their operations, intending to convert to partnerships, to get 

around the prohibition on companies. On July 14*^ a further edict was 
issued specifically dismissing a number of the companies' petitions for 

charters, and on August 23^^^ many of the promoters were brought before 
the Lord Justice and warned off! 

In their hubris, the Directors also attacked four substantial and legal 
companies including the Royal Exchange Company, which fell from 250 
to 60, and the London Assurance Company, which fell from 175 to 30! 
In doing this they inadvertently attacked the stock buying power of their 
own shareholders, who were suddenly placed in distress, and the distrust 
generated around the collapse of the shares of these companies would 
soon be transferred to the SSC itself 

THE COLLAPSE 

In July, Blunt moved to the country and began selling, unable to see 
how the company could last beyond November. But it didn't take that long! 
Like other great market tops, it occurred in August (1720). On August 

24^^, the fourth and final subscription of South Sea Company shares was 
floated at £ 1 ,000 per share and was entirely taken up within three hours. 
But the liquidity of the market was exhausted. Over the next month the 
shares dropped to 780, then rose to 810, fell to 500, then rose to 600, 
then fell to 130, and bounced up to £ 320. (Some prices in September: 



300 The Lost Science Of Money 



the 1^^ : £770; the 9* : £575; the 19^^ - £380; the 28^^ - £190) 

The Directors panicked. First they sought a merger with the Dutch 
East India Connpany, and were refused. They tried in vain to get the 
Bank of England to honor a promise to buy £ 3.5 milHon of the 
Company's bonds, but the Bank refused and called for an audit of the 
Company! 

THE FOREIGN ELEMENT WAS POPULARLY BLAMED 

The foreign element - the Jews and the Dutch, were popularly 
thought to play a large part in the stock manipulations. Jonathan Swift, 
in A South Sea Ballad wrote: 

"A race of men who t'other day 

lay crushed beneath disasters 

are now by stock brought into play 

and made our lords and masters,"-^^ 

The collapse of the South Sea Bubble even caused anti- Jewish riots 
in Amsterdam. 

PARLIAMENT ACTED 

Powerful members of Parliament were deeply involved in the scandal: 
Robert Walpole, Charles Stanhope, Aislabie, Sunderland, and the 
Craggs, to name a few. Sir Matthew Decker was a director of the South 
Sea Company. The Duke of Buccleugh is also mentioned as a director, 
though not on the list of those fined. Adam Smith would later discuss the 
South Sea Company in The Wealth of Nations, without ever mentioning 

the bubble and the fraud!^^ Why did he omit that information? Was it an 
effort to protect his benefactor, Buccleugh 's ancestor? 

Parliament was determined to punish the malefactors, and was 
concerned that efforts to quickly restore financial confidence in London 
would displace the pursuit of justice. When a bill was passed to block the 
Directors of the Company from leaving the country, James Craggs the 
younger, whose family was heavily involved in the swindle, created a 
sensation in Parliament by rising to challenge anyone in the House to a 
duel. Lord Molesworth rose to answer Craggs: 

"I have had the honor to be a member of this house upwards of 30 
years and never before now have known any man bold enough to chal- 
lenge the whole House of Commons and all England besides. For my part 
though past 60, 1 will answer whatever the right honorable gentleman has 
to say within the house, and I hope that there are younger members 

enough who are not afraid to look him in the face out of the house." ^^ 



11 HATCHING THE BANK OF ENGLAND 301 



But the younger Craggs and Charles Stanhope, another guilty mem- 
ber of the House, died in a debauch a few days later. The elder Craggs 
poisoned himself before he was to be questioned. 

THE CROOKS WERE LET OFF EASY 

When the honest majority in Parliament brought the swindlers to 
court, emotions continued to run high. Notices were placed around the 
courtroom warning honest gentlemen not to sit near the Directors, 

because many people were bringing "pocket pistols" to the meeting.^^ 
No one attempted such well deserved "summary justice" but a number 
of suicides occurred among guilty members. Parliament's job was made 
difficult by the attempts to shield the crooks by the Crown and especially 
by Robert Walpole who became known as "The Screen." 

"Instead of being awarded a long term of imprisonment, only fines, 
the greater part of which was paid out of illicit gains, were inflicted," 

wrote Melville."^^ 

The gentle treatment of the swindlers set the standard for the non~ 
punishment of financial crime in the English speaking world to the 
present day. The South Sea company continued until 1748, when its 
shares were converted to an annuity. 

The Monarchy suffered seriously in the public mind, and rightfully 
so. King George I had made £86,000 profits on his SSC dealings and had 
sold out and gone on vacation in Germany before the collapse. Though 
the Whigs were inseparable from the scandal, the government, not Whig 
methods and amorality, took the blame. 

THE BANK OF ENGLAND AND 
THE IRISH POTATO FAMINE 

The Irish famine arose out of the taxation needed to pay the interest 
to the Bank of England for the millions of new "pounds" it created out 
of thin air and then "lent" to the government for a century of warfare. 
From a total population of 8 million, 1,029,000 Irish children, women 
and men starved to death during a period when landlords exported more 
than enough food for all. Those who starved were Catholic; most of the 
landlords were not, 

"It is interesting to notice the exact statistics of the food that was 
exported from Ireland during 1845. They are 779,000 quarters of wheat 
and wheat flour, 93,000 quarters of barley, and 2,353,000 quarters of 
oats - that is to say, enough to feed for twelve months every person in 
Ireland who died of starvation, nearly four times over," Mollis wrote. 



302 The Lost Science Of Money 



citing Mulhall's Dictionary of Statistics , 

'These exports of food. . .went out to some extent, to pay the rents to 
absentee landlords, but, mainly, to pay the interest on the mortgages in 
English bank-manufactured money, which the Irish landlords, like the 
English landlords, had raised in order to pay the taxation required to 
meet the interest on the Napoleonic War Debt. 

". . .(In Ireland) the capital wealth was in the hands of people, whose 
cultural and political sympathies were with their creditors rather than 
with the country in which they lived. 

"Lord George Bentinct suggested the putting of purchasing power 
into the pockets of the Irish by a scheme of railway building, but... Lord 
John Russell's Whig Government did not permit it. There were more 
profitable investments elsewhere." ^^ 

SEPARATION OF MONEY AND STATE 

The Bank of England's separation of the monetary power from the 
nation was generally repeated in the English speaking countries, with 
unhappy results upon the entire world. In the struggles for the monetary 
power between the bankers and the representative legislatures of the 
people, the bankers understood the issue and especially how it benefited 
them. The rewards of any intrigues, bribery and assassinations would be 
large, self financing and immediate. 

The representatives of the people would not always understand the 
complexities of the monetary power and would be vulnerable to bribery. 
Moreover, taking action against the injustice brought immediate person- 
al sacrifices. 

The people occasionally understood the issue, but mostly did not 
and in the 20th century, almost never. The ever escalating horror of the 
wars engendered in large part by the bankers, combined with immense 
national debt loads and ever increasing taxation, ground the people down, 
reducing their ability to rationally consider political and social questions. 
This further concentrated control into the hands of the malefactors. 

Financial control of mass communications, starting with the pulpit 
and newspapers, then radio, movies, and television, to say nothing of the 
universides, would keep the money question out of view or out of focus. 

Only the greatest expenditure of energy and money over the last 
three centuries have kept that form of economic organization from being 
defined and understood in terms of fraud and theft. That brings our study 
to the propaganda apparatus charged with the task of keeping this 
plutocratic system whitewashed. 



11 HATCHING THE BANK OF ENGLAND 303 



Notes to Chapter 11 

' Andreas Andreades, The History of the Bank of England, (London Univ. Press, 

1909) 

2 Andreades, cited above, pp. 41-42. 

^ J. Keith Horsefield, British Monetary Experiments 1 650-1 710, (Harvard Univ. 

Press, 1960), p. xviii. 

^Horsefield, cited above, p. 128 

^ Saxe Bannister, William Paterson, (Edinburgh: W. P. Nimmo, 1859), p. 24. 

^Bannister, cited above, pp. 68-69. 

' Saxe Bannister, The Writings of William Paterson, (1859, repr., New York: A. 

M.Kelley, 1968), pp. 83,84. 

^Bannister, William Paterson, cited above, p. 84, 

^Andreades, cited above. Chapter 2. 

'^ As quoted by Bannister, William Paterson, cited above, p. 73 

" Charles Arthur Conant, A History of Modern Banks of Issue, (New York: 

Putnam, 1909) 

'^ Sir Francis Baring, Observations on the Establishment of the Bank of 

England, (1797, repr., New York: A M Kelley, 1967) 

'^Adam Smith, The Wealth of Nations, (1776, Chicago: Great Books Collection, 

Encyl. Brittanica, Univ. of Chicago Press, 1952), p. 138. 

^"^ Andreades, cited above. 

'^ Bannister, William Paterson, cited above, p. 89. 

^^ Horsefield, cited above, p. 140. 

^^ David Ricardo, Proposals for a Secure and Economic Currency, (London: 

John Murray, 1816), pp. 87-99. 

^^ David Ricardo, Works, Principles Of Political Economy, (London: John 

Murray, 1876), p. 219. 

^^ Ricardo, Plan for the Establishment of a National Bank, in Proposals for a 

Secure and Economic Currency, cited above, p. 99. 

2^ Andreades, cited above, quoting Macleod's 1855 Theory and Practice of Banking. 

2^ Baring, cited above. 

^2 Philip Cdin\\\\on, Analysis of Trade, Commerce, etc, (self pub, 1759), pp. 152-5. 

^^ Bannister, Writings of William Paterson, cited above, p. 62. 

^^ Bannister, William Paterson^ cited above, pp. 41 1, 415. 

^^ David Ricardo, Plan for the Liquidation of the Public Debt, (London: 1819) 

^^ Ricardo, Proposals for a Secure and Economic Currency, cited above, p. 23. 

27 Smith, cited above, pp. 303, 305, 411. 

2^ Ricardo, Proposals for an Economic and Secure Currency, cited above, pp. 67, 92. 

^^ Ricardo, Proposals for a Secure and Economic Currency, cited above, pp. 90-99. 

^^ The South Sea Bubble, by Lewis Melville (pseudonym) by "Benjamin", 

(repr.. New York: Burt Franklin, 1968), p. 27 



304 The Lost Science Of Money 



^' Virginia Cowles, The Great Swindle - The Story of the South Sea Bubble^ 

(New York: Harper Brothers, 1960), p. 9. 

^^ Cowles, cited above. Chapter 1 . 

^^ Cowles, cited above, pp. 66-71. 

^"^ Cowles, cited above, pp. 102-4. 

^^ Cowles, cited above, p. 101. 

^^ Melville, cited above, p. 58. 

^^ Melville, cited above, p. 82. 

^^ Cowles, cited above, p. 127. 

^^ Melville, cited above, p. 148. 

^^ Smith, cited above, see pp. 303-358. 

^^ Melville, cited above, p. 188. 

^^ Melville, cited above, p. 141. 

^^ Melville, cited above, p. 245. 

^"^ Christopher Hollis, The Two Nations, (1935, repr., New York: Gordon, 1975), 

pp. 116-17. 



305 



CHAPTER 12 



POLITICAL ECONOMISTS: 
PRIESTHOOD OF THE 
BANKER THEOLOGY 



"If an Empire were of granite, it would be ground to dust 
by following its precepts." Napoleon on Adam Smith 

"...there has been brought in such a complication of Knavery 
and Cozenage, such a mystery of iniquity, and such a jargon of 
unintelligible terms to involve it in, as were never known in any 

age or country of the World..." Cantillon on The Bank^ 

"What makes all doctrines plain and clear? 

About two hundred pounds a year. 

And that which was proved true before, 

prove false again? 
Two hundred more." 
Samuel Butler's Hudibras on Economics 



The magnitude of the evil that was finally institutionalized in the 
Bank Of England by the Dutch, Jewish and English moneylenders and 
the House of Orange has not been fully recognized in terms of the long 
range problems and disharmonies it set in motion against humanity and 
now even the planet. 

Before then, when a nation's money system was used for taxation, 



306 The Lost Science Of Money 



the revenue generally aided the society to some degree, at least in terms 
of what a Republic or King thought was needed. But private money sys- 
tems like the Bank of England's unjustly concentrated the resources of 
society into a few private hands, crippling the possibility for government to 
function properly. This would lead to a growing contempt of government. 
Today, some are foolishly questioning the need for any government what- 
ever, instead of contributing meaningfully to an understanding of its prop- 
er and necessary role. 

This private monetary domination of society has stood on three 
crucial legs: 

1. Control of the money power, the creation and regulation of money, 

2. Using warfare, to force the buildup of an immense national debt, and 

3. Harsh taxation on the populace, which gave the miscreants further 
resources. 

Perhaps a fourth condition is the absence of a countervailing moral 
force that could identify the injustice and call for action against the cor- 
rupted monetary regime. 

The underlying primary source of the power, the well pumping 
money night and day, was usury - the structural misuse of Society's 
money mechanism. It is the privilege to create and direct the flow of new 
credit money and to charge interest on loans of private '*money" created 
out of thin air. 

It transferred power from Society to the Money Power 24 hours a 
day, seven days a week whether business was good or bad; whether 
crops were abundant or there was drought; whether the country was 
healthy or beset by plague. It transferred this wealth even though its 

beneficiaries normally did little or nothing useful for their fellow man;^ 
but systematically harmed the society to derive greater payments from 
it, and to render it less capable of protecting itself from their parasitical 
activities. 

They received the wealth of nations through conquest of their 
money systems. Few shots were fired and no formal surrender occurred 
to announce to the people that they and their posterity were to be subject 
to this power. 

Had an awareness of conquest existed, it would have been possible 
to legislate the monetary usurpers out of existence. Failing a political 

A) While they did provide their private and costly debt money for warfare and 
for the use of merchants, they had systematically blocked the government from 
doing so on a more reasonable basis. 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 307 



solution, direct action would probably have soon done away with its 
primary members through revolution. But the awareness was limited to 
very few people. 

IDEAS RULE 

Men can be ruled by brute force in the short term, but over time soci- 
eties are ruled through idea systems. If a new monetary rule over 
Mankind were to be established, a new theology that justified and sancti- 
fied the new world order would be needed. This theology would declare 
that order to be God's will, or an indisputable law of Nature, or crucial to 
the functioning of Society, and would shroud its essentials in mystery. 

ECONOMISTS AS PROPAGANDISTS 

Those whose job it was to understand money and guide the Nation 
economically, the "Political Economists," instead became the priesthood 
of the new Bank aristocracy, often serving as a propaganda apparatus to 

whitewash the monetary power structure.^ They put forward false ideas 
and smoke screens on the nature of money, primitive concepts that 
helped entrench the bankers. Some of the most ignorant and even the 
insane among them were given important positions while the better 
minds were pushed aside or ignored by the money power. 

ECONOMICS DEGENERATES FROM THE SCHOLASTICS 

The Scholastics defined a moral order of business activity making 
extensive use of logic and arguments from A'Priori positions, as we saw 
in Chapter 7. This means they drew conclusions from certain principles 
they held to be true, with a lesser concern for empirical evidence derived 
from experience. Political Economy continued to stress this theoretical 
approach. 

However, the area of economics most suitable for this approach is 
the morality of economic activities, which the Scholastics concentrated 
on, but which Political Economists did away with. Observation, more 
than theory, is needed for discovering how processes and things function. 
The political economists' methods were like the medieval doctors who 
theorized on how the body worked, but never dared to dissect the body 
and find out what was actually happening. 



B) These comments obviously don't apply to the growing number of good econ- 
omists who have included a deep concern for economic justice in their work and 
who should be supported in spite of the great damage that most of the profes- 
sion has done. 



308 The Lost Science Of Money 



FOSTERING A DISDAIN FOR THE LESSONS OF HISTORY 

This theoretical approach was expressed as a disdain for the lessons 
of history. Since money systems have to be viewed over long time peri- 
ods, history would be the only source to provide mankind's empirical evi- 
dence about money - his experience. While it is common to find super- 
ficial and erroneous references to historical events to justify their rea- 
soning, this anti-historical bias of political economy has long been 
noted. In the preface to Prof. Andreades groundbreaking 1909 work the 
History of the Bank of England, Professor H.S. Foxwell of the 
University of London wrote: 

"It was not the absence of official records that left so many chapters 
of English economic history to be first dealt with by foreigners. The 
main cause is to be found in the anti-historical bias of the dominant 
school of English official economists (most of them avowed disciples of 
Ricardo) their doctrinaire habits of thought and their belief that they 
were in possession of a set of 'principles' of universal application, led 
them to frown on historical research,. .This is really the attitude of the 
quack. What is curious is that in England and to some extent in France 
also the quack methods received the sanction of the professed practi- 
tioner, and left it to the layman to follow the sounder practice.. .such eco- 
nomic history as was written in England was. ..under the ban of the dom- 
inant school." 

NICOLA ORESME'S MEDIEVAL MENDACITY 

Even before Calvin's Reformation there was at least one Catholic 
precedent to the monetary trickery of the Political Economists - the case 
of Nicolas Oresme (1320-82). It's hard to imagine now, but as early as 

the 14^^ century some men understood who gained and who lost by 
certain monetary policies even better than they do today. For example 
the town of Navarre's Treasurer General wrote to his King. 

"Everywhere there are four sorts of men. The first... are those who 
have rents... (they want) money of strong alloy. The second... are those 
who engage in commerce, who wish for. . . a middle sort of 
money... trade is always poor except when money is in a middle state. 
To write all the reasons in this document would be too lengthy. The third 
sort of men are those who live from the work of their bodies. These 
would wish to have weak money... The fourth sort of money is desired 

by lords when they are at war (and want to pay troops in feeble coin)."^ 
Nicola Oresme 's De Moneta, a rare treatise on money from this 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 309 



period, was an attempt to tilt monetary policy to favor the first group - 
flie landlords: 

"Can any words be too strong to express how unjust, how detestable 
it is especially in a Prince to reduce the weight without altering the 
mark?" he wrote, 

Oresme's goal was to stop Princes from changing the coinage without 
approval of the landowners. He asserted that "not only that the community 
might [change the coinage], but also that it ought, assuming that the 

contribution is necessary,"^ and he called it an easy to collect tax. 

Oresme's political motive wasn't fully appreciated until Peter 
Spufford's recent analysis identified how he advanced the interests of his 
wealthy sponsors: 

"Oresme's argument is purely one sided; for him the only sort of 
good money was strong money.,. as far as trade was concerned he was 
only interested in the. , .supply of luxury goods to the landowning classes." 
Oresme misleadingly characterized any policy other than the one his 
masters desired, as: 

"prejudicial and hurtful to the whole civil commonwealth.'"^ 

The reward Oresme received for his partisanship was to be appointed 

Bishop of Liseaux. To give him his due, he was the first Westerner to 

state "Gresham's law" clearly in writing, in 1364, two hundred years 

before Gresham's time: 

"That if the fixed legal ratio of the coins differs from the market 

value of the metals, the coin which is underrated entirely disappears 

from circulation and the coin which is overrated alone remains current."^ 
References to it coming from Aristophanes play "The Frogs'' are not 
correct. That passage doesn't accurately describe the causes of the "law" 
but merely notes its effect. 

WALPOLE'S DISDAIN 

At first it was not clear to all the financial malefactors in 18^"^ century 
England that they need be concerned about their image, Christopher 
Hollis noted that Robert Walpole, nicknamed "the screen" for protecting 
the key miscreants in the South Sea financial scandal, was content to 
simply run roughshod over society. But Walpole's brother-in-law 
Charles Townshend understood that a "mythology," a justifying ideology, 
was needed to shield the corrupt system. To start providing this he wrote 
a sanitized Whig version of English history, The History of Our Times, 
which introduced the "Progressive Theory of History," 



310 The Lost Science Of Money 



TOWNSHEND'S PROGRESSIVE THEORY OF HISTORY 

Townshend's "book" is impossible to find today. Hollis tells us that, 
in it, he asserted the theory that no matter how badly off the people's situ- 
ation appeared, "the lesson of history was a lesson of steady improve- 
ment," that each succeeding generation was better off and more intelli- 
gent and aware than the previous generations. This idea created an illu- 
sion of progress, when there was the opposite. 

"The important task was to capture the educational machine. 
Therefore in 1724 Townshend and Gibson, the Bishop of London, 
arranged for '24 persons... 12 from Oxford and 12 from Cambridge' to 
preach a sermon each at Whitehall. For that sermon the preacher was to 
receive the considerable (payment) of £30, and none 'must hope for a 
share of this bounty but they who are staunch Whigs and openly declare 

themselves to be so.' It was a beginning," wrote Hollis.^ 

THE MYTH OF ADAM SMITH 

"He does not keep in view the moral destination of our race, 
nor regard wealth as a means to the higher ends of life." 

Ingram 

"...Adam Smith who introduced a spirit of sophistry, confusion 

and hypocrisy into political economy... even burned his papers on 

his deathbed for fear lest they should betray his true opinions." 

Frederich List^ 

Though dead over 200 years, Adam Smith (1723-1790) is still the 
financial establishment's favorite economist. Publishing houses and 
television shows are named after him. His book was reverently recom- 
mended at the 1992 Republican National Convention. Normally, to 
achieve such notoriety requires some great discoveries or advances, but 
where are they? Professor Andreas Andreades wrote of Adam Smith: "In 

this case as elsewhere, the father of political economy discovered nothing."^ 
Understand then that we must examine Smith, not because of the 
accuracy or quality of his views, but because of the position the finan- 
ciers have bestowed upon him. And now you will see one of the reasons 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 311 



why economics is called the "dismal science." In the quotations below, 
we have presented sections to be emphasized, in bold type. 

Contrary to belief, Smith did not discover the division of labor; that 
was clearly discussed in Xenophon's Cyropaedia 2,000 years earlier. 
Smith claimed credit for developing and spreading the concepts of "free 
trade," but where money is properly defined as a legal institution, free 
trade concepts are not applicable to the operation and control of the 
monetary mechanism any more than they are to the operation of the law 
courts. 

If one listens carefully, the "sirens" of Laissez Faire are clearly 
reminiscent of the hollow personal freedoms offered by the Oriental 

cults that infiltrated Rome from the 3^^^ century BC, as described in 
Frazer's Golden Bough, discussed in Chapter 2. Their effect was similar 
- destruction of the only power potentially capable of withstanding the 
cultural offensive from the East - the national organization. 

ADAM SMITH FALSIFIES THE GOVERNMENT'S 
MONETARY ROLE AS MINOR 

On page 11, of The Wealth of Nations, while laying the groundwork 
before presenting his definition of money, Adam Smith took pains to fal- 
sify history to minimize the role of Government in monetary matters:^ 

"To facilitate exchanges.. .it has been found necessary, in all coun- 
tries that have made any considerable advances toward improvement, to 
affix a public stamp upon certain quantities of such particular metals as 
were in those countries commonly made use of to purchase goods. 
Hence the origin of coined money, and of those public offices called 
mints; institutions exactly of the same nature with those of 
aulnagers (wool inspectors) and stamp-masters of woolen and linen 
cloth. All of them are equally meant to ascertain by means of a public 
stamp, the quantity and uniform goodness of those different commodities 
when brought to market." (We remind the reader that throughout this 
book, all emphasis in quotations have been added.) 

This is a remarkable statement fi-om Smith, who had lectured for 
years on Jurisprudence, at the University of Glasgow, "which he handled 
historically" according to the Great Books biographical note. He would 
have been intimately familiar with the celebrated 1601 Mixt Monies 
Case (see chapter 10), which alone disproves his mint statement. 

To equate the mints with a quality control grading on wool and linen is 
to pretend a separation of money and State that did not exist until the Bank 



312 The Lost Science Of Money 



of England usurped the money power. That served the Bank's purpose. 

It is accurate to call this a "falsification," for on the very next 
page he contradicted himself, showing the great importance he 
placed on the institution of the mint. He exaggerated the Kingly 
abuse of it, and essentially condemned all past government control 
over money: 

"For in every country of the world, I believe the avarice and injustice 
of princes and sovereign states abusing the confidence of their subjects 
have by degrees diminished the real quantity of metal, which had been 
originally contained in their coins.'' 

And he then admitted the great importance he placed on the control 
of the mints: 

"Such operations, therefore have always proved favourable to the 
debtor and ruinous to the creditor and have sometimes produced a 
greater and more universal revolution in the fortunes of private persons, 

than could have been occasioned by a very great public calamity."^^ 

Also please note carefully how Adam Smith has quietly slipped in 
the false notion that Sovereign states or governments can "feel" avarice. 




1 2a. Adam Smith's 
scheme was founded 
on the erroneous 
assumption that all 
human action is 
motivated by selfish- 
ness. But basing legal 
systems, with their 
rewards and punish- 
ments, on this notion 
over more than two 
centuries has had a 
self fulfilling effect in 
creating just such a 
lower form of 
humanity* 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 313 



This childish anthropomorphic view of government is an essential part 
of the economists' attack on society. 

OBSCURING AND DEGRADING THE CONCEPT OF MONEY 

On the next page (13), aware that his definition of money was obtuse, 
Smith shifted responsibility for his obfijscation on to the subject matter: 

"After the fullest explication which I am capable of giving it, appear 
still in some degree obscure... and after taking the utmost pains that I am 
perspicuous, some obscurity may still appear to remain upon a subject in 
its own nature extremely abstracted." 

Then after seven more dense and dubious pages on the value of labor 
- some of the most confused and confusing passages ever written - Adam 
Smith finally gets to the heart of his definifion, on page 20: 

"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/' 

Adam Smith thus ignored the existing advanced thought on money 
and redefined it as a commodity, taking the concept back to where it was 
in England before the Romans arrived. It's important in evaluating 
Smith's motives to note that he does not attempt to refute or even 
acknowledge the existence of the more advanced concepts. 

A REGRESSION TO GOLD AND SILVER BY WEIGHT 

Adam Smith retrogressed the concept of money backwards from an 
advanced numerary based on law, not just back to a "Moneta" level of 
unlimited coinage, but all the way back to "Ponderata," pure metal by 
weight. This was even more backward than the ancient oriental monetary 
systems which had at least monetized agricultural commodities (see 
Chapter 1). Smith virtually obliterated any concept of money in the law. 
Had he said this plainly, without the "value of labor" smoke screen, 
it would have been clear that he had no answer to the great thinkers who 
showed that money was not merely a commodity. But he just ignored 
them. 

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 would cause confusion and create mystery. 

STUDIED AVOIDANCE OF THE QUANTITY OF MONEY 

Having mis-defined money as a commodity, he had to explain how 
gold and silver get their value. This was the purpose of his lengthy 



314 The Lost Science Of Money 



discussion on the value of labor (brace yourself): 

"But though labour be the real measure of the exchangeable value of 
all commodities, it is not that by which their value is commonly 
estimated... It is more natural, therefore, to estimate its exchangeable 
value by the quantity of some other commodity than by that of labour 
which it can purchase. The greater part of people understand better what 
is meant by a quantity of a particular commodity than by a quantity of 
labour. The one is a plain palpable object; the other an abstract notion, 
which though it can be made sufficiently intelligible, is not altogether so 
natural and obvious," Smith wrote on page 13. He continued: 

"Gold and silver, however, like every other commodity, vary in their 
value, are sometimes cheaper and sometimes dearer, sometimes of easier 
and sometimes of more difficult purchase. The quantity of labour which 
any particular quantity of them can purchase or command, or the quantity 
of the goods which it will exchange for, depends always upon the fertility 
or barrenness of the mines which happen to be known about the time 
when such exchanges are made. The discovery of the abundant mines of 
America reduced, in the sixteenth century, the value of gold and silver in 
Europe to about a third of what it had been before. But... a commodity 
which is continually varying in its own value, can never be an accurate 
measure of the value of other commodities. Equal quantities of labour at 
all times and places, may be said to be of equal value to the Laborer... 
Labour alone therefore never varying in its own value, is alone the ulti- 
mate and real standard by which the value of all commodities can at all 
times and places be estimated and compared. It is their real price. Money 
is their nominal price only." 

TRANSLATION: 

Don't be too concerned if that was not clear to you. Smith himself 
was confused: 

He said the value of gold and silver as commodities, and as money, 
is determined by the labor involved in producing them - the cost of pro- 
duction, which he said is known to those using the money. The two- 
thirds drop in the value of gold and silver in the 1500s and 1600s (it was 
more like an 80% drop) was a result of discovering "abundant mines in 
America." He called labor the ultimate standard of value, because the 
laborer always values his own labor consistently. 

But we know it's not up to a laborer how much he will be paid. He 
is not free to withhold his labor and to starve with his family. 

Finally, Adam Smith nullified his point on the value of labor by 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 315 



calling it the "real" price of things, whereas he calls the money price of 
things only a "nominal" price. But in reality the only price that buyers 
and sellers are ever concerned with is expressed in terms of money. 

Roman law had been clear on this subject: "Res Tanti Valet quanti 
Verdi Potesf - the value of a thing is what it can be sold for. 

Adam Smith's claims on the cost of mining confused students for 
two centuries; but they never examined the cost of mining. In reality the 
metals were taken from American Indian societies at gunpoint, and then 
mined with slave labor mercilessly worked to extinction. Did the Indians 
place equal value on their "labour at all times and places"? Did it make 
any difference what the Indians thought or valued? Certainly not the 
many millions slaughtered or worked to death in the mines. 

Even following Adam Smith's line of reasoning, how would the cost 
of production affect prices unless it first affected supply (quantity)? So 
we are back to quantity. Smith's avoidance of this protected the Bank of 
England because their additions to the supply of money were causing a 
drop in the value of money. 

Over a century ago, Alexander Del Mar correctly pointed out that 
Adam Smith: 

"Buried this (quantity) principle of political economy and subverted 

it to the fallacious and inequitable doctrine of metallism."^^ 

Smith's use of labor as a measuring device wasn't original. John 

Locke used it in 1690: 

"But since gold and silver being little useful to the life of man.. .has 

its value only from the consent of men - whereof labor yet makes in great 

part the measure.. ."^^ 

America's Ben Franklin picked up on it in 1729, writing: 

"Silver and gold.. .(are) of no certain permanent value 

...therefore it seems requisite to fix upon something else.. .and this I 

take to be labour." ^^ 

But neither Franklin or Locke confused the nature of money with the 
value of labor, as Smith did. 

NOTORIOUSLY POOR DEFINITIONS 

Smith's poor definitions drew strong criticism from another obtuse 
political economist, Reverend Thomas Malthus, who made the famous 
population explosion error: 

"Where Adam Smith has most failed in the use of terms is the appli- 
cation of the word 'real,'" wrote Malthus, referring to Smith's phantom 



316 The Lost Science Of Money 



value system pretending to distinguish real from nominal prices. In The 
Measure of Value, Malthus took Smith to task on his obscure concept of 
labor and value, noting that Smith's assertions on the constant value of 
labor: 

"haven't convinced anyone, so in no works of political economy is 
it considered the measure of value," and Malthus pointed out that Smith 

himself had used com prices, not labor, as a measure of silver's value.^^ 

Malthus further complained: 

"It is quite astonishing that Political Economists of reputation 
should be inclined to resort to any kind of illustration however clumsy 
and inapplicable, rather than refer to money." 

However, when Malthus presented 60 "better" definitions of 
Political Economy terms, a definition of money is conspicuously absent. 
Malthus swallowed Smith's materialist definition of money as gold and 
silver metal, and didn't consider it necessary to dispute. 

Malthus' theory that population must outrun the earth's ability to 
sustain it was much welcomed by the wealthy in his day. Since the poor 
were destined for death in any case, it was easier to justify trampling on 
them. Reverend Malthus twisted morality to preach that the poor must 
choose between what he called "vice" - having children and therefore 
engaging in sex - or starvation. Economics rightly earned the title of "the 
dismal science." 

If economics is ever to become a science its terminology must be 
cleanly defined. But its masters seem to prefer operating in an amor- 
phous, poorly defined environment. That's why this work concen- 
trates on the definition - the correct identification of the nature of 
money - as the key building unit of economic thought. 



BETTER MONETARY THOUGHT EXISTED 
BEFORE AND AFTER ADAM SMITH 

For a breath of fresh air, here are some of the advanced views on 
money and banking, which Adam Smith ignored: 

BISHOP GEORGE BERKELEY (1735) 

The philosopher George Berkeley (1685-1753), Anglican Bishop of 
Cloyne, Ireland, was a thoughtful and accurate commentator on money. 
He wrote the ''Querest'' in 1735, a work organized as questions that sug- 
gested their own answers. ^^ 

Recognizing the great importance of the definition of money: 
"Q.441) Whether it doth not much import to have a right conception 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 317 



of money?" 

Aware of the "cycle of money:" 

"Q.445) Whether in the rude original society the first step was not 
the exchanging of commodities, the next a substitution of metals by 
weight as the common medium of circulation, after this the making use 
of coin, lastly a further refinement by the use of paper with proper marks 
and signatures? And whether as it is the last so it be not the greatest 
improvement?" 

Recognizing that money is an abstract power, not just a material 
commodity: 

"Q,23) Whether money is to be considered as having an intrinsic 
value, or as being a commodity, a standard, a measure, or a pledge as is 
variously suggested by writers? And whether the true idea of money as 
such, be not altogether that of a ticket, or counter?" 

Recognizing the quantity aspect of money's value, Berkeley put 
forward the basic concept that prices are determined by the proportion 
of money to goods: 



12b. PhUosopher 
George Berkeley, 
Anglican Bishop of 
Coyne, Ireland, pre- 
sented sound mone- 
tary concepts in his 
1735 book of ques- 
tions "Querest." He 
showed far superior 
understanding and 
honesty on money 
than Adam Smith 
did 40 years later, 
even though Smith 
had read Berkely's 
book. 




318 The Lost Science Of Money 



"Q.24) Whether the value or price of things be not a compounded 
proportion directly as the demand and reciprocally as the plenty? Q.25) 
Whether the terms Crown, Livre, Pound, Sterling etc. are not to be con- 
sidered as exponents or denominations of such proportion? And whether 
gold and silver and paper are not tickets or counters for reckoning, 
recording and transferring thereof?" 

And again an accurate view of the abstract power of money being 
independent of its material: 

"Q.35) Whether power to command industry of others be not real 
wealth... and whether money be not in truth, tickets or tokens for conveying 
and recording such power, and whether it be of great consequence what 
materials the tickets are made of?" 

George Berkeley argued that while the idea of a Bank was good, // 
must be a publicly owned and controlled institution: 

Q.220) Whether national banks are not found useful in Venice, 
Holland and Hamburg? 

Q.221) Whether (those banks) are not in the hands of the people?... 

Q,225) Whether the notes of such publick (banks) would not have a 
more general circulation than those of private banks, as being less 
subject to Frauds and Hazards? 

Berkeley's questions 244 and 254 indicate the Bank's propaganda 
campaign. Q 254 probably refers to the South Sea Bubble scandals: 

"Q.244) Whether it be just to apprehend Danger from trusting a 
National bank with power to extend its credit, to circulate notes which it 
shall be a felony to counterfeit, to receive goods or loans,... when these 
powers are no other than have been trusted or many years with the Bank 
Of England, although in truth but a private Bank? 

Q.254) Whether a view of the ruinous Effect of absurd schemes and 
credit mismanagement so as to produce gaming and madness instead of 
industry can be any just objection against a National Bank? 

Do you feel the different effect on your mind, of reading Berkeley 
as compared to deciphering Smith? Henry George, in 1897 after doing 
years of research into economic treatises while writing his Science of 
Political Economy, would describe the effect on the mind of reading 
economics as: 

"the destruction of the capacity for thinking which results from the 
industrious study of a logomachy made up by monstrous piecing together 
of words which aboHsh and contradict one another... (where) hollow 

phrases count with it for thoughts."^^ 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 319 



JOHN RAITHBY (1811) 

John Raithby's 1811 book. The Law and Principle of Money, also 
presented intelligent views on money. Raithby understood that the 
money question is in large degree a struggle not only of ideas but against 
a particular gang of people: 

"There is in this country a set of men of small account indeed in 
respect of rank or fortune, or honourable pursuit, but bold, busy, factious 
and intriguing; attached to no legitimate party in it; industrious in vilifying 
its character; and decrying its resources; the secret and determined enemies 
of its honour and repose... Nations like individuals may fall the victim of 
imaginary as well as of real disorders. It is important therefore that 
delusions however highly sanctioned which have a necessary tendency 
to unsettle the government and to agitate the people be dispelled." 

Raithby demonstrated that "intrinsic" value is an illusion as 
regards money; pointing out the not so obvious fact that intrinsic 
values of substances can only be realized through the actual con- 
sumption of those substances. 

"To maintain that it is of the essence of money to possess intrinsic 

value is to maintain a doctrine highly inconvenient and dangerous."^ ^ 

Aware of the abstract and legal nature of money, Raithby clearly 
showed that money was not a part of the national capital of a country. He 
demonstrated that legal money could be made of anything. His purpose 
was the "estabhshing of a paper money, in place of 'precious metals'" to 
be issued by the state and made a legal tender. These concepts thus strike 
directly at the heart of the Bank of England by embracing the concept of 
Nomisma, issued by government. 

SEIZING SOCIETY'S MONEY POWER 

Adam Smith was strongly opposed to the chartering of any corpora- 
tion, except for banks. Predictably he only supported the creation of 
money through private banks such as the Bank of England. But this too 
is purposely made obscure in Smith's presentation. He was strongly 
opposed to any banks issuing small denomination notes. These would 
have been more helpful to the average citizen than large denomination 
notes, which could only be used by relatively wealthy persons. Adam 
Smith raises the art of obfuscation to new levels when he presents a "self 
criticism" of his own proposal to restrain banks from issuing small 
notes: 

"To restrain,,. a banker from issuing such notes, when all his neighbors 



320 The Lost Science Of Money 



are willing to accept them, is a manifest violation of that natural liberty 

which it is the proper business of law not to infringe, but to support."^^ 

This is an example of the "sophistry" that Friedrich List discussed; 
Adam Smith's expert use of the English language to spread confusion. 

ADAM SMITH HATED GOVERNMENTS ISSUING MONEY: 

However, when it came to a public national bank, a government 
issuing money, then even one penny was too much for Adam Smith! 
When the American Colonies issued their own money, currency that was 
highly appreciated, even demanded by the colonists, Adam Smith went 
off the deep end, in his condemnation of it: 

"...and though the colony governments paid no interest to the holders 
of this paper, they declared it to be and in fact rendered it a legal tender 
of payment for the full value for which it was issued." 

Then after whining that this paper was not redeemable in gold for sever- 
al years and should therefore have been discounted, Adam Smith continued: 

"To oblige a creditor, therefore to accept of this as full payment for 
a debt of a hundred pounds actually paid down in ready money was an 
act of such violent injustice as has scarce, perhaps, been attempted by 
the government of any other country which pretended to be free."(p.l41) 

Smith's stated distinction between government paper and Bank of 
England notes was that the Bank's notes were convertible to gold on 
demand. But he downplayed that the Bank was often in crisis, and had 
often suspended redemption of its notes into gold. Convertibility was 
only theoretical; the Bank never had enough gold to convert a major part 
of its notes. We find no similar criticism from Smith of the Bank of 
England's failures. 

The vehemence of Smith's attack distracts his readers from 
understanding that government paper need not be convertible into 
"money" when the government paper is the money! 

The real difference was that in the American colonies the money was 
being created by society for everyone's benefit. The Bank of England on 
the other hand was privately issuing money mainly for the benefit of 
those who controlled it. 

SMITH SMEARS ENGLAND AS TOO 
"SLOTHFUL" TO ISSUE MONEY 

Having dispensed with the Colonies, Adam Smith obscured the 
question of who in England should hold the money power by mis-defining 
the question as whether the English Government should be in the banking 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 321 



business for profit: 

"The profit of a public bank has been a source of revenue to more con- 
siderable states. It has been so not only to Hamburg but to Venice and 
Amsterdam. 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..." 

"The orderly, vigilant, and parsimonious administration of such 
aristocracies as those of Venice and Amsterdam is extremely proper, it 
appears fi*om experience, for the management of a mercantile project of 
this kind. 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." (p,358) 

Adam Smith's assault is one of the most vicious, elitist attacks on 
society as can be found anywhere from a "man of letters." In Smith's 
smearing of the English Government we see the beginnings of the relent- 
less attack on society - the belittling and smearing of its organizational 
form - government, an attack which has been ongoing for over two cen- 
turies, and has reached such a destructive and dangerous level today. 
Most importantly, Smith also inadvertently illuminates the primary pur- 
pose of this attack - to keep the monetary power in private hands: the 
apparent motive for these attacks is to keep society from properly con- 
trolling the money system. 

He said the government is too "slothful" and "thoughtless" to be 
allowed to run a National Bank based on sound principles. Therefore, he 
supports a private Bank of England based on outwardly "vicious" prin- 
ciples with a dismal track record to match? That is what still passes for 
logic among many economists. 

CHARGING INTEREST ON PRIVATELY CREATED MONEY 

The French philosopher Charles de Montesquieu, writing in 1748, 
accurately condemned the Bank of England's type of funding system: 

"Some have imagined that it was for the advantage of a state to be 
indebted to itself: they thought that this multiplied riches by increasing 
the circulation. Those who are of this opinion have I believe con- 
founded a circulating paper which represents money...with a paper 



322 The Lost Science Of Money 





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72c. the philosopher 
Charles de 
Montesquieu (1689- 
1755) noted impor- 
tant differences 
between money and 
credit. While he 
strongly supported 
the circulation of 
paper money, he con- 
demned the circula- 
tion of paper credit. 



which represents debt. The first (is)...extremely advantageous to the 
State; the last can never be so,..(for)...the taxes raised for the payment 
of the interest of the debt are an injury to the manufacturers. ..It takes the 
revenue of the State from those who have activity and industry to con- 
vey it to the indolent; that is it gives facilities for labor to those who do 
not work, and clogs with difficulties those who do work., .These are its 

inconveniences. I know of no advantages. "^^ 

John Law and Adam Smith, the supporters of bank privilege, both 
evaded this question. Law's evasions are sharp and clean: 

"The more they loan the more they add to the numerary value; which 
is of benefit to the country, both because of employment... and extension 

oftrade,"2^and, 

"(The money) is added to the money of the Nation, without 
interest: for what is pay'd by the borrowers is got by the propri- 
etors... All may share in the establishment of the bank through 

ownership of it,"^^ 

But consider how much more appropriate and convenient for all to 
benefit, if the Bank of issue is a National Bank, owned and operated by 
society. 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 323 



SMITH'S EVASION OF THE INTEREST PROBLEM 

Adam Smith artfully dodged this problem. He discussed it as paying 
interest on the public debt, not on money creation, and by repeatedly 
referring to the holders of the public debt as the "creditors of the public," 
Smith created the impression that something real was lent as in a normal 
perception of a creditor-debtor relationship. While some of the govern- 
ment bonds were purchased by individuals with "real" assets, a major 
part was purchased by the Bank of England with new money created out 
of thin air specifically for the purpose. Smith defended the bankers: 

"In the payment of interest of the public debt, it has been said, it is 
the right hand which pays the left.. .it is only a part of the revenue of one 
set of the inhabitants which is transferred to another, and the Nation is 
not a farthing poorer." 

"This apology is founded altogether in the sophistry of the mercan- 
tile system, [it seems that John Law's patent medicine was no longer 
selling after 56 years]. ..To transfer from the owners of.. .land and capital 
stock, from the persons immediately interested in the good condition of 
every particular portion of land, and in good management of every par- 
ticular portion of capital stock, to another set of persons (the creditors of 
the public, who have no such particular interest), the greater part of the 
revenue arising from either must, in the long-run, occasion both the 
neglect of land, and the waste or removal of capital stock.. .a creditor of 
the pubUc, considered merely as such, has no interest in the good condition 
of any particular portion of land,. ..or stock,, .The practice of funding has 
gradually enfeebled every state which has adopted it,.. Is it likely that in 
Great Britain alone a practice which has brought either weakness or deso- 
lation into every other country should prove altogether innocent?" (p.412) 

This problem must have been too strong for Smith to ignore, but 
look at his strange choice of words: 

The process may not be "altogether innocent," question mark! Be- 
aware that Smith has depicted the negative effects of interest payments 
on the debt as falling upon landowners and business owners, rather than 
the whole nation. These two groups were not at the top of the Nation's 
popularity hst. By 1776 more than half of England's population lived 
squalidly in cities. 

Adam Smith and David Ricardo shared nearly the same view of 
money as gold and silver, but Ricardo applied it honestly and was 
strongly opposed to fleecing the nation by charging interest on the 
national debt. Contrast Smith's obtuse explanations with Ricardo's 



324 The Lost Science Of Money 



clear statement: 

"It is evident therefore that if the Government itself were to be the 
sole issuer of paper money instead of borrowing it of the Bank, the only 
difference would be with respect to interest: the Bank would no longer 

receive interest and the Government would no longer pay it..."^^ 

THE BUILDUP OF AN UN-PAYABLE NATIONAL DEBT 

For Adam Smith to even admit that it was the Bank of England that 
made the huge debt possible in the first place, reads like his teeth are 
being pulled: 

"...the Bank of England... either by voluntary discounting those bills 
at current value... frequently enables government to contract a very large 
debt of this kind." 

Frequently enables? Voluntary discounting? Indeed! 

While Smith asked whether the debt could be "altogether innocent," 
others clearly stated the danger. William Paterson, David Ricardo and 
others put forward plans to end the national debt (see Chapter 11). Adam 
Smith whined impotently about the debt but made no proposals for elimi- 
nating it, conveying the message that nothing can be done about it. 

THE QUANTITY OF MONEY AND INFLATION - 
HOW MUCH MONEY IS NEEDED? 

JOHN LOCKE'S VIEWS 

Locke (1692 - 1718) made some very clear monetary observations 
in 1692: 

"For mankind having consented to put an imaginary value upon gold 
and silver by reason of their durableness, scarcity and not being liable to 
be counterfeited; have made them by general consent, the common 
pledges, where men are assured, in exchange for them to receive equally 
valuable things to those they parted with... they having as money, no 
other value, but as pledges to procure what we want... and they procure 
what we want or desire only by their quantity, it is evident that the intrinsic 
value of silver and gold, used in commerce is nothing but their quantity."-^^ 

This paraphrases Aristotle and Paulus; Locke was a lecturer in Greek 
at Oxford. In 1718 Locke confirmed: 

"Observe well these rules: It is a very common mistake to say 
money is a commodity...." On the distinction between money and metal: 
"Bullion is valued by its weight... money is valued by its stamp." and "a 
great abundance of money in a nation will sink it to the general value of 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 325 



the metal and take away the use it had in exchange, as money, according 

to the value put upon it."^"^ 

In these statements Locke described money as an abstract social 
institution, not based on commodity value, though he made it clear that 
the inaccurate commodity view of money was common. He saw the 
inverse relation of the quantity of money in circulation to its value and 
estimated the right amount of money for a society's circulation: 

"But what proportion that is, is hard to determine, because it 
depends not barely on the quantity of money but the quickness of its cir- 
culation.... but to make some probable guess, we are to consider how 
much money it is necessary to suppose must rest constantly in each 
man's hands, as requisite to the carrying of trade." 

SIR WILLIAM PETTY'S VIEWS 

William Petty held a commodity view of money as being only gold and 
silver, but was still aware of how the quantity of money in circulation deter- 
mined its value. In 1682, he wrote his famous Quantulcunque Concerning 

Mone^P-^ in the form of questions and answers: 

"Question#24: May a nation, suppose England, have too much money? 

Answer: Yes: as a particular merchant may have too much 

money, I mean coined money, by him. 

Question #25: Is there a way to know how much money is sufficient 

for any Nation? 

Answer: I think it may be pretty well guessed at.., so much 

money as will pay half a years rent for all the lands of England and a 

quarters rent of the housing and a weeks expense of all the people, and 

about a quarter of the value of all the exported commodities sufficient 

for that purpose..." 

Question #26: What remedy is there if we have too little money? 

Answer: We must erect a bank which well computed doth almost 

double the effect of our coined money 

THE FABLE OF THE BEES 

In 1714, Bernard Mandeville's Fable of the Bees theorized: 

"The quantity of circulating coin in a country ought always to be 
proportioned to the number of hands that are employed." 

JOHN LAW'S VIEWS 

John Law was bom in Scotland. His father was a goldsmith/banker. 
Though John Law's schemes were implemented in France, as described 



326 The Lost Science Of Money 



in Chapter 11, his views were well known in England. Law was much 
ridiculed from the early 1720s onwards when his system brought the 
French monetary order to grief. But he understood banking better than 
his contemporary Political Economists, for Law was not an academic 
but a promoter familiar with the real workings of banking. His published 
works have to be viewed as a branch of his fortune seeking. 

Around 1720, John Law wrote: 

"As money increased, the disadvantage and inconvenience of barter 
were removed; the poor and idle were employed, more of the land was 
laboured, the product increased, manufactures and trade improved, the 

landed men lived better and the people with less dependence on them."^^ 

Law was one of the first to shift the discussion away from money 
and on to credit, being aware that private banks of issue were really deal- 
ing in credits. Law is not interested in giving us a definition of money; 
he is interested in profiting fi-om his knowledge of the definition. To him, 
anything that can be brought into circulation, will be money: 

"They may be brought to work with credit.. .(if) the credit have a cir- 
culation.,. then that credit is money, and will have the same effects on 
home and foreign trade."(p. 1 1). . ."An addition to the money adds to the 
value of the country." 

The tone of his book gives the impression of a lack of concern with 
the over-issue of such "credits." But John Law understood the impor- 
tance of the quanfity of money affecting its value: 

"If money were given to a people in greater quantity than there was 
a demand for, money would fall in value; but if only given equal to the 
demand, it will not fall in value."(p. 11) 

DAVID HUME'S VIEWS 

David Hume had a good understanding of the way quantity affects 
the value of money. In 1752 he wrote: 

"...The prices of everything depend on the proportion between com- 
modities and money, and that any alteration in either has the same effect 
either of heightening or lowering the price. Increase the commodities 
they become cheaper. Increase the money, they rise in their value.., If the 
coin be locked up in chests it is the same thing with regard to prices as 
if it were annihilated.. .It is the proportion between the circulating money 

and the commodities in the market, which determines prices."^^ 

John Law, and Hume understood that money's role was active, 
not passive, upon economic activity. In other words, a growing 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 327 



supply of money could cause economic activity to expand, not just 
prices to rise. Money is an active force. Commenting on the observed 
effects of increasing the supply of money, Hume wrote: 

"We find that in every kingdom into which money begins to flow in 
greater abundance than formerly, everything takes on a new face; the mer- 
chant becomes more enterprising, the manufacturers more diligent; and 

even the farmer follows his plough with greater alacrity and attention. "^^ 
Hume spoke out forcefully against "imaginary paper money" and 

wanted to "banish paper money forever," yet he understood a 

Government bank was superior to a private one: 

"A public bank by this expedient - gives some advantages." 

JOHN STUART MILL 

Mill also incorrectly believed the cost of production determined the 
value of gold and silver, and at the same time held a more accurate 
(though contradictory) view regarding the quantity of money. In 1828 he 
wrote: 

"The value of money, other things being the same, varies inversely 

as its quantity. "^^ 

This is a general guideline, but it's not that simple, because "other 
things" don't remain the same. The quantity of money also alters eco- 
nomic conditions. 

ADAM SMITH ON THE BANK OF ENGLAND OVER-ISSUING 
MONEY 

Almost everyone else knew, but Adam Smith argued to the contrary, 
that it was impossible that the Bank Of England's creating money could 
cause prices to rise. Smith argued: 

"The increase of paper money, it has been said by augmenting the 
quantity and consequently diminishing the value of the whole currency, 
necessarily augments the money price of commodities. But as the quan- 
tity of gold and silver, which is taken from the currency, is always equal 
to the quantity of paper which is added to it, paper money does not 
necessarily increase the quantity of the whole currency." (p. 140) 

To justify this fantastic conclusion. Smith constructed a primitive 
physical analogy to represent the flow of money in an economy, the fore- 
runner of what today would be called an economic "model." Smith 
likened the circulation of money as flowing in a channel. The amount of 
money necessary to fill the channel depended on commercial activity, 
roughly: 



328 The Lost Science Of Money 



'That sum being then sufficient for circulating the whole annual 
produce of their land and labour." (p. 125) 

Smith then asserted that when paper notes are put into circulation by 
the Bank of England, an equal amount of the gold and silver component 
of the channel overflows: 

"The channel of circulation will remain precisely as before... 
Whatever therefore is poured into it beyond this sum cannot run in it, but 
must overflow... It will therefore be sent abroad, in order to seek that 
profitable employment which it cannot find at home. But the paper can- 
not go abroad... because it will not be received in common payments. 
Gold and silver therefore to the amount of [the added Bank currency] 
will be sent abroad. They will exchange for foreign goods. ..but the rev- 
enue of idle people, considered as a class or order cannot in the smallest 
degree, be increased by these operations of banking." 

Sorry, Smith fans, but it won't wash. What if foreign banks were 
also printing foreign banknotes? Where would the gold and silver then 
overflow to? To Disneyland? 

Nearly everyone else realized that adding substantial amounts of 
paper notes to the money supply caused the value of money to drop. 
Why not Adam Smith? Again, Smith's theories protected those "idle 
people" of the Bank of England. 

WHY DO ADAM SMITH'S IDEAS PREVAIL? 

Adam Smith's views suited England's financial/political plutocracy, 
so they lionized him. According to Friedrich List, at least one Enghsh 
Prime Minister, William Pitt made a habit of carrying Smith's book 
under his arm, promoting it. It's beyond the scope of this work to examine 
other areas of Adam Smith's weak economic reasoning; several excellent 
writers have already done that, and I recommend the following: 

The 8^^ Earl of Lauderdale (John Maitland), writing from 1804, 
demonstrated the error of Smith's treating a nation's economy the way 
one would treat an individual, or household, or shopkeeper's economy. 
Lauderdale showed that production, not parsimony, was the crucial fac- 
tor in building national wealth.^^ 

Friedrich List's National System of Political Economy exposed 
much of Smith's Wealth of Nations as a political tract. List pointed out 
that notably lacking in Smith's Wealth of Nations was a role for the 
nation. He showed that while England aggressively promoted Smith's 
"free trade" ideas to other countries, she herself pursued a very different 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 329 



policy, which was to import raw materials and apply mechanical power 
to them in a production process. England was thus applying the princi- 
ples of the industrial revolution, but tried to hide that fact from other 

nations.^ ^ 

John Rae's Sociological Theory of Capital was published in 1834. 
The economist Irving Fisher called it "Truly a masterpiece, a book of a 
generation or a century." Rae showed the error of Smith's theoretical 
method and showed that national wealth is created very differently from 

the way Smith preached,-^^ 

ADAM SMITH'S SELFISHNESS ERROR 

We should not leave the subject of Smith without discussing his 
most vicious error, as made clear by both Buckle and Henry George. 
George wrote: 

"Buckle's 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 phenomenon of selfishness; thus making a 
deductive application of one set of mental principles to the whole set of 
economical facts. He everywhere assumes that the great moving power 
of all men, all interests and all classes, in all ages and in all countries is 
selfishness,., here (in The Wealth of Nations) he makes men naturally 
selfish; formerly, he made them naturally sympathetic... indeed Adam 

Smith will hardly admit common humanity into his theory of motives. '"^^ 
When Buckle says formerly he made them "sympathetic," he is 
referring to Smith's only other work, published earlier, The Theory of 
Moral Sentiments, in which Buckle concluded that Smith had done the 
opposite - there he excluded selfishness! 

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

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



330 The Lost Science Of Money 



exactly where it would lead: 

"Nor can we abstract from man all but selfish qualities in order to 
make as the object of our thought on economic matters what has been called 

'economic man/ without getting what is really a monster, not a man, ''^^ 
Ecco Homo - circa 2000! 

ADAM SMITH vs ENGLAND: 

SUPPRESSING THE 1810 BULLION REPORT: 

The bankers used Smith's monetary ideas against England, in sup- 
pressing the 1810 "Bullion Report." In 1810 the Bank had £ 3,2 million 
of gold, and £ 32 million of banknotes circulating, not including credits 
on the Bank's books. 

Prices rose about 40% from 1797 to 1809, a very unusual event for 
that time, and by 1810 there was strong political opposition to the Bank. 
The report of Parliament's Bullion Committee placed the blame on the 
note-issuing activity of the Bank of England and the country banks. Yet 
the people of the Bank stonewalled the Committee and cited Adam 
Smith's monetary theories to defend the Bank. 

An exasperated Ricardo wrote: "It will scarcely be believed fifty 
years hence, that Bank Directors and Ministers gravely contended in our 
times, both in Parliament and before committees of Parliament, that the 
issues of notes by the Bank of England... had not nor could have any 

effect on the prices of commodities, bullion or foreign exchanges. "^^ 

Parliament ignored the conclusion of its own committee and would 
not blame the Bank; yet thoughtful observers understood that bank cre- 
ated money was responsible. 

THE BANK SHIFTS FROM EXPANSION TO CONTRACTION 

Faced with a situation where continued expansion would not be tol- 
erated, the Bank could have stabilized at the new monetary level, but 
instead, the people of the bank quietly but purposely shifted to contrac- 
tion of the money supply. 

If expansion had concentrated power into the Bank, would contrac- 
tion disperse that power? No - for in the expansion process, the nation, 
through the government, as well as private parties became indebted to 
the bank and to the other bondholders. 

Contraction or deflation would limit additional indebtedness but 
would also increase the value of the currency. This would make the 
existing debts much more difficult or even impossible to re-pay. 

Monetary contraction began in 181 1 as the Bank's discounts (moneys 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 331 



advanced on commercial paper) fell from £20 million, down to £4 mil- 
lion in 1817. In 1819, Sir Robert Peel's monetary committee adopted the 
conclusions of the Bullion Committee, and Parliament passed an Act to 
resume convertibility of the Pound into gold within four years. 
Convertibility had been suspended from 1797. 

However, instead of adjusting the gold standard to reflect the inflat- 
ed pound and maintain the existing money supply and existing value 
relations in commerce, they decided to further contract the currency in 
order to make it convertible into gold at the old higher rates. 

SILVER DEMONETIZED 

Further aggravating this deflation, silver was de-monetized in 1816 
for payments over two Pounds, rendering existing silver coinage and 
bullion un-usable in large commercial transactions. 

These moves caused a dramatic contraction of the currency - a great 
deflation. One commodity index which had been at 142 in April 1818 

fell to 84 in September 1822.^^ 

The greatest effect was on the British National Debt which stood at 
over £800 million. About 80% of this debt was entered in the Napoleonic 
Wars after 1800 in inflated pounds. 

But the Bank, and other "fund holders... were to receive full pay- 
ment of interest and principal in an appreciated currency even 
though the producer might be made bankrupt. Petitions came 
in. . .from all over the country. . .begging that something might be done to 
modify the effects of the resumption of (gold convertibility)," wrote 
Feaveryear. He noted that: 

"Member of Parliament Charles Western... argued that most of the 
National Debt, and indeed of the existing private long term debts as well, 

had been contracted in a depreciated currency.... "^^ Western wanted to 
lower the standard, and asked Parliament to examine how contraction 
had shifted money from the public and from the producers, to the bond- 
holders. His proposals were defeated. It was not until the early 1830s 
that a recovery was in progress. 

"CURRENCY SCHOOL" VS THE "BANKESfG SCHOOL" 

In the aftermath of this monetary rape of England, a debate was 
staged among political economists, perhaps as a distraction. They argued 
over whether only printed banknotes should be considered as currency 
created by the Bank (the Currency School), or whether the bank credits 
created on a client's account were also to be considered as money (the 



332 The Lost Science Of Money 



Banking School). Remember from Chapter 7, that the Scholastics had 
also missed the monetary importance of bank created credits? 

Clearly the Bank-created credits also added to the money supply, so the 
"Banking School" was correct. But the confusion of the "debate" was 
compounded by the Currency School accurately maintaining that the 
quantity of money was the main factor determining prices, and the 
"Banking School" maintaining that it was the price level that determined 
the quantity of money. 

This false debate tactic would be used time and again by bankers 
under fire. That it is still taught as an important monetary debate indicates 
the artificial and superficial nature of monetary thought and training. 

There was one real monetary issue to debate: whether the power 
to control the money system belonged in private hands or in 
Society's hands. Political economists avoided that debate then, and 
they continue to avoid it to this day. 

In Summary 

Early on, the financial establishment realized the need for a justify- 
ing theology. The polifical economists who served as its priesthood kept 
the Scholastics' theoretical method but quickly eliminated moral consid- 
erations, which were not in the interests of their sponsors. 

Adam Smith's Wealth of Nations canonized this amoral version of 
economics. We have shown that, in large part, his purpose was to keep 
the money issuing power from being properly instituted in governmen- 
tal hands, so that private money issuers could assume it. 

This single condition would be enough to hamstring governments 
and promote the concentration of power and wealth into a financial 
establishment. These persons claimed those powers not by their nobility 
of spirit, or their excellence of production or other valuable services per- 
formed for society, but mainly by their ability to perpetrate this fraud on 
their fellow man. 

We saw how Adam Smith's viewpoint generally supported the Bank 
of England, and how his ideas were used against England on several 
occasions in order to serve a particular clique or gang. We found better 
monetary reasoning both before and after him. But even worse than any 
deception was Adam Smith's false concept of humanity's nature as moti- 
vated only by selfishness. That error has had self fulfilling conse- 
quences. 



12 POLITICAL ECONOMISTS: PRIESTHOOD OF THE BANKERS... 333 



Notes to Chapter 12 

' Philip Cantillon, Analysis of Trade, Commerce, etc, (London: self published, 
1759), pp. 152-5. 

^ Guillaume le Soterel, Treasurer General of Navarre to King Philippe of 
Evreux, quoted by Beatrice Leroy, Theorie Monetaire et Extraction Miniere en 

Navarre Vers 1340, in Revue Numismatique, (6^^ series, XIV, 1972), p. 110, as 

quoted by Peter Spufford, cited in 4 below, pp. 305-6. 

^ Nicola Oresme, Z)e MoA^eto, (repr.. New York: T. Nelson, 1956), pp. 19, 31, 36. 

^ Peter Spufford, Money and its Use in Medieval Europe, (Cambridge Univ. 

Press, 1988), pp. 300-10 

^ Oresme, cited above. 

^ Christopher Mollis, The Two Nations, (1935, repr., New York: Gordon, 1975), 

p. 38, based on C.H. Firth in the English Historical Review, January, 1917. 

^ Friedrich List, National System of Political Economy, (1844, London: 

Longmans Green, 1885), p. 124. 

^ Andreas Andreades, History of the Bank of England, (London Univ. 1909), p.48 

^ Adam Smith, The Wealth of Nations, {111 6, Univ. of Chicago Press, Great 

Books Collection, Encyl. Brittanica, 1952) vol. 39. 

^^ Smith, cited above, p. 12 

^^ Alexander Del Mar, The Science of Money, (NY: Cambridge Encyl. ,1904), 

pp. 20-30. 

^2 John Locke, An Essay Concerning Civil Government, (Great Books, cited in 9 

above), vol. 35, p. 35 

^^ Benjamin Franklin, Writings, A Modest Inquiry into the Nature and Necessity 

of a Paper Currency, (Philadelphia, April 3, 1729), p. 126. 

^^ Malthus, Definitions In Political Economy, (London: John Murray, 1 827), p. 60. 

^^ George Berkeley, Querest, (1735, London: Innis, Davis & Hitch, 1750), 

Sketch of National Bank Omitted. 

'^ Henry George, The Science of Political Economy, (1898, New York: R. 

Schalkenbach Foundation, 1992), p. 346, quoting Schopenhauer. 

'^ John Raithby, The Law and Principle of Money, letter to MP. W. Huskisson, 

(London: Cadell & W. Davies Strand, 1811), pp. x, 113. 

^^ Smith, cited above, pp. 135-9. 

^^ Charle Montague, Spirit of the Laws, transl. by T. Nugent, (Great Books, cited 

in 9 above), vol. 38, Chapter 18, # 17. 

^^ John Law, Considerations Sur Le Numeraire, (Paris, 1852). 

^^ John Law, Oeuvre de Law, vol.1, p. 54, 

^^ David Ricardo, Plan for Establishing of a National Bank, as quoted by 

Andreades, cited above, p. 417. 

2^ John Locke, Some Considerations of the Consequences of the Lowering of 

Interest, reprinted in Mcculloch's Principles of Political Economy, and in 



334 The Lost Science Of Money 



Laughlin, Principles of Money. (New York: Scribners, 1911), p. 223. 

^^ John Locke, Essay on Money and Bullion, (London: for B. Lintot, 1718. New 

York Library call #: *c.p.v.72), pp. 9,10. 

^^ William Petty, Quantulumcunque Concerning Money, (London: A&P 

Churchill, 1682) 

2^ John Law, Money And Trade Considered, (London: W. Lewis, 2"^ edit, 1720), 

pp. 10, 11. 

^^ Hume, Essays, Moral Political and Literary, as quoted by L. Laughlin in 

Principles of Money, cited above, pp. 316-18 

^^ Hume, Essays, cited above, p. 313. 

^^ John Stuart Mill, Principles of Political Economy, p. 30, in Laughlin, cited above. 

^^ James Maitland, 8^^ Earl of Lauderdale, The Nature and Origin of Public 

Wealth, (1804, 1819, repr., New York: A.M Kelley, 1962). Also see his Three 

Letters to the Duke of Wellington, (1829, repr,, New York: A. M. Kelley, 1965). 

^^ Frederich List, cited above. 

32 John Rae, The Sociological Theory of Capital, (1834, New York: McMillan, 1905). 

33 Henry George, cited above, pp. 89-90. 
3^ Henry George, cited above, p. 99. 

3^ Ricardo, Works, Principles of Political Economy, (London: J. Murray, 1876), p. 214 
3^ A.E. Feavearyear, The Pound Sterling, (Oxford, 1963 edition, describing the 
Gayer-Rostow-Schwartz price index), pp. 222-225. 
3^ Feaveryear, cited above, pp. 222-225. 



335 



v^JtI/vJl 1 Jl1/Xv 1 D 



THE USURY DEBATE 
CONTINUES 



Economists are the pests of Society 

and the persecutors of the poor." 
Thomas Michael Sadler 



The banker's power over society arose from the privilege to create 
and control the nation's money supply for private profit instead of for the 
common good. Just as important as the power to create money is the 
ability to reduce or overly restrict the circulation and cause a deflation, 
as was done in England after the 1810 Bullion Report. This crime was 
as harmful to society as it was profitable to the bankers and bondhold- 
ers. This is only one of many historical examples demonstrating the neg- 
ative effects of privately controlled money systems. 

The Bank of England's operations signaled a recovery of the lost sci- 
ence of money. But to hold those privileges in a private institution 
required promoting a primitive commodity concept of money as exem- 
plified in Adam Smith's work. Had the dominant view of money been 
Berkeley's or Raithby's, as an institution of society based in law rather 
than a commodity, in all likelihood the society would have understood 
the need to control its money system and not allowed the Bank to do so. 

To assure that the definition of money and other key economic ideas 
were kept obscured, the educational establishment was compromised. 
Over time an orthodox "thesis" of Capitalism was assembled and pro- 
moted to protect the financial villains. Thus the Bank's policy was to 
quickly re-bury the science of money. 



336 The Lost Science Of Money 



UNIDENTIFIED USURY 

The way the Bank of England manipulated England's money system 
can be described as usury - the taking of something for nothing through 
the structural misuse of the money mechanism. This may be called 
''macro usury," because it operates on the entire money system, affect- 
ing all exchanges and property and the labor markets. Over time it cre- 
ates a socially unacceptable and mathematically impossible economic 
equation and if not fought brings society to a form of economic slavery. 

But it was not identified as usury, even by those who saw through its 
public image. Also there was no Church, legal system or tradition to 
oppose it. The Protestant denominations had in large part been neutered 
on the problem of Usury, one of the most important moral and econom- 
ic dangers that any society ever faces. Only the authoritative but distant 
body of thought of Aristotle and the Scholastics warned of the problem 
from across the centuries. 

THE "THESIS" OF CAPITALISM 

We will consider Adam Smith's Wealth of Nations, including his 
mis-definition of money and related errors and truths as the "Thesis" of 
capitalism; the quasi official statement setting forth its basic principles 
of operation. It was mainly a rationalization and justification for prac- 
tices already in existence, and a power structure already in place. 

Promoted by interested parties, this "Thesis" (or theory) could stand 
for a time on its own plausibility. However, since it was false in several 
essential elements; over time, scrutiny and critical attention would 
expose its falsehoods making them difficult and expensive to support. 
Furthermore, such attacks would be accurately seen as a search for truth, 
against vested interests. These "errors" could not simply be removed 
from "Thesis," for they were the very source of the unearned benefits 
and the raison d'etre for "Thesis" in the first place. 

ENGLAND IN TROUBLE - THE VISIBLE EFFECTS OF USURY 

Most economic theorists were content to accept and spread these 
economic sophistries. But those willing to open their eyes could direct- 
ly observe that Englishmen were being destroyed by these economic 
theories. Natural leaders such as William Cobbett were deeply con- 
cerned over the deteriorating condition of the people. Cobbett, a careful 
observer, wrote in 1806: 

"Experience, daily observation, minute and repeated personal 
inquiry and examination, have made me familiar with the state of the 



13 THE USURY DEBATE CONTINUES 337 



labouring poor, and sir, I challenge contradiction when I say, that a 
labouring man in England with a wife and only three children, though he 
and his family be economical, frugal, and industrious in the most exten- 
sive sense of those words, is not now able to procure himself by his 

labour a single meal of meat from one end of the year unto the other." ^ 
Against these conclusions were thrown sweeping assertions to the 

contrary such as Macauly's 1830 statement that he was: 

"unable to find any satisfactory record of any great nation, past or 

present, in which the working classes have been in a more comfortable 

situation than in England in the last thirty years. "^ 

Such bold lies emanating from and promoted by the financially 
powerful in positions of influence, could only be decisively refuted by 
careful empirical studies, which were difficult to carry out. There were 
no research libraries where the actual data could be readily examined. 

As noted, the Reverend and economist Thomas Malthus didn't dispute 
the appalling condition of the people but used it to preach that they must 
choose between having enough food and having sex! The English poet 
Carlyle would later refer to such Malthusian beliefs as "pig philosophy." 



ROGERS AND ARISTOTLE TO THE RESCUE 

Professor J.E. Thorold Rogers, an Aristotelian scholar at Oxford, 
carefully researched what had happened to the English worker from just 
after the break with the Catholic Church. From Roger's arguments and 
indisputable statistics emerged this terrible conclusion: 

"I contend that, from 1563 to 1824, a conspiracy, concocted by 
the law and carried out by parties interested in its success, was 
entered into to cheat the English workman of his wages, to tie him 
to the soil, to deprive him of hope and to degrade him into irreme- 
diable poverty... For more than two centuries and a half the Enghsh law 
and those who administered the law were engaged in grinding the 
English workman down to the lowest pittance, in stamping out every 
expression or act which indicated any organized discontent, and in 

multiplying penalties upon him when he thought of his natural rights."^ 
In 1844 the productivity of the English people was higher than ever 
before, but "the condition of the people was vastly worse than it had ever 
been before in recorded history," wrote Mollis. From Henry VIII's time 
to 1866, Rogers found that while prices had risen twelve fold, agricul- 
tural wages merely doubled, 

Hollis notes that Rogers' study showed that: 



338 The Lost Science Of Money 



"The gentlemen of England, so far from being those leaders of 
the nation toward a finer and a wider freedom which the progressive 
history had represented them to be, were revealed as... the trickiest 

and most rapacious class ever known among men."^ 

When Rogers' Professorship expired in 1867, he stood for re-election: 
"They put up against him a certain Bonamy Price, a man who had 
until recently been off his head, though Professor Hewins in the 
Dictionary of National Biography assures us that by the time of the elec- 
tion he had completely recovered," wrote HoUis.^ The mentally unbal- 
anced Price was elected, and the Aristotelian master Thorold Rogers 
lost his professorship. 

CHRISTIANITY JOINS IN THE "RESCUE" 

It was at this point, Hollis contends, that elements of Christianity 
and Judaism came to the temporary rescue of the common Englishman: 

"The first effective attacks on the system" came not from econo- 
mists but from the religious motives of three men: Thomas Michael 

Sadler, a Methodist, Lord 
Shaftesbury (Ashley), an 
Evangelical, and Disreali, 
a Jew. Hollis wrote: 

"They (Sadler and 
Ashley) were not always 
able to clearly under- 
stand nor wholly to 
explain how it was that 
society could survive if 




13b. 

Thomas Michael Sadler, 
an unsung hero of 19th 
century England, who 
for religious reasons 
helped alleviate the 
vicious treatment of 
England's working chil- 
dren and women. 



13 THE USURY DEBATE CONTINUES 339 



the poor were raised above the level of starvation. It was their glory that 
this inability did not stop them for an instant."(P- 138-9) 

"It was Sadler who saw that the law of charity must be re-introduced 
as the law of life, even though [according to the political economists] it 
destroy society. It was Disraeli who saw that it would not destroy society 
but would save it from destruction. . .Deep down in his soul there was the 
immemorial teaching of his ancient race against usury - the teaching of 
Moses and the teaching which traditions of the race take back beyond Moses 

to the identification of usury with the serpents bite of Eden, ['neshec']"^ 

CHARLES DICKENS' "SCROOGE" 

Reflecting the inability of the English financial establishment to 
continue their policies of depraved indifference toward humanity, 
Dickens' great novel about "Scrooge" (A Christmas Carol) was pub- 
Hshed in 1843. Though part of the book's message was exceptionally 
constructive, the course of action envisioned in the story - the self- 
reform of the evil-doer - rather than his destruction, was perhaps the 
wrong message, judging by what has happened since then. 

THE TEN HOURS BILL 

One of the significant achievements of this reform movement was 
the "ten hours bill" of 1847 which reduced from twelve to ten hours the 
daily time that women and children could be forced to work in the fac- 
tories. Even the corresponding cut in pay they endured did not diminish 
that at last they were being considered as human beings, not just factory 
fodder. Then, fi*om the mid 1800s to the very early 1900s, the 300-year 
decline in the English working man's standard of living reversed and his 
condition improved. 

HoUis may have overestimated the relief gained for humanity 
against the bankers, when we observe the continuing manipulations in 
the monetary area, and factor in World War II. However, his conclusion 
on the importance of a true spiritual motive stands up to our test, for it 
would be the Church of England that finally led to the nationalization of 

the Bank of England in the mid 20*^ Century (see Chapter 20). 

THE BETTER ECONOMISTS OPPOSE THE BANK 

John Wade noted inl842 that: 

"All the great authorities are in favor of a change (Ricardo Mcculloch, 
Tooke, Torrens, Thompson, William Clay, Porter, Jones Loyd,)...to have 

given in their [support] to a National [government] Bank."-^ 



340 The Lost Science Of Money 



Wade's conclusion was that there should be: 
"One issue [of money] by one bank under one authority;., .for 
the good of the country alone.'' 

Unfortunately, these experts, while able to see the iniquity of the pri- 
vate Bank of England, didn't have the clear concept of money needed to 
fight the Bank effectively, and the Bank was able to maneuver around 
them. For Wade's statement also called for the money to be "nearly fixed 
in amount and convertible,..." But at least the Bank could no longer 
ignore them. 

USURY IN TROUBLE 

The structural usury of the Bank of England's operations, what we 
term "macro-usury," was under heavy attack. Even simple usury, defined 
as the riskless charging of interest, had never been on firm ground. 
Calvin, who had delivered Protestantism to usury in 1536, was not 
enthusiastic about it (see Chapter 7). In 1822 it was sfiU under formal 
ban of the Catholic Church, and the Old Testament and the Koran con- 
demn it to this day. 

We saw the attempted justification for macro usury in Adam Smith's 
attacks on government money in Chapter 12. The changing secular 
rationale for simple usury can be traced through the writings of Bacon, 
Petty, Smith and Bentham. One recurring theme was the need to attack 
Aristotle: 

Francis Bacon (1561-1626) wrote: 

"Few persons have spoken usefially of usury" {Works, Essay # 41)^ 
and he quickly attacked Aristotle, first by criticizing the Scholastics for: 

"...almost having incorporated the contentious philosophy of 
Aristotle into the body of Christian religion" {Works, p. 209), 

"Aristotle... full of ostentation.. ."(^rfe, p. 800) 

and 

"Aristotle so confident and dogmatical" {Works, p. 850). 

In his ignorance, or his zeal to justify usury, Bacon went so far as to 
criticize Aristotle as: 

"barren of the production of works for the benefit of the life of man."^ 

Yet Bacon does not refute, or even discuss, Aristotle's monetary 
views. And when he gave his jusfification of usury, Bacon 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..." 



13 THE USURY DEBATE CONTINUES 341 



Bacon was aware of problems caused by usury: 

"(Its inconveniences). ..It makes fewer merchants. ..(and) makes poor 
merchants. It bringeth the treasure of a realm or state into few hands." 
{Works, p. 785) 

Bacon's "solution" was to propose setting two usury rates - a general 
rate at 5% which anyone could charge, and a special higher rate which 
would require a license. But this would clearly only further accentuate the 
concentrating power of usury. 

Bacon's inability to understand the abstract nature of money was 
combined with a crass materiahstic instinct for personal gain. In 1621 
Parliament charged him with corruption while holding an office of the 
Crown and fined him the astronomical sum, for the time, of £40,000 and 

had him imprisoned. ^^ 

Regarding the controversy on whether Shakespeare's works were 
really authored by Bacon, it's not possible to reconcile Bacon's statements 
on usury with Shakespeare's views against usury eloquently presented in 

the Merchant of Venice A 

Bacon's usury rationale was not to be incorporated into the "Thesis" 
of capitalism, for William Petty had redefined it in economic rather than 
psychological terms: 

"Question #28: What is interest or use money? 

Answer: 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 justification has a definite ascetic rehgious overtone to it, with 
a desire to reward self denial. It is the rationale still given in the 20th 
century by some members of the Austrian School of Economics. 

Adam Smith refined Petty's rationale: 

"The interest or the use of money. It 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 afibrds him the opportunity of making this profit."'^ 

Smith overlooked that the lender gets his profit even when the 
enterprise loses. Part of the problem with simple usury would disappear, 
if instead of being based on the "opportunity" for profit it were based on the 



A) Shakespeare's Merchant of Venice was based closely on another play // 
Pecorone, written by Ser Giovani of Venice, in 1378. 



342 The Lost Science Of Money 



actual profit made, as in the business stmctures Venice used successfully for 
many centuries. 

BENTHAM'S USURY RESCUE SQUAD 

In 1787 Jeremy Bentham wrote In Defence of UsuryP The title 
indicates continuing problems for usury. 

Though written only 11 years after Smith's Wealth of Nations, the 
decadence of Bentham's thought and manners is evident. Bentham, the 
son of a rich lawyer, and a lawyer himself, not an economist, had none 
of the surface politeness normally evident in Smith's work. In fact, in the 
above work he can be fairly and justly described as something of a pig. 

First Bentham created the present mis-definition of usury: 

"The taking of a greater interest than the law allows. ..(or) the taking 
of greater interest than is usual." (p 8) 

Ignoring hundreds of years of the Scholastic's work, Bentham continues: 

''...there can be no such thing as usury: for what rate of interest is 
there that can naturally be more proper than another.... Custom therefore 
is the sole basis which either the moralist in his rules and precepts, or the 
legislator in his injunctions can have to build on." (pp 9-10) 

Thus it seems Bentham has achieved the purpose of his book in only 
nine pages, by defining usury out of existence! When he wrote, the legal 
rate was 5 or 6 percent per year. It had been constantly reduced from the 
10% when Henry the 8th legalized it. Bentham neglected to inform his 
readers that usury was illegal before then. 

The predatory nature of Bentham's philosophy is apparent in his justi- 
fication of the harmful effects usury has on common people. He dismissed 
it writing that: (paraphrasing closely) simple people will be robbed more 
in buying goods than in borrowing money, (p 41) Why were Bentham's 
works touted, then and now, as economic or philosophic achievements? 

Bentham laid bare his motive in an attack on Aristotle: 

''...'to trace an error to its fountain head is to refute it' said Lord 
Coke. If our ancestors have been all along under a mistake. ..how came 
the dominion of authority over our minds?" (p 95) 

One would naturally think he is going to cite the strong Old 
Testament admonitions against usury - particularly since Bentham was 
Jewish - but no, he ignores those prohibitions completely in the book. He 
is after Aristotle: 

"Christians were too intent upon plaguing Jews, to listen to the sugges- 
tion of doing as the Jews did. The anti- Jewish side of it foimd no inopportune 



13 THE USURY DEBATE CONTINUES 343 



support in a passage of Aristotle: that celebrated heathen, who in all mat- 
ters wherein heathenism did not destroy his competence, had established 
a despotic empire over the Christian world. As fate would have it, that 
great philosopher with all his industry and all his penetration, notwith- 
standing the great number of pieces of money that had passed through 
his hands... [and]... notwithstanding the uncommon pains he had 
bestowed on the subject of generation, had never been able to dis- 
cover in any one piece of money any organs for generating any other 
such piece. Emboldened by so strong a body of negative proof he ven- 
tured at last to usher into the world the results of his observation in the 




13c. Jeremy Bentham's 1811 "Defence of Usury" wasn't very convincing. 
Like those supporting usury before him, he launched a vicious attack on 
Aristotle. Bentham had his body preserved in alcohol, and donated to the 
British Museum/University College of London. He can still be viewed sit- 
ting at his desk, fully clothed (thank God!) in a roll out display. 

That's utilitarianism for you! 



344 The Lost Science Of Money 



form of an universal proposition, that all money is in nature barren... A con- 
sideration (he didn't consider) though a Daric would not beget another 
Daric,...yet for a Daric which a man borrowed he might get a ram and a 
couple of ewes.. .and the ewes.. .would probably not be barren." (p 98-101) 
Thus Bentham spread the same erroneous justification that Calvin 
used. The Scholastics had clearly shown it was the "ewes," not the coins, 
that create more ewes. Couldn't these fellows read? 

THE "ANTI- JEWISH" PLOY 

So to be anti-usury is to be anti- Jewish! Instead of criticizing the 
Jews for the activities of some of their most powerful members, activities 
viewed as harmful by all prior moral systems, especially the Jewish 
Bible, Christians should simply have joined in the infamy and done as 
the Jews did! Instead of considering that some of the Jews were acting 
anti-socially, Bentham attacked Aristotle for corrupting the Christians! 

Bentham's attack is an early example of the anti-Semitism smoke- 
screen to protect improper monetary activities, a tactic that has been 
used to block the search for knowledge for decades in America. To brand 
a concept as "anti-Semitic," whether it is or not, has been sufficient to 
destroy theories without examining their merits. 

It should be noted that Aristotle never mentioned the Jews in any of 
his writings. In attacking Aristotle's condemnation of usury, aside from 
his abusive manner, Bentham found it necessary to avoid discussing 
Aristotle's concepts of the social/legal nature of money. 

Until reading Bentham's book, the author had thought the greatest 
crime any British citizen committed against the Greeks was taking the 
"Elgin" Marbles from the Acropolis. However, Bentham's slimy attack 
on Aristotle does supersede it. 

In the rest of the work Bentham tried to associate some of the posi- 
tive attributes of thrift with money lending! Finally, compound interest 
was forbidden in Bentham's day and he urged its legalization. 

Charles Haney's History of Economic Thought classified Bentham 
as a "hedonist" - one who asserts that individual actions are solely moti- 
vated by a desire for pleasure and avoidance of pain. "The community, 
he [Bentham] states, is a fictitious body, and the common interest can be 
understood only by what is the interest of the individual... nothing ought to be 
done or attempted by the government... his rule of government is 'be quiet'." 

THE PROBLEM OF MONO-THESIS 

If this is what passed for economic writing "in defense of usury" - in 



13 THE USURY DEBATE CONTINUES 345 



defense of "Thesis" - then capitalism's thesis was in deep trouble. It was 
rabid on usury, rabid against Aristotle and rabid against the Government. 

JOHN WHIPPLE'S ENLIGHTENED ATTACK ON USURY 

In America, legal and monetary thought advanced rapidly in the 
work of John Whipple, a Rhode Island lawyer. In 1836 Whipple wrote 
The Importance of Usury Laws - An Answer to Jeremy Bentham, which 
was finally published in 1850. He used correct principles of money to 
attack Bentham's errors: 

"A just system of currency has its foundation in equal rights. Equal 
rights are based on principles in harmony with the laws of nature." 

Justice and principles. How few lawyers think in those terms today! 
Combining the concept of rights (bom in the new world) with an 
Hellenic or Classical view of harmony with nature (bom in ancient 
Greece) led Whipple to his conclusions. 

Whipple argued theoretically from the nature of money: 
"(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, any further than 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, '' And, 

"The power of money then over every other article, arises out of 
the artificial character given to it by the state, and not out of the 

qualities of the material of which it is composed.''^"^ 

Whipple also argued from experience, giving examples of the docu- 
mented problems that occurred when usury laws were removed in 
Massachusetts, Indiana and other states. Whipple thus combined sound 
reasoning with attention to the real facts. 

Whipple was not frightened off by Bentham's anti-Semitic smoke- 
screen. Remarking on Bentham's assertion that anti-usury laws were due 
to prejudice against the Jews, Whipple said: 

''The real truth is that this feeling which he calls prejudice is the 
result of the moral instinct of mankind. " 

THE MATHEMATICAL IMPOSSIBILITY OF 
LONG TERM USURY 

Finally, Whipple did the obvious. He calculated the exact mathematical 
results and showed the impossibility of sustaining long term compound usury: 



346 The Lost Science Of Money 



"If 5 English pennies.. .had been.„at 5 per cent compound interest from 
the beginning of the Christian era until the present time (say 1 850), 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'' (p.48 ) 

That's 32 billion Earth sized spheres! In other words, it's not possi- 
ble in nature. Thus riskless usury even at moderate rates cannot work 
over long time periods. Of course, 1,800 years is a long time and no one 
worries about a money system lasting that long. But the example gives 
insight into the kind of unnatural forces at work when a geometrically 
compounding demand is placed on society or nature. Something will 
have to give; the money system must break or society must break, or both. 

The high development of Whipple's concepts just ten years after 
Jefferson died suggests the existence of an advanced American literature 
on monetary theory and we continue to search for other traces of it. For 
a work of this thoughtfulness and quality to remain unpublished for four- 
teen years, and unknown through 19^"^ and 20^^ century America, does 
indicate a deliberate repression of monetary thought. 

THE MONETARY REFORMS OF 1844 

Bentham's book was republished in 1842 as the debate on the Bank 
of Englands' abuse of power reached a climax. But the growing pressure 
was too intense. From 1811 the Bank's policies had not only continued 
to impoverish the lower levels of English society but had put the squeeze 

on many wealthier elements as well Under the 1844 reforms, the Bank:^^ 

* was forced to stop charging interest on the Government's "debf to it: 
"It is exempt from paying interest on its debt to the Bank so long as the 

charter of the latter is continued," wrote Andreades.^^ Ricardo's attacks 
finally bore fruit. 

* a separate note-issuing department was created. Gold backing was 
required for issuing any more than the £15 million in printed currency 
then outstanding. Silver could once again be used as metallic backing by 
the Bank, up to 20% of its total metal; but silver coinage was not 
re-monetized. 

* fixed the note issue of other banks at the average outstanding during 
the prior 12 months. 

This well meaning legislation meant the Bank could no longer act 
with impunity. However, it was also a disastrous formula for continued 
deflation, and had to be temporarily rescinded in 1847. Further deflation 



13 THE USURY DEBATE CONTINUES 347 



was then avoided mainly by the fortuitious discovery of gold in 
California in 1849. 

THESIS, ANTITHESIS AND SYNTHESIS 

Though the blow struck against the Bank was not a mortal one, the 
dangers of capitalism's "Thesis" standing alone were apparent. The note 
issuing power of the Bank was severely limited; but for a time the near- 
ly identical process of creating loan credits on its books was not so lim- 
ited. Yet there was still the danger that the whole scheme of the private 
central bank could be unwound and relegated to history's dust bin of 
errors. Suppose society were to demand restitution and seize the male- 
factors' ill-gotten wealth? 

It might be more convenient for the people of the bank if the false 
"Thesis" were under attack not by truth but by a similarly false "Anti- 
Thesis." Such a debate between two partially false opposing ideas could 
be easier to manage than continually supporting one partly false idea 
standing alone. 

Those rejecting "Thesis," instead of finding truth, could be distracted 
by, or channeled into a partly false "Anti-Thesis." Attacks upon "Thesis" 
could be more easily characterized as coming from a competing, perhaps 
even dishonest doctrine rather than a search for truth. The very idea of a 
"search for truth" or a more accurate view of the world loses importance 
as the debate degenerates into forms of tribal warfare with sides chosen 
mainly for emotional reasons, or financial affiliations. Over time, frus- 
tration and anger is whipped up on all sides to assure a good fight, and. 
forgiveness is made impossible as agent provocateurs carry out atroci- 
ties against the ideological representatives of both sides. 

A wasteful expenditure of misdirected energy ensues, allowing an 
underlying "Synthesis" to be maintained by the behind-the-scene man- 
agers of the debate. Thus we are not examining "thesis, antithesis and 
synthesis" in their Hegelian sense as a progression of history, or even nec- 
essarily as definite events, but rather as a potential tool of societal control. 



MARX AND ANTI-THESIS APPEAR 

Indicafions of an "Anfi-Thesis" appeared in rough form in 1848 
when Karl Marx and Frederich Engels, active in revolutionary political 
debate, were commissioned by the Communist League to write the 
Communist Manifesto. 

Its opening lines seem more likely to raise apprehension than to per- 
suade: "A specter is haunting Europe - the specter of Communism. All 



348 The Lost Science Of Money 



the Powers of old Europe have entered into a holy alliance to exorcise 
this spectre ("Pope and Czar, Mettemich and Guizot, French Radicals 
and German police-spies")... Where is the party in opposition that has 
not been decried as Communistic by its opponents in power?" 

That opening statement indicates some of the old "non-bank" pow- 
ers of Europe were being drawn into a de-facto "pro-bank" alliance by a 
perceived threat to order and property. 

MARX IN TRADITION OF ENGLISH POLITICAL ECONOMY 

Today's popular image of Marx as an opponent of democracy and 
order arose in part from later propaganda: 

"Marx, the flower of classical English political economy, was less a 
revolutionary than his followers have thought and far more a revolu- 
tionary than his adversaries have feared," wrote Terence McCarthy, not- 
ing that Marx's intent was to show that the principles of "political econ- 
omy" themselves led inexorably to socialism. ^^ 

A refined "anti-thesis" appeared with Capital^. Conceived as a work 
in six volumes, Marx wrote in the style of English political economy, 
spending his last 20 years reading economics at the British Museum's 
Library. McCarthy noted that: "Adam Smith was the overwhelming influ- 
ence upon the mature Marx. Marx's approach to economics, although 
deeply affected by Ricardo, was basically Smithian." (p. ix) 

Like Smith, Marx's method is primarily theoretical analysis. Like 
Smith, Marx is internationalist (cosmopolitan) rather than nationalist. 
Both Marx and Smith largely ignored the role played by the Jews in 
financial history. Marx was of Jewish ancestry, but his father converted 
to Evangelical Lutheranism and Karl was baptized at age six. 

MARX'S CONCEPT OF MONEY MIRRORS ADAM SMITH'S 

The similarities on some key issues of these two "founders" are 

^Marx (1818 - 1883) wrote Capital while living in the slums of Soho, plagued 
by illness, poverty and tradesmen's lawsuits. Volume 1 was published in 1867. 
Working from Marx's notes and outlines, Engels finished vol. 2 in 1885 and vol. 
3 in 1894. Before dying Engels asked Karl Kautsky to write vol, 4. But it proved 
impossible to complete as directed: "(^^i^'s) material... was disorganized and 
disjointed," noted McCarthy, citing "Marx's none too clear wishes." (p v) 

Suzanne De Brunhoff 's Marx On Money notes a "seemingly insurmountable 
obstacle: the texts were scarcely edited by Marx.... Engels points out... 'the 
greatest difficulty was presented... we had no finished draft, not even a scheme 
whose outlines might have been filled out, but only the beginning of an elabora- 
tion - often just a disorderly mass of notes, comments and extracts. '"(p 73) 



13 THE USURY DEBATE CONTINUES 349 



striking, especially their common views on the nature of money. Both 
Karl Marx and Adam Smith shared virtually the same primitive com- 
modity concept of money; they were both essentially "metallists:" 

"...Throughout this work, I assume for the sake of simplicity gold as 
the money-commodity. Gold, the equivalent money par excellence," 

wrote Marx,^^ 

The same view is repeated in vol. 2: "For the sake of simplicity we 
regard only gold as material for money," (v. 2, p. 547) and in vol. 3: 

"It should always be borne in mind that.. .money - in the form of pre- 
cious metal - remains the foundation from which the credit system, by 
its very nature can never detach itself." (v. 3, p. 592) 

Like Smith, Marx began his magnum opus with a discussion of 
money. Like Smith, Marx thought the value of gold was ultimately based 
on the labor needed to obtain it, but they differed slightly on exactly how 
this came about: "This value (of money) is determined by the labour- 
time required for its production," wrote Marx, meaning the average cost 
in labor, of the commodity used as money, (v. 1, p. 106). For Smith's 
similar views see Chapter 12. 

Marx credited Benjamin Franklin with originating this idea that 
value was measured by labor, but John Locke seems to have preceded 
Franklin in this view by some years. 

Regarding paper money, Marx wrote: "Paper money is a token repre- 
senting gold, or money... only in so far as paper money represents gold, which 
like other commodities has value, is it a symbol of value." (v. 1, p. 144) 

These views are repeated often in the first sections of vol. 1, where 
Marx makes his primary exposition on money. Addressing scholars who 
question whether those were Marx's real monetary views, De Brunhoff 
warns against considering Marx's discussion there as merely hypothetical, 

Kautsky remarked "[Engels] had initiated me into the reading of this almost 
indecipherable manuscript... whoever has seen Marx's handwriting (knows) 
how hazardous the interpretation of many of his hieroglyphics. . .."(v. 4, p xxiii) 
Nevertheless, Kautsky completed vol. 4 and it was published in German in 
1904. McCarthy thought vol. 4 "ought to have appeared as the first volume of 
Capital. Had Marx organized his work in that way, the extreme difficulty which 
even the earnest student of economics encounters in entering the realm of 
abstraction into which he is introduced on page 1 of volume 1 of Capital, would 
largely have been overcome." (p v) But volume 4 was not available in English 
until 1952, when McCarthy translated it. 

In addition, the final section of vol. 1 on the accumulation of primitive cap- 
ital would have been better at the beginning of that volume. 



350 The Lost Science Of Money 



as a "theory of a non-theory of money," leaving the theory of money to 
be resolved elsewhere in the four volumes. We agree. 

Consistent with their materialistic view of money, neither Smith nor 
Marx discuss the pivotal Mixt Moneys of Ireland case of 1 601 , described 
in Chapter 10, which re-affirmed the legal nature of money. 

Though both thought the values of gold and silver were determined 
by the labor needed to produce them, neither checked on the costs of 
mining. Marx had William Jacob's classic 1830 study on the precious 
metals and even mentions Jacob's report that mining costs were higher 
than the values assigned to the metal as money (v. 1, p 47). But Marx 
puts that aside, preferring to rely on his theoretical method. 

ON THE QUANTITY OF MONEY 

Like Smith, Marx ignored how the quantity of money could affect 
prices. In fact he reversed the relationship: 

"The quantity of the medium of circulation is determined by the sum 
of the prices that have to be realized." (v. 1, p. 133-34) 

In other words, prices determine the money supply, rather than the 
money supply determining prices - similar to the view of the old 
"Banking School" in the debates after the 1810 Bullion Report. There is 
an element of truth in it, in so far as those controlling money could gov- 
ern their issuance of it by such a factor at times, especially where com- 
mercial banks are creating credit in reaction to business demands. 

However, the causal effect of quantity had been fairly well under- 
stood, and Marx's footnotes show he was aware of those arguments. His 
^^^^^^^^^^^^^^^^^^^^ reversal of quantity and price does 
^^^^^HJP^^^^^PIIII^^^^^I fit better into his general view of 
^^^^Hr ^^^^H ^^^ proletariat vs the industrialists, 

^^HF ■■ ■■^^^- W^^^k Their setting of prices rather than 

^^^B'.:;; ,;„;. ,, .j^HBH^^B ^^^ banks creating money is easier 
^Hr '"''''^^i'^.^^HHI^H^^^^^I to blame as the controlling factor. 



13d. Because Karl Marx's concept 
of money did not differ significant- 
ly from Adam Smith's faulty view, 
"Marxism" never really threat- 
ened the basis of capitalism's 
power - the control over society's 
monetary system. 



13 THE USURY DEBATE CONTINUES 351 



Both Marx and Smith were derelict in not identifying the quantity 
factor of the inflow of gold and silver from the plunder of the Americas. 
It was clear enough to Rice Vaughan in the 1630s: "This real increase (in 
prices) is grown principally and in a manner solely, out of the great 

quantities of gold and silver.. .come out of the West and East Indies.. .."^^ 

ON CENTRAL BANKING AND THE PUBLIC DEBT 

Marx accurately described the Bank of England and the public debt: 
"At their birth the great banks, decorated with national titles, were 
only associations of private speculators, who placed themselves by the 
side of governments, and thanks to the privileges they received, were in 
a position to advance money to the state. . .The Bank of England began 
with lending its money to the government at 8%; at the same time it was 
empowered by Parliament to coin money out of the same capital, by 
lending it again to the public in the form of bank notes,.,. It was not long 
ere this credit money, made by|he bank itself, became the coin in which 
the Bank of England made its loans to the state, and paid, on account of 
the state, the interest on the public debt. It was not enough that the bank 
gave with one hand and took back more with the other; it remained, even 
whilst receiving, the eternal creditor of the nation down to the last shilling 
advanced." (v. I,p828) 

"The public debt becomes one of the most powerful levers of prim- 
itive accumulation. As with the stroke of an enchanter's wand, it endows 
barren money with the power of breeding and this turns it into capital, 
without the necessity of its exposing itself to the troubles and risks 
inseparable from its employment in industry or even in usury. The state- 
creditors actually give nothing away, for the sum lent is transformed into 
public bonds, easily negotiable, which go on functioning in their hands 
just as so much hard cash would, (v. 1 , p 827) 

These statements, at the end of volume 1, show a much greater 
understanding of money than we see in Marx's formal definition as gold 
and silver commodities, near the beginning of that volume. "Enchanters' 
wand" indicates an awareness of the power of legal tender status. 
"Barren money" indicates more than a passing familiarity with 
Aristotle's concepts of money. "Risks inseparable from its employment 
in industry" indicates a greater understanding than Marx displayed in his 
scenario of the exponential growth of industrial capital presented below. 

ON PRIVATE CONTROL OF MONEY CREATION 

Marx showed progress over Smith: "Since the standard of money is 



352 The Lost Science Of Money 



on the one hand purely conventional and must on the other hand find 
general acceptance, it is in the end regulated by law," (v. 1, p 112) and, 

"Coining, like the establishment of standard prices, is the business 
oftheState...."(v. l,p 140) 

Earlier, in 1848, plank # 5 of the Communist Manifesto called for: 

"Centralization of credit in the hands of the state by means of a 
national bank with state capital and an exclusive monopoly." 

However, that view was not consistent with Marx's commodity view 
of money. Thus 19 years later, we find no call for this crucial reform in 
Capital, where Marx writes: 

"The only difference between coin and bullion is one of shape, and 
gold can at any time pass from one form to the other." (v. 1, p 140) 

But applying that view in practice relinquishes control over money 
to the "financiers" with the power to "pass" gold from bullion to 
coinage. This had been the purpose and effect of the English Free 
Coinage Act of 1666, discussed in Chapter 10. 

The lack of reform proposals in Capital is noteworthy. De Bmnhoff 
writes: "Marx is obviously no more a monetary reformer than he is a 
Saint-Simonian reformist." (p 120) Marx doesn't require reform, for he 
is postulating an inevitable progression toward his desired outcomes. 

THE WAR BETWEEN INDUSTRY AND LABOR 

Marx postulates a fundamental struggle between Capital and Labor, 
focusing on capital mainly as industrialists rather than as private central 
banking. Where Adam Smith approached political economy in sympathy 
with capital, Marx approached it as a champion of labor, and strongly 
criticized Smith: "Adam Smith forgets to mention labour power as one 
of the elements of productive capital." (v. 2, p 235) 

This dichotomy grew to historic proportions, eventually promoting 
a destructive antagonism between business and labor in the western 
world to this day. But while their interests strongly differ, they also have 
much to gain from co-operation. Parasitic finance, though, offered nei- 
ther of them anything, harming both labor and industry. 

Marx's Nightmare of Exponential Growth 

Since Marx considered profits as having been expropriated from the 
workers, he devoted little attention to the visionary, planning, organiza- 
tional, and risk taking skills of the entrepreneur and focused on an expo- 
nentially growing capital in the hands of the industrialists: 

"The capital produces yearly a surplus value, of which one part is 
yearly added to the original capital; since this increment itself grows 



13 THE USURY DEBATE CONTINUES 353 



yearly along with the augmentation of the capital already functioning... 
(v, 1, p 672)The original capital of £10,000 brings in a surplus value of 
£2,000, which is capitalized. The new capital of £2,000 brings in a sur- 
plus of £400 and this too is capitalized; which in turn produces a further 
surplus value of £80 And the ball rolls on." (v. 1, p 637) 

But since the industrialists were operating within natural limits, pro- 
ducing real goods, they were not really in the position painted by Marx. 
They took risks - they could lose their assets, except in monopoly situa- 
tions. Later in vol. 1, it is apparent that Marx realized this contradiction, 
and one has the impression that some "stock themes" were used, though 
his awareness had advanced beyond them. 

The nightmare of unnatural exponential risk- free growth does exist 
in another area that Marx was well aware of - the interest on the nation- 
al debt. He recognized the bank problem, but de-emphasized it: 

"The great part that the public debt, and the fiscal system corre- 
sponding with it, has played in the capitalization of wealth and the 
expropriation of the masses, has led many writers like Cobbett, 
Doubleday, and others, to seek in this, incorrectly, the fundamental cause 
of the misery of the modem peoples." (v. 1, p 829) 

Marx's focus fits his theme of the battle between industry and labor, 
but history has shown that the real struggle would be the people of the 
bank (what he refers to as a "bankocracy"), against both industry and 
labor. But explaining that to the "proletariat" would be hard. 

To Marx, the unjust central bank and centralization of credit was an 
essential part of capitaHsm and therefore of the presumed historical pro- 
gression to socialism. He considers the question "absurd... whether capi- 
tahst production,., would be possible... with the circulation of metallic 
coin alone. Evidently this is not the case. It would have found the barri- 
ers of the limited production of precious metals in its way." (v. 2, p 399) 

MARX'S HISTORICAL PROGRESSION TO SOCIALISM 

This paramount theme is found in Marx's brutally honest description 
of the establishment of original capital in society: 

"It is notorious that conquest, enslavement, robbery, murder, briefly 
force play the great part." (v. 1, p 785) 

Before the capitalist system could start, the means of production 
owned by the people had to be taken from them. Citing several sources, 
Marx accurately described how the English peasants were ruthlessly dis- 
possessed of their traditional land rights starting in the 16th century, 
and were pushed into the labor force where they could only survive by 



354 The Lost Science Of Money 



selling their labor to capitalists. The capitalists made a profit by taking 
the "surplus value" of their labor - roughly everything they produced 
that was not needed for their bare survival 

'These new freedmen became sellers of themselves only after they 
had been robbed of all their own means of production and of all the guar- 
antees of existence afforded by the old feudal arrangements,.. The start- 
ing point... was the servitude of the labourer... the expropriation of the 
agricultural producer, of the peasant, from the soil is the basis of the 
whole process." (v. 1, p 786-87) 

'The process was carried on by means of individual acts of violence 
against which legislation, for a hundred and fifty years fought in vain. . . 
by the 18th century... the law itself becomes now the instrument of the 
theft of the peoples land...." (v. 1, p 796) 

Marx predicted that capital would concentrate in ever fewer hands, 
where capitalists, having already expropriated the peasant and proletari- 
at, would then eat each other, until finally the few remaining magnates 
would themselves be expropriated: 

"Along with the constantly diminishing number of magnates of cap- 
ital who usurp and monopolize all advantages of this process,... grows 
the mass of misery, oppression, slavery, degradation, exploitation; but 
with this too grows the revolt of the working class,.,, always increasing 
in numbers and disciplined, united, organized by the very mechanism of 
the process of capitalist producfion itself... (and) the expropriators are 
expropriated... by the mass of the people." (v. 1, p 836-37) 

This accounts for Marxism's later influence. The author thinks that 
many good people could see the injustice, even the viciousness of the 
prevailing economic system. Marxism offered political relevance and 
hope to them. Association with the revolutionary cause distinguished him 
from mere economic theorists. When Marxism became "Antithesis," he 
was lionized and followers would not be too theoretically demanding. 

MARX'S USE OF MATHEMATICAL FORMULAE 

Perhaps in a desire to be "scientific," Marx used mathematical forms 
to express economic equivalencies. For example that 20 yards of linen = 
one coat (v. 1, p. 57). But in this author view, such math as applied by 
Marx and others is quesfionable. The problem is the use of the "equal 
sign". In mathematics that sign carries great power. For whatever is done 
to one side of the equation can be done to the other side and the equa- 
tion still holds true. Multiply or divide one side by a thousand and it 
equals the other side similarly multiplied or divided. The square root of 



13 THE USURY DEBATE CONTINUES 355 



one side equals the square root of the other side, etc. 

However, this is not necessarily true for an expression of economic 
equivalence between different objects because economic value and 
mathematical value are two different things. For example although one 
overcoat may be equivalent at one moment to 10 yards of cloth, one 
tenth of an overcoat may not be as desirable as one yard of cloth. 
Someone may well be able to use 1 yard of cloth, while one tenth of an 
overcoat could be useless. And likewise one hundred yards of cloth may 
be more valuable than 10 overcoats, or vice versa, depending on the 
"economic" situation. Thus an economic equivalence is much more 
complex than a mathematical one, and is rarely adequately expressed in 
an equation. Extra variables exist, including time. 

THE SYNTHESIS OF SMITH AND MARX 

The synthesis of Adam Smith and Karl Marx led to a world where 
labor and business are at each others throats, with a body politic polar- 
ized into "right wing" and "left wing." This is the kind of split that could 
be managed by the "financiers" operating behind the scenes. Rarely did 
either the right or the left, labor or industry, identify the "financiers" as 
their true problem. 

The synthesis promoted the idea of commodity money, long known 
to be primitive. Concurr- 
ently it advanced a private 
central banking system 
creating abstract money 
(credit) for profit and 
power. Their theory would 
always be in conflict with 
the actual practice, render- 
ing monetary concepts a 
morass of confijsion to the 
present day. 



13e. Stanley Jevons advo- 
cated a monetary world 
view where one private- 
ly owned central bank 
holds the money power, 
and thus the nation in 
its hands. 




356 The Lost Science Of Money 



STANLEY JEVONS' SYNTHESIS 

The main elements of this synthesis can be seen in Stanley Jevons' 
(1835-82) work. Jevons no longer discussed whether privately owned 
banks should control money; it was assumed. He limited his discussion 
of this to the different ways that the banks should be allowed to do it. It 
was no longer possible to demand complete autonomy for the Bank; the 
restrictions put on it in 1 844 made that clear. 

Neither do we see a discussion in Jevons of the supposed opposition 
between business and labor. It is assumed. 

Writing 100 years after Smith, Jevons dropped the argument that the 
value of labor determines the value of money, and gave a market defini- 
tion of value: "Every act of exchange presents itself to us as a ratio 
between two numbers. Value is that ratio.,.," 

Jevons guaranteed the continuing confusion of money as a com- 
modity by improperly expanding money's functions to include acting as 
a longer term store of value. Money was the standard of value, medium 
of exchange and measure of value, and he put forward as a question 
whether money should also be a store of value: 

'Tt is worthy of inquiry whether money does not also serve a fourth 

purpose - to embody value."^^ 

Professor Laurence Laughlin later criticized Jevons for adding the 
store of value fiinction to the purposes of money: 

"This function seems to have been illogically added to the general 
concept of money, because the precious metals generally associated with 

the latest evolution of the money material are durable."-^ ^ 

Jevons pointed out that in recent English history gold had undergone 
substantial changes in value: (p 313-30) 

1789- 1809 - gold fell 46% 
1809-1849 - gold rose 145% 
1849-1875 - gold fell 20% 

Searching for a better long term standard, Jevons proposed a stan- 
dard of value based on an index of commodity prices. This is still being 
proposed in modified form. 

ONE PRIVATE BANK IN CONTROL OF MONEY 

Jevons did not discuss whether the government or a private bank 
should control money. Ignoring the work of Ricardo, Berkeley, Raithby, 
Tooke, Thompson, Macleod and others, Jevons just assumed that money 
should be privately controlled and quickly went into a highly detailed 



13 THE USURY DEBATE CONTINUES 357 



description of the types of reserve systems appropriate to banking. On 
one point he was absolutely clear - he favored one controlling bank: 
"Nothing is less fitting to be left to competition than money."(p 64) 

RE-BURYING THE SCIENCE OF MONEY 

Regarding the nature of money, Jevons took pains to obscure it: 

"There was a tradition in Greece that Lycurgus obliged the 
Lacedaemonians to use iron money... However this may be it is certain 
that iron money could not be used in cash payments at the present day 
since a penny would weigh about a pound." (p 35) 

He went out of his way to dismiss the Spartan numerary system of 
Lycurgus as merely an attempt to pay off old debts and interest by turning 
something cheap into legal tender! For 300 years? See our discussion of 
Lycurgus iron money in Chapter 1 . 

Jevons ignored the legal concept of money discussed in detail by 
Aristotle, Plato, Paulus, Locke, Berkeley, Franklin, Raithby and others. 
It's not an oversight - he's much too familiar with banking for that. Is 
he ever concerned for the commodity value of the scraps of paper used 
as banknotes the way he is concerned over the value of the scraps of 
iron? It is not a factor! The paper banknotes and the iron are working 
as nomisma, not commodities. 

Just like Adam Smith, Jevons influenced his readers to think of 
money as a commodity, when he was aware that the private banks were 
issuing abstract money. This trick, used repeatedly, is how the nomisma 
concept of money has come to be erased from the collective memory of 
mankind - from the dominant written works on money. 

When finally the Science of Money had been privately reconsti- 
tuted after being lost for many centuries, the bankers understood that 
they had to re-bury it in order to protect their parasitic activities 
against society. 

Regarding the legal concept of money, Jevons presented just enough 
of it as was helpful to banking but not enough to be dangerous to banking. 
He did not identify money as an institution of the law, but promoted the 
use of bank-controlled fiat money: 

"There is plenty of evidence that an inconvertible paper money, if 
carefully limited in quantity, can retain its full value." (p 229) 

THE RIGHT QUANTITY OF MONEY 

Regarding how much money was appropriate, Jevons thought that 
no one could tell how much was right, and that "statesmen" shouldn't 



358 The Lost Science Of Money 



attempt to regulate it directly. He asserted that the amount necessary was 
proportional to population, industrial activity, complexity of organiza- 
tion and, echoing Marx, the price of goods. Maintaining that few of these 
were accurately known, Jevons suggested: 

"...leave it at perfect freedom to regulate itself. Money must find 
its own level - like water," he said echoing Smith's fallacious "channel 
of circulation" model. 

He advocated that any attempts to control the money supply be 
restricted to regulating the issue of Bank notes, which to him meant 
determining what system of bank reserves to use. Very convenient for 
the money power, 

Jevons thus promoted a monetary world view where, in each coun- 
try, one private bank holds the money power and this privately owned 
central bank can reign supreme over governments and humanity. 

HOW BANKERS INFLUENCE MONETARY THEORY 

This work does not suggest that the financiers specifically hired and 
paid Adam Smith, Karl Marx, Stanley Jevons and others to formulate 
and publish works that would assist them. For example, though volume 
one of Marx's Capital was published in German in 1 867, it was not until 
1886 that it was even translated into English. Marx lived his last three 
decades in poverty in London's Soho slums. 

No doubt, as J.E. Thorold Rogers concluded, such conspiracies did 
and still do exist, and researchers should not be afraid to use that term to 
identify them when there is enough evidence. But proving it is very hard, 
and we have more pressing work 

It is also completely unnecessary to postulate such a direct conspir- 
atorial connection. It's possible for the financiers to look over the cur- 
rent crop of professors and single out those with plausible theories bene- 
ficial to their activities. Elements of the financial establishment could 
see to it that those ideas were promoted and refutations of them were 
ignored, possibly without the professors even being certain why their 
works were well received. 

An example of how easy it is for important works to be lost and 
destroyed by simply ignoring them is that when Sir James Eraser (author 
of The Golden Bough) edited a book of Bishop Berkeley's works he was 
unable to find a copy of the Querest to include, until at the last moment 
by chance he came across one. The first copy which this author read of 
Berkeley's Querest was about 250 years old. We have already discussed 
how a different form of censorship has operated, where the latest 



13 THE USURY DEBATE CONTINUES 359 



reprintings of The Golden Bough have left out all of Erasers' controver- 
sial additions and reverted to the initial edition! 

Understand also that many of the economics chairs at universities 
are endowed by financial institutions - banks and related bodies. These 
groups have a direct influence over who does and doesn't get promoted 
to those chairs of influence and therefore over which monetary ideas the 
next generation of economists and teachers are indoctrinated with. 

Because political economy was to such a large extent developed in 
England, one would expect that these predatory economic and monetary 
doctrines would especially dominate in the English speaking univer- 
sities and countries. 

In summary, neither Adam Smith's system of private money, nor 
Bentham's justifications of usury could stand a test of the facts, but 
relied mainly on theoretical argumentation. Examinations of history that 
challenged the political economist's theoretical systems, such as Rogers' 
work demonstrating the economic regression of the English workman, 
were difficult to carry out. Finally, in the mid 1800s, considerations of 
justice and religion combined in England to produce a degree of social 
and banking reform. 

Marx's appearance as an opponent of Smith's "Thesis" of capitalism 
was not fundamental in monetary terms, because Marx and Smith's 
errors on the nature of money were virtually identical. Marxism would 
later raise the specter of chaos and atheism, when it became historically 
associated with revolution. The debate shifted away from usury and the 
injustice of private central banking, onto a struggle of worker against 
industrialist. 

While the unforeseen development of nuclear weapons has made it 
touch and go at times, and threatens the future of mankind even more 
today, that is not a threat from Marxism, but from religious fundamen- 
talism, something Marx had no patience with. 

The political economists' effect has been to re-bury the science of 
money, smothering it in indecipherable jargon. That process continues to 
this day through the financial establishment's influence on the teaching 
and rewarding of economists. All this has indeed made economics a very 
dismal science. We'd like to see that change. 



360 The Lost Science Of Money 



Notes to Chapter 13 

^ William Cobbett, The Political Register, December 6, 1806, as quoted by 
Hollis, cited in 4 below, p. 46. 

^ Macauly, Essay on Southeys Colloquies, as quoted by Hollis in 4 below, p. 46. 
^ James Edwin Thorold Rogers, 5a Centuries of Work and Wages, (London: 
Swan Sonnenschein, 1903), p398. 

^ Christopher Hollis, The Two Nations, (repr. New York: Gordon Press), p. 46. 
^ Hollis, cited above, p. 47. 
^ Hollis, cited above, p. 139. 

'^ John Wade, Principles of Money, (London: E. Wilson, 1842), p. viii. 
^ Sir Francis Bacon, Philosophical Works, Edit. J.R. Robertson, (Freeport; 
Books for Libraries, 1905). 

^ Sir Francis Bacon, New Atlantis, (Univer. of Chicago Press, Great Books 
Collection, Encyl. Britannica, 1952), vol. 31. 

^ ^Francis Bacon Philosophical Works of Francis Bacon. Edit. J.M. Robertson. 
Ellis & Spedding text. Freeport, NY: Books for Libraries, 1970. 
William Petty, Quantulumcunque Concerning Money, (London: Churchill, 1682) 
Adam Smith, The Wealth of Nations, Ml 6. Great Books Collection,cited in 9 
above, vol. 39, p. 22. 

^ Jeremy Bentham, Defence of Usury, (London: Payne & Foss, 1818). 

^ John Whipple, The Importance of Usury Laws - an Answer to Jeremy 
Bentham, (1836, Boston; Wentworth, 1857), pp. vii, 15-16, 26. 

^ A.E. Feavearyear, The Pound Sterling, (Oxford Univ. Press, 1963), pp. 270-75. 

^AndrQ3sAnda:eedcs, History of the Bank of England, (London Univ, 1909), p. 391. 

^ Karl Marx, History of Economic Theories from the physiocrats to Adam Smith, 
edit. Karl Kautsky, trans. T. McCarthy, (New York: Langland, 1952) p. xi. 

^Karl Marx, Capital vol. I, (1867, New York: Modem Library, n.d., a reprint- 

ng of the 1912 C.H. Kerr edition (Chicago), based on Unterman's 4th German 
edit. p. 106. Page numbers of the Modem Library edition as cited are identical 
to those in the more difficult to obtain Kerr edition of vol. 1. Many of the Ken- 
editions are in a state of deterioration. Our citations referring to volumes 2 & 3, 
are from the Kerr 1912 edition. Citation at the bottom of our page 349 to (v. 3, 
p. 592) is from the Intemational edition, Moscow, (pub. details to follow). The 
Kerr volume 3 fell apart as we searched for this page. 

^^Rice Vaughan, A Discourse of Coin and Coinage, in J.R. McCulloch's Rare 
and Valuable Tracts on Money, (London: Pol. Econ, Club, 1856; repr. New York: 
A.M. Kelley, 1966), Chapter 11, written 1630-35, pub. 1675. 
2^ Stanley W. Jevons, Money and the Mechanism of Exchange, (1875, New 
York: Appleton, 1897). 
2^ Laurence Laughlin, Pmapfes o/Afoney, (New York: Scribners, 1911), pp. 170-75. 



361 



CHAPTER 14 



U.S. COLONIAL MONEYS 



"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." 

Benjamin Franklin 



Our rich American monetary experience contains many of the best 
"case histories" for the study of money systems. The unsurpassed mon- 
etary "experiments" tried by our young nation can help instruct students, 
reformers and leaders everywhere. We therefore have a unique contribu- 
tion to make to the world community in this field.^ This is especially 
tme because the original union of the colonies into the United States and 
the merging of 1 1 colonial currencies into one national currency is the 
closest historical parallel to what is now happening with the new Euro 
currency system. 

Our history also helps us understand how monetary aggression has 
been used against a people and can show us, and the rest of mankind, 
how to block any such attempts in the future. 

When entering this field remember that monetary history is a battle- 
ground where private interests, intent on protecting modem day privi- 
leges, seek to paint the historical canvas in a manner that works to solid- 
ify or justify their present political advantages, even to the point of 
obscuring or misinterpreting the actual history. Once the student is aware 
of this problem, two key features of American monetary history that set 
it apart from all other nations soon become evident: 

First, from its beginnings the US has been a great monetary laboratory. 

^The author began presenting the themes of Chapters 14 to 17 to the public 
in January 1995, in newspaper and magazine articles and radio interviews. 



362 The Lost Science Of Money 



Most of our history is marked by monetary crises, with relatively brief 
periods of monetary peace. Almost every conceivable monetary solution 
has been tried at some time here, and the results recorded. 

Second, America has been a nation of fiat paper money. Our devel- 
opment was inseparable from paper money, right from colonial days. 
Without it there would not be a United States. The colonies relied on 
colonial paper money for their development. We then gained our inde- 
pendence and later maintained the union with government issued paper 
money. 

Unfortunately, our past doesn't give us a complete "good old days" 
system to return to - we still have to create that. Our history can be 
viewed as a struggle against those forces intent on controlling the nation 
through privately issued money. Most of the time, from one generation 
to another, private money has dominated us, siphoning wealth and 
power from the general population to the people of the banks. 

ABORIGINAL MONEYS OF THE MOUND CULTURES 

The "Mound builder" cultures in North America died out before the 
Europeans arrived, so little is known of them. Their largest structure was a 
canal 100 feet wide and 150 miles long near Osceola, Arkansas, A calendar 
stone, found in the mound at the intersection of 5th and Mound Street in 
Cincinnati, divided the year into eight seasons of 45 days. This led Del Mar 
to speculate that they had emigrated from Asia, possibly India. Since they 
had no iron, he concluded they immigrated before the 13th century BC. 
These were extraordinary conclusions for the time. Today we know that 

their migration was indeed from Asia more than 10,000 years ago.^ 

In the mid- 1800s M.W. Dickeson examined 1033 ancient mounds in 
the Mississippi Valley, finding several artifacts that were probably used 
as money. Del Mar classified them: 

* Lignite and coal money, decorated with parallel lines and dots; others with 
figures of men and animals. 7/8 to 1 .25 inches round and 1/4 inch thick. 

* Ivory and bone money. 1/4 inch thick, 3/8 to 5/8 round. 

* Terra cotta money, stamped on one side with dots, parallel lines, a tri- 
angle, or letters. 1.12 to 1.75 inches round, 1/8 to 1/4 inch thick. 

* Stone money, sandstone and slate. 1/2 to 8 inches round; one found in 
the hand of a skeleton. 

* Gold coins, 3/4 inches diameter, rough edged; about 48 grains. One 
with four waving parallel lines found in the hand of a skeleton in Ross 
County, Ohio. A similar one found in a mound at old Fort Rosalie, near 



14 U.S. COLONIAL MONEYS 363 



Natchez, Mississippi. A third one with a man on one side and a bird on 
the other found in Perry County, Ohio. 

* Similar coins of silver and copper. 

* Galena lumps of irregular roundish shapes covered with hieroglyphics. 

* Concave-convex copper discs. 

* Beaver and Marten skins. 

* Small lumps or balls of gold, slightly flattened, with irregular edges, 
were found especially in the Ohio mounds.^ 

Such pieces could be collected into a major museum presentation. 

INDIAN WAMPUM 

Del Mar maintains that the North American Indian nations didn't use 
money until Europeans arrived, but had a tradition of exchanging 
wampum. These were strings of colored beads and were not so much 
used as money as they were beautiful objects used as tokens of goodwill, 
or to commemorate important events and solemn occasions such as mak- 
ing a promise or treaty. Del Mar relates that: 

"At the Cincinnati meeting of the American Association For The 




14a. Indian wampum did not talte on a monetary ciiaracter until the 
colonists used it in that way. Wampum had a more ceremonial usage in 
commemorating treaties or other agreements and responsibilities. 



364 The Lost Science Of Money 



Advancement Of Science in August 1881, Mr. Horatio Hale of 
. . .Canada, read a paper on Hiawatha and the Iroquois Confederation, in 
which he traced the real history of this 'law giver of the stone age' entire- 
ly from the wampum belt which he handled, than which there could 
scarcely be a stronger proof that among the Indians wampum were used 
for commemorative purposes and not as money, until the whites gave 

them this character."^ 

After contact with Europeans, the Indians started using money 

forms,^ In 1763, Pontiac, chief of the Algonquins, while besieging the 
English in Detroit, issued notes on birch bark to obtain supplies for his 
forces. One side had the figure of the thing to be purchased; the other side 
had an otter, Pontiac's totem. After the siege he paid off the notes and with- 
drew them."^ 

COLONIAL MONETARY HARDSHIPS 

From the beginning the North American colonists were at odds with 
the home country over money. The Dutch had kept coinage out of New 

Amsterdam, and English laws forbade sending coinage to America.^ She 
didn't want the colonists to trade with each other, but to send raw mate- 
rials back home to England. The scant coinage in the colonies came 
mainly from pirates or trade with the Spanish West Indies. The colonists 
were not backward people, but were forced to use primitive barter. 

They were in dire need of a money system but England refused to 
provide it, continually placing them in distress. For 10 to 20 years after 
1640, more people were going back to England than were coming here. 
Out of necessity, the colonies became a kind of monetary laboratory, 
devising various monetary solutions. In 1650, Massachusetts even made 
Indian wampum a legal tender up to a small amount in an effort to cre- 
ate a circulating medium. 

THE "COUNTRY PAY" PERIOD (1632-1692) 

In the Country Pay period many agricultural products were legally 
declared to be money. It was not quite barter, because the money values 
of the produce were fixed by law from time to time, much as had been 
done in the ancient oriental cultures of Mesopotamia. At one point in 
North Carolina 17 different commodities were legal tender. But this wasn't 
much more efficient than barter. Though "country pay" was sanctioned 
by the English Crown, and administered by the Colonial Governments, 

^ Donald Taxay presents a somewhat different view that is worth reading in 
Money of the American Indians, referenced in endnote 3. 



14 U.S. COLONIAL MONEYS 365 



the results were very poor. Everyone wanted to pay with the least desir- 
able commodities, in the worst condition. 

Another problem using commodities as money was seen when 
Virginia and Maryland made tobacco a legal tender in 1633. But in 1639 
there was a bumper crop and the colonial assemblies ordered one half 
the crop to be burned. This is a good example of how a money's com- 
modity basis can interfere with its function as money. At the same time, 
to protect debtors, depending on the crop to pay off their debts, they 
ordered creditors to accept £40 as full payment for every £100 of debt, 
again echoing the ancient oriental price setting practice (see Ch. 1). 
Virginia re-monetized tobacco in 1730, when her legislature authorized 
tobacco warehouses to issue transferable tobacco notes. 




14b. Hull's mint began stamping gold and silver "tree coinages" in 
Massachusetts in 1652. They weren't much help to the colony, being 
quickly paid to merchants in England, where they were melted down. 



366 The Lost Science Of Money 



HULL'S MINT IN MASSACHUSETTS 

In 1652 Massachusetts defied the Enghsh Crown and allowed John 
Hull to open a mint that produced the "tree" coinage. Willow, oak and 
especially pine trees were featured on the coinage, which was 67 grains 
of gold - the exact weight of the ancient Bezant. All the coins were dated 
1652, but the mint operated until 1685, ready to coin all gold and silver 
presented, for a 5% fee. Most of the metal came from buccaneers operating 
against Spanish shipping in the West Indies. 

Though the mint was considered treason in England, the 
Massachusetts Assembly made the coinage legal tender in the colony. 
This may have been the last straw in the Crown's running dispute with 
the Massachusetts Puritans' bloody persecutions of those outside their 
church. 

In 1684, the Crown temporarily revoked Massachusetts' colonial 
charter and later closed the mint. The power of the Puritan churches over 
politics was dramatically reduced, but from this point those same "reli- 
gious" leaders continued their reign of terror over the people, with the 

infamous Massachusetts witch hunts and burnings.^ The Puritans came to 
America not to establish religious freedom but to exercise religious tyranny. 
Although Hull's mint had coined about one million pounds sterling 
worth of coins, it didn't relieve the colonists' monetary distress. The coins 
quickly flowed out of the country and were re-minted as English coinage. 

THE COLONIAL LAND BANKS 

The next experiment took the form of private land banks. One was 
established in South Carolina in 1675. It issued paper bank notes that 
were theoretically convertible into land of secured estates. When the 
Hull mint was closed, John Blackwell set up a private land bank in 
Boston in 1686, but its notes failed to gain acceptance. 

Private land banks were attempted as late as 1732 in Connecticut 
when the New London Society for Trade and Commerce issued notes on 
land, but it was closed down in 1733. In 1739 another land bank was 
formed in Massachusetts when "a number of land owners formed a com- 
pany and mortgaged their estates to it for its notes, giving 3% per annum 
interest in merchandise and 5% per annum on the principal in [the bank's 
notes which] were payable after 20 years in manufactures of the 
province," wrote William Graham Sumner. The bank's charter explicit- 
ly stated it was trying to reduce the hardships caused by a lack of circu- 
lating medium. But the bank was closed down in 1740.^ 



14 U.S. COLONIAL MONEYS 367 



The colonists shunned this privately issued money, and viewed cur- 
rency as a function of government, as it was in England until 1694. 

MASSACHUSETTS BILLS OF CREDIT - THE WEST'S FIRST 
PAPER MONEY 

In the late 1600s the population of the colonies approached one mil- 
lion, making barter extremely impractical. Then in 1690 Massachusetts 
embarked on a radical experiment, and began to issue "Bills of Credit," 
a form of paper money not backed by any physical thing. Rather than 
a promise to pay, it was a promise to receive - to accept the paper 
bills for all moneys due to Massachusetts, valued at 5% above the 
note's face amount. 

At first, this paper was not made a legal tender but everyone accepted 
it, and though Massachusetts originally did not intend the bills as money, 
they immediately began circulating as money, ending the colony's dis- 
tress. This money didn't flow back to England like the coinage. 

The closest precedent for Massachusetts 's money were the paper 



1 4c. 

Massachusetts issued 
"bills of credit" in 
1690. Rather than 
being a debt instru- 
ment - a promise to 
pay - they were in 
fact a promise to 
receive^ and were 
thus an advanced 
money form. The bill 
reads: "This indent- 
ed bill of 20 
shillings... shall be in 
value equal to money 
and shall accordingly 
be accepted by the 
treasurer in all pub- 
lic payments... .' 



99 



JGolcmv to iixeJBflfeilW'Ikutl-tfci^^ 
ftmia.1 to , mcni.«y&JR3iU Ve-'3#ftr^^ 
'*.ccepteil3y...lkerirealWer-asi:<iB£Cii^^ 

a/rud for a^ Sio^ at ^m^^^i/mM^ 







J^r^^^' 



368 The Lost Science Of Money 




14d Other colonies followed Massachusetts example. New Jersey issued 
similar bills with a value stated in terms of silver, but did not promise to 
pay silver, for the bill itself was the money! Thus it is crucial to recognize 
the differences between money and wealth and credit. 

bills issued by King Charles II in 1667 described in Chapter 10. Del Mar 
reports a Canadian precedent in 1685 when French officials cut playing 
cards in fourths, and endorsed amounts on them totaling two million Livres, 

circulating them until they were paid in 1714, in coins or other money.^ 
But the Massachusetts bills were a higher form. It is crucial to 
understand that they were money in themselves^ not convertible or 
payable into some other ^'money. ^^ 

Originally £7,000 worth of bills were issued. In 1691 there was an 
additional issue, and in 1692 the Massachusetts Assembly declared them 
legal tender for all payments. The notes were well administered, not 
over-issued and circulated at their full face value (at "par") with silver 
coinage for 20 years, but around 1712 there were large increases in the 
volume of notes as well as coinage, and the notes lost about 12% of their 
value against coinage. In 1714 Massachusetts issued an additional 
£125,000 of notes. Eventually a total of £420,000 of Massachusetts 
notes would be issued, and their value declined very substantially, but 
the infrastructure that they had helped to build remained. 

Other colonies copied Massachusetts, emitting similar bills of credit. 
It was not unusual for the bills of one colony to circulate in nearby 
colonies. Invariably they transformed life in the colonies, improving 



14 U.S. COLONIAL MONEYS 369 



industry and commerce, helping to build real infrastructure. The 
colonists accepted, welcomed, and even demanded them for use as 
money. They had finally found a solution to the monetary drought. 

When the colonies authorized the issuance of too many bills - and 
this sometimes occurred - their value dropped. But when the paper issues 
were moderate - and there was no exact science to this - they kept their 
value well. The colonists were learning one of the basic laws governing 
money, that if too much is circulating in relation to the work it has to do, 
its value will start to decline (whatever it is made of). 

Of great importance is that the colonies did not issue more bills than 

their legislatures authorized^ 

THE REIGNING ERROR ON COLONIAL MONEY 

Leslie Brock advanced the modem study of colonial money by real- 
izing the entire field was cast in a misleading light by the dominance of 
writers such as Horace White, Charles J. Bullock, and Andrew 
MacFarlane Davis, who regarded inconvertible paper money as evil. 
They were largely influenced by Dr. William Douglas of Boston, and 
concentrated on the worst years of the period from which to draw their 
conclusions. 

The Dictionary of American Biography tells us that Dr. Douglas' 
monetary Discourse: 

", . .was written at odd times, stolen from his professional work (as a 
medical doctor), was often based on hearsay and tradition since but few 
documented sources were available to him, and it is therefore marred by 
many inaccuracies, but... in his Discourse Douglas showed a sound 
grasp of the principles of exchange, a clear understanding of Gresham's 
law, and he stated in no uncertain terms that the Colony must adhere to 

the universal commercial medium (gold and silver)."^ 

In other words, that Douglas' facts were wrong didn't matter so long 
as he mouthed the Adam Smith theoretical viewpoint. But if over and 
again the facts are wrong, then just what is the theory based on? This 
conformity with prevailing error was enough reason for his Discourse to 
be reprinted in 1897 by the American Economic Association, while they 
ignored the superior work of Alexander Del Mar on the subject. This is 
another example of the mis-shaping of monetary history and theory. 

In the 1960s Brock's doctoral thesis, The Currency of the American 

C. There was one case of fraud, out of hundreds of colonial issues, by a Virginia 
official, John Robinson, who lent his friends $100,000 of notes he was supposed 
to have been destroying over a ten-year period. He was caught in the 1750s. 



370 The Lost Science Of Money 



Colonies, 1 700-1 764}^ corrected this misconception, but the Libertarian- 
oriented economists seem to be having trouble catching up with his 
work. His thesis at first didn't receive the attention from pubUshers it 
deserved, being finally printed in 1975 in typewritten, not typeset, form. 
Joseph Albert Ernst's Money and Politics in America 1755-1775 also 
presents an intelligent evaluation of the period instead of the misleading 
anti-paper moralizing. Ernst also pointed out the problem of merely 
examining note issues, when much of the money of the period was in the 

form of book credits between merchants. ^^ But Ernst thus confused 
money with credit. These works, and Del Mar, can be consulted for 
detailed descriptions and additional sources on colonial money issues. 

PENNSYLVANIA'S SUPERIOR MONEY SYSTEM 

The Massachusetts bills of credit provided one model for colonial 
money. The other model was the Pennsylvania system, where the colony 
loaned the money into circulation, instead of spending it into circulation. 

By 1722 the Pennsylvania colony was being reduced to a form of 
monetary slavery by usury: 

"The shopkeepers had no money to go to market, and the farmer's 
or planter's crop was then reduced to the lowest value; so that all the 
European goods imported, as well as the bread and flour or country pro- 
duce, were bought up and engrossed at a low price, by a cabal of only 
four or five rich men, who retailed them again on credit at what rate they 
pleased, taking advantage of the people's necessities and circumstances; 
by which means they soon got the whole country into their debt, exact- 
ing bonds of everybody at 8%," wrote Keith. ^^ 

In 1723, a group of merchants petitioned Pennsylvania to alleviate 
"the great loss and growing ruin of themselves, and the evident decay of 
the province,. .for want of a medium to buy and sell with, and praying that 
a paper currency be established." A state loan office was created, and 
"Four men (were) appointed trustees at £50 per year salary" and author- 
ized to loan £15,000 of paper money at 5% interest for 8 years. £250 was 
the maximum loan and the borrower had to pledge triple collateral - most- 
ly land - and annually pay the interest and 1/8 of the principal. 

"So great were the benefits that accrued to the province by this addi- 
tion and so immediately were they felt that in December a further issue 
of £30,000 was ordered on the same terms," wrote a member of the 

Numismatic Society of Philadelphia.^^ 

Keith wrote: "It is inconceivable to think what a prodigious good 



14 U.S. COLONIAL MONEYS 371 



effect immediately ensued on all the affairs of that province; [shippers 
received payment in 6 weeks instead of 9 months]. The poor middling 
people who had any lands or houses to pledge, borrowed from the loan 
office, and paid off their usurious creditors. The few rich men who had 
before this [quit] all trade - except that of usury - were obliged to build 

ships, and launch out again into trade."^"^ 

Rather than extinguishing the money that was being paid back year- 
ly, in 1726 Pennsylvania enacted provisions to re-loan the bills that had 
been paid in, assuring a continually circulating medium of exchange, 
and declared the money a legal tender. She earned £2,500 yearly inter- 
est on this paper money created out of thin air, which paid half of 
colonial expenses during some periods. While the collateral the money 
was loaned on was mainly land, it was never convertible into land, and 
was not a "land bank" in that sense. 

BENJAMIN FRANKLIN'S SUPPORT OF PAPER MONEY 

Ben Franklin, a scientist, inventor, printer, and soon to be statesman, 
had high powers of observation and reasoning. Writing in Busybody #8 



}4e. Ben Franklin 
helped rescue Penn- 
sylvania from a pro- 
longed usury crisis 
by issuing colonial 
paper currency. His 
1729 essay explained 
why. Two hundred 
years later, Austrian 
economist Ludwig 
Von Mises impudent- 
ly charged his 
motive as a printer 
was to profit from 
printing the money. 
But the "Austrians" 
are for the most part 
monetarily illiterate. 
Franklin understood 
the difference 
between money and 
wealth. 




272 The Lost Science Of Money 



James 2"*^ (1633-1701) of England. William was invited by elements in 
England to mount a campaign to temporarily take the Monarchy. After 
years of planning, the assault, misnamed the "Glorious Revolution" 
landed in November 1688. 

William's attack had heavy Jewish financing. Isaac Lopez Suasso of 
the Hague advanced him two million gold crowns, interest free; Suasso 

was later made the Baron d'Avemas le Gras.'*^ 

From the reign of William 3rd of Orange we see the precise origins 
of the primary destructive mechanisms operating upon society at the 
present time. 

Sir Archibald Alison's History of Europe noted: 

"The Prince of Orange brought from the Republic of Holland where 
it had been already practiced and thoroughly understood the secret of 




lOe. Philosopher 
John Locke became 
part of William 3rd 
of Orange's revolu- 
tion, returning to 
London with 
William's wife. He 
wrote a book pro- 
moting toleration, 
with some excep- 
tions, including that 
it was all right for 
the Jews to remain 
religiously intoler- 
ant. This double 
standard reduced 
the seriousness of 
Locke's philosophic 
system. 



14 U.S. COLONIAL MONEYS 373 



COUNTERFEITING OF COLONIAL BILLS 

An alarming amount of counterfeiting of colonial bills occurred. 
According to Nussbaum: 

"A careful monograph... refers to a report of 1768 according to which 
a clan of 500 counterfeiters was working from New Hampshire to North 
Carolina... North Carolina authorized persons confronting a counterfeit- 
er to kill him if he would not surrender within a certain time., .only a half 
a dozen executions of counterfeiters in addition to some suicides are 

known for the entire colonial period."^^ 

Pennsylvania punished counterfeiting by cutting off both ears on the 
first offense, and other limbs on continuing offenses, but large quantities 
of forgeries kept coming in. 

THE LORDS OF TRADE AND PLANTATIONS 
ATTACK COLONIAL MONEY 

The London group the "Lords of Trade and Plantations," charged 
with overseeing the colonies, harassed the colonists' paper money sys- 
tems on a case by case basis. From 1720, most new colonial money 
issues were considered suspended until specifically approved by the 
Crown, but enforcement was difficult outside of New England. Two of 
the defenses the colonies had were distance and the time lapse for com- 
munications. 

After the "Lords of Trade" learned of Pennsylvania's money, a letter 
condemning it arrived in October 1726, setting forth the "evil conse- 
quences" of paper money. They refrained from nullifying them, they 
wrote, only out of consideration for the "innocent persons in whose 
hands they might be," But they threatened to void them all if more notes 
were issued and ordered the existing notes retired on schedule. 

As the expiration approached, Pennsylvanians feared another eco- 
nomic collapse, as there was not much other money in the jurisdiction. 
Then, in May 1729, Governor Patrick Gordon defied the Lords Of Trade, 
and authorized £30,000 in Bills of Credit to be loaned on the same terms 
as the former emissions, but to be paid back over 16 years instead of 8, 
He also re-issued £40,000 of the previously issued £45,000. The good of 
the colony was sufficient justification for his act, he said. 

The Lords of Trade continued to hound Pennsylvania even though 
its money system was held in high regard in England: 

"Some of our plantations have severely felt the ill effects.. .of 
increasing the quantities of bills; whilst the Philadelphians by keeping 



374 The Lost Science Of Money 



sacredly to a certain number or sum total of bills have not only preserved 
their credit amongst themselves, but even extended it to some of the 

neighboring provinces/' wrote Englishman Joseph Harris.^ -^ 

Even the arch-enemy of government paper money, Adam Smith, had 
to acknowledge the quality of Pennsylvania's money: 

"The early notes of the colony seem to have kept their credit... "^^ 

MASSACHUSETTS DEFLATED 

It was a different story in Massachusetts. In 1727 the Lords of Trade 
began a series of monetary repressions. They ordered the existing bills 
of credit be withdrawn, and no new ones be issued; all local taxation was 
to be paid in coinage. This action started 2 1/2 decades of deflation, eco- 
nomic hardship and depression in Massachusetts. 

In 1730, Governor Belcher was ordered to continue the contraction 
of the notes, down from £140,000 to about £30,000. The notes were to 
be paid off in coinage at ten and then seven paper per one coin, raised by 
taxes. By 1735, coinage was so scarce the colonists couldn't pay taxes 
except in commodities. The contraction resulted in a continuous eco- 
nomic crisis. Prices kept falling; debtors who had contracted debts in 
less valuable money were ruined. Property had to be sold for one-tenth 
of its fair value just to pay taxes. Trade was stagnant and cries of distress 
arose on all sides. 

According to Charles Bullock, trade and industry were restored 

"when specie was re-instated."^^ This primitive commodity view of 
money ignored that it was the re-instatement program that had destroyed 
the trade and industry in the first place. It also ignored the real cause of 
the recovery: 

Del Mar relates that in 1751 Massachusetts was so desperate that 
revolution was a real possibility. The Assembly issued more interest 
bearing notes to pay the colony's expenses, and the Governor acqui- 
esced. To his surprise the certificates immediately began to circulate as 
money. The Colony, which had been in economic ruin, immediately 
revived and began to prosper when a circulating medium was provided. 
This is not to imply that Bullock lied, just that he read about a return to 
coinage, which his theories approved of and therefore assumed the 
recovery was due to that. 

London heard about the new certificates in June 1751, condemned 
them and tried to push an interest bearing loan of coinage onto 
Massachusetts. They declined. The treasury certificates continued to 



14 U.S. COLONIAL MONEYS 375 



circulate as money, with at least £157,000 still outstanding in 1766 and 
beyond. Even in 1774, Governor Hutchinson said: 

"There has never been a time since the first settlement of the country 

when the treasury has been in so good a state as it is now."^^ 

THE 1764 CURRENCY ACT 

The Lords of Trade sporadically attacked the colonists' paper money 
systems, but governor after governor did not enforce the Crown's 
desires. English creditors pushed for harsher sanctions, which passed in 
a 1751 act, but proved hard to enforce outside New England. In 1764 the 
England Grenville Ministry passed a similar law and enforced it. 

The Act didn't ban paper money for government expenses, but 
banned it as legal tender in private transactions and made the ban 
retroactive for ten years, applying it to any money issued since 1754! It 
thus sharply contracted the circulation, harming trade. Within a year 
New York, Virginia, and Pennsylvania petitioned London for relief The 
repeal movement was even supported by many London merchants who 
had originally promoted the Act for theoretical economic reasons, but 
then found that it damaged their trade in practice. 

Franklin went to London to lobby for the repeal and appeared before 
Parliament in February 1766. In June 1767 he thought it would pass: 

"(The) Ministry had agreed to the repeal, and the notion that had 
possessed them that they might make a revenue from paper money, in 
appropriating the interest by Parliament, was pretty well removed by my 
assuring them that no colony would make money on those terms, and 
that the benefits arising to the commerce of this country in America, 
from a plentiful currency, would therefore be lost, and the repeal answer 
no end, if the assemblies were not allowed to appropriate the interest 
themselves. ..we began to think that all would go smoothly... but in the 
house Grenville stood up and undervalued them all as trifles; and said he: 

'I'll tell the honorable gentlemen of a revenue that will produce 
something valuable in America: Make paper money for the colonies, 
issue it upon loan there, take the interest, and apply it as you think proper,'" 

recounted Franklin,^ ^ who, sensing the strong feeling in the house 
against the colonies, considered requesting the monetary privilege for 
Pennsylvania alone. 

It was from this point that Franklin began losing confidence in the 
future of British- American relations. 



376 The Lost Science Of Money 



NO "PARTIAL SCHEMES OF PRIVATE MEN" 

The single good monetary law from the Lords of Trade came in 1741 
when they forbade all private money issues in the colonies. The private 
money gang's headquarters were in London, and they suppressed colo- 
nial imitators. The colonists were in full agreement with this law. 

There were also private money predators in the midst of the 
colonists. In the aftermath of the disastrous 1764 legislation, some of 
them felt the time was right to strike. At the end of 1766, eight 
Philadelphia mercantile houses, seven of them members of the 

"Presbyterian Party" and the eighth the Jewish firm of Willing and 
Morris, issued £30,000 in short term (9 month) interest bearing notes. 
Immediately two hundred other merchants advertised in the December 

1 1^^ Pennsylvania Gazette that they would not accept these notes under 
any conditions. 

A complaint sent to the Pennsylvania General Assembly "argued 
that the right to strike money of any kind belonged to the legislature 
alone and that the 'partial schemes of private men' would only under- 
mine the general welfare. "^^ That group of eight deserves careful study 
of their origins and ties to future events. Some activities of Willing and 
Morris are traced below. 

NORTH CAROLINA'S NOMISMA PROPOSAL REJECTED 

The southern colonists were known to have brought the works of 
both Aristotle and Cicero to the new world. At a time when North 
Carolina's population was greater than New York's, a proposal had been 
made by Governor Arthur Dobbs: 

"In 1753 (he) proposed to the mother country to mint copper money 
(1/2, 1 and 3 penny pieces) for the colony, 1/3 more valuable than 
English silver pennies. The quantity to be determined by the Governor 

and Council, but not to exceed 50 tons," wrote Dickeson in 1865.^-^ 

The Lords of Trade forbade it, but Dickeson noted that the refusal 
helped create a revolutionary climate: 

"It was undoubtedly fortunate that this and similar schemes for 
apparently facilitating the internal industry and commerce of the country 
failed to be realized. . .as it had the effect to throw them more particular- 
ly upon their own resources, which gradually induced a spirit of self 
dependence; subsequently brought to a separation from the parent govern- 
ment, and finally confirmed them as an independent Nation and People." 



14 U.S. COLONIAL MONEYS 377 



THE MONETARY CAUSE OF THE REVOLUTION 

More than anything else it was The Lords of Trade's monetary 
suppressions that led to the Revolution: 

'There can be little doubt that the acts of 1751 and 1764, which sup- 
pressed further issues of bills of credit, contributed not a little to the final 
breach with the Mother country,' admitted Bullock, "...In 1776 when he 
was examined before the House of Commons, Franklin gave it as his 
deliberate opinion that one reason for the impatience and disrespect 
which the colonies were manifesting toward Parliamentary authority was 
'the prohibition of making paper money.' Too little attention has been 
given to this fact by most American historians," Bullock recognized, and 
noted that: 

"In colony after colony, party lines came to be drawn upon this sole issue."^"^ 
"There can be no doubt that the bitterness engendered by this conflict 
was one great cause of the Revolution," wrote Sumner, another commodi- 
ty money advocate.^^ 

Del Mar was more to the point: "But the narrow minded and selfish 
London merchants and bankers, who influenced the government at this 
period, would not permit the colonies to have their own monetary sys- 
tem... accordingly orders were sent to America to put down the colonial 
money and enforce the falsely named "national," but really private 
[English] money.. .it was the enforcement of this policy that brought on 
the Revolution...," wrote Del Mar, and led to establishing an order of 

society that had been "forgotten for 18 centuries"- a republic.'^^ 

By 1773 London reconsidered, and allowed colonial legislatures 
more leeway in issuing various forms of paper money. But it was too lit- 
tle, too late; the colonists "rejected any parliamentary interference with 

their control over money," wrote Emst.^ -^ 

CONTINENTAL CURRENCY - LIFEBLOOD 
OF THE REVOLUTION 

On May 10, 1775 the first Confinental Congress assembled at 
Philadelphia. Skirmishes with the British had occurred in Massachusetts. 
One of Congress's first concrete acts (June 22) was to issue $2 million 
in bills of credit - Continental Currency. At first the colonies pledged to 
redeem them in coinage, proportionately to their populations. The bills 
were not interest bearing. 

The Confinental Currency has been vilified and ridiculed by those 
who mis-read history, and support private money. In fact, however, the 



378 The Lost Science Of Money 



Continental Currency and the Revolution were inseparable. 

An area for further research is the reason the coinage phrase was put 
on some of the higher denomination bills, though left off the smaller 
ones. Were there debates on this? Which faction was responsible for 
such terminology, etc. 

Congress eventually authorized a total of $200 million, and never 
exceeded that amount. 

Tradition has placed the start of the revolt at the battles of Lexington 
and Concord. Del Mar disagreed: 

"Lexington and Concord were trivial acts of resistance which 
chiefly concerned those who took part in them and which might have 
been forgiven; but the creation and circulation of bills of credit by revo- 
lutionary assemblies in Massachusetts and Philadelphia, were the acts of 
a whole people and coming as they did upon the heels of the strenuous 
efforts made by the Crown to suppress paper money in America they 
constituted the acts of defiance so contemptuous and insulting to the 
Crown that forgiveness was thereafter impossible. ..there was but one 
course for the Crown to pursue and that was to suppress and punish these 
acts of rebellion.. Thus the Bills of Credit of this era, which ignorance 
and prejudice have attempted to belittle into the mere instruments of 
a reckless financial policy were really the standards of the Revolution. 

They were more than this: they were the Revolution itself! "^^ 

LIMITATIONS OF THE CONTINENTAL CURRENCY 

The Continentals were not intended as a permanent system, and their 
power was limited by several important factors: 

First, they didn't isolate the financial power of England from the 
colonies - her gold and silver coinage was still usable here as money. 

Second, the Congress had no statutory power to create legal tender 
money. It had no courts or police. It had no statutory power to levy taxes. 

Third, the individual states retained their legal tender powers, and 
only gradually, one by one accorded legal tender status to the 
Continental Currency. As late as 1777 Congress was still appealing to 
some states to make the currency a full legal tender. 

Fourth, the Currency had no higher rank or standing than the eleven 
paper currencies still being issued by the 1 1 individual colonies/states. 

The currency was issued in denominations from $0.33 to $80. At first 
they were hand numbered and individually signed by 28 citizens of 
Philadelphia appointed to sign and number the bills, getting paid $ 1 .30 per 
1,000 bills signed. The military importance of the bills was recognized 



14 U.S. COLONIAL MONEYS 379 



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th^ Bearer to r^ 

the ^ife^ thereof in 

cording to z<JleJ'ok- 
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On June 22, 1775 the 
Continental Congress 
assumed the mantle 
of sovereignty and 
created the Contin- 
ental Currency, 
though at first they 
had no authority to 
do so and no powers 
of taxation. The cur- 
rency made the revo- 
lution possible, and 
was finally brought 
down largely by 
British counterfeit- 
ing. Some of the later 
higher denominations 
inappropriately 
promised to pay 
metal, a subject for 
further research. 



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380 The Lost Science Of Money 



and the printers were exempt from military duty. 

At the close of 1775 there was about $6 million in Continental 
Currency outstanding, along with $3.8 million in individual colonial 

issues and $9.2 million of coinage.^^ The bills had been mostly distributed 
to the colonies for revolutionary war expenses. 

In July 1776 the Continental Congress issued the Declaration of 
Independence, the greatest written document of the nation. They also 
issued a proclamation that anyone refusing to accept the Continental 
Currency was a public enemy - General George Washington was author- 
ized to imprison such persons and to seize their supplies. At first the 
Currency functioned well; in late 1776 the notes were only at a 5% dis- 
count against coinage. 

MASSIVE BRITISH COUNTERFEITING OF THE CONTINENTALS 

Counterfeiting was standard British procedure and used as a military 
weapon. When they earlier fought the Dutch over possession of New 
Amsterdam (New York) the British had even flooded the colony with 
Indian wampum, which the Dutch were using for money. 

"The English Government which seems to have a mania for coun- 
terfeiting the paper money of its enemies entered into competition with 

private criminals...," wrote Schuckers.-^^ 

"In January 1776 or earlier a printing press on board HMS Phoenix, 
a ship of 44 guns lying in New York harbor was turning out counterfeits 

of the $30 bill..,," wrote Scott.^^ 

When General Howe took New York in 1776 it became the center 
for counterfeiting. "Immense quantities" were openly printed there. On 
April 14, 1777, a New York newspaper, the K Gaines Gazette, carried 
the following advertisement: 

"Persons going into other colonies may be supplied with any num- 
ber of counterfeit Congress notes for the price of the paper per ream. 
They are so neatly and exactly executed that there is no risque in getting 
them off it being almost impossible to discover, that they are not 
genuine. This has been proved by bills to a very large amount, which 
have already been successfully circulated. Enquire for Q.E.D. at the 

Coffee House, from 1 1 P.M. to 4 A.M during the present month."^^ 

Benjamin Franklin, who had been one of the best printers in 
America, noted: 

"The artists they employed performed so well that immense quanti- 
ties of these counterfeits which issued firom the British Government in 



14 U.S. COLONIAL MONEYS 381 



New York, were circulated among the inhabitants of all the states, before 
the fraud was detected. This operated significantly in depreciating the 

whole mass."^^ 

The Convention of July 30, 1777 reported that on July 3rd a large 
amount of Continental Currency had been fabricated in England and 
brought to America in British Men Of War operating in the Delaware River. 

A British "wagon train of clothing and supplies for British prisoners 
in Lancaster. . .sent out from Philadelphia by General Howe under a flag 
of truce in January 1778" was discovered to contain Continental 

Currency," relates Scott,^^ In general those colonists supporting England 
passed the bills, 

"The evil became so great that it was found necessary at a later period 
to officially withdraw from circulation (in January 1779) two of the 

Continental emissions amounting to $10 million," wrote Schuckers.-^^ 

"In April 1780, two British ships - the Blacksnake and the Morning 
Star - were captured off Sandy Hook with a large amount of counterfeit 
on board," wrote Scott. 

Schuckers recounts that: 

"In a confidential letter to Lord George Germaine about 1781 
[perhaps a bit earlier], General Clinton observed 'That the experi- 
ments suggested by your Lordships have been tried, no assistance 
that could be drawn from the power of gold or the arts of counter- 
feiting have been left untried; but still the currency...has not failed/" 

In March 1778, after three years of war, it was at $2.01 Continental 
for $1 of coinage. At the end of 1778 the Continentals retained from 1/5 
to 1/7 of their value against coinage. At the end of 1779, they retained 

only 1/25 of their value against coinage (4%),-^^ 

By May 1 780, the currency stood at 1/75 in coinage in 
Massachusetts and 1/120 in Pennsylvania. Still it continued. This massive 
British counterfeiting of the Continentals is ignored by the advocates of 
private money or commodity money. The British, and just plain crooks, 
also counterfeited great amounts of the state currencies. 

This counterfeiting shows the British establishment's under- 
standing of how excessive quantity can destroy a money system, con- 
trary to their claims that the Bank of England's issues could not 
affect prices, as discussed in Chapter 13. 

BREAKDOWN OF THE CONTINENTAL CURRENCY 

The Articles Of Confederation were ratified on July 9th, 1778. On 



382 The Lost Science Of Money 



September 1, 1779, the Confederation authorized an upper limit of $200 
million for the issues of Continental Currency. They were already at over 
a 90% discount to coinage. Its important to note that the $200 MiUion 

limit was not exceeded.^^ As we shall see in subsequent monetary 
actions, the U.S. Government has a near perfect record in this regard. It 
has almost never created unauthorized money, and often has not even 
created as much as was authorized. 

The individual states had continued issuing their own paper notes on 
an equal footing with the Continental Currency, In 1778 Congress asked 
the states stop issuing their own notes, but only Delaware and Maryland 
complied. 

From 1775 to 1783 the states issues were as follows: 



Massachusetts: 
Connecticut: 
New Jersey: 
Delaware: 
Virginia: 
South Carolina: 



Plhode Island: . . .$ 714,000. 
New York: . . . .$1,161,250. 
Pennsylvania:. . . $4,325,000. 

Maryland: $950,000. 

North Carolina: . $33,325,000. 



. $3,868,000. 
. $1,516,500. 
, $1,618,000. 
, $146,500. 
$128,441,000. 
$33,458,926. 

Total issues by individual states: $209,524,776.^^ 

Thomas Jefferson estimated that there were an additional $200 million 
of British counterfeits of the Continentals circulating, and that's probably 
a very low estimate. Perhaps someday our British cousins will tell us for 
the monetary record (if they know) how much they counterfeited. It 
could have run into the billions. 

Another problem was that the states began to restrict the Continentals. 
As early as October 1777, Massachusetts limited their legal tender power 
and in June 1781 revoked their legal tender status in the state. 

By May 1781 the currency had fallen to 500 to 1 against coinage, 
then to 1,000 to 1. May 1781 is the last entry of paper money in 
Washington's diary. From then on the campaign, with French help, was 
carried on in coinage. The "Continentals" had carried the Nation through six 
years of the Revolution, to within just 5 months of its successful conclusion. 

THE FRENCH FACTOR IN THE REVOLUTION 

France's help was essential. She was the first country to recognize 
the United States, in 1778, The French aristocrat Beaumarchais had been 
a great supporter of the Revolution, personally advancing about one mil- 
lion dollars. 



14 U.S. COLONIAL MONEYS 383 



At times the Revolution seemed more French than American. The 
French Colonel du Portail, a Brigadier General in the American Army, 
wrote to Comte St. Germain: 

"This is a sluggish people, without energy, without vigour, without 
affection for the cause in which they are engaged... there is 100 times the 
affection for the Revolution in any one coffee house whatever in Paris, 

than in all the United States together. "^^ 

The French Government loaned $7.9 million to the new nation, and 
Calonne estimated in 1786 that her overall expenditure toward the 
American Revolution was $256 million, about one half what it cost 

England."^^ Jefferson estimated the total American cost at $170 million. 
The cost to England was £97.6 million (about $500 million). France, in 
more ways than one, is responsible for the Statue of Liberty standing in 
New York harbor, 

THE DARKEST HOUR OF THE REVOLUTION 

Recognizing France's contribution to the Revolution does not 
detract from the great accomplishment of America's revolutionary leaders; 
but there was a moment in June 1780 when all seemed lost. Only 
$151,666 in gold and silver, needed for foreign purchases, had been 
received by the treasury in 1778 and 1779. The Congressional assembly 
of 1780 was besieged with petitions for tax exemptions. In the words of 
the immortal Thomas Paine: 

"A declaration to have stood forth with their lives and fortunes... 
would have sounded much better." 

At this point a letter arrived from General Washington. Tom Paine 
was the Clerk of the House and read Washington's letter to the assembly, 
warning of mutiny at any moment. Paine recounted: 

"When the letter was read I observed a despairing silence in the 
House. Nobody spoke for a considerable time. At length a member 
whose fortitude to withstand misfortunes I had a high opinion of, rose: 
If, said he, 'the account in that letter is a true state of things,. ..it appears 
to me in vain to contend the matter any longer. We may as well give up 
at first as at last.'" 

Paine continued: 

"With the depreciation of the currency, the slow operation of taxes 
and the petitions to be exempt therefrom, the treasury was money-less 
and the Government credit-less. 

The only thing which now remained and was capable of reaching 



t*' 



384 The Lost Science Of Money 



the case was private credit. I drew out the salaiy due me as clerk, 
inclosed five hundred dollars (Continental) in a letter to a gentleman in 
this city... Mr, Blair McLeneghan. I mentioned to him the (state of 
affairs) and Washington's letter.., and the absolute occasion there was for 
the citizens to exert themselves at this time, which there was no doubt 




}4h. Tom Paine, America's greatest son and Father of the Revolution, 
author of Common Sense^ and The Rights Of Man. He had an innate sense 
of fair play. He put forward the first plan for a social security system in 
America, and called the Continental Currency a "cornerstone" of the rev- 
olution. Testifying to America's present sad condition, there is no national 
monument dedicated to him commensurate with his importance, 
and the resting place of his bones is still unknown. 



14 U.S. COLONIAL MONEYS 385 



they would do if the necessity were made known to them; for that the 
abihty of Government was exhausted. I requested Mr. Mcleneghan, to 

propose a voluntary subscription among his friends. '"^^ 

Mr. Mcleneghan communicated the letter at a coffee house. He and 
Robert Morris donated £200 each in coinage, and eventually others con- 
tributed £1,360 in Continental Currency, nine days later at the City 
Tavern, where they decided to form the fund into a bank to be called the 
Pennsylvania Bank, with a subscription of £300,000. 

The Congress deposited £15,000 in bills of exchange, and promised 
more. The Pennsylvania Bank was authorized to issue notes paying 6% 
interest. It started operations on July 17,1780, and invested in food sup- 
plies forwarded to the Army, and in bounties for recruitment.'*^ 

The next year in February 1781, Congress appointed Robert Morris 
to the post of Superintendent of Finance. On May 17 he presented 
Congress with a plan for establishing the Bank Of North America, which 
passed by one vote on May 26th. It was to be capitalized at $400,000 
(1,000 shares at $400 each). The subscriptions of the Pennsylvania Bank 
were transferred to the Bank Of North America. 

However, by October 1781, only $70,000 had actually been paid in, 
when a French frigate arrived with $470,000 in coinage, which was 
immediately deposited into the bank. The Government thus owned 633 
of the 1,000 shares. The notes were not legal tender, but were accepted 
by the U.S. for duties and taxes. The bank was given the privilege to 
issue notes, but didn't do so until January 1782. 

In the meantime, on October 19, 1781, ComwaUis surrendered the 
British forces at Yorktown and the Revolution was won! 

ALL IN ALL, A REMARKABLE PERFORMANCE 
BY THE CONTINENTALS 

The establishment of a national currency by a new Nation in forma- 
tion would have been difficult even in peacetime (as the European Union 
now understands). Getting eleven states to give up a large part of their 
sovereignty - the money power - wouldn't have been easy. Add the coun- 
terfeiting by England, and the necessity to fight a revolutionary war 
against a great power, and it is a wonder the Continental Currency per- 
formed as well as it did, for as long as it did. 

The importance of the Continentals was well recognized: 
"Its powerful if not indispensable agency in gaining our independ- 
ence," wrote Samuel Breck."^^ 



386 The Lost Science Of Money 



During the war Franklin had written: 

'This effect of paper currency is not understood on this side of the 
water [in England]. And indeed the whole is a mystery even to the politi- 
cianSj how we have been able to continue a war four years without 
money, and how we could pay with paper that had no previously fixed 
fund appropriated specifically to redeem it. This currency as we manage 
it is a wonderful machine.. .It performs its office when we issue it, and 
when we are obliged to issue a quantity excessive, it pays itself off by 

depreciation."^"^ 

Franklin realized the injustice of this to fixed pensioners and 
salaried persons, and proposed legislative remedies for them. 

THE AFTERMATH OF THE CONTINENTAL CURRENCY 

There was a realization that many patriots had been hurt by the 
Continental Currency: 

"the legal tender legislation. . .enabled the unprincipled debtor to pay 

his debts at an enormous discount," wrote Breck.^^ 

In war or revolution, people would be hurt - many physically, and 
the lucky ones just financially. With hindsight, better provision could 
have been made to prevent the unscrupulous from misusing it, or to cor- 
rect obvious injustices after the event. The overriding fact remains that 
the Continental Currency enabled us to gain our independence; it 
enabled the United States of America to be founded. 

Those still holding the Currency were unable to get any value for it 
(a penny on the dollar), but they were able to have their own nation. 
Again Thomas Paine captured the essence of the situation: 

"...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.'"^^ 

Paine added: "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.'"^^ 

To Summarize 

For almost two centuries the field of colonial paper money has been 
miscast in terms of inflation and debasement by the influence of the 
English school. This misapprehension continues to the present day in 
spite of excellent works to the contrary, and the testimony of expert wit- 
nesses of the period such as Franklin, Jefferson and Paine. But there was 



14 U.S. COLONIAL MONEYS 387 



one good effect of the mother country's monetary repression - it precip- 
itated the revolution and led to the founding of the United States. 



Notes to Chapter 14 

^ Alexander Del Mar, Did the Hindus Discover America?, Indian Review, 
Madras, September 1912. 

2 Alexander Del Mar, History of Money in America, (repr., New York: Burt 
Franklin, pp. 20-30. See also M.W. Dickeson, American Numismatical Manual, 
(Philadelphia: J.B. Lippincott, 1865). 

^ Del Mar, cited in 2 above, p. 88. For a somewhat different view, see Donald 
Taxay's Money of the American Indians, Nummus Press, 1970. 
^ Del Mar, cited in 2 above, p. 90. 

^ Arthur Nussbaum, The History of the Dollar, (New York: Columbia Univ. 
Press, 1957), pp. 25-35. 

^ Brook Adams, The Emancipation of Massachusetts, (New York: Houghton Mifilin, 
1887), pp. 75-95. 

^ William Graham Sumner, A History of the American Currency, (New York: 
Holt, 1874), pp. 40-50. For more on land banks, see Del Mar, cited in 2 above. 
Also Brock, cited below, and Sumner, cited above. 

^ Del Mar, cited in 2 above, p. 118 quoting Weeden's Economic and Social 
History of New England. 

^ Dictionary of American Biography, (New York: Scribners, 1990). 
^^ Leslie V. Brock, The Currency of the American Colonies 1700-1764, (New 
York: Amo Press, 1975). 

^^ Joseph Albert Emst, Money and Politics in America 1755-1775, (Univ. of 
North Carolina Press, Inst. Early American Hist. & Cult., 1973), Chapter 1. 
'^ Davis Rich Dewey, Financial History of the United States, (New York: 
Longman's Green, 1903), Keith quoted on pp. 26-27. 

^^ ''The Paper Money Issued by Pennsylvania " written anonymously by a mem- 
ber of the Numismatic Society of Philadelphia in 1862. 
^"^ Dewey, cited above, Keith quoted on pp. 26-27. 

^^ Benjamin Franklin, Autobiography of Benjamin Franklin 1 706-1790, (New York: 
Macmillan, 1911). 
^^ Nussbaum, cited above, p. 25. 



388 The Lost Science Of Money 



^^ Joseph Harris, Essay upon Money and Coins, 1757, reprinted in Mculloch's 

Rare and Valuable Tracts on Money, (see Selected Bibliography), p. 374. 

^^ Adam Smith, The Wealth of Nations, 1716, (Univ. of Chicago Press, Great 

Books Collection, Encyl. Britannica, 1952), vol. 39, p. 359. 

'^ Charles J. Bullock, The Monetary History of the U.S., (New York: Macmillan, 1900). 

20 Del Mar, cited in 2 above, pp. 80-85. 

2^ Benjamin Franklin, Works, Library of America, Franklin's June 13, 1767 let- 
ter from London to Joseph Galloway. 
22 Ernst, cited above, pp. 121-2, including footnotes. 
2^ Dickeson, cited above, pp. 70-71. 
24 Bullock, cited above, pp. 47-58. 
2^ Sumner, cited above, p. 29. 
26 Del Mar, cited in 2 above, p. 69. 
2^ Ernst, cited above, p. 312. 
2^ Del Mar, cited in 2 above, p. 96. 
29 Del Mar, cited in 2 above, p. 100. 

^0 J.W. Schuckers, Finances and Paper Money of the Revolutionary War, 
(Philadelphia: J. Campbell & Son, 1874), p. 20. 

^* Kenneth Scott, Counterfeiting in Colonial America, (Oxford Univer. Press, 1957). 
^2 Frank Moore, Diary of the American Revolution, (New York: Scribner, 1860), 
vol. 1, p. 440. 

^^ Ben Franklin, Writings, cited above, p. 1127. 

^4 Scott, cited above. 

^^ Schuckers, cited above, p. 23. 

36 UX BUREAU OF STATISTICS, November, 1872, p.212, as quoted by Del 

Mar, cited in 2 above, p. 112. 

3^ Though about $248 million were actually issued, some were replacements for 

damaged notes and there were never more than $200 million outstanding. 

3^ Schuckers, cited above, p. 127. 

39 Samuel Breck, Continental Paper Money, (Philadelphia: J. Clark, 1843). 

"^0 Schuckers, cited above. 

^^ Thomas Paine, Dissertation on Government, the Affairs of the Bank, and 

Paper Money, In The Writings of Thomas Paine. Edit. M. D. Conway. (New York: 

AMS,vol3, 1967). pp. 18-20. 

42Lawrence Lewis, The Bank of North America, (Philadelphia: Lippincott, 1882). 

"^^ Breck, cited above, p. 1. 

"^"^ Franklin, Writings, cited above, April 22, 1779 letter from France to Dr. 

Cooper, pp. 422-3. 

"^^ Paine, Letter to Abbe Reynal in Writings of Thomas Paine, cited above, p. 87. 

"^6 Breck, cited above, p. 8. 

4^ Writings of Thomas Paine, cited above. 



389 



CHAPTER 15 



THE MONEY POWER VS 
THE U.S. CONSTITUTION 



"It was not any confidence in their frothy bubbles, 

but the lack of all other money, which induced... 

people to take their [the bankers] paper" 

Thomas Jefferson 



The Revolution established The Articles of Confederation as the 
governing document of the land in 1781. Its key monetary provision was 
in Article 9, giving Congress the power to "emit bills of credif - fiat 
paper money like the Continental Currency. But there were merchants 
(we didn't have bankers yet) who wanted this power for themselves. 
They grasped for it before, during, and after the revolution. 

EARLY MOVES TO USURP THE U.S. MONETARY POWER: 
ROBERT MORRIS SOUGHT IT 

Robert Morris (1734-1806) of the firm of Willing and Morris 

became the richest merchant in America, fi-om revolutionary war profits.^ 
He was also an important factor in arranging credits for fighting the war, 
including Washington's action at Trenton, and his final assault on 
Comwallis at Yorktown, But his partner Thomas Willing was accused 
and examined as a traitor. The story was that he helped the British com- 
mander William Howe in his efforts to convince Congress to give up the 

war and make peace. Willing was not convicted of any wrongdoing.^ 

Morris's first attempt to assume the monetary power was in 1763, 
when he tried to establish a bank, but failed to get the expected financing 

from abroad.^ Then, in 1766, his firm was among the gang of eight 



390 The Lost Science Of Money 



discussed in Chapter 14 that tried to issue private money in Philadelphia, 
but were blocked by other merchants, 

MOIIRIS USED THE BANK OF NORTH AMERICA AS A VEHICLE 

Morris' next attempt was through the Pennsylvania Bank. When 
Congress appointed him Superintendent Of Finance in February 1781, 
Alexander Hamilton sent congratulations and urged him to propose the 

establishment of a National Bank/ During the Revolution, in 1779, 
Hamilton had put forward his own plan for the "Company Of The Bank 
Of The United States" to be capitalized at $200 million with a ten year 
charter. But the plan was considered too grandiose and received little 
attention.^ 

Hamilton's original instincts were for a bank based on land, to be 
half owned by the government. Morris's intentions were more on the pri- 
vate Bank of England model. 

First he transformed the Pennsylvania Bank into the Bank Of North 
America, a bank of issue which could create money. Its notes were not 




15 a. 

Robert Morris 
became the rich- 
est merchant in 
America through 
war profits on the 
Revolution. He 
then attempted to 
not only privatize 
the monetary 
power in the 
United States, but 
to actually per- 
sonalize it! 



15 THE MONEY POWER VS THE CONSTITUTION 391 



legal tender, but were accepted for state taxes and duties, the same for- 
mula originally used by the Bank of England. This alteration was 
approved by a committee of four, including Reverend Witherspoon. 
Only Madison was vehemently against it. The proposal passed Congress 
by one vote. 

BANK OF NORTH AMERICA 

Thomas Willing was made President of the Bank. Subscriptions 
were slow and, as noted above, the U.S. ended up owning most of the 
Bank - 633 of the 1,000 shares. 

"In this way the Financier was employing public money to establish 
a financial institution which, though incorporated by the Government 
and under its general inspection, was largely a private institution," wrote 
Morris biographer Ver Steeg. 

Morris then personalized the Bank's notes, apparently convincing 
Congress that his personal guarantee of the notes was necessary for their 
acceptance in commerce. Some of the notes were payable in gold and 
silver on demand; others were payable at future dates. The gold and silver 
came from government flinds.^ 

But since the issue of the notes didn't start until 1782, after the 
Revolution had been won, the fact that they were acceptable for state 
taxes and government duties would be enough to give them substantial 
power as currency, if history is any guide. 

The Morris notes were accepted as cash in Philadelphia, but 
$400,000 of them circulated at a 10 to 20% discount in New England. 
Morris's personal guarantee wasn't very good outside Philadelphia; the 
notes were continually being redeemed for metal. Morris' "guarantee" may 
actually have worked against their acceptability, for he was considered 
by many to be a "desperate speculator and as 'a man of talents and 
intrigue,'" wrote Holdsworth.^ 

When Pennsylvania moved to restart its excellent money system, the 
Bank of North America under Morris and Willing tried to block her in 
order to monopolize the issue of money. The memory of how well 
Pennsylvania's money had performed was still strong in the minds of the 
citizens and the Bank of North America became extremely unpopular. In 
late 1785, Pennsylvania revoked its charter and the bank had to get a 
charter in Delaware. 

What other errors did Morris promote? His program on Government 
borrowing foreshadowed Hamilton's Federalist program. Morris 



392 The Lost Science Of Money 



preached that paper money had to be convertible to gold and silver and 
that the money system must be based on the "interest and influence of 
the monied men:" 

"In the financiers report. . .he emphasized the need and the virtue of 
borrowing.. .Borrowing was beneficial rather than burdensome, he 
asserted as he sketched the activities of an imaginary (farmer) who made 

imaginary profits on borrowed funds," wrote Ver Steeg.^ 

But the new nation was not buying Morris' schemes and there was 
an effort by members of Congress to dismantle Morris' system. When 
his plans for a national debt were defeated in April 1783, he went back 
to his other business activities, which ended in bankruptcy: 

"Morris' declining years were clouded by sad misfortunes resulting 
from the disastrous failure of vast business operations and speculation in 

land, unwisely conducted with too much debt...," wrote Knox.^ 



THE CONSTITUTIONAL 
CONVENTION 

"We marvel that they saw so much 
but they saw not all things." 
Benjamin Franklin Butler 



Up McCagg Road a few miles from AMI's headquarters, a blue 
metal plaque marks the birth site of Martin Van Buren, 8th President of 
the U.S. The original house is gone, but the site is beautiful, as it must 
have been when the young Van Buren grew up in these natural and har- 
monious surroundings. A mile further up the road is his final resting 
place in Kinderhook Cemetery. 

Van Buren played a big role in the formative years of our nation, and 
was a conscious warrior in the battle over a Grand Theme of humanity 
that those early years focused on - and which continues to this day. It 
was a battle that he waged as a friend of Thomas Jefferson, James 
Madison, and Andrew Jackson, against what he called "THE MONEY 
POWER." He gives us a fascinating description of this battle in his book 
Inquiry into the Origin and Course of Political Parties in the U.S. 



15 THE MONEY POWER VS THE CONSTITUTION 393 



THE FIRST GRAND THEME - THE NATURE OF MAN 

The battle was over the nature of man. Broadly and simply stated, 
does mankind need to be ruled by authority or are men capable of 
self government? 

The outcome of the fight would not only determine our form of gov- 
emment, but could influence the way humanity would develop. For if 
authoritarianism were applied, distrusting men to make the correct 
choices, many might then act that way, damaging their spirits. If on the 
other hand self government was expected, many men could rise to it and 
set an example for the world. 

After the revolution was won in 1781 "It became at once evident that 
great differences of opinion existed.. .as to the character of the govern- 
ment that should be substituted for that which had been overthrown," 

wrote Van Buren.^^ 

One viewpoint held that the British system "was the best that could 
be devised to promote the welfare and secure the happiness of 
Mankind." Although they had been "prompt to resist tyranny" and were 
"stung by the oppressions practiced upon the colonies by the British 
Government," in theory they "tolerated its forms and constitution." This 
was the view of the Federalist Party, which included most of the mer- 
chants and was led by Alexander Hamilton. 

It was the Federalists who had pushed for the Constitutional 
Convention in 1787, to re-make the Confederation of states into a 
stronger national government. 

Reacting to the Federalist thrust, the opposing popular viewpoint 
grouped into the Anti-Federalists. 

In their drive for a more powerful central government. Van Buren 
admits that at that time the Federalists, who he generally opposed, were 
right. As to their opponents, "...they were too much in the habit of 
regarding (the federal government) at that early period as a foreign gov- 
ernment only remotely responsible to them. 

"Their minds were thoroughly convinced that those entrusted with 
power would invariably and incurably abuse it, and therefore it was 
unwise to grant more power than was absolutely necessary to manage 
public affairs." These Anti-Federahsts included most of the landowning 
farmers. 

The antagonism between the two ideologies was compromised in 
the Constitution. While Hamilton's open desire for a British style 
Monarchy had no chance of acceptance, the Constitution that was 



394 The Lost Science Of Money 



hammered out did strengthen the national government, but also put 
clever checks and balances into place, which when combined with 
Madison's Bill Of Rights appeared to block authoritarian rule. 

MONETARY POWER LEFT UNDEFINED 

The Constitution gave the Federalists a stronger government, and 
the anti-federalists had their checks and balances. Everyone would live 
happily ever after? Not exactly. The Constitution left open a back door 
through which a form of authoritarian rule could enter, a form more dan- 
gerous than monarchy because it was less visible and not understood; 
and more threatening still because its center of power was outside the 
nation, to the east. 

It would take Jefferson almost twenty years to understand what had 
been ignored in the Constitution and he would spend the rest of his life 
doing battle against the MONEY POWER. Jackson's Presidency 
became literally a life and death struggle with the bankers. Van Buren 
thought he finally finished them off in 1840, but he was overly optimistic. 

What was the source of so much trouble? The constitution had 
failed to adequately define the monetary power in the new nation. 
Authoritarianism had been kept out politically and religiously, but was 
allowed to sneak in monetarily! 

Van Buren recognized this years later when he wrote "The MONEY 
POWER (he always capitalized it)...when firmly established, was destined to 
become the only kind of an Aristocracy that could exist in our political system." 

But why did the framers of a document so far advanced in its day 
regarding the balance between legislative, judicial, and executive power, 
not realize that the monetary power, if left unchecked, could endanger 
and ultimately overwhelm the whole structure? 

CONFUSION OVER THE NATURE OF MONEY 

The main explanation reflects the thesis of this book - that, as a 
group, the founding fathers didn't have a good understanding of the 
nature of money. Even today the various schools of economics have not 
accurately defined or even agreed on a concept of money. This may be 
the greatest failure of economics, since money is at the heart of every 
aspect of it. Economists are sfill squabbling over the most basic quesfion 
about money: 

THE SECOND GRAND THEME - THE NATURE OF MONEY 

The battle has raged for centuries over this 2"*^ theme - the nature of 
money. Simply and broadly stated, is money a concrete power, embodied 



15 THE MONEY POWER VS THE CONSTITUTION 395 



in a commodity such as gold; or is it 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 even legal requirements of the government? Or is it a hybrid - a com- 
bination of these factors? 

The supreme importance of the definition of money will now 
become 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. 

However, if, as we have been demonstrating in this work, the true 
nature of money is an abstract social institution embodied in law - that 
is, a legal institution - then it is more a creature of governments, and the 
Constitution had better deal with it adequately. The Constitution must 
describe how a uniform currency is to be provided, controlled and kept 
reasonably stable, in a just manner. 

I am suggesting that the nature of human affairs requires gov- 
ernment to have four branches, not three; the fourth branch to 
embody and administer the monetary power. 

So the stakes involved in understanding this "money game" are 
enormous - whether a nation's rule book will promote justice or allow a 
form of economic slavery. 

HOW TO ANSWER THE MONEY QUESTION 

There are two basic approaches to gaining knowledge on this ques- 
tion. A logical, or theoretical approach; and a practical approach based 
on experience - on the facts - what is called an empirical approach. The 
latter was Van Buren's favored method: 

"...experience, the only unerring test...," he wrote. 

In the field of money this factual approach relies on history, since 
that's where mankind's experience with money is found. We also have 
memories of our own experiences, but the effects of money systems 
often require several generations to become apparent. It must be kept in 
mind that logic can become too divorced from reality, and that experi- 
ence can be misinterpreted. 

Chapter 14 recounted the colonists' monetary experience, especially 
their discovery that abstract paper money - fiat money - builds real infra- 
structure and wealth; that money works as a medium of exchange and 
need not be an object of value in itself 



396 The Lost Science Of Money 



CONVENTION DOWNPLAYED U.S. EXPERIENCE 

But 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. Many wanted to emphasize that the 
Continentals became worthless; they placed all abstract fiat money 
under that cloud, and rejected the idea of paper money altogether. 

They ignored the fact that paper money was crucial in giving us a 
nation; that abstract money usually 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. And then there was the little matter of a war against 
the world's strongest power. 

CONVENTION AVOIDED THE MONEY QUESTION 

The Convention met from May to September, 1787, but there had 
been almost no discussion of the coinage or money powers until August 

16^^.^^ When we think of the "Founders" at the Convention, remember 
that Jefferson and Paine were not there and Franklin was so advanced in 
age that some one else had to deliver his closing speech for him. Van 
Buren was six years old. 

In addition to ignoring the nation's rich practical experience with 
money, the convention paid little heed to the brilliant writings of John 
Locke, Benjamin Franklin and others on money. The delegates didn't 
bother to find out why Locke in 1718 wrote: 

"Observe well these rules: It is a very common mistake to say that 
money is a commodity... Bullion is valued by its weight... money is valued 
by its stamp." 

Locke viewed money as a pledge for wealth, rather than wealth 
itself: 

"mankind agreed to put an imaginary value on gold and silver 
because of their durableness, scarcity and not being likely to be coun- 
terfeited; making them the standard pledges. ..having as money, no other 
value except as pledges. ..it is evident that the intrinsic value of silver and 

gold, used in commerce depends on their quantity."^^ 

They didn't consider the reasons Ben Franklin gave for agreeing 
with Locke's view: "Silver and gold.. .(are) of no certain permanent 
value..." and "We must distinguish between money as it is bullion, which 
is merchandise, and as by being coined it is made a currency; for its 
value as merchandise, and its value as a currency are two different 

things..."!^ 



15 THE MONEY POWER VS THE CONSTITUTION 397 



The Convention ignored William Barton's 1786 proposal for a unit- 
ed American paper currency, to be based on the highly successful 
Pennsylvania system described in Chapter 14. Barton noted that: 

"It must appear that we judge very erroneously when we suppose 
intrinsic value to be inseparably connected with (money)... we may 
infer that money in its proper signification is not wealth but the sign 
token or representative of if and 

"We are well aware of the prejudices that have been entertained 
against a paper currency; and indeed the manner in which it was issued 
during the last war afforded too much ground for such prejudice. But 
arguments drawn against the abuse of a thing do not militate against the 
excellence of the thing itself, or its use/' and 

"It is easy to conceive why persons who have embarked their funds 
in the Bank (of North America) are so averse to a currency issued by the 
Government," and 

"The only class of people who could derive any advantage from a mer- 
cantile bank among us would be those connected with the institution itself "^^ 

THE ABUSE OF MONETARY THEORY 

Unfortunately, the delegates were more influenced by Adam Smith's 
primitive theory, which heavily supported the Bank of England and con- 
tained crucial monetary errors that tended to "legitimize" the Bank's cor- 
rupt system of finance. Smith was quoted by delegates to the 
Convention. He wrote little specifically on money, but his monetary mis- 
takes and inconsistencies have had a disproportionately bad effect on 
mankind's money systems, promoting the idea that money must be gold 
and silver. Smith never mentioned the legal concept of money, as put 
forward by the philosophers and jurists Berkeley, Raithby, Locke, Julius 
Paulus, Plato, Aristotle, and others (see Chapter 12). 

WITHERSPOON'S "ANONYMOUS" SMOKING GUN 

In 1786, anticipating the Convention, a very curious book Essays on 
Money was published anonymously. Its entire thrust was to "theoretical- 
ly" attack the idea of government paper money: ^^ 

"State bills are an absurd form of money and not money at all." 
Why? - no answer. It turned out to be written by the Calvinist 
Clergyman, John Witherspoon. Referring to Locke and Franklin's views, 
he misrepresented their point on money, saying: 

"They seem to deny the intrinsic value of gold and silver." 
Discussion? - none. 



398 The Lost Science Of Money 




15b, Calvinist John 
Witherspoon, the only 
clergyman to sign the 
Declaration of Inde- 
pendence, devoted 
great effort to lieeping 
the Constitutional 
Convention from 
properly constituting 
the monetary power 
in the the new govern- 
ment. The power 
would then necessarily 
fall into private hands 
and there is no histor- 
ical case where that 
has worked to the 
benefit of the society. 



Then, using a rhetorical device, he stated some arguments for govern- 
ment paper money and stonewalled them, pretending they didn't matter. 

Concerning those with personal knowledge of the colonies' paper 
money systems: 

"We are told by persons of good understanding that (paper money) 
contributed to (the colonies) growth and improvement." Rebuttal ? - 
none. Concerning the fall of the Continental Currency: 

"(Some say it was due to the) Counterfeiting.. .of our enemies." 

Disagreement? No comment. 

John Witherspoon (1722-94) of New Jersey was the only clergyman 
to sign the Declaration of Independence. He had been president of 
Edinburgh College before immigrating and had written works "assailing 
the moderate party and its submissive attitude to the state in church mat- 
ters," wrote McNeal.^^ He had moved to America to become President 
of Princeton University. 

Witherspoon's influence and book did as much damage as any mer- 
chant, in leaving the back door open for the MONEY POWER to rule 
America. This connection between Calvinism and our flawed monetary 
system is a recurring theme in America, deserving further study. 



15 THE MONEY POWER VS THE CONSTITUTION 399 



SOME MERCHANTS UNDERSTOOD 

Besides Witherspoon, those delegates who understood most about 
money were merchants like Robert Morris and Alexander Hamilton. 
They didn't want the Nation to have the money power because their 
intention was to assume that power themselves - to take it from the 

nation as had been done in England. ^^ 

This would soon be demonstrated when, as Van Buren tells us, 
Hamilton and his associates put forward "a funding system, upon the 
Enghsh plan,. ..as the first great measure of the new government..." 

"TO EMIT BILLS OF CREDIT" 

The coveted monetary power was contained in the five "magic" 
words "To Emit Bills of Credit." They were already in the Articles of 
Confederation which was being supplanted. They were the authority 
under which the Continental Currency and the various colonial moneys 
came to be issued. 

Madison recorded the arguments on this provision: ^^ 

Gov. MorrisfPa.) "The moneyed interest will oppose the plan of gov- 
ernment if paper emissions are not prohibited." 

Mr. MasonfVa.) "The Revolutionary war could not have been carried 
on had such a prohibifion existed." 

Mr. Ellsworth fCT.) "By withholding the power from the new govern- 
ment, more friends of influence would be gained to it than by almost 
anything else." 

Mr. Butler fS.C.) remarked that paper money was not legal tender in 
any European country. 

Mr. Mason (Va.) countered that neither was any European country for- 
bidden from making paper money a legal tender. 

Madison thought the power was needed for emergencies but wanted 
to make its acceptance voluntary, not a legal tender. The committee 
voted 9 to 2 against including the phrase "to emit bills of credit." 

The power to create money, long regarded as a key element of sov- 
ereignty, was not solidly placed in the new government by the "Moneyed 
interest," while they hypocritically proclaimed the need to strengthen the 
national government. They tried to get a clause forbidding it, but failed. 
The Constitution is silent on the power, neither conferring or forbidding 
it. In later years delegates would argue over whether they had given the 

government the power to issue paper money. ^^ 



400 The Lost Science Of Money 



What would be the effect of ignoring this power? Delegate Gorham 
of Massachusetts brushed it off- "The power so far as it is necessary or 
safe, is involved in that of borrowing." 

In other words the government would be forced into borrowing 
"money" instead of creating it. The honest patriots would assume that 
the government would be borrowing real assets - gold and silver com- 
modities - and paying interest on it. The merchants, however, knew that 
they would soon have the government borrowing paper "bills of credit" 
emitted out of thin air by their private bank, and paying interest on it to 
the bankers, as was being done in England at the time. 

Their bank would be allowed to do what they had blocked the 
government from doing - to create paper money - their own bank 
note^^ pretending to back them with gold and silver. 



LIMITED U.S. MONEY "POWERS" 

Having been sold the idea of money as a commodity, in particular 
gold and silver, the Convention took minimal monetary actions. The 
entire Federal monetary powers in the Constitution are: 

"Art.l, sec. 8. The Congress.. .shall have power.. .to borrow money 
on the credit of the United States... to coin money, regulate the value 
thereof, and of foreign coin... to provide for the punishment of counter- 
feiting." These provisions were unclear enough that for years delegates 
would publicly argue over what money powers they had placed in the 
federal government. 

Regarding the individual states, the Constitution declared: 

"Art. 1 , sec. 1 0. No State shall coin money nor emit bills of credit, nor 
make anything but gold and silver coin a tender in payment of debts../' 
Note that the monetary power was considered so important that it was 
explicitly denied to the individual states; yet it would be handed to a pri- 
vate gang of bankers! 

Thus the Constitution failed to adequately define money, and how it 
would be controlled. The European Monetary Union must avoid this 
error. Whether it takes an extra month or an extra year, its founding doc- 
uments should explicitly define the nature of money as an institution of 
the law, and specify how money is to be controlled, expanded and kept 
reasonably stable and in adequate supply. Up to now they have not done so. 

Alexander Del Mar, the great monetary historian and once head of 
the U.S. Bureau of Statistics, described the monetary result of the 
Consfitutional Convention: 



15 THE MONEY POWER VS THE CONSTITUTION 401 



"Never was a great historical event followed by a more feeble 
sequel. A nation arises to claim for itself liberty and sovereignty. It gains 
both of these ends by an immense sacrifice of blood and treasure. Then 
when victory is gained and secured it hands the national credit - that is 
to say a national treasure over to private individuals, to do as they please 
with it!. ..They had before them.. .the historical examples (where) the 
main contention from first to last between the aristocratic and popular 
factions arose out of and centered in the monetary system; that greatest 
of all dispensers of equity or inequity.,.. They had only to take care that 



1 5c. Alexander Hamilton, leader of the Federalist Party, advanced the 
interests of merchants and financiers in the new nation until Aaron Burr 
killed him in a duel. Hamilton tried to withdraw, but Burr was deeply 
offended and would not allow him an honorable exit. 



402 The Lost Science Of Money 



the seed they planted was genuine and uncontaminated. Nature was cer- 
tain to do the rest. Well they planted; and now look at the fruit and see 
what it is that they planted! They planted financial corporations... they 
planted private money... they planted financial exemptions from pubUc 

burdens. ..In a word they planted another revolution."^^ 

These were strong sentiments. It was put differently by 
Congressman Benjamin F. Butler in an 1869 speech to Congress on the 
money question: 

"We marvel that they saw so much but they saw not all things."^^ 

THE FEDERALIST PAPERS IGNORED THE 
MONEY DEBATES 

The Constitution was sent out for ratification by the States, and 
essays urging its adoption were written by Alexander Hamilton, John Jay 
and James Madison. But Madison was not a Hamiltonian Federalist, and 
later broke with him publicly. In the 85 articles known as the Federalist 
Papers the monetary question is entirely ignored except indirectly in 
Federalist # 12: 

"Prosperity of commerce is now acknowledged... to be most useful 
. . .by prompting the introduction and circulation of the precious metals, 
those darling objects of human averice and enterprise, it serves to vivify 

and invigorate the channels of industry. "^^ 

As to the monetary powers question, all attention in the new nation 
was focused on the Constitution's limitations against the individual 
states issuing money. 



EARLY EFFECTS OF MIS-DEFINING THE MONETARY POWER 

While the Constitutional Convention decided for self government, 
against rule from the top down, most of the Delegates viewed money as 
a commodity rather than an institution of the law. The Constitution trusted 
the people with the political power, but didn't firmly place the monetary 
power - the authority to create and regulate the money supply - in their 
government. As a result the power was left up for grabs. Alexander 
Hamilton wasted no time in "grabbing." 

HAMILTON AND THE MONEY POWER ATTACK 

The Constitution went into effect in 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 



15 THE MONEY POWER VS THE CONSTITUTION 403 



inexpedient, and caused as much unpopularity to his administration., .as 
any other act it made." 

What was so bad about it? 

"A large proportion 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)." 

Madison wisely attempted to have the law pay speculators less than 
the original holders, but was voted down. Hamilton argued that the sale 
represented a "contract" to the speculators and had to be honored. He hid 
the fact that these buyers were given privileged political information. 
Van Buren tells us: "(Many) believed that the scramble which ensued 
was foreseen and counted upon as a source of influence to enlist 

Congress on the side of the administration,"^-^ 

1ST BANK OF THE U.S. ASSUMED THE MONETARY POWER 

Hamilton and associates, having kept the monetary power out of 
government hands, moved to assume it themselves. Arguing that the 
Bank Of North America was only a state bank and too limited, Hamilton 
suggested that it come forward if it wanted to alter itself for the nation- 
al purpose. Curiousfyy the Bank of North America took no steps toward 
this obvious increase in profit and power. 

Hamilton proposed the establishment of a national bank in his 
December 1790 Report on a National Bank. In February 1791, he 
pushed the Bank act through Congress. The privately owned bank was 
to be a bank of issue on the English model, not a bank of deposit on the 
Amsterdam model. This meant that it would be creating new paper 
money, not just holding and transferring the coinage deposits of its 
clients. The government was given 20% of the new banks shares. 

And we see why the Bank of North America was not put forward 
for this purpose: the U.S. Government had owned over 60% of its 
shares. Thomas Willing resigned the Presidency of the Bank of 
North America, to become President of the first Bank of the U.S. 

In written opinions to Washington, Jefferson tried to get him to veto 
the Bank bill arguing that it was unconstitutional, but Hamilton created 
the "doctrine of implied powers" to support the federal government's 



404 The Lost Science Of Money 



power to charter a corporation. Hamilton had an advantage over 
Jefferson. His strongest arguments concern the true necessity for a 
monetary power in society - sudden emergencies such as war; or if the 

coinage had somehow been removed from a country. ^^ 

EarUer at the Convention, Hamihon couldn't think of even one rea- 
son for such a power when there was a chance it might be properly con- 
stituted in the hands of the nation. Then his Report on a National Bank 
echoed Adam Smith's assertions that government could not be trusted to 
operate it.^^ 

His February 1791 letter to Washington doesn't present a strong 
argument on why the government should give this power to a private 
group. It is assumed largely because the government didn't command 
the gold and silver - they were in private hands. 

It was therefore crucial to the bankers that the Convention had 
embraced a commodity concept of money - Witherspoon and Smith's 
primitive view that money was gold and silver - and the government 
shouldn't be empowered to issue paper money. But see what this really 
meant in practice: 

The P^ Bank of the U.S. 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! 

So the real question in practice was not whether money was a legal 
power or a commodity, but whether private banks or the government 
would be allowed to 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 




^^SVVM*^* q(v#w '^i « 



' ' ?^™ * ^ " 'V»VHr 



r 




•^ ■' f J • . ■"!-;' 












15d. A $50 note from the first Bank of the United States, dated June 22, 
1799, payable at the Boston branch. The note is signed by Thomas 
Willing, Morris' partner and president of the Bank. 



15 THE MONEY POWER VS THE CONSTITUTION 405 



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 gov- 
ernment to accept them in payment for taxes, as had been done in 
England. 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. 

But 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 had just 
fought the Revolution against! 

Furthermore, ''A comparison of the Bank of England act of 1694 
and the United States Bank act of 1791 shows that a careful study had 
been made of the English institution. The powers of the banks, relating 
to the scope of the business were practically identical," wrote 

Holdsworth.^^ 

The Bank bill passd the Senate on February 8, 1790 by a vote of 39 
to 19. Madison and 18 other senators, all but one from southern states, 
opposed it. 

President Washington signed the bill, and the bank started in 1791, 
with a charter for 20 years. On the day of the offering, the bank's 25,000 
shares were over-subscribed by 4,000 shares within two hours! Only 

one-fourth the $400 cost of a share had to be paid in gold.-^^ The rest 
could be paid for with publicly held government bonds. These were the 
same bonds Hamilton had used to turn the state debts from pennies into 
dollars the prior year, at public expense. You can see where the "money" 
for the bank is really coming from - from the nation. 

A PAPER BANK 

Holdsworth describes the ensuing speculation in rights to buy the 
stock: "Immediately a violent speculation sprang up in bank stock or 
'script' as it was called. Two days after the subscription books were 
closed $35 was paid for a right to the certificate which the commission- 
ers were to deliver, acknowledging receipt of the first cash payment of 
$25, and within a week sales were made at $50. Brokers offices sprang 

up on all sides advertising the purchase and sale of bank script."^^ 

The script rose to 56 in August 1791 , then dropped to 45, rose to 60, 
then to 100 in two days and from 100 to 150 on a single day, "It was 



406 The Lost Science Of Money 



claimed that agriculture, commerce and manufacturing suffered by the 
withdrawal of considerable sums of specie with which to speculate in 
bank script," continued Holdsworth. 

The Bank began regular business operations on December 10, 1791: 
"Sumner says: "The belief at the time, and subsequently, was that no 
more than the specie part of the first installment was ever paid into the 
bank in specie," wrote Holdsworth, adding that "BoUman writing in 
1810, said: 'No more or little more than the first installment, $675,000 
can be considered as having been received by the bank actually in hard 
money.'" 

How was the Bank stock paid for? Holdsworth gives the answer: "In 
a debate in the Pennsylvania legislature in 1793, it was stated that one 
great source of profit to the Bank of the United States when it was first 
established was in the discounting of notes for stockholders, to enable 
them to pay subsequent installments [on their bank stock]. No one 
seemed sufiFiciently informed or inclined to defend the bank from this 
charge, and in the light of facts bearing upon this dangerous practice in 
the organization of other banks it seems probable that the charge was not 

groundless."^^ Thus the buyers of the shares paid for them with their own 
paper notes. The Bank also accepted paper notes from the Bank of Boston 
and the Bank of New York, in place of gold and silver. 



AND THE BANKER'S "ARGUMENT"? 

What arguments or justifications did the bankers provide for the 
great privileges and power to be handed to them through such a private 
bank? Hamilton's argument, like Smith's, was really a smear: The gov- 
ernment shouldn't control the national bank because it was "liable to 
being too much influenced hy public necessity.. At would, indeed, be lit- 
tle less than a miracle, should the credit of the bank be at the disposal of 
the government, if, in a long series of time, there was not experienced a 

calamitous abuse of it."^^ 

History shows that the opposite of Hamilton's fears have been real- 
ized. His faith in private control was based on trusting to the greed of the 
bank's owners not to abuse their power. But there was little reason to 
expect that to work, then, or now. 

One finds little other "theoretical justification" advanced by the 
bankers for private control of the monetary system. The impression is 
that they were not as much interested in monetary theory, as they were 
in obtaining the powers afforded by the establishment of the bank. 



15 THE MONEY POWER VS THE CONSTITUTION 407 



For example, in Hamilton's letter to President Washington in support 
of the bank act, the nearest argument on those lines is this: 

"Suppose that the necessity existed ,.,for obtaining a loan; that a 
number of individuals came forward and said, we are willing to accom- 
modate the government with this money (which we have or can raise) 
but in order to do this it is indispensable, that we should be incorporat- 
ed as a bank. . .and we are obliged on that account to make it a consider- 
ation or condition of the loan," wrote Hamilton. 

This argument reduces to: we'll be able to get you a loan, if you 
grant us the monetary power. At the bottom of the argument is the 
assumption that the nature of money is gold and silver commodities. 
Thus under this erroneous definition of money, the government has to 
borrow or tax the "money" from the individuals who own it, rather than 
to legally create the money, as the bankers would soon be doing through 
their new-found monetary privilege, 

Richard Timberlake confirms this lack of discussion or theoretical 
justification in the introduction to his book The Origin of Central 
Banking in the United States: 

"(The) central banking concept had been fully understood and 
appreciated by the time of Andrew Jackson. Therefore I presumed it 
must have first appeared much earlier. So as a postdoctoral continuation 
of my dissertation, (I) traced back through the primary sources to where 
the central banking idea had originated and who was responsible for it. 
Much to my surprise, I could find no trace of its formal initiation," 

Timberlake notes that Hamilton's report on the bank reads in sec- 
tions very much like Adam Smith's writings on the Bank of England. 
Examining Smith directly for a banker's apologia, in The Wealth of 
Nations, pubhshed in 1776, just 15 years before the 1st Bank of the US 
was founded, we find Smith putting forward this justification for the 
Bank of England: 

"[It] Render(s) a greater part of [businesses] capital active and pro- 
ductive than would otherwise be so" since businessmen can borrow of 
the bank, instead of being "obliged to keep by him (capital which is) 
unemployed, and in ready money, for answering occasional demands, 
(which) is so much dead stock. [The bank] enables him to convert this 
dead stock into active capital and productive stock.,. which produces 
something both to himself and to his country." 

But at only one point does Adam Smith refer to the main question of 
why the central bank should be private and not publicly owned. A care- 



408 The Lost Science Of Money 



fill analysis of the way he does it indicates that he did not wish to clear- 
ly frame the question, but obscured it as whether the English Government 
should be in the banking business for profit, as discussed in Chapter 12. 

THE BANK TREADED SOFTLY 

Once established, the 1st Bank of the United States operated conser- 
vatively, perhaps in an effort to arouse the least opposition and set down 
roots. According to Jefferson, its loans were generally made to 
importers. Under Hamilton the U.S. debt to it was continually built up 
and had grown to over $6 million by 1795. Furthermore, Hamilton 
obscured the nation's financial situation. Thomas Jefferson complained 
to James Madison: 

"Dear Sir: I do not at all wonder at the condition in which the 
finances of the United States are found. Hamilton's object from the 
beginning was to throw them into forms which should be utterly indeci- 
pherable."-^^ 

Twentieth Century financial textbook writers Studenski and Kroos 
have confirmed that: 

'Tt was impossible to ascertain from (Hamilton's) accounts the exact 
amount of government receipts or expenditures or national debt. Indeed 
no clear statement of the debt was ever presented by Hamilton. . ."^^ 

Holdsworth confirmed that: "In the early days of banking a veil of 
mystery was thrown over the operations of banks, and the general pub- 
lic knew but little of their nature or modus operandi. Even the bank of 
the United States, semi-public institution though it was, published no 
reports... A careful search has failed to reveal any trace of the original 
books and records of the bank."-^^ 

So while the records of the publicly owned Bank of Amsterdam 
from 1609 are still intact in Holland, the records of the privately owned 
first Bank of the United States from 1800 are completely lost! 

GOVERNMENT FORCED OUT OF ITS SHARES 

Owning part of the Bank was very beneficial to government, bring- 
ing over $1,101,720 in dividends from Bank stock to the Treasury. 
Predictably, the merchants would covet the Government's shares. In 
1796-97, the Bank forced the Government to sell over half of its 5,000 
shares to reduce its "debt" to the Bank. Then in 1802, the Government's 
remaining 2,200 shares were sold to Baring Brothers in London, to 

reduce its debt. These share sales brought a total of $671,860.^"^ To his 
credit, Hamilton is reputed to have opposed the sales. 



15 THE MONEY POWER VS THE CONSTITUTION 409 



THE FIRST U.S. COINAGE 

It was not until 1794 that the U.S. minted its first silver dollar, at 416 
grains; and in 1795 its first gold coin, the $10 Eagle at 270 grains, 
ll/12ths fine. Hamilton had set the ratio at 15 to 1, following Isaac 
Newton's example, but this slightly undervalued gold in relation to 
British markets. 

THE RETURN OF THOMAS PAESfE 

Tom Paine, America's greatest son, originated the idea of American 
independence, and prepared the public mind for it with his publication 
of Common Sense. On returning home in 1802 after trying to help 
France's Revolution, he wrote: 

"A faction (the Federalists) acting in disguise, was rising in America; 
they had lost sight of principles. They were beginning to regard govern- 
ment as a profitable monopoly, and the people as hereditary property."^^ 

The Federalists were pushing for war: 

''A war in some shape or other seems to have been the great object 
with Hamilton's people. First they would have war with the northern 
Indians. That failed... Britain at one time seemed their target. Great 
efforts were made to get a war with Algiers. That failed. Now it seems 
to be a point to differ with the French," wrote William Maclay, a mem- 
ber of the 1st Congress, in his daily joumal.^^ 

The Federalist pretext for war with our revolutionary ally France 
was over New Orleans and the Mississippi basin. Had they succeeded, a 
huge buildup in the U.S. debt for the cost of such a war would have forev- 
er entrenched the Bank of the U.S. This was the formula used earlier to 
entrench the Bank of England. 

Paine blocked it, suggesting to Jefferson that he ask the French 
about buying the land. This led to the Louisiana Purchase, and stopped 
the bank from sinking blood soaked roots into the nation, as the Bank of 
England had done in its host country a hundred years earlier. 

THOMAS PAINE'S MONETARY VIEWS 

Tom Paine at first held a commodity view of money: "Its being 
stamped into coin adds considerably to its convenience but little to its 
value. ...the value is not in the impression but in itself ...The only prop- 
er use of paper in the room of money is to write promissory notes and 
obligations of payment in specie thereon," he wrote, repeating the senti- 
ments already well propagated by the Adam Smith gang, "As to the 
assumed authority of any assembly in making paper money.. .a legal 



410 The Lost Science Of Money 



tender... there can be no such power in a Republican government... tender 
laws of any kind, operate to destroy morality, and to dissolve by the pre- 
tense of law what ought to be the principle of law to support, reciprocal 
justice between man and man: and the punishment of a member who 

should move for such a law ought to be death."-^^ 

Later, in 1796, while in France, Paine launched an attack against the 
Bank Of England, in a piece called The Decline and Fall of the English 
System of Finance. To do this he had to investigate and understand 
money better. His conclusions indicate a change in viewpoint, and an 
awareness that quantity and not intrinsic qualities determined the value 
of money: 

"The same fate would have happened to gold and silver, could gold 
and silver have been issued in the same abundant manner that paper had 

been, and confined within the country as paper money always is."^^ 

Paine also began to understand central banking: 

"There is something curious in the movements of this modem com- 
plicated machine, the funding system; and it is only now that it is beginning 
to unfold the full extent of its movements. In the first part of its move- 
ments it gives great powers into the hands of government, and in the last 

part it takes them completely away."-^^ 

Though Tom Paine 's strong suit was not in the monetary area, his 
attack temporarily brought the Bank of England to its knees. There is lit- 
tle doubt that he would have mastered the subject with sufficient time 
and study, for in Agrarian Justice he came close to inventing a fiat 
money system while putting forward the first proposal for a type of 
social security system for America. Unfortunately his final short years 
were spent in terrible poverty in lower Manhattan, in a nation too ready 
to forget his great contribution, a nation that has not yet earned the right 
to build a memorial honoring this great man. Jefferson had attempted to 
have the Virginia legislature grant Tom Paine a piece of land, but was 
blocked by supposedly religious elements. 



JEFFERSON FINALLY UNDERSTANDS MONEY 

Jefferson continued to fight the bank, aware of the danger it posed. 
In a December 1803 letter to Treasury Secretary Gallatin he wrote: 

"This institution is one of the most deadly hostility against the prin- 
ciples of our Constitution.. .suppose a series of emergencies should 
occur... an institution like this... in a critical moment might overthrow the 
government." 



15 THE MONEY POWER VS THE CONSTITUTION 411 



I5d 

In his mature years, 
Thomas Jefferson, 
author of the 
Declaration of 
Independence and 
3rd U.S. President, 
came to understand 
the Money Power, 
and what had been 
left out of the 
Constitution. He 
became aware of the 
necessity for the 
government, not 
private banks, to 
control the money 
system and worked 
toward that goal. 




Jefferson, Paine, and others were at a real disadvantage fighting 
Hamilton and the bankers, for in their earlier years they held a com- 
modity view of money as gold and silver. They saw their enemies - 
the bankers - creating paper money, and this reinforced their view 
that it was evil! It took Jefferson years to realize that it was not 
paper money, but the private issuance of it that was the problem (Le. 
the circulation of private debt as money). We observe his develop- 
ment chronologically through his letters: 

In Nov. 1798, watching Hamilton increase the national debt, he 
wrote to John Taylor: "I wish it were possible to obtain a single amend- 
ment to our constitution... taking from the federal government the power 
of borrowing money. I now deny their power of making paper money or 
anything else a legal tender." 

In December, 1803 he asked Gallatin: 

"Could we start toward independently using our own money to form 
our own bank...?" 

By June 1813, Jefferson had figured it out, judging from his letter to 



412 The Lost Science Of Money 



John Eppes: 

"Although we have so fooUshly allowed the field of circulating 
medium to be filched from us by private individuals, I think we may 
recover it.. .The states should be asked to transfer the right of issuing 
paper money to Congress, in perpetuity." And: 

"...the nation may continue to issue its bills as far as its needs require 
and the limits of circulation allow. Those limits are understood at present 
to be 200 millions of dollars." 

Finally in October 1815, Jefferson wrote Gallatin: 

"The treasury, lacking confidence in the country, delivered itself 
bound hand and foot to bold and bankrupt adventurers and bankers pre- 
tending to have money, whom it could have crushed at any 
moment.. .These jugglers were at the feet of the government. For it was 
not, any confidence in their frothy bubbles, but the lack of all other 
money, which induced... people to take their paper... We are now without 
any common measure of value of property, and private fortunes are up 




I5e. James Madison, 
father of the U.S. 
Constitution and the 
Bill Of Rights. In 
May of 1791 he and 
fellow Virginian, Tom 
Jefferson, took a one 
month coach trip 
through the colonies, 
mapping a political 
strategy for the 
future. They passed 
just three miles from 
AMI'S offices on the 
Old Post Road in 
Kinderhook, a section 
of which (next to 
Lindenwald) has 
been preserved unal- 
tered. 



15 THE MONEY POWER VS THE CONSTITUTION 413 



or down at the will of the worst of our citizens... As little seems to be 
known of the principles of political economy as if nothing had ever been 
written or practiced on the subject, or as was known in old times, when 

the Jews had their rulers under the hammer.'"^^ 

BURR SHOT HAMILTON 

Hamilton's influence ended when Jefferson beat him for the 
Presidency in 1800. In the Electoral College, Aaron Burr had cast the 
deciding vote for Jefferson, against Hamilton. In 1804, Burr, a man with 
very strong connections to Kinderhook, and to Martin Van Buren, killed 
Hamilton in a duel over a personal slur Hamilton made on him. Bun- 
rejected his attempts to apologize. 

With his own library of over 3,000 books, Burr had some awareness 
of monetary matters. His father and grandfather had been presidents of 
Princeton University. When Congressman Sedgwick asked his opinion 
of Hamilton's bank legislation, in February 1791, Burr referred him to 
the philosopher David Hume's essays on money. Opposite from Adam 
Smith, Hume advocated that if you must have paper money, a govern- 
ment owned bank "offers some advantages." 

TAKING THE 1st BANK OF THE U.S. DOWN 

In 1811, thanks partly to Jefferson's influence, the Bank's re-charter 
was turned down by one vote in Congress. On liquidation it was found 
that 18,000 of the bank's 25,000 shares were owned by foreigners, most- 
ly Dutch and English. While the revolution was fought to end foreign 
domination, it was being re-insinuated through the bank: 

"The fact that 1800 of the 2500 shares [Conant has dropped a zero] 
were held abroad was made the occasion of bitter attack on the bank," 
wrote Conant, noting that on February 12, 1811, Congressman Desha of 
Kentucky declared in the House that "This accumulation of foreign cap- 
ital was one of the engines for overturning civil liberty, and that he had 

no doubt King George III was a principal stockholder.'"^' 

But the largest single stockholder was American slave trader 
Stephen Girard: "When the charter of the Bank of the United States 
expired in 1811, Stephen Girard, then the foremost merchant and the 
wealthiest man in the country, was the largest stockholder," reports 

Holdsworth.^^ 

The bank's demise was not really a great victory against the private 
money issuers, for by then over 100 private banks had been chartered by 
the state governments. While the Constitution forbade the states from 



414 The Lost Science Of Money 



issuing money, it did not stop state chartered banks from issuing money! 
These state banks wanted to remove the Federally chartered Bank of the 
U.S. from its advantageous position, so they helped put it under politically. 
They also blocked the Bank from obtaining a charter from Pennsylvania, 
after its Federal charter expired. 

THE FIRST PAPER MONEY ISSUED BY THE UNITED STATES 

Contrary to predictions, no financial calamity followed the liquida- 
tion of the Bank. The U.S. Treasury followed very much the course 
being advocated by Jefferson, and as outlined in detail in his 1813 letter 
to Eppes, and alluded to in his letters of 1803 and 1815 to Gallatin. On 
June 30, 1812 on Gallatin's recommendation or agreement, $5 million in 
one year Treasury notes were issued to compensate for the removal of 
money supply no longer provided by the Bank. They paid 5.4% interest, 
were payable in metal on demand, were transferable from one party to 
another by assignment, and were redeemed after one year. No small 
notes were issued - all were $100 and over. 

The notes were spent into circulation, by paying them to government 
creditors willing to accept them at full value. They were receivable for 
taxes and fees. Additional issues were made in February 1813, March 
1814^ and December 1814 with denominations as low as $20. These notes 
were easier to transfer, but not easy enough for currency transactions. 

This was corrected in the February 1815 issue, which were bearer 
certificates paying no interest, and requiring no transfer formalities. 
They had no date for repayment, were denominated under $100 and 



v^t;^feij»»i?^ 



?^ /o) 



If' 



?^,- 



■|«rt 



^■11''! 



^t- 



..'■V ^Z-f ;■ 









t>' 









I5h. A $10 U.S. Note from March 1815. When used as money, it was a 
bearer instrument paying no interest. TJiey could be converted on 

request into a security paying 7%. 



15 THE MONEY POWER VS THE CONSTITUTION 415 



were very close to a true money. These notes were not given legal tender 
status by the Congress. Holders could convert them into 7% interest 
bearing securities, on request. 

The amount of all such notes authorized was $60.5 million, of 
which only $36.7 million were actually issued, about $3.5 million in 

small notes.^^ Thus our government didn't abuse this note issuing 
process, and didnH even issue the full amounts authorized, but acted 
responsibly in its first ever creation of money. 

About a hundred years later, J. Laurence Laughlin, a banker apologist 
professor at the University of Chicago, bitterly complained: 

"Here we have an unmistakable case of 'bills of credit' intended to 
circulate as money... The seat of sovereignty being in the people, when 
did the people confer upon Congress all the attributes of sovereignty 

which may have been claimed by an unlimited ruler?"^"^ 

Someone should have asked Laughlin, When did they confer the 
same sovereignty he refers to - the power to create money - upon the 
bankers? His phrase "which may have been claimed by an unlimited 
mler" is very revealing of the kind of power the bankers usurped. 

Clearly the United States was coming "dangerously" close (from the 
bankers viewpoint) to establishing its own currency. All that was needed 
was to sever the connection to gold and silver. In 1814a bill was intro- 
duced into Congress by Representative Hall of Georgia: 

"That the treasury notes which may be issued - would become legal 
tender among citizens or between a citizen of the U.S. and a citizen of 
any foreign country." The House, still under the sway of the financial 

interests, turned it down 94 to 45 1'*^ 

REAL NEED FOR A CENTRAL BANK 

In 1814, a large portion of the currency circulating in the U.S. were 
the bank notes of the then existing 208 state banks. These notes were 
theoretically exchangeable for coins, but the coinage was never really 
there, and redemption had been widely suspended since the War of 1 8 1 2. 
They maintained value mainly because the government accepted them in 
payments. 

By 1814 the government had accounts in 94 banks, keeping four dif- 
ferent accounts in each of them: one for local bank notes, one for out of 
state bank notes, and two others for U.S. Treasury notes. Much of the 
Treasury's revenue was useless because it was collected in state bank 
notes that were not accepted in other states. This fiscal situation was 



416 The Lost Science Of Money 



chaotic and the Treasury is known to have lost about $6 million as a 
result - a huge amount at that time. 

MADISON'S DALLAS PLAN BLOCKED 

To resolve this problem, in 1814 President Madison tried to set up a 
central bank of issue, which would be 40% owned by the government. 
But the measure, known as the Dallas plan, named after Treasury 
Secretary Dallas, could not get through Congress in its initial form, and 
Madison vetoed the version that passed. Knox tells us that the details of 
this Plan have been lost, and that the "(Dallas) scheme of 1814-15 was 
looked upon as one for a paper national bank..." because the money was 

to be backed by U.S. Treasury notes,^^ 

Senator Calhoun of South Carolina objected to the private participa- 
tion, and put forward a plan for a national bank to be government owned: 

"Calhoun objected to a financial partnership of this character in 
which the government would borrow back its own credit, and in a second 
plan proposed that the Government should use its own credit directly 

without the intervention of a bank.. .," wrote Dewey. "^^ 

Henry Clay, who earlier had thought that state banks were sufficient 
for the nation's monetary system, changed his mind to support such a plan: 
"But it now appeared to him that the general Government could no 
longer depend upon them. A national bank seemed to him not only nec- 
essary but indispensable," wrote Knox.^^ 

The proposals were blocked, and in the chaotic state bank currency 
atmosphere, Madison, aware that a central bank was crucial to the 

nation, signed a bill allowing another privately dominated bank - the 2"^* 
Bank of the U.S. with only 20% government ownership. 

In these maneuverings (which deserve closer study) we see an 
important principle: it was not a case of the financially savvy elements 
providing the nation with the know how and mechanisms that would 
otherwise have been unavailable. The fact is they blocked and impeded^ 
over and again, all attempts to establish monetary systems that would 
have better served the national interest They engaged in a form of 
financial treason. 

OPPOSITION FROM THE STATE BANKS EVAPORATED 

Opposition from state chartered banks was removed by the 2nd 
Bank of the U.S. promising to take over the government's holdings of 
their irredeemable notes. In effect they were technically bankrupt as they 
couldn't honor their notes with metal. The state banks were given 10 



15 THE MONEY POWER VS THE CONSTITUTION 417 



months to re-establish redeemabihty for their notes. After "February 20, 
1817, all payments to Government were to be made in coin, Treasury 
notes, notes of the U.S. bank, or bank notes payable on demand in 
specie," wrote Studenski and Kroos. 

Subscriptions for the bank's shares opened in June 1 8 1 6. A total cap- 
ital of $30 million was to be raised. However: 

"When $3 million of the stock remained un-subscribed, it was taken 
by Stephen Girard, who with John Jacob Astor and David Parish had 
been instrumental in promoting the charter," noted Studenski and 

Kroos.^^ Girard was a prominent Philadelphia slave trader; thus profits 
from the slave trade were closely connected with private banking. This 
area calls for further research. 

In January 1817, the 2nd Bank of the U.S. received its charter for 20 
years. The paper notes of the bank were not declared a general legal tender 
but were acceptable for all government payments. Remember this was the 
formula used by the private Bank of England, and the 1 st Bank of the 
U.S. The conscious element among the bankers are aware that this is the 
essential defining characteristic of money. The bank would handle pay- 
ments destined for the government and keep the government's accounts. 

THE 2ND BANK OF THE U.S. - THE BANK FROM HELL 

The 2^^^ Bank of the U.S. operated illegally from the beginning - 

although the first installment for shares was in gold, the 2"^ and 3^^ 

installment payments were accepted in lOU's from state chartered banks: 

"The bank violated its charter from the outset," wrote Charles 

Conant, "The proportion of gold required to be paid in on the second and 

third installments was never paid.^^ So again the banker's gold "require- 
ment" turned out to be a masquerade. 

William Jones was appointed as president of the Bank. He had pre- 
viously been ineffective as Treasury Secretary: "In his person helpless 
inefficiency was placed in control of government finances," wrote Ralph 

Catterall.^^ Perhaps the intention was to run the bank from behind the 
scenes. The written histories of the 2nd Bank of the U.S. read like financial 
soap operas. 

The bank immediately began a criminally insane 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 $2.5 

million. This tremendous expansion caused a wild speculative boom.^^ 



418 The Lost Science Of Money 



Roughly 60% of the early loans were made in the Philadelphia- 
Baltimore area. 

In August 1818, the bank turned abruptly and began a criminally 
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 1819. 
Its circulating notes dropped from $10 million to $3.5 million in 1820. 

A massive wave of bankruptcies swept the nation. The South and 
West were particularly hard hit. In the South, the bank undermined the 
feeling of national unity and must be viewed as a major contributing 
cause of the civil war. 

Real assets that had been pledged to the bank and its branches for 
loans were seized, with sheriff's sales everywhere. Farmers and artisans, 
dispossessed of a Hfetime's work, moved west. A public outrage arose 
throughout the land. 

A Pennsylvania commission led by the economist Condy Raguet 
condemned the bankers as the cause of the problem: 

''...the incorporation of the monied interest, already sufficiently 
powerful of itself, was but the creation of odious aristocracies, hostile to 
the spirit of free government, and subversive of the rights and liberties 
of the people." 




75/ From behind its elegant classical facade in Philadelphia, the private 
2nd Bank of the United States perpetrated some of the worst financial 

villainies upon our young nation. 



15 THE MONEY POWER VS THE CONSTITUTION 419 



Yet instead of a debate over whether a private company should be 
allowed to ravage the nation's money system like that, the MONEY 
POWER managed to deflect the uproar and stage-managed the debate 
into arguments over whether an "inflationary" policy or a "sound 
money" pohcy should be followed. 

The management of the bank was changed and in 1823 Nicholas 
Biddle was elected its president. He ran the bank more carefully. Biddle 
had been a child prodigy in Greek Classics, finishing his University of 
Pennsylvania studies at age 13. Biddle originally refused to become a 
director of the Bank, but President Monroe pressed him to accept one of 
the governments directorships on the bank board and he did so out of a 
sense of duty, 

REGRESSING AMERICAN MONETARY THOUGHT 

The monetary thought that is most easily found in the historical 
record, shows a definite regression from the abstract level attained by 
Jefferson, as seen in his long letter to Eppes. Under the dominating 
influence of Adam Smith, American monetary thought was reverting to 
metallism - a feature so convenient, if not essential, to the bankers, in 
theory, though not in practice. 

Condy Raguet, an early economic commentator whose 1820 report 
correctly condemned the bankers for the 1819 debacle, unfortunately 
held Adam Smith in high regard. Smith's anti-government position 
insisted on private control over the nation's money system. As a result 
Raguet became confused and contradictory when it came to the idea of 
a nation having its own national bank to issue currency. Yet he made an 
honest proposal to reduce private banking evils: 

"The true and only answer is by establishing individual liability" for 

the directors and officers of the banks. -^^ 

State legislatures would later apply this measure to shareholders of 
the state banks, but limited it to double the par value of their shares. 

When Ricardo's monetary views began to be known in America 
after 1810, they provided some relief from Smith's pro-banker position. 
As discussed in Chapter 12, though Ricardo held virtually the same def- 
inition of money as Smith, he correctly attacked the notion that private 
individuals should control the nation's money creation process. This is 
not an endorsement of his other economic views. 

In 1820 another American, Daniel Raymond, wrote some early 
works on economics: Thoughts on Political Economy, and Elements of 



420 The Lost Science Of Money 



Political Economy. He called for the elimination of bank created paper 
money, and for the Federal government to supply the country with a 
national currency backed 100% by gold and silver. 

This was close to Ricardo's proposal to reform England's monetary 
system. Raymond attacked Adam Smith and Alexander Hamilton for 



"wm 




I5f. Andrew Jackson, victor at the Battle of New Orleans. As 7th President 

of the United States he faced a trickier foe in his war with the 2nd Bank of 

the U.S., a saga that reads like a financial soap opera. 



15 THE MONEY POWER VS THE CONSTITUTION 421 



their assertion that private bank notes added to the Nation's capital. 
Condy Raguet was also aware of this "error." Both supported the 
"Quantity" theory of money, Raymond citing the philosopher David 
Hume: 

"...In proportion as money is increased in quantity, it must depreci- 
ate in value." 

with Condy Raguet clearly stating: 

"Every emission.. .of these bank notes and credits is an augmentation 
of the currency and depreciates it below the general level." 

However, both of them made the error of equating gold with 
money. They failed to make the critical distinction between wealth and 
money. Considering that Franklin and Locke and Berkeley had shown 
better thought, this error should have been avoidable. 

In 1831 Albert Gallatin's son Robert published Considerations on 
the Currency and Banking System of the United States, Familiar with 
Ricardo's proposal to establish a national bank and eliminate private 
banks from the money creation process, Gallatin first praised it: 

"A very ingenious idea was proposed by Mr. Ricardo." 

But then he asserted that the dispersal of money would become 
"political," and he followed in Adam Smith's destructive footsteps: 

"The President of the U.S. (Jackson) has expressed the opinion that 
the bank failed in the great end of establishing a uniform and sound cur- 
rency and has suggested the expediency of establishing 'a national bank 
founded upon the credit of the government and its revenues'. ..and 
although we (Gallatin) are clearly of the opinion that the U.S. at large are 
entitled to the pecuniary profit arising from the substitution of a paper 
for a metallic currency, we are not less convinced that this object cannot 
be obtained in a more eligible way and more free of objections than 
through the medium of a national bank, constituted on the same principles 
as that now existing... 

"The advantages which the Bank derives from its charter by being 
permitted to issue paper... must be allowed in addition to the usual interest 
on its capital, a reasonable profit; since it incurs all the risks and is liable 
for all the losses incident to those operations.... the government receives 
already a portion of the profits in the shape of those services which are 

rendered gratuitously... for the residue."^"^ 

Thus the younger Gallatin was ready to allow plutocratic control 
over the nation's money - to create paper money out of thin air and in 
effect control the nation's economic life - all in exchange for the service 



422 The Lost Science Of Money 



roughly equivalent to maintaining a simple checking account for the 
government! 

PRESIDENT JACKSON WANTS A GOVERNMENT BANK 

Andrew Jackson and his Vice President Martin Van Buren consid- 
ered the Bank as the main threat to the Republic: "Ever since I read the 
history of the South Sea Bubble I have been afraid of banks," Jackson 
had written to Biddle, unnecessarily alerting the enemy.^^ Jackson real- 
ly wanted to set up a government owned bank. Sensing that a simple 
deposit bank wasn't enough, he assigned some of his economically ori- 
ented associates to figure out how to do it as a bank of issue, but they 

failed to come up with any proposals after five months. ^^ 

The abstract monetary awareness finally achieved by Jefferson was 
already being lost to easy-to-grasp concretes like gold and silver. 
Jackson's experts (including Alexander Hamilton's son, who, like the 
young Gallatin, had taken a different path from his father) told him a 
government bank would make political loans, apparently the banker's 
mantra of that time. But what would you call the loans made by the 2^^^ U.S. 
Bank? Perhaps what he needed was not a banking expert but a government 
expert - who could devise political insulation for a monetary department. 

JACKSON'S WAR WITH THE BANK 

In 1832 two events precipitated Jackson's confrontation with the 
bank. First, the bank made an illegal arrangement with Baring Brothers, 
whereby instead of redeeming the 3% government bonds Baring was 
holding - the last of the revolutionary war debt - the bank instead held 
onto the government funds that were intended to repay the bonds. The 
arrangement allowed the bank to earn 7% on the government moneys it 
held, while paying Barings 3%. 

Then, when a French Government check (bill of exchange) to the 
U.S. for $961,240 had temporarily bounced, the bank demanded 15% of 
the bill as damages, even though the U.S. Treasury had returned the 
money and offered to pay the actual costs involved. The bank deducted 
the 15% from the government's accounts. The U.S. had to sue to get the 
money back and didn't collect until 1847! 

Jackson had intended to let the Bank's charter expire in his second 
term, but the Bank's activity in purchasing congressional support 
alarmed him as his veto could be overridden. He wrote to a friend: 

"I have no hesitation to say if they can re-charter the bank with this 
hydra of corruption they will rule the nation and its charter will be 



15 THE MONEY POWER VS THE CONSTITUTION 423 



perpetual and its cormpting influence destroy the liberty of our country. 
When I came into this administration ...I had a majority of 75. Since 
then it is now believed it (the bank) has bought over by loans, discounts, 

etc until... there were 2/3 for re-chartering it."^'' 

Once the privilege to create money has been given to a bank, it can 
use that power to protect itself through bribery. At one point in the fight, 
David Gulliver wrote to Biddle: 

"...all hope is now in bribery !"^^ 

Senator Benton later estimated that "advocates of the bank spent $3 
million in bribing senators, members of the House of Representatives 

and editors of Newspapers."^^ 

Biddle made huge "loans" to newspaper editors, to stifle opposition: 

"Duff Green (Washington Telegraph) ceased to oppose; while Webb 

and Noah (New York Courier and Enquirer) became active supporters 

instead of bitter opponents. ..a $15,000 loan did it.. .then another $20,000, 

then another $15,000."^*^ 

EVEN THE "GREAT" DANIEL WEBSTER IS CORRUPTED 

Biddle paid Daniel Webster $32,000 in "loans," and then stopped 




I5h. Two pistols misfired in an assassination attempt on President Jackson 
during his fight with the 2nd Banic of the U.S. The would-be killer 

had recently returned from a trip to England. 



424 The Lost Science Of Money 



paying. He received this note: 

"I believe my retainer has not been renewed or refreshed as usual If 
it be wished that my relation to the bank should be continued it may be 

well to send the usual retainers, yours with regard, Danl Webster. "^^ 
In July 1832 Congress voted to re-charter the bank. Van Buren 

returned from England the same day. Jackson had overtaxed his strength 

and taken to bed: 

"Holding (Van Buren's) hand in his own, and passing the other 

through his white locks, Old Hickory (Jackson's nickname) said: 'The 

Bank, Mr. Van Buren, is trying to kill me, but I will kill it!'"^^ 

Van Buren re-told the story: 

"I have not forgotten the gratification which beamed from his face 
when I said I hoped that he would veto it... not that he was ignorant of 
my views on the subject, for in all our conversations on the Bank... and 
they had been frequent and anxious, - my voice had been against the then 
existing and any other national bank." 

Jackson vetoed the bank's re-charter, and issued a lengthy "Veto 




15g. Daniel Webster 
supported the 2nd 
Bank of the U.S. 
with speech and pen, 
against Jackson. 
Much later he was 
found to have 
received over 
$32,000 from the 
Bank in payment for 
his support. 



15 THE MONEY POWER VS THE CONSTITUTION 425 



Message" explaining it in great detail. He pointed out the unfairness of 
the bank's monopoly, calculating its value in millions of dollars and 
noted how inappropriate it was that: 

"Of the $28 millions of private stock in the corporation, $8,405,500 

were held by foreigners, mostly of Great Britain."^^ 

Daniel Webster then issued an answer to Jackson's Veto Message, in 
support of the Bank. We can guess how little attention the public would 
have given to Webster had they known he was in the pay of the Bank. 

Jackson instructed Treasury Secretary Louis McLane to start remov- 
ing government deposits, about $7 million. McLane refused and had to 
be replaced by William Duane who also refused and was replaced by 
Attorney General Roger Taney. Taney slowly drew down the govern- 
ment fiinds and deposited them in other banks. 

Meanwhile the Senate refused to confirm Jackson's new appointees 
to the Bank's board on the grounds that they wanted too much information 
about the Bank's affairs! 

Biddle had been contracting the nation's money supply, and the 
removal of government funds accentuated that. However, "Biddle went 
far and away beyond anything required by conservative banking," wrote 

James.^^ From August 1833 to February 1834 he called in over $18 mil- 
lion in loans. The challenge to Biddle's power may have affected his 
mind. He began making rash statements in letters to associates: 

"(Are we) to suffer ourselves to be trampled down by the merest rab- 
ble?." And: 

"My course is decided.. .all the other banks and all the merchants 

may break, but the bank of the U.S. shall not break!"^^ and: 

"The prospects of the bank are I think favorable. The state of the 
country is so bad and gets worst daily. I do not see how things can hold 

on in this way much longer.. .Congress will soon have to act,"^^ 

In January 1835 an assassination attempt on Jackson failed when 
two pistols misfired due to dampness! 

The bank, refusing to die, was re-chartered as a Pennsylvania cor- 
poration, but was later liquidated in a cotton trading debacle. Biddle was 
indicted but not convicted of defrauding shareholders, who lost their 
entire investment. 

MARTIN VAN BUREN AT THE HELM 

Martin Van Buren had an illustrious career in public service: as State 
Senator, Attorney General, U.S. Senator, and Governor of New York. 



426 The Lost Science Of Money 



From the start of it, he had effectively fought against banker privilege, 
personally blocking dozens of proposals to form new banks in New York 
State. He proposed legislation limiting bankers' power, which would 
years later form the basis for New York's bank Safety Fund system, and 
later her "Free Banking" law (see Chapter 16). 

He also started the movement to do away with debtors prisons, and 
proposed a constitutional amendment for the more direct election of the 
President. Only three portraits decorate the library of his Lindenwald 
estate - one of himself, one of Jackson, and one of Jefferson. 

Unfortunately neither Van Buren nor his advisors had achieved a full 
concept of money. Daniel Raymond correctly urged Van Buren that any 
central bank must be government owned but incorrectly insisted that all 
currency must be 100% backed by gold and silver. He was essentially 
advising setting up a deposit bank on the Bank of Amsterdam model, 
rather than a bank of issue. But the kind of growing money supply that 
the country needed required a bank of issue. 

Jackson and Van Buren removed the monetary power from the private 
bankers but did not re-establish it in the hands of the nation. Instead, Van 
Buren organized the Independent Treasury System, establishing 1 5 sub 
branches of the Treasury to handle government moneys in 1 840. From 
December 1836 the government moved toward making and receiving all 
payments in coinage, or truly convertible bank notes, starting with sub- 
scriptions for public lands. Once the state bank notes were no longer 
accepted by the government, their circulation was cut back dramatically. 

This was the closest our nation has ever come to implementing a 
real gold/silver standard. Operating under the commodity theory of 
money, Van Buren, who truly cared for the Republic, helped bring 
on the worst depression the Nation had ever seen, starting in 1837. 
It was reportedly even worse than that caused by the 2nd Bank of the 
U.S. in 1819. Bad as the state bank notes were, they had still been func- 
tioning as money! 

Those who proclaim that no gold and silver money system has ever 
failed should consider that whether you are a laborer, farmer, or indus- 
trialist, the money system's success or failure is not measured by the 
value of a piece of metal. When your job, your farm, or factory has dis- 
appeared in a monetarily created depression, the system has failed! 

This experience argues for the necessity of a monetary branch in 
government, like that of an executive, legislative and judicial branch. 
Once the legal nature of money is understood, it becomes clear that this 



15 THE MONEY POWER VS THE CONSTITUTION 427 



power should reside in government, not private hands. 

Van Buren retired to Lindenwald, his estate in Kinderhook. It is pos- 
sible he visited this house where the author is writing, a 150-year old 
country schoolhouse (there may be something in the air up here). He put 
a lot of energy into farming, as part of his core belief: 

"It can only be when the agriculturists abandon the implements and 
the field of their labor and become, with those who now assist them, 
shopkeepers, manufacturers, carriers, and traders, that the Republic will 
be brought in danger of the influences of the MONEY POWER." 

Van Buren had devoted great effort to rescuing the nation from the 
"MONEY POWER," and he believed the goal had been accomplished: 




15i. Martin Van Buren, 8th President of the U.S., grew up, lived, and is 
buried just a few miles from our offices. His book The Origin of Political 
Parties in the US.^ provides some of the deepest insights into the forces at 
work in the founding of our country. Van Buren successfully fought bank 

privilege throughout his career. 



428 The Lost Science Of Money 



"The practice of funding the public debt.. .has long been discontin- 
ued.. .A national Bank has become a completely 'obsolete idea' among 
us, as thoroughly condemned in public opinion as a national debt.^^ 

But the problem was far from solved; it was just beginning and 
won't be solved until an accurate concept of the nature of money as an 
institution of the law is properly formulated into the supreme law of the 
land - the Constitution. 

Van Buren had alleviated the problems caused by his own commod- 
ity view of money by again issuing paper money in 1837. It had been 22 
years since the U.S. had issued its own notes. Congress authorized the 
issue of $10 miUion of them. These notes were not as convenient as the 
earlier ones of 1815: they were denominated over $50, paid 0.1% to 5% 
interest, were transferable only by assignment, and were to be redeemed 
in a year. 

Still, they functioned excellently, with 60% of government revenue 
being collected in them in 1837-38. Congress authorized their re- 
issuance every year up to 1843, when there were still only $10 million 
outstanding. In 1850 an administration tried to issue more, and under 
growing influence of the bankers. Congress withdrew them. In the brittle 
monetary atmosphere that followed, a financial crisis erupted when an 
Ohio insurance company went bankrupt after a ship sank with $ 1 million 
of their gold aboard. Congress had to re-authorize the notes in 1857. 

So from the Constitutional Convention up to the Civil War period, 
just prior to the introduction of the Greenbacks, the U.S. Government 
handled the money power well, issuing notes in an orderly, responsible 
manner. But as we shall see, the performance of the private banks was 
not so honorable. 

In summary, although there were earlier attempts to privatize the 
money power, this factor came to the fore at the Constitutional 
Convention where Morris, Hamilton and Witherspoon promoted private 
control of the money system. Because the delegates didn't fully under- 
stand the nature of money, they failed to clearly place the money power 
in government, leaving it imperfectly defined. 

Thus the private 1st Bank of the United States took over the monetary 
power, and tried to ensnare the nation in foreign wars. Jefferson's matur- 
ing concept of money confirmed him in his fight against this foreign dom- 
inated bank, helping him to block its re-chartering. 

A centralized monetary power was still needed, but the bankers' 



15 THE MONEY POWER VS THE CONSTITUTION 429 



political strength kept it out of government hands and eventually the pri- 
vate 2nd Bank of the U.S. was formed. Using the financial privileges 
granted to it by the Congress, it purchased the support of the press and 
of additional members of the legislative branch, Jackson and Van Buren 
fought this scandal ridden institution, blocking its re-charter. But their 
subsequent attempt to place the country onto a coinage standard led to 
disastrous deflationary results. As after the liquidation of the 1st Bank of 
the U.S., the nation once again successfully issued government notes for 
money in an orderly and responsible manner. 



430 The Lost Science Of Money 



Notes to Chapter 15 

^ Clarence L, Ver Steeg, Robert Morris Revolutionary Financier, (Univ. of 

Pennsylvania Press, 1954), p, 194. 

^ John Jay Knox, History of Banking in the United States, (New York: Rhodes, 

Bradford & Youngman, 1903). pp. 27, 3 1 . 

^ Knox, cited above, p. 27. 

^ Lawrence Lewis Jr., The Bank of North America, (Philadelphia: Lippincott, 1882). 

^ Lewis, cited above. 

^ Ver Steeg, cited above, pp. 85, 86. 

^ John Thorn Holdsworth, The First and Second Banks of the United States, 

(Washington, DC: National Monetary Commission, 1910), p. 26. 

^ Ver Steeg, cited above, pp. 110, 124. 

^ Knox, cited above, p. 28. 

^^ Martin Van Buren, Inquiry into the Origin of Political Parties in the US,, 

(New York: Hurd & Houghton, 1867), pp. 11, 23, 29, 32, 

^^ Sarah Breckenridge, Legal Tender, (Univ. of Chicago Press, 1903), Ch. 8. 

^" John Locke, Essay on Money and Bullion, (London: B. Lintot, 1718), pp. 1-15, 

^^ Benjamin Franklin, Modest Inquiry into the Nature and Necessity of a Paper 

Currency, 1729, in Writings, Library of America. 

"^ William Barton (17??- 1815), The True Interest of the United States and 

Particularly Pennsylvania Resulting from a State Paper Money, 1786, Evans micro- 

fihn # 19497, pp. 4, 13. (Evans reconstmction of the JCB defective copy # 19498.) 

^^ [John Witherspoon], Essay on Money, 1786. 

^^ John T. McNeal, History^ and Character of Calvinism, (Oxford Univ. Press, 

1954,1967), p. 347. 

^^ see Ver Steeg, cited in 1 above, also Lewis, cited in 4 above, also Van Buren, 

cited in 10 above, pp. 128, 146-7. 

^^ Madison Papers, Elliot Debates, vol. 5, p. 434. 

'^ See Breckenridge, cited in 11 above, for details on delegates later arguing 

over what they had done. 

2^ Alexander Del Mar, History of Money in America, (1899, repr: New York: Burt 

Fmnklin, 1968),pp. 109-10. 

^' Benjamin F. Butler's speech. House of Representatives, Congressional 

Globe, 40**^ Congr,3^^ session, 303ff. 

^^ Federalist Papers, (Univ. of Chicago Press, Great Books Collection, Encyl. 

Britannica, 1952), vol.43, p. 56. 

2^ Van Buren, cited above, pp. 125-8. 

^"^ See Henry Mark Holzer, Government's Money Monopoly, (New York: Books 

In Focus, 1981), pp. 71-73. 

^^ Alexander Hamilton s Papers on Public Credit, Commerce and Finance, 
edit., McKee & Williams, (New York: Liberal Arts Press, 1957), pp. 83-85. 



15 THE MONEY POWER VS THE CONSTITUTION 431 



^^ Holdsworth, cited above, p. 21. 

^^ Charles A. Conant, A History of Modern Banks of Issue, (New York: Putnam, 
1909, 1927), pp. 330-45. 

^^ Holdsworth, cited above, pp. 24-25. 

^^ Holdsworth, cited above, pp. 29-30. 

^^ Hamilton, cited above, p. 83. 

^' Thomas Jefferson, Letters and Addresses, edit. William Parker, (New York: 

1905), March 6, 1790 letter to James Madison. 

^^ P. Studenski & H. Kroos, Financial History of the U.S. , (New York: McGraw Hill, 

1952), p. 64. 

•^^ Holdsworth, cited above, p. 111. 

^^ Holdsworth, cited above, pp. 48-49. 

^^ Thomas Paine, Writings of Thomas Paine, vol 3, edited by M. D. Conway, 

(New York: AMS Press, 1967), vol. 3, p. 383. 

^^ Journal of William Maclay, Appleton, 1 890, p. 406-7. 

^^ Thomas Paine, Dissertation on Government, the Affairs of the Bank, and 

Paper Money, in Writings of Thomas Paine, vol 3, cited in 35 above, pp. AA-Al . 

^^ Paine, Writings, cited above, pp. 2, 37. 

^^ Paine, Writings, cited above, p. 309. 

^^ Thomas Jefferson, cited above. 

^^ Conant, cited above, pp. 340-41. Conant says 1800 out of 2500 shares, but he 

has dropped a zero. Its 18,000 of 25,000. 

^'^ Holdsworth, cited above, p. 104. 

^^ Reports of the Secretary of the Treasury, December, 1815, American State 

Papers, Finance, vol. 3, pp.7, 146, 263, 445, 548, 683. As quoted by 

Breckenridge, cited above. 

^^ J. Laurence Laughlin, Principles of Money, (New York: Scribners, 1911), p. 478. 

"^^ Annals, 13th Congress, 3rd session, vol. 3, p. 557, as quoted by Breckenridge, 

cited above. 

^^ Knox, cited above, p. 56. 

'^^Davis Rich Dewey, Financial History of the US., (New York: Longmans 

Green, 1903), p, 147. 

^^ Knox, cited above, p. 55. 

^^ Studenski and Kroos, cited above, p. 84. 

^^ Conant, cited above. 

51 Ralph Catterall, The l"""^ Bank of the US., (Univ of Chicago Press, 1902), p. 1 

5^ Caterall, cited above, pp. 1-53. 

5^ Condy Raguet, A Treatise on Currency and Banking, (1840, repr., New York: 

A.M. Kelley, 1969), p. 103. 

5"^ Robert Gallatin, Considerations on the Currency and Banking System of the 



432 The Lost Science Of Money 



U.S., (Philadelphia: Carel & Lear, 1831), pp. 38, 84, 87. 

^^ Caterall, cited above, p. 184. 

^^ Marquis James, The Life of Andrew Jackson, (New York: Bobs Merrill, 

1938), pp. 559-65. 

5^ Caterall, cited above, April 7, 1833 letter to R.H.M. Cryer. 

^^ James, cited above, p. 680. 

^^ As related by Peter Cooper, in his Pamphlet, A Paper Currency, New York, 

1870s, TF PV 64, at the New York research library. 

^^ Caterall, cited above. Chapter 11. 

^^ James, cited above, p. 658. 

^^ James, cited above p. 601 

^^ Jacksons Veto Message, in American Economic Policy Since 1789, edit. 

William Letwin, (Chicago: Aldine, 1964), p. 11 9. 

^^ James, cited above, p. 650. 

6^ 2/8/1834 letter to Watmough, in Caterall, cited above, p. 331. 

66 2/10/1834 letter to Mckin, in Caterall, cited above, p. 331. 

6^Van Buren, cited above, p. 431. 



433 



CHAPTER 16 



U.S. GOVERNMENT ISSUED 

MONEY 

COMPARED TO 

PRIVATELY ISSUED MONEY 



"The history of banking... before the (civil) war 

will make plain to anyone that the note issuing privilege was 

much abused to the great detriment of individuals and the public. 

Banks were started for the sole purpose of foisting worthless 

notes upon a trusting public. ..." 

John Jay Knox, Controller of the Currency 

"The Banking system is the principal cause of social evil 

in the United States." 

William Gouge, 1833 



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 govemment or religious hands 
and was inseparable from ultimate sovereignty in the society. Yet in 
America today, the idea that govemment should control the issuance of 
money is guaranteed to arouse ridicule among most economists. The 
govemment'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. 



434 The Lost Science Of Money 



But are their views well grounded in historical or modem experi- 
ence, or merely a bias they picked up in economics classes or from 
re-reading Ayn Rand novels once too often? Have private money 
systems really achieved better results than government ones? Rather 
than trying to deduce the answer theoretically, from free market axioms 
that are assumed to be correct or accurate and sufficient, let's simply 
look and compare the results of the two types of systems in the United 
States. First, we'll briefly recap the government controlled systems. 

U.S. EXPERIENCE WITH 
GOVERNMENT ISSUED MONEY 

Colonial monetary "experiments" before the Constitution took place 
under conditions of limited sovereignty and life or death warfare. Even so, 
we saw many examples of the colonial governments' paper money working 
well (Chapter 14), facilitating the creation of real infrastructure. 

We found that the colonies never issued more currency than was 
authorized by their legislatures. We read expert eyewitness Benjamin 
Franklin's accounts of the benefits of those money systems. Yet some 
refuse to consider those facts and instead attack the eyewitnesses. 

We learned on examining the performance of the government issued 
Continental Currency that $200 million was authorized, and $200 milhon 
was issued. We saw that, despite its destruction, largely at the hands of 
British counterfeiting, the Continentals enabled us to fight and win the 
Revolution. Thomas Paine, America's greatest son, informs us that the 
continentals were a "cornerstone" of gaining our independence from the 
decadent east. 

We have read how the U.S. experience affected the development of 
Thomas Jefferson's views on money, starting from a crude behef in metal- 
lic money and progressing to a system of govemment controlled nomisma. 

We saw that the issuance of U.S. paper money in the form of treasury 

notes, from 1812 to 1817, after the private P^ Bank of the U.S. was 
closed, was done responsibly and effectively and well within the legisla- 
tively authorized limits. We saw it again from 1837 to 1857 after the pri- 
vate 2"*^ Bank of the U.S. was brought down. Thus from the beginning 
until just before the Civil War Greenbacks, the monetary record of the 
U.S. is excellent. 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 435 

The one major mistake was Van Buren's severe depression, which 
arose from his misguided commodity view of money and his attempt to 
institute a true metallic standard of gold and silver from 1836. 
Fortunately, that was the first and last time that happened in the U.S. 

THE EXPERIENCE WITH PRIVATE 

MONEY IN THE U.S. 



Privately issued money was shunned and suppressed in the colonial 
period by the colonial governments, by individuals and even by 
England. The Articles of Confederation placed the money power in the 
hands of government. It was only under the Constitution that bankers 
assumed a degree of centralized control over the nation's money through 

the privately owned P* Bank of the U.S. in 1791. 

THE FEDERALLY CHARTERED, BUT PRIVATE 
1ST BANK OF THE U.S. 

By most accounts, the P^ Bank of the U.S. operated carefully, creat- 
ing about three to four bank credit dollars (loans and discounts) for each 
dollar of metal reserves held by the Bank. In addition, it issued circulat- 
ing notes about equal to the gold and silver it held. Thus it magnified its 
coinage position almost five fold. This is considered to be conservative 
banking, especially since the Bank held substantial amounts of U.S. 

Government securities.^ Considering the great need for money in the 
young nation this was no doubt very welcome. Yet there were major 
problems associated with this bank. 

We saw that of the Bank's $10,000,000 "capital", less than $700,000 
was actually paid-in with gold and silver. The rest was purchased with 
loans of paper credits, even from the Bank itself! Later through its bank- 
ing operations, it did gather about $5,000,000 in "specie". 

We have noted the attempts of the Bank's supporters to foment war- 
fare, which would have entrenched the bank with an unpayable national 
debt to it. The blatant Federalist search for enemies, and the ease with 
which Paine and Jefferson solved the French war "problem" by the 
Louisiana Purchase, argues for the dishonesty of the FederaHst's moves 
as seen in Chapter 15. 



436 The Lost Science Of Money 



The Bank also alienated control over the nation's money system, 
placing it in the hands of its shareholders to the east. On liquidation it 
was found that three fourths of the Bank's shares were foreign owned, 

mainly by the Dutch and English.^ 

Jefferson wrote to Gallatin about the danger posed by this Bank: 
"I deem no government safe which is under the vassalage of any self con- 
stituted authorities. . .except that of the nation, or its regular flinctionaries."-^ 

It was in the aftermath of closing the Bank in 1811, in the war of 
1812, that the U.S. issued its first notes that served as paper money. 

THE STATE CHARTERED PRIVATE BANKS 

It should be noted that several states: Georgia, Tennessee, Kentucky, 
and South Carolina, each had their own state chartered bank that was 
owned by the state. However, the overwhelming majority of state char- 
tered banks were privately owned and controlled. 

The private state bank response to the removal of the P* Bank of the 
U.S. and the war of 1812 was not honorable. In 1811 there were 88 pri- 
vate state chartered banks claiming "assets" of $42.6 million. By 1814 
all of these banks suspended the convertibility of their notes into 
coinage. But people continued to accept the notes because there was lit- 
tle alternative money, and the notes were accepted for taxes. 

"No wonder that under such chaotic circumstances banking prac- 
tices became more and more irresponsible and even fraudulent," wrote 

Nussbaum.^ 

The state bankers then used the suspension period to expand dra- 
matically from 88 to 208 banks by 1815, then claiming assets of $82.3 
miUion. They used the suspension as an opportunity to make super profits: 

"Indeed the current chaos enabled them to earn extraordinary prof- 
its, for they were able to issue notes and lend money on a much greater 
scale than would have been possible under a sound banking system," 

wrote Studenski and Kroos.^ 

This was possible mainly because the government still accepted 
these private state banknotes in payments. No doubt "laissez-faire" 
advocates can interpret this to blame our government, though its purpose 
was to promote stability, and the bankers purpose was to unjustly enrich 
themselves at the expense of their neighbors. 

As already noted, the government ended up holding accounts in 94 
banks. It was necessary to have four accounts in each bank: one for the 
local Bank's notes, one for other bank's notes that were not acceptable 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 437 



locally, and two others for different U.S. Treasury notes.^ 

The U.S. government is estimated to have lost about $6 million in 

these spurious banknotes; a huge amount for the time. ■^ So in this peri- 
od, thie private money issuers made great profits by printing paper 
money; with much of the bill falling on the nation. Will anyone pre- 
tend that the private bankers' actions were more to be trusted or pre- 
ferred than the government's? 

To avoid this chaos of the state banks, Madison signed in the 2^^^ pri- 
vately owned Bank of the U.S.. We discussed in Chapter 15 how this pri- 
vate bank engaged in a criminal expansion and contraction, all in three 
years time, thrusting the nation first into a speculative frenzy and then 
into a deflationary depression. Banker apologists typically gloss over 
this debacle with nearly the identical phrase: "The Bank was poorly run 
in its early years." (Knox, Laughlin, Conant) 

REACTION TO THE PRIVATE 2ND BANK OF THE U.S. 

The public's reaction to this bank was not so forgiving. In the ensuing 
uproar, the state of Georgia sued the bank for removing coinage from circu- 
lation and Georgia's Govemor, John Clark, demanded that the Bank provide 

"a circulating medium sufficient to supply the real wants of our citizens."^ 
In North Carolina, Archibald Murphy, Chairman of a state legislative 
committee, wrote that the Bank, by its action to ruin state banks and 

individuals, constituted "the greatest crime in years,"^ The actions of this 
Bank worked to undermine the national unity of the young nation and 
planted the seeds of civil war. 

In Illinois, in August 1818, the Constitution prohibited any but state 
chartered banks within the state. Several states imposed taxes on the 

branches of the 2"^ Bank of the U.S. (Georgia, Kentucky, Maryland, 
Ohio, North Carolina, Tennessee, and Pennsylvania). 

In Ohio on September 17, 1820, a $100,000 tax was collected by an 
agent, who: 

"leaped over the counter, seized upon the vaults, and forcibly col- 
lected the tax. The act aroused intense excitement throughout the 

Union," wrote Caterall.^*^ 

In Pennsylvania, Condy Raguet's legislative investigating commis- 
sion harshly criticized the Bank: 

"A distress unexampled in our country since the period of its inde- 
pendence, prevails throughout the Commonwealth ...The incorporation 



438 The Lost Science Of Money 



of the monied interest already sufficiently powerful of itself, further 
created vicious aristocracies, hostile to the spirit of free government, and 

subversive of the rights and liberties of the people."^^ 

Is there any evidence or reason to believe that any American gov- 
ernment controlled money system could have performed so badly? 

HOW FREE BANKING OPERATED 

We identify the period in America before 1836 as the free banking 
period. The records of banks prior to 1832 are very poor or non-existent. 
In July of that year Congress directed the Secretary of the Treasury to 
present an annual report on State Banking. Fortunately there are several 
dependable commentaries on banking practices. 

The primary game of banking by many bankers of this period was 
not just to charge interest on the bank note money they printed, but it 
was to actually spend the bank-notes into circulation, appropriating 
property from the accumulated wealth of the community. The officers 
and directors of the banks and their friends, relatives and business asso- 
ciates had first claim to the paper money created by their banks and were 
the main borrowers. These notes were accepted by the public because 
there was very little other money in circulation, and mainly because they 
were accepted in payments to the government. 

Historian Charles J. Bullock made these observations: 

"From 1 800 to 1 860 bank notes were often at a discount of 50 to 68%." 

He noted that: 

"Banks were located in inaccessible places, on some bottomless 
prairie road or in the depths of forests where it would prove as difficult 
as possible to find the offices at which the notes were payable.... 

"A messenger sent to South Royalston to demand payment of 
$10,000 in notes issued by the local bank was arrested on some frivolous 

charge,. .to avoid redeeming the notes."^^ 

Financial historian William G. Sumner informs us that : 

"Stock of coinage in banks was insignificant and was moved from 

bank to bank to meet the inspector's visits.'' ^^ 

However when Sumner really gets harsh, he does it by 

quoting Hezekia Niles: 

"The imagination of an honest man can hardly conceive the stupen- 
dous villainies that have been contrived by the banks..." 

and by quoting William Gouge: 

"The banking system is the principal cause of social evil in the 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 439 



United States." 

GOUGE'S DESCRIPTION OF EARLY BANKING 

William M. Gouge gave a thorough description of the private bank- 
ing abuses in his 1833 book A Short History of Paper Money and 

Banking .^"^ Gouge had been editor and publisher of The Journal of 
Banking and was a contributor to various business magazines such as 
Hunts Merchants Magazine and The Banker s Magazine and Statistical 
Register, What he wrote about banking was taken seriously and his book 
remains the definitive work on early U.S. banking. 

Despite its title, Gouge's book was quite lengthy. He gave many 
concrete examples along with estimated figures on the operations of 
banking of his day. Of equal importance to us today are the fraudulent 
principles that he concluded were at work in banking, especially the 
immoral effects of banking on the development of humanity. 

Its important to read some Gouge to understand that the harm being 
done by banking upon society is not some new discovery or modem 
development. This sociopathic aspect of banking has long been recog- 
nized and commented upon. The following chapter notations in {} refer 
to Gouge's chapters. 

How banks got their "money:'' 

"When people hear of Banks having capitals of $500,000 or of 
$1,000,000, they suppose that these institutions had. . .real money to this 
amount. . .but this is not true. The Banks create their own capitals in the 
same manner that they create the money they lend to people. The cap- 
ital of banks consists of. . .the promissory notes of individuals. The bank 
obtained these promissory notes from its stockholders, by giving them 
the promissory notes of the Bank. Thus Bank capitals are formed by 
exchanging one kind of promises to pay for another kind of promises to pay. 

...the whole business, is nothing but a paper transaction between the 
Bank and its stockholders. 

...The most prestigious Banks have formed their capitals in this way." 
{Ch. 8} 

On speculation in bank stock: 

Gouge pointed out that a large part of the banking game was to 
manipulate bank shares. The opening of the New York Stock Exchange 
in March 1817 made this easier. He described some tactics that original 
stockholders used in distributing their stock to the public: 



440 The Lost Science Of Money 



"When a charter is granted, the speculators make a big show of their 
desire to possess the stock, creating the idea that it is very valuable. In 
New York, they subscribe to a much greater amount of shares than are 
being offered... Oversized roughnecks... are hired by the speculators to 
get the shares for them. They struggle violently at the windows so as to 
give and receive personal injury. 

"These doings have their effect on simple-minded people; and, from 
the hope of large profits, they prefer bank stock to land and houses... 

"The losses suffered by simple minded people, through such doings, 
is enormous." {Ch. 8} 

Why false monetary ideas dominated legislatures: 

"The prevalence of false views of the money corporation system, in 
legislative bodies, is mainly due to of the influence of those members 
who have personal or political interest in establishing and supporting 
banks..." 

"The large extent of bank influence is not easily seen. We seldom 
see an identified Bank or a money corporation candidate running for 
office; but when questions arise which affect them, the Banks have 
agents at work, whose operations are the more effective because they are 
unseen..." 



"They have great power over the press. Few journalists can venture 
to expose the money corporation system, in such plain terms as every 
body would understand, without risking losing their jobs. Many news- 
paper editors.. .far from being independent. . .are in debt to the Banks..." 

"Despite our boasted liberty in the United States, a free and Ml 
exposition of the principal cause of our social evils would not be toler- 
ated." {Ch. 19} 

Banks draw on the community's wealth: 

"If the superior credit the Banks enjoy, grew out of the natural order 
of things, it would not be a subject of complaint. But the Banks owe their 
credit to their charters - to special acts of legislation in their favor, and 
to their notes being made receivable in payment of dues to 
Government." 

"As it is public credit that supports the Banks, and not the Banks that 
support public credit - as the deposits of the Banks are the property of 
the community generally, and as the profits derived from circulation 
come from the community generally, they ought to go to the communi- 
ty generally, and be used to lighten the burdens of taxation." {Ch. 20} 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 441 



"In addition consider what some have gained and others have lost, 
by the breaking of over one hundred and sixty Banks between the years 
1811 and 1830." 

The long range effects of such banking: 

"If you deprive a man of his property, you deprive him of the means of 
properly educating his children, and thus harm the moral and intellectual 
character of his descendants for several generations... the wealth of the 
few goes on increasing in the ratio of compound interest, while 
the... (banking) operations to which they owe their wealth, keep the rest 
of the community in poverty..." 

",,. unequal political and commercial institutions invert the opera- 
tion of the natural and just causes of wealth and poverty..." 

"...wealth and poverty are the result of a country's institutions. 
Political privileges are the common cause: but commercial privileges 
have the same effect: and when the foundation of this artificial inequality 
of fortune is once laid, whether by feudal institutions or money corpora- 
tions, all the subsequent operations of society tend to increase this con- 
centration of wealth." {Ch.21} 

The effects on moral character: 

"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." {Ch.22} 

Although Gouge's concept of money's nature was not advanced - he 
remained an advocate of gold and silver - he saw through the fraud and 
immorality of banking in America and his writings would help bring 
much needed reforms in banking. 

BOSTON'S "SUFFOLK SYSTEM" 

In 1825 a group of larger Boston banks tried to limit the excessive 
issue of notes by country banks. They formed the "Suffolk System" which 
sent notes issued by remote country banks back for immediate collection 

unless the country bank kept a real deposit with the Suffolk group. ^^ 

NEW YORK'S SAFETY FUND SYSTEM 

Some state governments moved legislatively to improve local banking 



442 The Lost Science Of Money 



practices. In 1829 New York organized a Safety Fund System in which 
each bank in the state was required to pay V2% of its capital to the New 

York State Treasury each year, until 3% total had been paid.^^ This 
Safety Fund was then administered by the State and used to 
redeem the bank notes issued by failed banks. It also limited notes 
issued by banks to two times their capital, and limited their loans to 2 Vi 

times their capital. ^^ This worked well, but New York was the exception; 
most states had no such systems. 

THE STATE "FREE BANKING" LAWS FROM 1836 

Gouge's expose' was an important factor in obtaining reform legis- 
lation to regulate banking. In 1836 the move for regulating the banks 
was unstoppable, and, beginning with New York, better banking regula- 
tion laws began to be passed. New York's law was called a "free bank- 
ing" law, but this was misnamed, since its effect was just the opposite - 
a much greater government regulation of banking. The act was called 
"free banking" only because the requirement for a special legislative act 
establishing each new bank was removed. 

In New York, at first the inferior bonds of the western and southern 
states were allowed as bank capital. Although even this was a big 
improvement over the past, New York soon limited the security to NY 
state and federal bonds. In the years following, other states adopted sim- 
ilar laws. 

Some of the important new requirements placed on banks were:^^ 

* Bank note issues by banks were restricted to specific percentages of 
the bank's real capital. 

* The bank's capital reserves were improved, moving toward govemment 
bonds rather than the worthless personal notes of the bank's stockholders. 

* A double liability was imposed on Bank stockholders, where they 
were liable to be called to pay an additional twice the par value of their 
stock if their bank got into trouble. 

* More efficient systems of bank examination and reporting to the pub- 
lic were adopted. 

The results of private banking under these stricter state regulations 
were not without major problems, but were still widely recognized as far 
better than the mostly unregulated period before 1836. 

THE "FREE BANKING" IDEOLOGUES - A MODERN LESSON IN 
MISINTERPRETING MONETARY HISTORY 

We now depart briefly from our chronological narrative to consider 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 443 



the ideas of the current "free banking" movement, which is based on a 
misreading of the free banking era. This political movement, in eco- 
nomic garb, has arisen recently from Frederich Hayek's ill considered 
essay, Denationalisation of Money, 

It is important to realize that the real free banking period was pre- 
1836, before the various states began passing these regulations, because 
now comes along the modem "free banking" economists who are trying 
to make the historical case that "free banking" worked well in the past 

and therefore should be adopted today. ^^ 

First of all, these fellows are to be commended for their interest in 
monetary and banking history and their realization of the great relevance 
of historical example and experience to the monetary field. This atten- 
tion to history, rather than isolated theory, should over time help them to 
reach more accurate conclusions as long as they will be true to the prin- 
ciples needed for good research. 

Unfortunately they have made several serious methodological errors 
in their efforts to support their conclusion that bankers should be essen- 
tially unregulated. This is not entirely their fault; training in economics 
is notably lacking in guidance on historical research. 

But it also appears that some of these researchers, influenced by 
the polemic style of Ayn Rand, the Libertarians or the Austrian 
School of economics, have brought too much partisanship to their 
study, and may have even come to their conclusions before examin- 
ing the historical evidence. The anti-government attitude of those 
groups has created a prejudice in them to view all regulation as bad and 
to place their trust in the bankers to act honorably. Here are some of the 
problems with the "free banking" arguments: 

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

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

Problem # 3: Partly because statistics on the banks are very patchy, 
the free banking advocates have focused on certain measures that cannot 



444 The Lost Science Of Money 



convey a full and accurate picture of banking. For example, they try to 
evaluate banking performance by the percentage of depositors' money 
that was lost. But that treats the banks as deposit institutions, when they 
were in fact banks of issue, creating new money in amounts approaching 
10 times their deposits. 

The free bankers' work thus ignores the bank stock frauds which 
observers tell us was an important part of banking. In Chapter 20 we 
show that the stock market losses of the 1929 crash, caused by a bank- 
ing created crisis, were about 40 times as much as the direct losses in 
bank deposits. Free bankers also ignore the harmful effects of banking 
activities on the rest of the community, so eloquently stated by Gouge. 

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

Problem # 5: Starting with this apriori position, they have briefly 
looked through history for empirical support for their theory. But using 
history in that manner is not likely to yield accurate results. The lessons 
of history have to be viewed more dispassionately within their own con- 
text to see what picture emerges from several sources. It doesn't work to 
force a modem day template onto the facts, to attempt to force a "fit" 
with favorite theories. 

Nor is it acceptable to use a modem created filter through which 
agreeable facts are retained and disagreeable facts are ignored. One can- 
not ignore the universal condemnations of the banks from qualified 
observers of many different persuasions. 

This is not the place to go through their definitions, facts and con- 
clusions, one by one, to point out their errors. We can and will do that if 
it becomes necessary; but its better for one of their own to do it. It would 
be commendable for Libertarians and "Austrians" to make monetary his- 
tory a larger part of their work, but not in a spirit of partisanship and neg- 
ligence. Particularly telling is their attempt to pass off the better results of 
the period of higher bank regulation by government as the free banking 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 445 



period. It's not that they thought they were getting away with something, 
but worse - their ideology has truly blinded them. 

If they feel the treatment of them here is too harsh, they should con- 
sider that their ideas, if implemented, would have negative life and death 
consequences on substantial numbers of people. Especially those unable 
to protect themselves from the bad effects these policies would produce, 

Fm reluctant to criticize them too strongly, because I know that the 
spell they are under can be shaken off. The source of so many of their 
errors lies in Austrian monetary propaganda, and in Hayek's 
Denationalisation of Money, which literally called the modem move- 
ment into existence. These youthful offenders probably saw themselves 
as rising heroically, or at least dutifully, to his call. 

Hayek's 1976 essay failed in one of its primary purposes: its 
attempt to throw a monkey wrench into the plans for the new Euro 
currency (see his pages 19-20). But it found more receptive minds 
among American Libertarians, who though they regard themselves as 
independent thinkers, generally closely follow a party line. 

Readers drawn to Hayek, due to the exalted status given him by 
well-funded incestuous praise from other Austrian School members, or 

the awarding of a "Nobel" Prize in Economics,^ will be disappointed to 
find that this piece is little more than a diatribe of endless, unsubstanti- 
ated generalizations, mostly against government (over 100 attacks in its 
scant 130 pages). While he should have been held to a much higher stan- 
dard of scholarship, Hayek saw his function more as a propagandist: 

"I ought, perhaps also to add, what I have often had occasion to 
explain but may never have stated in writing, thdLt I strongly feel that the 
chief task of the economic theorist or political philosopher should be to 
operate on public opinion to make politically possible what today may 

be politically impossible... "-^^ (emphasis added). 

The American Monetary Institute plans to publish an in depth 



A) In fact the Nobel Prize in Economics is not part of Alfred Nobel's legacy, but 
is awarded by the Swedish Riiksbank, and demonstrates the propagandistic and 
deceptive practices of the economics Establishment. Nobel's heirs have been 
trying to force the Riiksbank to stop pretending it gives a "Nobel Prize" in eco- 
nomics: "The economics prize runs counter to the idealism in Alfred's declara- 
tion that the prizes should be awarded each year to those 'who have conferred 
the greatest benefit on mankind.... The vast majority of economic prizes have 
gone to people who reflect the dominating western view of the world. It's doubt- 
ful whether this really is of benefit to all mankind,' says Peter Nobel." Financial 
Times, 11/24/01. 



446 The Lost Science Of Money 



refutation of Hayek's denationalisation "notion" - it can't really be 
called a thesis. 

THE REIGNING ERROR ON GOVERNMENT MONEY 

Remaining outside our chronological presentation for the moment, 
we discuss the reigning error on inflation and govemmentally controlled 
money. The "error" (for some, such as Frederich Hayek, it is more a mat- 
ter of propaganda) is the assumption that govemmentally controlled 
money systems - that is by definition, money systems based on the fiat 
of the law - are less just, more destructive and more dangerously infla- 
tionary than are money systems privately controlled by bankers. The lat- 
ter are often said to be controlled by no one, as the gold standard sys- 
tems have been falsely described. 

For all the attention and belief invested in this anti-governmental, 
actually anti-social viewpoint, surprisingly little logical argumentation or 
serious historical evidence has been put forward to defend it. Logically, 
it has usually depended on the assertion of two falsehoods: first the 
assumption that the poorly run money systems of the past were under 
government control, even when they were privately controlled; second, 
the anthropomorphizing of government - pretending that government 
has the motivations of greed, and lust for power and gain, that are char- 
acteristics only of living, individual men. We have pointed out how 
Hayek makes both these "mistakes" in his self-admitted propagandizing. 

In short, the "inflationists" argument usually reduces to the follow- 
ing, as stated by the distinguished conservative journalist Henry Hazlitt, 
in his introduction to Andrew Dickson White's essay, Fiat Money 
Inflation in France: 

"(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 between 1716 and 1720; of the history of our own 
Continental currency between 1775 and 1780; 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 his- 
tory ?"2i 

Thus those arguing against government exercising its proper control 
over the nation's money system actually think they have history on their 
side, having been misled into this view by some pretty clever people. No 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 447 



doubt Hazlitt believed that the narratives he rehed on, of those past infla- 
tions, were accurate and objective reports. But they were not. In fact, a 
literature continues to be built up about those events that generally relies 
on the uncritical acceptance of earlier accounts that range from mislead- 
ing to false. 

In Chapter 14 we dispelled this reigning error on colonial govern- 
ment paper money issues, which were indispensable in building colonial 
infrastructure and achieving progress. We examined how the Continental 
Currency enabled the United States of America to be founded, and how 
it was brought down largely by British counterfeiting. 

In Chapter 17 we'll see that the real history of the Greenbacks did 
not conform to the picture painted for Hazlitt, by the Austrian econo- 
mists. We will observe how the Confederate Currency fell, and we agree 
that a fiat currency does depend upon a continuation of the government 
that issues it. In Chapter 21 we examine the German hyperinflation, and 
again the reader will see that it was not what the bankers' apologists 
claim. Suffice it to say here that it occurred under a privately owned and 
controlled central bank. That leaves only their "argument" of the French 
Revolutionary money - the assignats. 

WHITE'S PURPOSE: TO ATTACK THE GREENBACKS 

France issued the assignats starting in 1789, under conditions of a 
society and economy so ruined by aristocratic arrogance and extrava- 
gance that the people had risen in revolution. One of the most important 
aspects of the assignats is how their story has been used (or misused) in 
the modem battle for control over society's monetary power. This prop- 
aganda effort began in earnest almost a century after they were issued, 
in the fight over the American Greenbacks. 

Perhaps the most clever attack of all on the Greenbacks was Andrew 
Dickson White's Fiat Money Inflation in France, written in 1876. White 
(1832-1918), whose inherited fortune arose from banking, eloquently 
used several rhetorical methods to undermine the Greenbacks. But 
Hazlitt's introduction presents White's essay as objective history, rather 
than with a political motive. Not mentioned is that White's purpose was 
to attack the Greenbacks, which at that time a majority of voters wanted 
to make a permanent feature of our money system. 

Since a direct examination of the Greenbacks and their results would 
defeat his purpose, instead White argued from analogy, asserting that what 
was true for France must also be true for the United States: the failure of 



448 The Lost Science Of Money 



paper money, under the chaotic conditions of the French revolution, 
automatically condemns government paper money everywhere. The 
argument does begin to look weak, even silly, when stated in that way 

Within the year (1877), Stephen Dillaye had demolished White's 
effort to the point of embarrassment: 

"The effort of his pamphlet is to overthrow our paper currency; to 
destroy confidence in our stability as a government; to question our 
honor as a nation, and our honesty as a people, by producing the history 
of French paper money, and showing by its failure and worthlessness, an 
example and illustration to convince us that because the French revolu- 
tionists failed in establishing a paper currency worthy of confidence, we 
must fail; that as they repudiated the obligations they created, the 
Government of the United States must repudiate the obligations it has 
created or may hereafter create. Mr. White's argument amounts to this or 

it amounts to nothing."^-^ 




16a. Andrew Dickson White, whose inherited fortune came from banking, 
argued that the failure of the French Revolution's Assignats proved that 
governments couldn't be trusted to issue paper money. He didn't mention 
that far more Assignats were counterfeited in London than were printed by 
the French. Same tactic she used against the Continental Currency. 
Such monetary aggression seems to be endemic to England. 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 449 



Dillaye provided details on how English counterfeiting was a major 
factor in the Assignat's decline, as it had been against our own 
Continental Currency. We will quote him at length, since the reader will 
have great diflSculty finding information on this elsewhere: 

"It is true that adventurers in Belgium and priestly knaves in 
Switzerland commenced the business of forging the Assignats as early 
as October 1792. ..It was found that Belgium was too open and too much 
in sympathy with revolutionary dogmas; and that Switzerland was too 
confined in its resources and communication for the. . .vast designs of the 
nobility and clergy. It is true that the business was kept up and increased 
there, but the great establishments for the systematized fraud found more 
scope and greater opportunities for uninterrupted work in London. 
...England lent its aid, while its cabinet became the concealed agent for 
the propagation of the felony and the circulation of the nefarious 
outrage." 

Continuing: "Seventeen manufacturing establishments were in full 
operation in London, with a force of four hundred men devoted to the 
production of false and forged Assignats. The success and the extent of 
the labor may be judged by the quantity and the value they represented. 
In the month of May 1795, it was found that there was in circulation 
from 12 billion to 15 billion francs of forged Assignats... The Assignats 
in circulation at this time... issued by the Revolutionary government 
were 7.86 biUion francs, and not, as Mr. White has stated 45 billion 
francs. . .The value of the lands dedicated. . .as the basis for their redemp- 
tion. ..was 15 billion francs. .."-^^ 

As part of his proof, Dillaye cites legal proceedings in England 
where court disputes between those involved in counterfeiting brought 
the matter into the public record. 

White's essay pretended that certain natural laws operated against 
government paper currency. Dillaye pointed out that: 

"The Natural laws of finance, as Mr. White understands them, would 
have... strangled our [American] revolution in 1775, and kept us slaves 
to. . .kingly impudence," and "not a dollar has ever been lost by the paper 
credits of the United States since the adoption of the Constitution; but 
the losses, the ruin, the bankruptcies and the fatal failures which have 
resulted from banks making gold the basis are written in the history of 
every crisis for over three quarters of a century, and aggregate very many 
times the amount of the national debt. . .but who will attempt to estimate 
the amount of human misery and woe which this system of fraudulent 



450 The Lost Science Of Money 



specie basis has entailed on the American people?"^"^ 

While White's essay continued to be reprinted by conservatives, into 
the 20th century (F.E.E. in 1959, and the Cato Institute in the 1980s), 
Dillaye's more accurate and more honest rebuttal has been ignored. One 
future project of the American Monetary Institute, for which a grant is 
sought, is to publish a reprint and modem analysis of Dillaye's work. 

Now - back to our chronology. 

THE JUDGMENT OF THE PEOPLE 

It is not only expert testimony that indicts private banking in the 
U.S., but the people as well. John Jay Knox, a Controller of the Currency 
and generally friendly to banker interests, wrote in his 1876 Treasury 
report: 

"The history of banking in the various states before the [Civil] war 
will make plain to anyone that the note issuing privilege was much 
abused to the great detriment of individuals and the public. Banks were 
started for the sole purpose of foisting worthless notes upon a trusting 
public." 

That, combined with the very successful U.S. government issuing of 
the Greenbacks during the Civil War (which we examine in the next 
chapter) convinced the American public that the control of money 
belonged in government hands: 

"The idea that the government should issue the paper money, as well 
as coin the gold and silver has taken a firm hold of the American mind," 

Knox wrote,^^ 

Indeed, through the present day, the U.S. government has main- 
tained a superior record of monetary activity, both in an absolute 
sense and in relation to the private issue of money, with only one pri- 
mary failing - that is that the issuance of money has been allowed to 
remain in private hands for most of our history. 

In the coming chapters the reader will see that there is a con- 
tinuation of this pattern into the modem period; of generally good mon- 
etary management by the United States, and generally nefarious busi- 
ness dealings by the bankers. Chapter 1 7 will describe how our govern- 
ment issued the Civil War Greenbacks. Chapter 18 describes the world- 
wide deflations of the 19th century, which we have characterized as 
crimes. Chapters 19 and 20 discuss how the bankers formally institu- 
tionalized their power in the Federal Reserve System, and what that sys- 
tem quickly did to our economy, but we are getting ahead of our story. 



16 U.S. ISSUED MONEY vs PRIVATE MONEY 451 



We now examine the exciting events of the mid- 1800s, which con- 
tinue to demonstrate the importance of the choice between private con- 
trol over our money system and societal safeguards through govemmen- 
tally created money. The activity and battles that arise out of this ques- 
tion have made it historically the central question of American politics, 
and we must never lose sight of that fact. 



Notes to Chapter 16 

^ Harry E. Miller, Banking Theories in the United States Before I860, (Harvard 

Univ. Press, 1927, repr., New York: A.M. Kelley, 1972), p. 174. See also John 

Thorn Holdsworth, The First and Second Banks of the United States, 

(Washington, DC: Natl. Monetary Commission, 1910), pp. 112, 116-17. 

^ Charles A. Conant, A History of Modem Banks of Issue, (New York: Putnam, 

1909), p. 340. 

^ Thomas Jefferson, Letters and Addresses, edit. William Parker, (New York: 

1905), December 13, 1803 letter to Albert Gallatin. 

^ Arthur Nussbaum, The History of the Dollar, (Columbia Univ. Press, 1957), p. 65. 

^ P. Studenski & H. Kroos, Financial History of the U.S., (New York: McGraw Hill, 

1952), p. 83. 

^ Studenski & Kroos, cited above, p. 80. 



452 The Lost Science Of Money 



^ Davis Rich Dewey, Financial History of the U.S., (New York: Longman's Green, 

1903), p. 145. 

^ Murray Rothbard, The Panic of 1819, microfilm *ZT239, main NY Research Library. 

^ Rothbard, cited above. 

^0 Ralph Caterall, 2'''^ Bank of the UX, (Univ. of Chicago Press, 1902), p. 90. 

'^ Condy Raguet, A Treatise on Currency and Banking, (1840, repr., New York: 

A.M. Kelley, 1969), Appendix, p. 293. 

^^ Charles J. Bullock, The Monetary History of the U.S., (New York: Macmillan, 

1900), pp. 84-5. 

^^ William G. Sumner, History of American Currency, (New York: Holt, 1874), pp. 

59, 107. 

^^ William M. Gouge, A Short History of Paper Money and Banking, 

(Philadelphia, T. Ustik, 1833). 

^^ Studenski & Kroos, cited above, pp. 88-9. 

^^ Dewey, cited above, p. 155. 

'^ Studenski and Kroos, cited above, pp. 86-100. 

^^ Studenski and Kroos, cited above, pp. 115-125. 

^^ For the free banking school see: Robert G. King, On the Economics of Private 

Money, Journal of Monetary Economics 12, 1983. George Selgin, The Theory 

of Free Banking, Cato Institute, Rowman and Littlefield, 1988. Lawrence H. 

White, Free Banking in Britain, NYU, 1989. Richard Salsman, Breaking the 

Banks, AIER, 1990. Kevin Dowd, The Experience of Free Banking, Routledge, 

Lord, 1992. 

^^ F. A. Hayek, Denationalisation of Money, the Argument Refined, (London: 

Institute of Economic Affairs, 1978), p 17. 

^^ Andrew Dickson White, Fiat Money Inflation in France, (Irvington on 

Hudson, New York: Foundation for Econ. Education, 1959), pp. 20-21. 

^^ Stephen D. Dillaye, Assignats and Mandats, A True History, Including an 

Examination of Dr. Andrew Dickson White's ''Paper Money In France, 

(Philadelphia: Henry Carey Baird & Co., 1877), p. 8. 

^^ Dillaye, cited above, pp. 32-33. 

^"^ Dillaye, cited above, pp. 48-49. 

^^ John Jay Knox, History of Banking in the United States, (New York: Rhodes, 

Bradford & Youngman, 1903), p. 1 1 . 



453 



CHAPTER 17 



THE GREENBACKS : 
REAL AMERICAN MONEY 



"The best currency that ever a Nation had." 

S. G. Fisher 



Thanks to over a century of relentless propaganda, the image of the 
Greenbacks comes down to us as worthless paper money. But upon more 
careful examination, on balance they were probably the best money sys- 
tem America has ever had and they served our nation well during its 
worst crisis - the Civil War. Demonstrating how far monetary history has 
been distorted, readers may be surprised to learn that every Greenback 
printed was ultimately as valuable as its gold equivalent, and became 
redeemable for gold coinage at full value. Today the Greenback sup- 
porters are erroneously presented as merely being pro-inflation or 
against sound money. What they really wanted was a more honest 
money system, controlled by government, instead of banks. 

REAL GROWTH IN THE U.S. 

The decade leading up to the Civil War was one of tremendous real growth: ^ 

1850 1860 

U.S. population: 23 million 31 million 

production of: 
com: 592 million bushels 839 million bushels 

wheat: 100 " " 173 " 

cotton: 2.5 " bales 5.4 " bales 

rail track in place: 8,500 miles 30,000 miles 

In Chicago, 4,000 tractors a year were being manufactured by 

McCormick alone, and there were another 100 tractor companies. There 



454 The Lost Science Of Money 



was enormous activity in the Great Lakes ports and the Mississippi 
River. American shipbuilding was among the world's best, building over 
one million new tons in 1854-55 - a tonnage not to be equaled again until 
1917. The first transatlantic cable was completed in 1866. 

BANKING AND MONEY SYSTEM STILL A NIGHTMARE 

This dynamic growth was held hostage to panics and speculation in 

the monetary and banking sphere. There was still no uniform American 

currency and banking was a nightmare: 

"The banking business was conducted by 1,606 state banks, each 

going its own merry way; 7,000 different kinds of bank notes circulated, 

with more than half being spurious," wrote Studenski and Kroos.-^ 

The banks literally let their notes fall apart: 

"Our banks re-issue their bills as long as they hold together. [They] 
are easily torn and mutilated, causing a loss and destruction of no small 
amount to the public, and correspondingly great profit to the banks," 

wrote Wilbur and Eastman.-^ They report that counterfeit notes were also 
a big problem: 

"There are quite a number of genuine dies (for printing money) now 
in the hands of counterfeiters, which were obtained at Sheriff's [bank- 
ruptcy] sales of the property of Mess. Durand & Co. (and Burton 
Edwards Co.) who formerly did an extensive business in bank-note 
engraving." 

Every minor financial problem, and even accidents, could develop 
into runs on over-extended banks and cause financial panics. One such 
crisis, the panic of 1857, grew out of the failure of the Ohio Life and 
Trust Company, caused by the sinking of the steamship Central America 
with over one million dollars in gold and silver aboard. As a result, on 
October 13, 1857 many banks suspended redempfion of their notes, 

causing business failures of $291 million in 1857 alone.^ 

President James Buchanan attributed the malady to our "vicious system 
of paper currency and bank credits, exciting the people to wild specula- 
tions and gambling in stock." 

THE WAR CRISIS 

The split between North and South was a long time building and part 
of the reason was the banking and financial piracy by largely northeast- 
em elements. 

When Jackson and Van Buren battled the 2"^ Bank of the U.S., it 

was southern votes that helped stop the Bank.^ The South's view of the 



17 THE GREENBACKS: REAL AMERICAN MONEY 455 



North's financial theft found its strongest expression in the writings of a 

northerner - T. P. Kettle.^ Randall relates that: 

"Kettle [assembled] statistics to show that the south was the great 
wealth producing section, while the north, like an economic leech, 
sucked up the wealth of the south. . ." 

The southern planters would be paid for their cotton in bills of 
exchange drawn on England. However "The market for foreign bills of 
exchange was in New York [and] The Southerner was... folly convinced 

of the prevalence of vicious [manipulated] speculation in cotton paper. "^ 
When the Civil War broke out in April, 1861 it was just a matter of 
time before all the banks would suspend their payments and it would 
once again be left to the Government to rescue the situation, this time 
with the Greenbacks. 

HOW TO PAY FOR THE WAR? 

In 1861 the national income was $4.3 billion per year or $140 per 
person. Government revenues were from customs fees and the sale of 
public lands. A very limited income tax was enacted for war expenses. It 
was a big question just how the war would be financed. 

Lincoln had appointed Salmon P. Chase as Treasury Secretary but 
Chase was more of an anti-slavery leader than a financial expert. His 
early finance plan called for $381 million to fight the war, $80 million 
of it from taxes and $300 million fi*om borrowing. However, there was 
only about $100 million of gold and silver in the country. 

The borrowing was to be mostly through treasury notes. Chase pro- 
posed that the notes be interest bearing: 3.6% for small denominations, 
up to 7.3% for large ones. On July 17, 1861 Congress authorized bor- 
rowing of up to $250 milHon in the form of bonds or notes at the dis- 
cretion of the Treasury Secretary. These interest bearing notes were not 
legal tender, but were receivable for all public dues, taxes, etc. The notes 
were redeemable in gold and circulated freely with banknotes and gold 
until December 28, 1861. On that date all the banks in the country sus- 
pended convertibility of their notes into coinage and the gold market was 
closed for two weeks. 

CONGRESS TAKES THE INITIATIVE 

Congressman E. G. Spaulding of Buffalo, New York, who was on 
the powerful House Ways and Means Committee, acting without the 
Treasury's support, introduced a bill in Congress to create legal tender 
money - the Greenbacks. Spaulding clearly understood money and banking: 

"Gold and silver, by long practice, have become the legal money of 



456 The Lost Science Of Money 



the world in all commercial transactions. The real intrinsic value of these 
metals is not as great as that fixed upon it by governments. . .without the 
government stamp gold and silver would be simple commodities, 
depending for their value upon the demand for use in trade and manu- 
facture... Why then should we go into Wall Street, State Street, Chestnut 
Street, or any other street, begging for money? Their money is not as 
secure as Government money... I am unwilling that this Government 
should be left in the hands of any class of men, bankers or moneylend- 
ers, however respectable or patriotic they may be. The Government is 

much stronger than any of them... They issue only promises to pay."^ 

Secretary Chase opposed the bill and held conferences with bankers 
to find alternatives. They had been working on a plan that would later 
become the National Banking System. Spaulding was for the new bank- 
ing system but realized it would take more time to put it into effect and 
viewed the Greenbacks as a necessary first step. 

In the debates that followed, Senator Howe of Wisconsin supported 
Spaulding's bill and attacked those pretending that the banks had suffi- 
cient gold and silver to lend to the government: 

"The Government may be able to borrow from the banks, but the 
Government cannot borrow coinage of the banks. If it borrows anything 
of them, it must borrow, not their money, but their promises to pay 
money. Nothing is more certain than that... We must rely mainly upon a 
paper circulation; and there is another thing equally certain, which is that 
the paper, whoever issues it, must be irredeemable. All paper currencies 
have been and ever will be irredeemable. It is a pleasant fiction to call 
them redeemable... I would not expose that fiction only that the great 
emergency which is upon us seems to me to render it more than usually 
proper that the nation should begin to speak the truth to itself; to have 

done with shams, and to deal with realities,"^ 

The legal tender law was passed in the House by 93 to 59 on 
February 25, 1862, Previously, the treasury notes issued from 1812 and 
on were always later redeemable in metal. But the Greenbacks were 
not paper promises to pay "money" later. The Greenbacks were 
themselves the money. Since they were not borrowed, there was no 
interest payment on them and they did not add to the national debt. 

GREENBACKS LIMITED TO $450 MILLION 

Congress at first authorized the Treasury to issue $150 million non 
interest bearing Greenbacks. Fifty million dollars were to replace some 
Treasury notes outstanding. They were receivable for all dues and taxes 



17 THE GREENBACKS: REAL AMERICAN MONEY 457 



to the U.S., except import duties, which still had to be paid in coin. The 
Greenbacks were payable for all claims against the U.S. except interest 
on bonds which was still payable in coin. The Greenbacks were 
declared a legal tender for all other debts, public and private. 

On July 7, 1862 Chase reported the need for $150 million more 
Greenback notes, which Congress then authorized. In January, 1863 
another $100 million were issued. In 1864 another $200 million of 
Greenbacks was authorized. On June 30th, 1864, Congress passed a law 
which limited the total Greenbacks to $400 million, plus another $50 
million in fractional currency. This amount was never exceeded; 
although by that time $449,338,902 had already been issued, some being 
replacements for worn notes. 

RESTRAINED INITIAL REACTION TO THE GREENBACKS: 

Bankers did not mobilize against the Greenbacks; they had to wait 
until the beneficial effects of the new currency rescued their own posi- 
tion and brought the nation through the war. Secretary Chase expressed 
a religious superstition of paper money: 

"Legal tender notes must be the devil made manifest in paper; for no 

man can foresee what mischief they may do when they are once let loose."^^ 
That's reminiscent of the delegate to the Constitutional Convention 
who compared government bills of credit to "the mark of the beast." 

Holders of Greenbacks could deposit them and receive 6% compound 
interest bearing bonds, redeemable after 5 years and payable after 20 
years in greenbacks. Congress authorized $500 million of such bonds. 
While the interest on them was to be paid in coinage, the principal 
on nearly all of the bonds was to be paid in Greenbacks. 

LINCOLN IS COOL TOWARD THE GREENBACKS 

Lincoln said little good about the Greenbacks and they should not be 
viewed as his or the Republican's program. In his December 1862 annual 
message to Congress he said: 

"The suspension of coinage payments by the banks soon after the 
commencement of your last session, made large issues of United States 
notes unavoidable. ..a return to [coinage] payments... at the earliest peri- 
od.. .should ever be kept in view." 

And urging the passage of the National Banking Act on January 17, 
1863 Lincoln told Congress: 

"...A uniform currency, in which taxes, subscriptions to loans and all 
other ordinary public dues as well as all private dues may be paid, is 



458 The Lost Science Of Money 



indispensable. Such a currency can be furnished by banking associa- 
tions, organized under a general act of congress." 

Thus Lincoln supported the banker's privilege to create money In 
the same speech, he apologized for additional issues of Greenbacks: 

"I think it my duty to express my sincere regret that it has been 
found necessary to authorize so large an additional issue of U.S. Notes 
when this circulation and that of the suspended banks together have 

become already so redundant as to increase prices."^ ^ 

HARD MONEY HISTOMAN SUMNER WAS NONCOMMITTAL 
Yale University's Sumner viewed the Greenbacks cautiously: 




1 7a, The Greenbacks were not a promise to pay money; they were money. 
There was no interest due on them, and they did not add to any national 
debt. Therefore they are the finest money system we have had to date. The 
reverse reads: "This note is a legal tender for all debts public and private, 
except duties on imports and interest on the public debt and is receivable 
in payment of all loans made to the United States.'' Advances in printing 

made them very difficult to counterfeit. 



17 THE GREENBACKS: REAL AMERICAN MONEY 459 



"The question whether it is necessary to issue legal tender notes is a 
question not of law, but of political economy, and political economy 

emphatically declares that it never can be necessary."^^ 

Readers understand that our thesis is that money is mainly a ques- 
tion of law, not political economics. Sumner was not for total abstinence 
from government paper issues but worried that: 

"We have not yet learned how to do it." 

He acknowledged an important fact: 

"The people of the U.S. have a patriotic attachment to the greenback 
because they think that it saved the country." 

The people's attitude did not come from the media of the day, which 
for the most part was against the currency. Sumner noted that: 

"The era of paper money on which we entered has one peculiar feature, 
unprecedented, so far as I have been able to learn, in the history of paper 
money. Our paper money is. . .fixed in amount. . .The whole story which 
precedes goes to show that the value of a paper currency depends on its 
amount... relative to the requirements of the country for the purpose of per- 
forming its exchanges." 

Then Professor Sumner spoke a great truth of economics: 

"For as the currency question is of first importance and we cannot 
solve it or escape it by ignoring it. We have got to face it and the best 
way to begin is not by wrangling about speculative opinions as to 
untried schemes but to go back to history and try to get hold of some 

firmly established principles." ^^ 

Perhaps it was reading Sumner's last paragraph that inspired the 
young Alexander Del Mar, a mining engineer, and later head of the 
Government's Bureau of Statistics, to embark on a lifelong study of 
monetary history, which Sumner s ''economists'' continued to ignore. 
American political economists, like those in England, would function 
more as a priesthood protecting the bankers' interests than as a profes- 
sion that should have been educating themselves and the public on 
money and banking. 

HISTORIAN BULLOCK WAS MILDLY POSITIVE 

Like Sumner, Harvard's Charles Bullock believed in commodity 
money of gold and silver. Yet his comments on the Greenbacks are mildly 
positive. First he defended them from blame for their initial 34% drop 
against gold, noting that by December, 1862 the Greenbacks had been 
steady against commodity prices. So the premium on gold did not indicate 



460 The Lost Science Of Money 



a drop in the Greenback but a rise in gold. Bullock, unable to praise the 
Greenbacks directly, quoted others who did. First, Sydney George Fisher: 
"It was the duty and the prerogative of a government to supply a cur- 
rency to the people. [The Greenbacks were] the best currency that ever 

a nation had."^^ 

And then Henry Carey: 

"[The Greenback was] democratic in its tendencies, . .the changes in 
prices that had occurred in 1 862 were such as must have taken place any- 
way." Carey desired "a national system of circulation based entirely on 
the credit of the government with the people, and not liable to interfer- 
ence from abroad." ^^ 

GREENBACKS COULDN'T BE COUNTERFEITED 

Unlike the Continental Currency the Greenbacks couldn't be coun- 
terfeited: 

"As yet the counterfeiters have not met with much success. . .they are 
easily detected by the paper, printing, poor engraving, and by an entire 
failure to imitate the lathe-work, especially upon the back of the note, 

observed Wilber and Eastman. ^^ 



»» 



GOLD RISES AGAINST THE GREENBACKS 

Greenback critics argue that they were inflationary and mistakenly 
measure the inflation against gold, starting at equal to a gold dollar in 
early 1862, and falling to 36 cents against a gold dollar by mid 1864, So 
one gold dollar exchanged for nearly $2.50 in Greenbacks. That is often 
the whole of their analysis and it is very misleading. Actually the 
Greenbacks did drop against gold; first to 58 cents at the end of 1862, 
then back up to 82 cents in mid 1 863 and then down to a brief low of 36 
cents on July 16, 1864. 

From that point they moved up steadily, averaging 39 cents for 
August; 45 cents for September; and 48 cents for October, 1864. They 
retreated to $0.44 in December, and averaged $0.68 for December 1865. 
From there they gradually rose to $1.00, at par with gold in December 
1878. Greenbacks became freely convertible into gold, dollar for dollar, 
in January 1 879. The accompanying graph shows how many Greenbacks 
one gold dollar exchanged for. 

But to simply compare the Greenbacks to gold cannot give an accu- 
rate picture. The fact that they became convertible into gold was not nec- 
essarily a good thing, but arguably a very bad thing for the currency and 
the nation, as we shall see. 



17 THE GREENBACKS: REAL AMERICAN MONEY 461 











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462 The Lost Science Of Money 



LIMITATION OF ISSUE RAISES THE GREENBACK'S VALUE 

Economists mistakenly argue that it was only because the 
Greenbacks were eventually made convertible into gold by law, that 
made them hold and increase their value. However, that law was a hard 
fought political struggle, dependent on the 1868 presidential election. 
The battle could have gone either way and the actual "resumption" law 
could not get passed by Congress until 1874, for implementation in 
1879. This could not have kept the Greenback from further declines, and 
start moving it upward back in mid- 1864. 

What did occur in July 1864 was that our government put a 
limit of $450 million on the Greenbacks and from that month they 
started rising (i.e. gold began falling in terms of Greenbacks). 

ACTUAL PRICE MOVEMENTS DURING THE PERIOD 

Wesley Mitchell's 1908 Greenback studies are watershed works. His 
method was empirical and was thus historically based on the facts. 
Examining the available data on price rises 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 gave the following general picture: ^^ 

1860 - wholesale prices were fairly constant, 

1861 - wholesale prices fell sharply, before the war. 

Autumn 1861 - an upward movement in prices began six months before 

the Greenback legislation, and continued throughout 1862. 

1863 - northern financial and military successes led to a fall in prices. In 

late 1863 - prices started up again, reaching their maximum in January 

1865, when 59 out of 90 commodities were at double or more than they 

were five years before. 

MITCHELL CREATES PRICE INDEXES 

Measuring price levels is difficult. Ricardo thought that paper cur- 
rencies could simply be compared to gold, but this ignores the real 
movements in the value of gold itself. In effect it assigns a fetish or reli- 
gious position to gold. 

Mitchell carefully constructed several price indexes as there were 
none in existence. Items had to be weighted for importance; averaging 
the data can mask really dramatic changes in particular prices. One 
especially volatile commodity price can throw off the whole index, such 



17 THE GREENBACKS: REAL AMERICAN MONEY 463 



as the unique 1300% rise in the price of cotton during the war. 

Mitchell's indexes started at 100 in 1860. The median of his com- 
modity price indexes stood at 216 in January 1865. General Lee surren- 
dered in April 1865 and by July 1865 the index was down to 158. It then 
reacted upwards, and thereafter fell through autumn 1871. 

Mitchell's cost-of-living index median did not rise as much as com- 
modity prices. It rose a maximum of 73% by 1866 in the east, 51% in 
the west. This is a very different picture from mere gold prices, which 
rose almost 200% at their highest point. 




17c. The Greenbacks functioned well, in spite of their being mainly spent 
on warfare, not merely a nonproductive activity, but a most destructive 
one, as this horrible scene from Gettysburg demonstrates. 



464 The Lost Science Of Money 



RENTS AND WAGES 

Other prices exhibited their own peculiar characteristics: Rents rose 
by 44% through 1870 and didn't come down much later. Mitchell's 
tables show an almost universal rise in wages during the war though not 
as much as wholesale or retail prices. Wages continued upward after the 
war, while other prices were falling. The highest point for wages came 
in July 1872. 

Wages rose more slowly than other prices and didn't come down as 
much later. The median of wages rose 79% (to 179) by July 1871 and 
had come back to 125 in July 1879. At first, wages rose more for higher 
paying jobs. From 1866, the lowest paid workers had the greatest rela- 
tive increases. Wages had greater relative increases in the west. 

AND REMEMBER THE WAR 

While the Greenbacks lost substantial value for a period, the nation 
was engaged in the bloodiest war in its history, in which 13% of the pop- 
ulation served in the armed forces and 625,000 died. Aside from the 
Revolution, the Civil War was the only war fought on our own soil. Is it 
reasonable to expect that any government in those circumstances could 
completely protect its citizens from financial and other hardships? 

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 (WWl), 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 
1 862 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 



17 THE GREENBACKS: REAL AMERICAN MONEY 465 



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 green- 
backs 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? 

Since our purpose is to evaluate the Greenbacks as a money system, 
the following question must be asked: What if the $450 million 
Greenbacks had gone into production of houses, industrial tools and 
machinery and other items that would have created both wealth and 
increased productive capability for Americans, rather than going into the 
destruction of those items? 

CONFEDERACY'S PAPER MONEY FAILS 

The Confederacy also issued paper money, but made major mone- 
tary errors in the way they did it. Even less enthusiastic than the North, 
the Confederacy's Treasury Secretary, Christopher Memminger, was 
afraid of paper money, which he called: "The most dangerous of all 

methods of raising money. "-^^ The South never made the Confederate 
money a legal tender, a monetary/military error of great magnitude. 

Even worse, the Confederate paper money was not money in itself 
but was merely a promise to pay money later. Typically, the face of 
Confederate notes have this phrase: 

"Two years after the ratification of a treaty of peace between the 
Confederate States and the United States of America, the Confederate 
States of America will pay to the bearer on demand 'X' dollars." 'X' 
being 5, 10, 500, or whatever the note's denomination was. 

The Confederacy raised a total of $712 million in various loans, 

according to Lemer.^^ These loans constituted about 39% of the South's 
total revenues. The rest came from paper money. In June 1861 there was 
$1 million in Confederate currency outstanding. By January 1864 there 
were $826 million outstanding. During the same period, bank notes and 
deposits of southern banks rose from $94.6 million to $2.68 billion. 

In the North the banks created $1.49 per Greenback dollar created 
by the government. The southern banks also had no central bank system 



466 The Lost Science Of Money 



and they created far less of the money supply than in the North; $1.20 
for each dollar created by the Confederate government, according to 
Lemer, but considerably less, according to Godfrey.^^ 

In February 1864 the Confederate Congress forced the conversion of 
the currency into a 20-year bond paying 4%. This was their third major 
monetary error. Confederate currency not tendered for this conversion 
was devalued one-third after one and a half months and two-thirds after 
about a year. The reform had a temporary effect as the Confederacy con- 
tinued to issue paper, finally issuing $1.55 billion of currency, compared 
with the North's $450 million. Unlike the North, the South placed no 
limit on its issue of paper notes, thereby violating another primary mon- 
etary principle - limitation of issue. Strike four. 

Lemer estimated the value of confederate notes against gold:^^ 



1861 
early 1862 
early 1863 
early 1864 
early 1865 



$1 Confederate = 



(i 



ii, 



a 



a 



.90 of gold 

.83 

.29 

.05 

.017 



a 



a 



i.i 



a. 



When a state loses a war of existence, its nominal currency, and 
much of the property of its citizens is lost. 

WERE THE GREENBACKS UNFAIR TO CREDITORS? 

No shortcomings have been raised against the Greenbacks as being 
inconvenient to internal trade or failing to serve as a superb medium of 




17d The Confederacy made several fatal errors in issuing its paper money. 
Instead of being money in itself, it promised to pay money later. This bill 
reads: "Six months after the ratification of a treaty of peace between the 
Confederate States and the United States of America, the Confederate 
States of America will pay to the bearer on demand two dollars." 



17 THE GREENBACKS: REAL AMERICAN MONEY 467 



exchange for private as well as public transactions. But what about when 
an old contract between private citizens for coinage was paid in 
Greenbacks? Wasn't that unjust to the lender? Didn't it mean that someone 
who had lent gold or silver was being paid back in less valuable paper? 

No doubt there were some cases where actual coinage was lent. 
However, in all likelihood what was lent in the overwhelming majority 
of cases prior to the Greenbacks was bank paper money, which pre- 
tended to be convertible into gold or silver. But system-wide, this pre- 
tension was a fiction. When the government substituted its paper for the 
bank paper, whatever other economic events occurred, it was replacing 
the bank paper with a superior paper asset. 

The disappointed lenders should have been asked how their debtors 
could have paid them in coinage after the banks suspended convertibili- 
ty of bank notes into coinage, in December 1861. The suspension 
showed that the metallic backing was a fiction - a fraud. Would it have 
been fair for the breakdown of this fiction to fall only on the backs of the 
debtors? After all it was the bankers, not the debtors, who had perpetrat- 
ed the fraud that their paper bank notes were convertible into coinage. In 
effect, system-wide, the debtors had not been loaned metal, but paper. 
And how many of the lenders were banks? Still there would be those 
seeking a pound of flesh from the debtors, but their claims were eventu- 
ally denied by the U.S. Supreme Court. 

THE NATIONAL BANKING ACT OF 1863/64 

The National Banking Act was in preparation, to replace the inade- 
quate state banking structure, as the Greenback legislation was passed. 
Some legislators viewed the two laws as politically connected. The 
Banking act became law on February 25, 1863. However, Congress had 
to correct some of the law's technical errors in June, 1864. 

The National Banking Act, which provided for the national charter- 
ing of banks by the federal government, has been characterized as a tri- 
umph of the Federalist/Whig tradition of Hamilton, Clay, and Biddle. 
States that had strict banking laws could henceforth be bypassed. 
Previously only two banks had national charters, both by Congressional 
acts - the first and second Banks of the U.S. The Bank of North America 
had been a Pennsylvania state bank. Now obtaining a national bank char- 
ter would be a routine matter. 

PROVISIONS OF THE NATIONAL BANKING ACT 

The act created a system of National Banking Associations under the 
supervision of the Treasury's newly created Comptroller of the 



468 The Lost Science Of Money 



Currency. The new law started to clean up the operational fraud always 
connected with banking in America: 

* Quarterly reports were required to be published. 

* The banks' capital was strengthened as a minimum of $50,000 was 
needed to start a bank. 

* A bank's indebtedness was limited to the amount of its paid-in cap- 
ital in U.S. notes, 

* The reserves of the banks were strengthened as each bank had to 
purchase Treasury bonds in the amount of 1/3 of its paid in capital, 
$30,000 minimum. 

* Initially each bank shareholder was made individually liable for the 
obligations of his bank - up to twice the par value of his stock. 

* The comptroller of the currency, not the individual banks, was 
responsible for printing bank notes. These were furnished to the 
banks, with their own names on them, up to 90% of the value of the 
government bonds the bank had deposited with the treasury, 

* A maximum of $300 million of such notes, system-wide, was decreed, 
"^ Banks were required to maintain a 25% reserve (15% in small 
towns) of their combined circulating notes and deposits. 

* The notes of the national banks were made acceptable for most U.S. 
dues. Notes were to be received by all member banks at full value. 

* The U.S. Treasury got an annual tax of 1% on a bank's average cir- 
culation, plus 1/2% on it's deposits and capital stock. 

Many state bankers were very hostile to the arrangement. Only when 
Congress placed a 10% annual tax on state banknote issues, on March 3, 
1865, did most of the state banks make plans to join the national system. 
Charles Conant claimed that the reason the state banks were not joining 
the system was that at first it required them to drop their names and be 

known only by numbers !^^ 

After the 10% tax on state chartered bank notes was decreed, their 
circulation dropped from $179.2 million, down to $19.9 million, on the 
effective taxation date, clearly demonstrating the power of law to get the 
Banker's attention. 

On June 30, 1863 the 1st National Bank of Philadelphia became the 
first to get a national charter. 
According to Conant: 

in 1864:- 453 national banks with $79.4 million were chartered, 

in 1865:- 1014 " " '' $242.5 " 

in 1866/67- 72 more were chartered. 



17 THE GREENBACKS: REAL AMERICAN MONEY 469 



The National Banking Associations proceeded to implement a gross- 
ly unfair distribution of the $300 million of banknote issue. For exam- 
ple, the city of Woonsocket, Rhode Island was given more circulating 
currency than North and South Carolina combined. Rhode Island was 
given $77.16 per capita. Arkansas was given $0.13 per capita. The State 
of Connecticut was given more than the combined circulation of 
Michigan, Iowa, Minnesota, Kansas, Missouri, Kentucky, and Tennessee. 
The original $300 million limitation on bank notes circulation was 
increased slightly in 1870 to $340 million. 

THE ACT RESTRICTS OPERATIONAL FRAUD 

There are always two types of bankers preying upon society. First, 
those engaged in outright operational fraud - the obvious cheats - who 
have plagued America throughout our history, right up to the 1980s and 
90s Savings and Loan scandals, and no doubt the present. For example, 

the former Republican President's son, Neil Bush (brother of the 2^*^ 
Bush President), who engaged in obvious conflict of interest dealing; or 
the bankers who created phony corporations to illegally channel money 
to themselves. The sons of two prominent Democrats were also caught 
cheating: Robert Strauss, then American Ambassador to Russia, and 
Lloyd Bentsen, first Treasury secretary under President Bill Clinton. 

BUT THE ACT ENTRENCHES STRUCTURAL FRAUD 

Then there are the more dangerous bankers - the ones who don't 
break the law but follow it. These "financiers" are engaged in a kind of 
stmctural fraud, preying upon society from behind the cover of inade- 
quate or ill defined or purposely mis-constructed laws, which grant them 
special privileges. 

An example of how this legalized structural fraud was done is that 
immediately upon the passage of the National Banking Act during the 
Civil War, while the U.S. Government authorized and issued $450 
million Greenbacks, the private bankers created $1.49 in their own 
money for every Greenback the Government issued! 

Treasury Secretary Salmon Chase and others bitterly complained 
about this. Dewey wrote: 

"The banks were accused of absorbing the government notes as fast 
as they were issued and of putting out their own notes in substitution, 
and then at their convenience converting the notes into bonds on which 
they earned interest [in gold]. '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 



470 The Lost Science Of Money 



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.'"^^ 

Thus while the National Banking Act limited petty fraud, it 
entrenched the more dangerous structural fraud into American banking. 
This fact was not lost on some observers. Judge Rufus P. Ranney called 
on Democrats to "consider how much danger there was in a system that 
had replaced the Bank of the U.S. If with its $35 million in capital the 
old Bank had [dominated] the press and Congress 'what are we to think 

of the numerous banks with their hundreds of millions in capital?'"^^ 

Another example of structural fraud is the charging of interest by 
banks on money they create out of thin air. Such interest, if it is to be 
ciiarged, belongs to society. Even more important is the control over 
the flow of credit in the society - the favoritism practiced in directing 
the flow of newly created money into the hands of privileged special 
interests. 

Those using structural fraud are more difficult to stop than the com- 
mon thieves. Indeed, with few exceptions, societies have been unable to 
stop them and have watched helplessly as the bankers' systems periodi- 
cally and "legally" destroyed their economies, and sometimes their 
nations. 

Recently, when political murders took place in some central American 
countries, our news commentators would remark that their legal systems 
were "too immature" to deal with the problem. Likewise our own legal 
system has proved too immature to deal with fraudulent banking practices. 

THE BATTLE OVER THE GREENBACKS 

When the Civil War ended, attacks began on the Greenbacks from 
two sources - those whose financial privileges were threatened by them 
and from religious groups, especially from the Calvinist religious sects. 

Opposition to the Greenbacks by bankers would of course be 
expected and discounted, though it could be effective in bribing legisla- 
tors and editors. 

The fight against the Greenbacks was a concerted political, religious 
and legal effort. It was not to be allowed to be determined by the results 
of the money system, or its economic effects. There was no idea of let- 
ting "market forces" demonstrate the supposed superiority of banknotes 
or metallic money over the legally created Greenbacks. The reason is 
because the Greenbacks worked very well, even under crisis conditions, 
and could not be brought down or embarrassed by such a trial; and its 
informed opponents knew it. 



17 THE GREENBACKS: REAL AMERICAN MONEY 471 



THE SUPREME COURT DECISIONS 

The constitutionality of the 1862 Greenbacks law was argued in the 
Hepburn vs. Griswold case. Hepburn was demanding payment in gold, 
from a contract entered into with Griswold, before the legal tender law 
had been passed. In February 1870 the understaffed Supreme Court 
issued an unclear ruling against Griswold (delivered by new Supreme 
Court Justice Salmon Chase, the former Treasury Secretary!), but it was 
soon realized that this very unpopular and faulty decision might also be 
applied to contracts entered after the legal tender laws were passed. 
There was widespread acknowledgment that further clarification was 
needed from the Court and that occurred in May, 1871 when the Knox 
vs Lee case reversed Hepburn and upheld the constitutionality of the 
Greenback legal tender act, 

"But the creditor group will lose some of its gold!" wrote Justice 
Bradley, rhetorically, in his opinion. "Is gold the only thing needful? Is it 
worse for the creditor to lose a little by depreciation than everything by the 
bankruptcy of his debtor?. . .is it worse than to lose everything by the sub- 
division of the government? What is it that protects him in the accumula- 
tion and possession of his wealth? Is it not the government and its laws?" 

Unable to repudiate the Greenbacks, the Bankers agitated to make 
them convertible to gold. 

PASTOR AND PROFESSOR AGAINST THE GREENBACKS 

But the real damage to the Greenback came from the incessant 
attacks and smearing by the religious establishment through their 
churches and universities. Higher education in America was dominated 
by religious organizations. D.S. Tewksbury noted that: 

"The American College... was designed primarily as a 'nursery of 
ministers,' and was fostered as a 'child of the church'... practically all 
the colleges founded between the Revolution and the Civil War were 

organized, supported and in most cases controlled by religious interests."^^ 
They insinuated their outlook into many areas of American life to 
dominate the American psyche: "The forces of irreligion, of rationalism 
and of deistic thought were effectively checked on a hundred fronts," 
wrote Tewksbury. 

For example, on the slavery question: 

"In the South the religious defense of slavery was vigorous and 
widespread. What is not so generally recognized, however, is that slav- 
ery 'found many defenders... [in the North] particularly in colleges and 



472 The Lost Science Of Money 



churches,'" wrote Lyons.-^^ 

Except for the 21 state colleges and a few other exceptions, before 
1860 colleges in America were primarily religious institutions: 

Denomination # of colleg es 

Presbyterian (Calvinist) 49 

Methodist 34 

Baptist 29 
Congregationalist (generally Calvinist) 2 1 

Catholic 14 

Lutheran 5 

The remainder of the sects had four or fewer colleges each. 

In the 1860s and 70s this religious control over education was 
expressed in the Greenback Battle: 

"Allied with the clergy in the work of creating an 'orthodox' financial 
view were the academic economists. Before the Civil War the clerical 
influence pervaded American higher education and at most American 
colleges 'political economy' was taught by a minister, as a branch of 
'moral philosophy'. ..Pastor (and) professor... helped erect a formidable 
psychological barrier against greenbackerism," wrote Unger. 

MONETARY "SMOKING GUNS" 

Irwin Unger's 1964 book, The Greenback Era, detailed the anti- 
Greenback activities of the religious sects. Their thrust was to smear the 
Greenbacks as immoral, while ignoring the excellent economic working 
and superior morality of the Greenback system compared to that of the 
bankers. 

Their method was a double pretense: first to pretend that money had 
to be gold and silver; second to pretend the bankers' notes were really 
convertible to gold and silver. 

"From the very first the ministers and the religious editors were 
active partisans who identified hard money with virtue," writes Unger. 
"The Calvinist denominations took the lead in the religious attack on 
heretical financial ideas. Atwater was a Presbyterian; Bacon a 
Congregationalist; the Advance, the Christian Mirror as well as the 
Boston Recorder and the Presbyterian Banner... were all Calvinist papers 
...Other Protestant groups opposed soft money... but throughout the 

debate, the Calvinist voice is heard most loudly. "^^ And: 

"The Christian defense of hard money eventually led to a very un- 
christian fetishism that gave the precious metals almost supernatural 



17 THE GREENBACKS: REAL AMERICAN MONEY 473 



powers. At its extreme it approached demonology..,(some believed) that 
paper money exerted an 'influence for bad as subtle as the evil one!' 
...Under the ceaseless hortatory barrage of the pastors and the denomi- 
national press, hard money took on the odor of sanctity." 

And further: 

"'The religious press has almost without exception been the aUies of 
the bondholders and bankers in their endless schemes to fleece the pub- 
lic, and the mouthpiece of the monopolists and the defender of the soul- 
less corporations that fill their pockets by robbing the toiling people,'" 
wrote Industrial Age magazine on October 31, 1874. 'Even bankers and 
brokers occasionally supported labor reform, a writer in Industrial Age 
noted, but 'The religious press has almost universally wheeled into line in 
support of the Shylocks and the Sharpers,' (May 1, 1876)" 

The editor of the religious Chicago ADVANCE, A.B. Nettleton wrote: 

"The overthrow of the greenback heresy... is really an event of 
national and historic import." 

Henry Ward Beecher preached hard money sermons to his flock, but: 

"Cameron tumed Beecher's 'Thou shalt not steal' against the Brooklyn 
pastor's stylish congregation - full of 'shady' contractors who had amassed 
fortunes during the war by cheating the government," wrote Unger. 

This may give an insight into the motives of the Calvinist sects. Did 
they want the monetary power to be held by members of their congre- 
gations and others they regarded as "elect" or "chosen"? Like 
Witherspoon at the Constitutional Convention (see Chapter 15), they 
worked overtime to keep the money power from being properly con- 
stituted in the government. Their founder Calvin had written: "The 
people must always be kept in poverty in order that they may remain 

obedient."^ ^ One of the most effective steps in raising a people out of 
poverty is a societally controlled fair money system. 

THE GREENBACK DEFENDERS 

"The Greenback appeal was more abstract than has been realized," 
wrote Unger, surprised. But it had to be abstract; money in its ultimate 
form is abstract rather than concrete. Facing religion's pretense of 
morality in its attack on the nation's money system, men of courage, 
understanding and patriotism put forward reasoned defenses of the 
Greenback system. They made proposals for its permanency, and they 
proposed to remove the privileges granted to the "People of the Bank" 
by the new National Banking Act, 



474 The Lost Science Of Money 



LYMAN DEWOLF 

Lyman E. Dewolf in 1869 stated his purpose: 

"The gross and unjust demands of the capitalists, coupled with the 
disordered state of the national finances which their false system has 
mainly produced rendered the publication of such a work necessary and 

at the eariiest possible moment,"^^ 

Dewolf had a high level of monetary awareness: 

"If it is supposed that money is only good by the commodity value 
it possesses and not by its legal attributes, then money must ever remain 
simply a commodity, and all exchanges barter, which is the very diffi- 
culty which civilization has been supposed to remove." And: 

"Take away from gold and silver the shield of law contained in these 
various mint regulations in the uses of those metals.., and it would be 
difficult to determine either their value or ultimate use. 

"The unit in money can have no invariable determinate proportion 
to any part of value, that is to say it cannot be fixed in perpetuity to any 
particular quantity of gold and silver or any other commodity." 




1 7e, Civil War 
General Benjamin 
F. Butler watched 
the activities of 
moneychangers 
in his jurisdiction 
for indications of 
the outcomes of 
battles. Later, as 
a Congressman, 
he delivered 
speeches with 
great monetary 
insight, and later 
ran for the 
Presidency on a 
Greenback plat- 
form. 



17 THE GREENBACKS: REAL AMERICAN MONEY 475 



CAMPBELL'S CONVERTIBLE BOND PLAN 

Illinois Congressman Alexander Campbell (1814-1898) put forward 
his convertible bond plan to end special privileges for bankers and unify 
the currency, by making the Greenbacks into a permanent system. 
Campbell's plan would eliminate private bank notes, which were to be 
called in over a six-month period, and be exchanged for the U.S. 
Government bonds that the banks already had deposited at the U.S. 
Treasury as security pledges for their currency, under the 1864 Act. 

Campbell's plan called for all government expenses, including the 
then existing debt, to be paid for with these new Greenbacks. The pro- 
posed greenbacks could be used at any time to buy government bonds, 
the interest and principle of which was to be payable in Greenbacks. -^^ 

BENJAMIN BUTLER UNDERSTOOD 

While most of the Greenback supporters came from the Democratic 
and later the independent parties, there were rare Republicans among 
them. Benjamin Franklin Butler was an articulate defender of the 
Greenbacks. Butler had been bom a Calvinist, but then "rejected 
Calvinism altogether," according to the Dictionary of American 
Biography, At one time he owned the blockade-running sailboat 
"America," which won the first America's Cup race against the British, 

He had been a Civil War general with a reputation for harshness and 
was nicknamed "Butler the Beast." He became a congressman from 
Massachusetts and eventually ran for Governor on the Democratic ticket 
and later for President on an Independent paper money platform. Butler 
had always been a student of finance and had kept a close eye on the 
activities of moneychangers within his military jurisdictions for indica- 
tions of how the war was going. 

In a speech to the House an January 1, 1869, he laid out the position of 
those supporting the Greenback system. The currency, he said, should be: 

"Uniform, sound, cheap, stable and elastic." He warned that the 
attempts by bankers to change the law to force payment of government 
bonds in gold would "cause the greatest depreciation of values in every 
[type] of property except debts held against the government and indi- 
viduals. Every bond and note would appreciate say 30%. All other prop- 
erty would depreciate the same amount." 

He also attacked the proposals to make the Greenbacks themselves 
convertible to gold, and denounced the supposed advantages of such a move. 

Butler made it clear he was not promoting inflation: 

"Let no man say that I desire to establish or perpetuate a depreciated 



476 The Lost Science Of Money 



currency. I think I have proposed a currency as valuable as gold and for 
all purposes of a circulating medium, better than gold... But what I desire 
is that the currency shall not be redeemable in gold and silver... In other 
words the value of the currency of this country, its volume, its sta- 
bility, the values of all property of the country, shall no longer be at 
the mercy of the panics, the caprice, the speculations, or the needs of 
the bankers of Europe or the traders of Asia,.. 

"My... proposition is to take from the national banks all power to 
issue notes to circulate as money, leaving them as they are now banks of 
deposit, loans and discounts, but not of issue." 

Butler's general proposal for a permanent greenback system followed: 

"The government shall issue an amount equal to its taxes, say $350 
million of certificates of value of convenient denomination... which shall 
be lawful money and legal tender for all debts, public and private, which 
by the law creating them are not made payable in coin and shall be 
receivable for all taxes. ..of every kind whatsoever, to be re-issued at 
pleasure.. .and which shall be receivable for all public loans made to the 
United States... 

"We have divested our government of every trait of the despotism, 
every attribute of the monarchies, and every vestige of the slaveries of 
the Old World, save one, and that is the all controlling, and all absorbing 
power by which masses of the people of all nations of the earth have ever 
been enslaved - coined money... 

"Our patriot fathers, founding a government for themselves on this 
continent carefully eliminated from its framework every attribute of 
monarch and aristocracy, the divine right of kings.. .all save one: they 
retained whether for good or evil, the precious metals.. .as the standard 
by which to measure the property and industry of the new Republic... 

"We marvel that they saw so much but they saw not all things. 

"I stand here therefore for inconvertible paper money, the greenback 
which has fought our battles and saved our country...! stand here for a 
currency by which the business transactions of 40 million people are 
safely and successfully done. ..that money which saved the country in 
war and has given it prosperity and happiness in peace...! stand for that 
money therefore which is by far the better agent and instrument of 
exchange of an enlightened and free people than gold or silver, the 

money alike of barbarian and despot."-^'^ 

This is one of the outstanding speeches of American political history. 
Our research confirms Butler's view of the monetary enslavement of 



17 THE GREENBACKS: REAL AMERICAN MONEY 477 



societies, and noting the historical connection between money and the 
temple organizations of the past as well as the religious organizations 
after the Civil War, we hypothesize a step further into the moral sphere: 
the oriental enslaving tendency of using precious metals, or private 
banker created money, pretending to set up a measuring scale for 
economic values^ is one side of a double edged sword. The other indis- 
pensable side of that sword of enslavement is religious; the influence of 
the Eastern cults on Western hfe, pretending to set up a scale of moral 
values. It is probable that neither edge of the sword can exist for long 
without the other. 

The Civil War crisis quickly exposed the weakness of a money sys- 
tem based on bankers promises; as almost any crisis does. The war also 
highlighted a system that functions in or out of crisis - a money system 
controlled by our government. The Greenbacks demonstrated that gov- 
emment-issued fiat money served the commercial, industrial and fiscal 
needs of the nation even in the middle of warfare. Once again our gov- 
ernment limited the issues to the authorized amounts, in contrast to 
the bankers' capricious issue of their paper notes. 

Against this excellent record, the English school complains that gold 
temporarily rose against the Greenbacks! But tracing the action of vari- 
ous prices, rents and wages we obtain a truer picture of their good per- 
formance. 

Bankers, professors and ministers joined in a concerted attack against 
the Greenbacks, looking to their own interest rather than that of the coun- 
try. Especially noteworthy was the great concern the bankers demonstrat- 
ed to remove this example of government money from circulation, where 
it gave the public a daily lesson in sound "monetary theory". 



Notes to Chapter 1 7 

^ J, G. Randall, The Civil War and Reconstruction, edit. D. David, (Boston: 

Heath & Co, 1937, 2"^^ edition 1961), pp. 3-11. 

^ Studenski & H. E. Kroos, Financial History Of The U.S., (New York: McGraw 

Hill, 1952), pp. 137-8. 

^ E. J. Wilbur and E. P. Eastman, Money - A Treatise on Counterfeit, Altered, and 

Spurious Bank Notes, (Poughkeepsie: Eastman Business College, 1865), pp. 19-20. 

^ Randall, cited above, pp. 12-17. 

^ Randall, cited above, p. 81. 

^ T. P. Kettle, Southern Wealth and Northern Profits, (1860, Univ. of Alabama: 



478 The Lost Science Of Money 



G. & J. Wood, 1965), 

^ Randall, cited above, pp. 81-90. 

^ E. G. Spaulding, A Resource of War, (repr., CN: Greenwood, 1971), p. 37. 

^ Spaulding, cited above, p. 108. 

^^ James Garfield , The Currency Conflict, Atlantic Monthly, vol. 37, p. 220. 

'^ The Collected Works of Abraham Lincoln, edit., R. Easier, (Springfield: Rutgers 

Univ. Press, Abraham Lincoln Assoc, 1953). 

^^ William Graham Sumner, History of the American Currency, (New York: Holt, 

1874), pp.196, 202. 

^^ Sumner, cited above, pp. 221, 226. 

^^ Charles J. Bullock, Monetary History of the U.S., (New York: Macmillan, 

1900), quoting Sydney G. Fisher's 1863 article in the North American Review. 

^^ Bullock, cited above, quoting Henry C. Carey. 

^^ Wilber & Eastman, cited above. 

^'^ Wesley Mitchell, Gold Prices and Wages Under the Greenback System, (Berkeley: 

Univ. Press, 1908). 

^^ Randall, cited above, p. 354. 

^^ Davis Rich Dewey, Financial History of the United States, (New York: 

Longmans Green, 1903), p. 283. 

^^ Studenski & Kroos, cited above, p. 148. 

^^ Randall, cited above, p. 260. 

^^ Eugene M. Lemer, in Milton Friedman's Studies in the Quantity Theory of 

Money, (Univ. of Chicago Press, 1956). Lemer's estimates are now considered high. 

^^ See Richard H. Timberlake, The Origin of Central Banking in the United 

States, (Harvard Univ. Press, 1978), pp. 90-105. 

^"^ Lemer, cited above. 

^^ Charles Arthur Conant, A History of Modern Banks of Issue, (NY: Putnam, 1 909). 

^^ Dewey, cited above, p. 324. 

^^ as quoted by Irwin Unger, The Greenback Era, (Princeton Univ Press, 1964), 

^^ D. S. Tewksbury, The Founding of American Colleges and Universities 

Before the Civil War, (NY: Teachers College, Columbia Univ., 1965), pp. 50-57. 

2^ Randall, cited above, quoting Adelaide Lyons, Religious Defense of Slavery 

in the North, (Durham: Trinity College Historical Society Papers, 1919), p. 5. 

^0 Unger, cited above, pp. 123, 125, 126. 

^^ Kampschulte, I, as quoted by Hartman Grisar in Martin Luther, transl. F.J. 

Eble, (Newman Press, 1955, please see details in our bibliography), p. 430. 

^^ Lyman E. Dewolf, Money - its Use and Abuse, (Chicago: Pigott Webster, 

1869), pp. 33, 170. 

^^ Alexander Campbell, The True Greenback..,, (Chicago, 1868). 

^"^ All Butler quotes from speech to House of Representatives, Congressional 

Globe, 40th congress, 3rd session, 303 ff. 



479 



CHAPTER 18 



1 9TH CENTURY MONETARY 
CRIMES - THE GREAT DE- 
MONETIZATIONS 



"The conspiracy... formed here and in Europe to destroy 

...from three-sevenths to one-half of the metallic money of the 

world, is the most gigantic crime of this or any other age." 

John G. Carlisle, 
U.S. Treasury Secretary 



By 1800 the Bank of England had been operating for over a centu- 
ry, transferring the power and wealth of society to the People of the Bank 
- the bankers and associated "financiers." Though previously sub- 
servient to govemment, they soon came to dominate govemment and 
society by usurping the nation's monetary power. Great concentrations 
of wealth were accumulated through macro usury - the structural misuse 
of society's monetary mechanisms. As this power and privilege was 
immorally gained, so was it irresponsibly used to further pillage soci- 
eties from within and from across national boundaries, utilizing the 

monetary weapons best understood by these miscreants. Thus the 19^*^ 
century witnessed monetary crimes on an immense scale. 

We've traced American developments through the mid- 1860s and 
now examine their intemational context, as so much of what happened 
in the U.S. originated abroad. 

The world was about to witness vast, consciously executed defla- 
tions, starting in England, then Europe's Latin Monetary Union, the 



480 The Lost Science Of Money 



U.S., and finally Japan. While the primary mechanism of deflation was 
the gold standard, each country's situation presented different opportu- 
nities for bankers to reduce the money supply and increase the value of 
the nation's currency units which were owed to them. But first we must 
understand the motive. 

WHY SOME BANKERS DEFLATE 

Ideally (and admittedly oversimplifying), society should expand the 
nation's money supply to keep up with population growth, and the 
growth in commerce and industry, with the value of the unit of currency 

remaining fairly stable, or declining slightly in value over time.^ 

Privately controlled money has no motive to give this optimal resuh. 
It usually starts by over expanding the money supply, causing excessive 
loss in the value of the currency ("inflation" or more accurately, depre- 
ciation of the currency), forcing the nation into debt to those holding the 
monetary power. Historically, the new money is usually created mainly 
for production that will be destroyed in warfare rather than becoming 
additional productive machinery and infrastructure in the society. 

Then when it becomes clear to all that they are harming the curren- 
cy, private control overly restricts or contracts the money supply. This 
increases the value of the currency unit, making it difficult or impossi- 
ble to repay the accumulated private and public debts. This dramatically 
transfers wealth and power from the society as a whole to its wealthiest 
elements, the bankers and other debt holders. 

Of these two private money "games," over-restricfion and deflation 
are by far the worse, directly and indirectly causing severe problems in 
all areas of life. For one thing it keeps large numbers of potentially work- 
ing people unemployed. The loss of these billions of man hours of pro- 
ductive work is never made up; neither is the harm done to the unem- 
ployed and their families. 

Deflations that go out of control also often take the weaker banks 
down, but generally not those that are within the society's controlling 
power structure. 

WORLDWIDE DEMONETIZATION AND DEFLATION MOVES 

The 1849 discovery of gold in California caused panic in some 
financial circles. They feared a repeat of the 1500-1700 AD experience 

A) The Austrian School erroneously asserts that any expansion of a fiat money 
system must lead to growing inflation, and then inevitably to a collapse. But this 
error arises out of their incorrect commodity-like definition of money, and their 
failure to properly distinguish between money, credit, and wealth, as we'll show. 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 481 



where gold and silver lost over 80% of their value and never regained it, 
as the metallic plunder from America poured into Europe as we described in 
Chapter 8. 

In his 1853 book, the Frenchman Michel Chevelier warned readers 
that their bonds would lose value: 

"The probable effects of the increased supply of gold, are now 
assuming a preponderance over all other subjects. The anxious pause of 
curiosity is latent but it is nevertheless felt by everyone. . .In our day we 
seem destined like our fathers of three centuries ago and from the same 

causes to witness the shock and crisis of a universal rise in prices."^ 

He advised that either gold or silver should be demonetized - that 
one of them no longer be sanctioned as money by governments. 

France was suffering from a poor coinage situation with much clip- 
ping and culling. Wise men argued that the coinage was a public institu- 
tion, and urged the enforcement of the existing severe penalties against 
coin clippers, but Chevalier advised his readers to break the law and pick 
out the heavier coins and melt them down. He argued that the problem 
was the government's fault for not maintaining the coinage. This blaming 

of government for the monetary mischief of private persons is not new.-^ 

Save yourself, he advised his readers, and let your neighbors and 
society fall, rather than attempt to remedy the social and economic ills. 

But in fact, nothing was really happening. The new gold production 
was easily being absorbed in money systems, as industrialization pro- 
gressed. Thus Chevelier's odd comment: "It is.. .remarkable that up to this 
time the fall in gold, as compared with silver, has been hardly perceptible." 

Yet Chevelier was taken seriously. The Germanic Confederation 
went so far as to de-monetize gold in the treaty of Vienna in 1857. 
They reversed themselves 14 years later, in 1871, re-monetizing gold 
and de-monetizing silver. 

Chevelier's predictions of the coming inflation never materialized. 
In fact the world was about to be pushed in exactly the opposite direction. 

ENGLAND STARTS THE WORLDWIDE 
DEMONETIZATION OF SILVER 

The primary deflationary technique was to implement a gold stan- 
dard, and to demonetize silver, declaring it not a legal tender for debt 
payments. This had begun in England in May, 1774, when the first legal 
tender law in England limited payments in silver to £25. In June, 1798, 
coinage of silver was suspended at the English Mint and in 1816 a law 



482 The Lost Science Of Money 



limited silver legal tender payments to £2 (see Chapter 12). 

Monetary theorist Henri Cemuschi would later label this "A disas- 
trous and chimerical operation... invented by Lord Liverpool."^ In his 
classic State Theory of Money, George Knapp would observe that: 

"England's reasons for going over to the gold standard have never 

been fully explained."^ 

THE PROBLEMS OF BIMETALLISM 

Bimetallism as then practiced was susceptible to private manipula- 
tion. From about 1825 problems arose once again in Europe out of coin 
clipping and the slightly different gold/silver ratios resulting from the 
differing values assigned to the metals by different nations. "Financiers" 
would export gold and silver back and forth on a large scale to take risk- 
less advantage of these tiny differences in their official values, 

W.A. Shaw's The History of Currency 1252 to 1896 clearly 
described the process by focusing on the activities of speculators: 

"Such is the nature of the bimetallic law that any overshooting of the 
ratio on no matter which side - in favor of silver or in favor of gold - 
establishes a differentiation, and the differentiation at once gives to the one 
metal a fulcrum or lever point - a purchasing power - against the other, and 
the undervalued metal, whichever it is, at once tends to disappear." 

Shaw noted that in centuries of coinage laws: 

"There is no idea of separating the two metals. . .there is no intention 
to declare a ratio; there is no conception of bullion apart from coin... The 
advantage which was to be derived from a trade in bullion, and from an 
understanding of the effects of differently prevailing ratios in different 
countries, was known only to the Jew and Italian. They plied their trade 
in secret, and the legislature was only apprised of the result by sudden- 
ly finding a slipping away and dearth of coinage..." 

The real problem to the nation under such attack was that: 

"The danger of arbitrage transactions to the medieval legislator lay 
in the fact that they stripped the country, which suffered from them, not 
merely of a bullion reserve, but of her actual currency, and rendered even 
internal trade impossible."^ 



THE ANCIENT RATIO MECHANISM STRIKES 
ONE LAST TIME 

An added threat to Europe was the ancient disparity in gold/silver 

ratios between Europe and Asia, described in Chapter 3, which had 

plagued monetary systems from antiquity, and once again demonstrated 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 483 



its power to affect modem capitalism. 

This will be the last time we see this mechanism having a substan- 
tial monetary impact on the West, for India had been conquered by the 
British and in 1821 Britain had raised the ratio in India to 15 to 1. 
However, from 1852 only silver coins were legal tender in India, reflect- 
ing the higher esteem in which the Indian populace held silver. This 
drew silver from Europe. 

France was bimetallic, but mainly used silver money from 1803 to 
about 1848. Belgium, which had separated from Holland in 1830, was 
using French money for nearly all (87%) of its circulation by 1860. 
Switzerland also used France's money system and had made it legal ten- 
der. Italy also adopted the French system in 1862, abandoning inde- 
pendent principality money. 

THE LATIN MONETARY UNION DEMONETIZES SILVER 

In 1858 an international commission was formed to study and rem- 
edy the monetary problems. It suggested tariffs on exporting silver and 
recommended harsh punishment of illegal money speculation. None of its 
proposals were acted on and silver exports to India grew: 91 million Rupees 

in 1862; 126 million Rupees in 1863; and 129 miUion Rupees in 1864.^ 

This Commission evolved into the Latin Monetary Union (France, 
Switzerland, Belgium, Italy, and Greece ) and it quickly shifted away 

from gold demonetization toward silver demonetization, from 1865-73.'^ 

Since there were approximately equally valued amounts of gold and 
silver coinage available for monetary purposes in the West, demonetiz- 
ing either metal would eliminate about one half the West's metallic 
money supply. The impact on the wealthy bond holders in all countries 
would be a large gain of money and power for decades as the value of 
the currency unit rose. 

By 1867 the Latin Monetary Union's conference included most 
European countries, the U.S. and Russia; 19 in all. Significantly, 
England never joined this monetary union. 

Germany would finally be the catalyst for action. She warred with 
France in 1870 and won. Bismarck extracted an unprecedented war 
indemnity of 5 billion Francs. Having just demonetized gold in 1857, 
Germany reversed course in December, 1871 and went onto the gold 
standard in order to receive payment from France in gold rather than sil- 
ver. France had to dump silver to get the gold. 

The new German monetary system required German banks to sell 



484 The Lost Science Of Money 



their silver by February, 1873, adding to the market pressure on silver.^ 
Finally Germany demonetized silver altogether in July, 1873, leaving 
France as the only major European nation still using silver money. H. 
Parker Willis ridiculed France's long standing use of both gold and sil- 
ver money from medieval times as a "bimetallic cult." 

In 1 873 France was forced to limit silver coinage; in 1 876 she canceled 
her law on free coinage of silver; in 1 878 she agreed to redeem her silver 
coins in gold if requested, and agreed to stop minting new 5 Franc silver 
coins. For practical purposes all of Europe was now on a gold standard. 

THE DEFLATION EVEN REACHES JAPAN 

The worldwide deflationary attack reached Japan when the Central 
Bank of Japan was established in October, 1882 and immediately adopt- 
ed a deflationary course: 

"Entering upon a policy of contraction in 1882, the government 
firmly persisted in its measures," wrote Masayoshi Takaki in The 
History of Japanese Paper Currency, "But this wholesome end was not 
and could not be this rapidly attained without great disturbances in all 

other business,"^ and: 

"With the fall in prices, distress and desolation extended over the 
land, and millions of people who had supposed themselves to be on the 
high road to wealth suddenly found poverty staring them in the face, 
while exacting creditors an all sides demanded the liquidation of debts." 

Two points deserve special mention: First, the establishment of a 
Japanese central bank under the advice of Finance Minister Ito Hirobumi 
did not start with the normal expansion phase as in all other such central 
bank foundings. Hirobumi had been smuggled out of Japan with four 
other students by the Jardine Matheson company in 1863 to study in 
London. The Bank was founded after he returned from a U.S. visit to 
study the American money system. 

Japan's central Bank was privately owned, under the dominance of 
the Mitsui group, the world's oldest commercial enterprise, established 
in 1616 when its founder Sokubei Takatoshi renounced his Samurai sta- 
tus to become a merchant. By 1882 it was the most powerful organiza- 
tion in Japan and its leader was an enigmatic figure, Minomura 
Rizeamon, known as the "Man From Nowhere." He kept Japan in line 

with the prevailing worldwide deflationary policy. ^^ 

Second, the deflation was accomplished without using the gold stan- 
dard as the normal deflationary agent, but by withdrawing the legal 



18 1 9TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 485 



tender "Han satsu" - the paper currencies that had been issued by about 
250 clans, starting from the 1600s. It was not until 1899 that Japan was 
effectively on a gold standard. 

HALF THE WORLD'S METALLIC MONEY DESTROYED 

Alexander Del Mar, estimated that the silver demonetizations cut 

Europe's money supply in half: 

"Mr. Carlisle (later Secretary of the Treasury, 1893-97) said in the 

House of Representatives, February 2P^ 1878, 'The conspiracy which 
seems to have been formed here and in Europe to destroy by legislation 
and otherwise, from three-sevenths to one-half of the metallic money of 

the world, is the most gigantic crime of this or any other age.'"^^ 

The literature of the time indicates that Americans, with their wider 
monetary heritage, were more aware or at least more vocal than the 
Europeans about the harmful effects of these reductions in the metallic 
money supply. 

These demonetization episodes demonstrate that the financiers' 
insistence on gold or silver for money was not part of an honestly held, 
though incorrect, monetary viewpoint, that the precious metals were 
really money. Its purpose was not to optimize production, trade, employ- 
ment, or the progress of humanity. It was in large part a ruse by which 
they assured the monetary power would remain in their hands. The 
episodes show that the old gold standard was not an automatic market 
mechanism, or one to be allowed to depend on natural developments 
such as new gold finds. It was a controlled and managed system - man- 
aged for the benefit of its managers. 

GROWING AMERICAN POWER 

America was foreseen to become a superpower as early as the 1700s 
by Philip Cantillon (see Chapter 12). In the early 1800s Alexis De 
Tocqueville predicted America would become the ruler of the seas. 
Europe's financial establishment would probably have preferred to deal 
with an America divided into North and South, which could more easi- 
ly balance against one another by European intrigue. But President 
Lincoln made the difficult and bloody decision to fight: 

"From the outset of the war, therefore, the great body of the aristocra- 
cy in England was anxious to see the U.S. go to pieces," wrote RandalL^^ 

Elements in England, France and Austria intrigued against the North. 
For a time England allowed warships to be constructed for the South, 
though it was a circumvention of her laws. The only European power to 



486 The Lost Science Of Money 



support the North was Russia, which sent a fleet of warships to its aid. 

Disaster struck England when it became clear the American union 
would be preserved: 

"It might have been thought that the ship carrying England and her 
fortune had suddenly sprung a leak," wrote Woloski in August, 1866, Sir 
Strafford Northcote called it a "run upon England" as her markets 

crashed on Black Friday, May 11, 1866.^-^ 

BANKERS FEAR THE GREENBACK EXAMPLE 

Issuing the Greenbacks was based on legislative authorization rather 
than the caprice of bankers. It required no debt or interest payments. A 
specific number were authorized and it was never exceeded. 

"In 1868 [there was] strong sentiment in favor of the retention of the 
greenbacks as a permanent feature of our monetary system," wrote 
Bullock. 14 

This currency was very popular among Americans, and very unpop- 
ular among bankers, including foreign bankers, who were concerned that 
their own nations would observe the benefits of a well operated govern- 
ment money system and follow the American example. 

To disrupt this progressive system the bankers would launch three 
deflationary attacks on America. 

THE FIRST ATTACK - AGAINST THE GREENBACK BONDS 

To help pay Civil War expenses the U.S. had issued bonds that were 

purchased with Greenbacks and were supposed to be redeemed in 

Greenbacks, but which paid interest in gold. 

Del Mar noted that after about 1 to $1 .5 billion worth of these bonds 

had been purchased by what he called "universal financiers" at half 

price, they began agitating politically to have them redeemed for gold 

which was then trading (in 1868) about 30% over the Greenback. ^^ 

The markets had always treated the bonds as redeemable in paper 
Greenbacks: 

"At the peak of the premium on gold (mid 1 864) when railroad 
bonds were yielding less than 6%, the gold yield on the 6% government 
bonds of 1881 exceeded 16%. ...the bonds were being treated as if 
they were predominantly paper bonds," wrote Friedman and 

Schwartz. ^^ 

The soldiers and sailors were paid in Greenbacks for their sweat, 
blood and shattered bodies. Nearly two-thirds of a million died. But the 
bondholders, supported by preacher and professor, pretended that the 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 487 



honor of the United States required that they be paid in gold! They agi- 
tated and conspired to have the rules changed. 

Payment in gold would give the English Baron James Rothschild, 
his clients, and other bankers, two undeserved benefits: first - the obvi- 
ous 30% gain; second, the U.S. did not have the gold and would have to 
borrow it from the only possible source - Baron Rothschild and the other 
bankers, and their wealthy clients in Europe. The U.S. would then have 
to pay them interest on that gold loan. 

The gold would ultimately be transferred from Baron Rothschild 
and other bondholders to Baron Rothschild and other bondholders; but 
the United States people would be financially raped in the process. Our 
own Government's laws would be manipulated to support this demon- 
strably pernicious gold money system, helping to keep it dominant over 
humanity by paying them interest on their sterile gold holdings, which, 
like the ancient temple cults, they probably hoarded in useless oversup- 
ply (see chapter 1). 

Since the physical gold would go from the bankers to the bankers, 
it's clear that what was important to them about gold was not any "intrin- 
sic" qualities, but how they could use it to fleece American society. 

We've singled out Baron Rothschild for a reason: it is possible to 
trace the actions of his intermediary in America (his only primary agent 
here), August Belmont, in the Greenback political struggle. Belmont was 
a major factor in the Democratic Party of that day. 

BANKERS SABOTAGE THE DEMOCRATS IN 
THE 1868 PRESIDENTIAL RACE 

In order for the "financiers" to succeed in their attacks on America's 
money system, it was necessary to sabotage the Democratic Party - the 
logical defender of the average citizen. The Republicans could already 
be counted on as the bankers party. The Democratic candidate, Horatio 
Seymour, was undermined thanks to Belmont's position as Chairman of 
the party's National Democratic Executive Committee. Belmont had the 
assistance of Manton Marble's The P^r/J newspaper in New York, which 
according to Del Mar was beholden to Belmont financially. We have a 
unique picture of how this occurred because Alexander Del Mar was a par- 
ticipant in the actual events and recounted them in his book Monetary 

Crimes}^ 

The Democratic Party platform opposed redeeming the bonds in 
coinage, while their candidate Seymour personally favored it. But the 



488 The Lost Science Of Money 



conspirators decided to take no chances and destroyed Seymour. The 
World, according to Del Mar, was seen as the Democrats' paper, specif- 
ically pledged from 1867 to support the Greenbacks. Out of the blue, on 
October 15, 1868, The World advised dropping Democratic candidate 
Seymour, claiming that he couldn't win. 

At an emergency meeting of Democratic leaders, called the next day 




18a. Alexander Del Mar (1836-1926), the greatest monetary historian 
of all time. His brilliance was ignored while nonsense was advanced as 
"political economy" by the English school. Del Mar's monetary con- 
cepts provide the weapons needed to protect humanity from 

the predations of the Adam Smith crowd. 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 489 



at the office of the National Intelligencer magazine in Washington, Del 
Mar, who had been an owner of the magazine, was in attendance. He 
relates in detail how August Belmont refused to disavow The World's 
article and was inexplicably unavailable - incommunicado - for several 
days at this crucial moment: 

"It was as though the general of a division had gone over to the 
enemy on the eve of an assured victory," wrote Del Mar. 

Seymour still got 2.6 million votes, compared to 2.9 million for 

Republican Ulysses S. Grant. ^^ Grant's first act on taking office in 
March, 1869 was signing the bankers' so-called Credit Strengthening 
Act, pledging payment of Government bonds in gold, which his prede- 
cessor Johnson had vetoed. 

The ^r/J newspaper then became magically transformed overnight 
into a hard money publication, supporting conservative candidates in the 
next election. Irwin linger observed that: 

"In Manton Marble's New York World the eastern conservatives had 
a powerful propaganda vehicle while August Belmont's Rothschild mil- 
lions would provide unlimited resources for effective political action."^^ 

THE GREENBACK AND POPULIST PARTIES 
FORM IN REACTION 

When it became apparent that the Democratic Party was blocked 
from serving as the vehicle for establishing a permanent Greenback sys- 
tem, several new populist parties formed to pursue this goal. Eventually 
these parties got a majority of the people on their side, but the financiers 
were able to keep them splintered and dominate the political process 
with money. 

THE SECOND ATTACK - THE ATTEMPTS TO 
REMOVE THE GREENBACKS 

In December 1865 Treasury Secretary McCulloch had put through a 
law to gradually retire the Greenbacks (it passed 144 to 6 in the House), 
The act provided that $10 million of Greenbacks received in payment to 
the Government would be retired (destroyed) over six months, and up to 
$4 million more per month thereafter. 

Despite the lopsided vote favoring the act, it had been extremely 
unpopular, since the Treasury should have been moving in exactly the 
opposite direction: creating more money to ease the extra monetary bur- 
den placed on the Union by the re-inclusion of the Southern States' mon- 
etary needs in the nation's money system when the Civil War ended. 



490 The Lost Science Of Money 



To make matters worse, instead of acting gradually McCuUoch 
retired no Greenbacks for almost six months and then retired $10 million 
all at once, creating great distress and causing business failures in the 

Northern states to skyrocket in 1867:^^ 

Northern Business Failures 

1860 2,733 1864 520 

1861 5,935 1865 530 

1862 1,652 1866 632 

1863 495 1867 2,386 

McCuUoch's pet Act was suspended in February 1868, after $44 

million in Greenbacks had been retired, many to be re-issued later. 

Even businessmen began to understand. George Morgan wrote: 

"Businessmen, generally are awakening to the fact that the real issue 

is between dead capital on the one side and active capital and labor on 

the other. They are beginning to understand that specie resumption and 

bankruptcy mean the same thing."^^ 

The New York Board of Trade was organized in opposition to the 

New York Chamber of Commerce, in order to support the Greenbacks.^^ 
The attempt to get rid of the Greenbacks through the law courts 

failed in 1871 when the Supreme Court, in Knox vs. Lee, ruled that the 

Greenbacks were legal in wartime. Then in 1884, in Juilliard vs. 

Greenman, the Court ruled that Congress had the power to create them 

in peacetime as well. 

The financiers also moved politically to force the redemption of the 

entire $360 million outstanding Greenbacks into gold. 

ENGLAND SENDS "EXPERTS" TO ATTACK 
THE GREENBACKS 

In 1869 Walter Bagehot, an English poHtical economist, wrote a 
short book published by the Economist which pretended to propose a 
union of American and British currencies. The book reads strangely. Its 
proposal wasn't meant to be taken seriously; it is mostly fluff: 

"First it must be founded on a single standard not a double. Second 

it must have a high gold unit."^^ 

The only points that stand out are the emphasis on gold and the 
smearing of the U.S. Government. The book's anti-governmental venom 
is as strident as the 1 990s variety. But at that time there was little public 
debt, no income tax, no welfare and practically no government! So the 
book's real lesson may be to indicate the largely psychological nature of 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 491 



the attacks on government; attacks supported and on behalf of powerful 
financial interests. 

Bagehot condemned the Greenbacks and the United States: 

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

Such anthropomorphizing of government, or pretending the 
government has desires and attributes like a person, is an essen- 
tial element of the financiers attack on their main potential oppo- 
nent - our government. 

Another English "expert" sent on tour to befuddle American minds 
was Bonamy Price, professor of political economy at Oxford University. 
We met him in Chapter 13, as the former mental patient who was given 
Thorold Roger's professorship at Oxford, when Rogers proved that 
Englishmen were in dreadful economic shape. You judge whether Price 

was rational in this October 1, 1874 interview with the Daily Tribune:^"^ 
Price : "Inconvertible currency is so vicious, so radically bad 

that I feel no interest in makeshifts. There is only one step to be taken - 
amputation. 

The Reporter : 'That is to sav contraction?" 

Price : "That is not contraction, but the extinction of inconvert- 

ible paper. Anything short of the extinction of the currency is so radical- 
ly and fundamentally bad that I have no interest in comparing the rela- 
tive goodness or badness of any expedients." 

The reporter: asks Price whether the U.S. Treasury's stoppage on 
redeeming paper money was not similar to the Bank of England's stop- 
ping the redemption of its paper money. 

Price: "Ah but the motive is different. The inconvertible cur- 

rency in your country is a tax. By means of this species of paper [paper 
money] the government has got hold of the property of the nation, and it 
has kept it. The property is gone and the public in the place of it has got 
a species of paper [paper money]. It is the government's business to 
restore the property," 

Reporter : "Who should issue die currency, the government or the banks?" 
Price : "Who the issuer is, is of no consequence as to the action 

of the currency... (and from a later answer:).. J believe the intermediate 
agency of a private corporation is the true method." 

Bonamy Price, an obvious shill for the bankers, doesn't explain why 
it's a tax and theft of property when the government does it but is not 



492 The Lost Science Of Money 



when a private company does it. Again we see the ploy of treating the 
government as a person rather than as society, 

THE FIRST "COMMUNIST" SCARE IN AMERICA 

The Republican Party made its first use of the "communist menace" 

scare in an attempt to panic the voters on October 12, 1875. The 

Cincinnatti Daily Gazette warned: 

"A vote for the Democratic ticket is encouragement... to communist 

revolution."^^ 

They accused the Democrats and populist groups of starting class 
strife. But the literature indicates these folk were only trying to defend 
against the class warfare that financial elements had already started. The 
positions taken by the real socialists and communists of the time are very 
instructive - they attacked the Greenbacks: 

"Indeed within the ranks of labor, the only audible sour note came 
fi*om the socialists. Long opposed to greenbackerism as a mere social 
palliative as recently as April 1876, they had tried to defeat the 

Greenback platform proposed at the Pittsburgh National Labor convention... "^^ 
The Marxist Labor Standard publication attacked the independent 

Greenback parties: 

"The disease from which we suffer is not the want of currency, but 

a planless system of production."^^ 

THE FINANCIAL COLLAPSE OF 1873 

At the end of August, 1873 large amounts of cash were withdrawn 
from New York banks. Jay Cook's banking house went under on 
September 18 and the U.S. markets tumbled on September 20. The New 
York Stock Exchange was forced to close. The collapse was blamed on 
speculation in railroad stocks: 

"The railroad boom collapsed abruptly in the fall of 1873 and hard 
times settled all over the nation. The blow caught the country by sur- 
prise," wrote Unger.^^ 

However, the demonetization of silver occurred at that time and 
major speculators would have understood its deflationary consequences. 

With the country reeling from the collapse, on April 22, 1 874 an 
"inflation bill" was passed that would have increased Greenbacks in cir- 
culation to $400 million, and national banknote circulation to $400 mil- 
lion as well (from 340 million). But in a surprise move. President Grant 
inexplicably vetoed the bill and bribery was charged. Unger concluded: 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 493 



"In a word, the shift of public opinion is not great enough to account 
for (the veto). Nothing in the press or surviving political correspondence 
suggests a buildup of hard money strength." 

Grant's veto did great damage to the Republican party. They lost 
control of congress in the 1874 elections and it was this 1874 lame duck 
congressional session that enacted the Resumption Act to redeem the 
Greenbacks in gold, 

THE RESUMPTION ACT TO REDEEM 
GREENBACKS IN GOLD 

The original intent was to assert the dominance of gold as the mon- 
etary base, but, as finally enacted, the Resumption Act was not a defla- 
tionary measure. While Greenbacks would be redeemable for gold, for 
every $80 of Greenbacks retired, $100 in bank currency was to be issued. 
The act would substitute bankers' paper notes for the government money. 

The act required that on January 1, 1879 the Treasury would redeem 
in coin all Greenbacks offered in amounts not less than $50, The act lim- 
ited the number of Greenbacks outstanding to $382 million. It also 
increased the private banks' monetary powers under the National 
Banking Act in several ways, primarily increasing the amount of cur- 
rency they could print, and reducing their reserve requirements. 

Yet there was so much popular sentiment for the Greenback that in 
the 1876 congressional session the Resumption Act looked like it would 

be repealed.^^ 

The Republicans adopted a blocking strategy. Speaker of the House 
Michael Kerr, after consulting with Manton Marble, packed the Banking 
and Currency committee and the Ways and Means committee with gold 
supporters: 

"These moves delayed the legislation for weeks. Bills aimed at 
repeal disappeared into committee pidgeon-holes" and though there was 
a small majority in the house to repeal resumption, "Attempts to bypass 

the committees failed repeatedly," wrote Unger.^^ 

Finally in late 1877 the House did pass a bill to repeal the 
Resumption law, but the bill was defeated in the Senate by one vote. 

BORROWING GOLD FOR THE RESUMPTION 

It was thought that $120-30 million total gold reserves - about 40% 
of the outstanding Greenbacks - would be needed for the Resumption. 
But when John Sherman became Secretary of the Treasury in 1877, the 
Treasury held only about $25 million in gold. 



494 The Lost Science Of Money 



Sherman was negotiating to borrow a total of $95.5 million in gold, 
much of it from the European bankers: Seligman Brothers; Morton Bliss 
and Co.; August Belmont and Co. acting on behalf of the Rothchilds; 
and Drexel Morgan and Co. representing Junius Morgan of London. 

The American bankers became upset at being left out of participa- 
tion in that syndicate, but they were unable to match the terms offered 
by the powerful international group. So Sherman signed on with the 
international syndicate. 

During the negotiations when a rumor circulated that President 
Hayes favored paying the bonds in silver, "The syndicate bankers were 
frantic at the turn of events," wrote Unger, 

THE SAME OLD GOLD STORY 

The progress of this bond offering indicates that the syndicate and 
its clients had far more gold than was useful to them: 

"...Although the contract called for only $10 million to be taken in 
the first month, in 3 weeks some $20 million were sold at above 102, and 
early in May the syndicate anticipated its June subscription. By the end of 

May, seven months before the contract expired, the books were closed,"^^ 
Through most of 1877 gold had been 4% above par, at $104 in 
Greenbacks for $100 of gold. After March 1878 it was only 12 cents 
over par. By November, 1878, through these gold bond sales, the 
Treasury held $141.9 million in gold. 

Did the nation really need the foreigners' gold? Or did their gold 
need the support of our nation, through the passage of laws that gave 
gold a privileged position? These laws were passed through financial 
power and bribery against the wishes of a majority of the citizens. 

In this episode you can see an element of what we hypothesized in 
Chapter 1 on the initial monetization of gold by the ancient temple cults, 
because they held so much of it. What would the syndicate have done 
with their gold and its storage costs, if the U.S. couldn't be manipu- 
lated to pay them interest on it? That the U.S. didn't really need any 
of their gold was soon demonstrated on resumption day, 

THE RESUMPTION IS A NON EVENT 

The Resumption Act had designated New York City as the place for 
the event. The doors of the sub treasury office opened at 10 AM. By 
close of the business day only $132,000 in Greenbacks were redeemed 
and $400,000 in gold was deposited for the more convenient bank paper! 
It was the same story at the banks involved in the resumption - a giant 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 495 



anti-climax. 

Some bankers may have believed their own propaganda against the 
Greenbacks; but the Greenbacks functioned well and had been near par- 
ity with gold for some time. Their good performance was one reason 
the leading financiers wanted them removed from circulation, as the 
Greenbacks gave a daily lesson in practical monetary theory. 

The bankers failed in this because in the back-and-forth struggle a 
law had been passed in 1878 requiring that all Greenbacks that were 
redeemed must be re-issued, so that theoretically $346 million 
Greenbacks remain current U.S. money to this day. 

THE 3RD ATTACK - THE "SECRET" DEMONETIZATION 
OF SILVER 

Monetary legislation is often passed under bizarre circumstances, 
but this episode is among the strangest. While the Greenback battles 
were raging, silver was quietly demonetized by two laws, a year apart. 
If one were to read either of the laws separately, you could not tell that 
silver had been demonetized for payments over $5. 

First there was an act of February 12, 1873 which neglected to name 
the silver dollar as one of the "currently minted" U.S. silver coins, 
instead substituting the "trade dollar," a special silver coin minted for 
trade with China. Then in June 1874, there was a revision of the coinage 
laws, a long act with 67 parts. Section 3,586 contained a phrase pertaining 
to all silver coinage not specified in the 1873 law as "currently minted:" 

"The ['other'] silver coins of the United States shall be legal tender at 
their nominal value for any amount not exceeding $5 in any one payment." 

THE "DISCOVERY" OF THE "CRIME OF 1873" 

Incredible as it may seem, the fact that silver coinage had thus been 
demonetized did not become generally known to the nation for almost 
two years when on March 2, 1876, George Weston's letter to the editor 
of the Boston Globe pointed it out! An uproar soon arose over the 
"Crime of 1873." 

Apparently even President Grant was unaware of what had hap- 
pened. Del Mar noted: 

"The most striking evidence of the public inattention to the effect of 
the coinage act of 1873, is that President Grant who signed it, had no 
knowledge of what it really accomplished in demonetizing silver and 
was still uninformed as late as October 3, 1873, as proved by his letter 
...(in which) he wonders why silver is not brought to the mints and 



496 The Lost Science Of Money 




18b. Parisian banker, Henri Cernuschi, the brilliant monetary thinker, was 
probably responsible for helping Del Mar get off the false path of met- 
allism, and concentrate on the legal nature of money. The honesty, accura- 
cy and foresight of Cernuschi's testimony to the 1876 U.S. Monetary 
Commission made a very deep impression upon the young Del Mar. 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 497 



coined into money!"^^. 

Supporters of the act insisted that the laws were passed openly. 
Bullock wrote: 

"After deliberating upon the subject during five consecutive ses- 
sions and securing expert advice. Congress passed the 'act of 1873.' This 
law. . .dropped the obsolete silver dollar from the list of authorized coins. 
Its deliberate intention as stated repeatedly in Congress was to establish 
legally the single gold standard. In 1876 it was discovered that a crime 

had been committed in 1873."^-^ 

William G. Sumner, playing a word game with the $5 limit wrote: 
"The law of 1 873 never threw a dollar of silver or other currency out 
of circulation. We hear it asserted that 'demonetization' destroyed half 
the people's money.. .no one of the other demonetizations, which took 

place in Europe at about the same time, diminished the money in use."^"^ 

But the $5 limit meant silver could be refused for any commercial 
transactions. Gold or paper money would have to be found for payment, 
and their value would be enhanced. In 1873 there was about $14 million 
in silver coinage and about $63 million in gold coin circulating. But 
there were also about $346 million Greenbacks circulating, along with at 
least $600 million in bank created paper money and deposits (including 
$329 million in national bank notes, and $ 1 .4 million in state bank notes, 
according to official government statistics, Series X 410-419). 

The amounts of silver involved may not seem significant, but it 
was important in the context of the requirement to make Greenback 
bonds, and later the greenbacks themselves, payable in "coinage," 
which would now mean only gold coinage, because it removed the 
possibility to mine new silver ore to be coined and used for the debt and 
redemption payments. 

Del Mar wrote: 

"The silver dollar was dropped purely and simply to enhance the 
value of the gold dollar and thus to double the debt of the American peo- 
ple. This was the motive and there was no other motive. The proof is that 
the very same men, I mean the identical individuals, who betrayed their 
party in 1868 and who doubled the public indebtedness by promoting the 
act of March 1869, assisted to again double the debt by promoting the 
surreptitious mint codification act of February 12, 1873, and June 
1874.. .though Congress was assured by its revision committee that no 
new matter had been introduced in them. The legislation of 1865-1874 



498 The Lost Science Of Money 



was no academic experiment but a sordid crime hatched abroad and 
brought into this country by the treacherous people who governed the 
utterances of the New York World [newspaper]. "^^ 

Del Mar is referring to August Belmont, Manton Marble, and their 
financial backer, Baron Rothschild. 

THE 1876 U.S. MONETARY COMMISSION INVESTIGATION 

Del Mar, who had been in charge of the U.S. Bureau of Statistics, 
organized the 1876 U.S. Monetary Commission to investigate the de- 
monetization, receiving testimony from a worldwide group of experts. 
The wisest was Henri Cemuschi (1821-1896), a Parisian Jurist and 
banker, who had studied at the University of Pavia. Cemuschi was the 
inventor of the term "bimetallism." Parts of his testimony sum up the 
common sense view of the situation: 

"The act when passed was not read except by title. ..carried through 
without the knowledge or observation of the country... it was neither 
demanded by the resolutions of public meetings or political conventions 
nor asked for in petitions from the people ... The press of the country was 
entirely unobservant or silent when it was pending, and when it passed. 
If it had been generally known that any such vital question as the demon- 
etization of silver was lurking in the bill it would have aroused the most 
wide spreading discussion throughout the country... No adequate or sat- 
isfactory reasons for the enactment of the laws of 1873-74 de-monetiz- 
ing silver, have ever been given."^^ 

In stark contrast, August Belmont's "testimony" for the commission 
was a paltry one page letter that bordered on contempt. He ignored the 
issue, saying that gold, being the standard of value, cannot rise or fall, 
and its abundance or scarcity causes a rise or fall in all other prices. He 
told them to get better statistics from someone else. He blamed the fall 
of silver to its being demonetized abroad, and then concluded that our 
problems were local, and the market collapse of 1873 resulted from 

over-trading in railroad stocks. ^^ 

THE CRIME OF 1873 IS A HOT ISSUE FOR DECADES 

Emotions on the issue were so strong that the debate lasted well into 
the 1890s! Innumerable books and pamphlets flooded the country. Most 
popular was Coin s Financial School, by W. H. Harvey, which sold an 
amazing 250,000 copies. In the book, Harvey's fictitious lecturer, Mr, 
Coin, attacked economists, bankers and professors by name so forcefully, 
that a number of them actually answered in the press. 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 499 



Harvey viewed England as the source of the problem: 
"Whenever property interests and humanity have come in conflict, 
England has ever been the enemy of human liberty... (If our silver 
coinage cannot succeed) let us attach England to the United States and 
blot her name out from among the nations of the World... If England 
wages a war on humanity, the U.S. should declare an industrial war on 

England," and so on.^^ 

Harvey beheved the U.S. could monetize silver alone, against the 
world, and that France would follow us. But he was dead wrong. 

ENGLISH INTERFERENCE WITH THE U.S. MINT LAWS 

Harvey and others were furious when it was somehow discovered 
that in 1872, Hooper, Chairman of the Committee on Banking and 
Currency, sent a copy of the proposed U.S. coinage bill to Alfred 
Latham, Chairman of the Bank of England, for comment from one of his 
employees, Ernest Seyd. 

Seyd had written a book on the subject called Suggestions, For some 
reason he ended up in America, being accused by anonymous writers 
who made unsubstantiated claims that Seyd admitted to having brought 
100,000 pounds with him to bribe Congress! As late as 1893 silver advo- 
cates in Congress focused on his supposed activities against silver, 



18c, August Belmont 
(1816 - 1820), the main 
representative of the 
Rothschild interest in 
America, was at the 
center of several major 
monetary/political 
schemes to harm the 
general population and 
favor the financiers, 
over a period of about 
two and a half decades. 
His testimony to the 
1876 U.S. Monetary 
Commission bordered 
on contempt. 




500 The Lost Science Of Money 



of 20 years earlier, without coming up with anything concrete. Reading 
the Congressional Record, 53rd Congress, August 18, 1893, p. 474-76, 
584-89, and p. 1059, it looks like a lot of smoke; which is not to say that 
Seyd was not purposely provocative, possibly an agent provocateur. 

THE SILVER DIVERSION 

Readers will note that we are no longer on our central issue, but are 
arguing silver. Now that's exactly what happened to the populists also! 

Consider how the silver issue was used to derail the populists, and 
obscure the real monetary question of who should control the money 
system - private bankers or the government. Monetary control had been 
the main focus of the Greenback movement. It is not out of the realm 
of possibility that the outrageous method of silver demonetization 
was a calculated move to enrage and disrupt and derail the move- 
ment. The "secret" demonetization of silver was like the matador 
waving a red flag in front of a bull. After all, the U.S. had coined 

roughly only 8 million silver dollars from 1792 to l%13?^ 

This silver diversion had two main effects: 

l)It shifted the focus away from the real monetary issue, which was 
who should control the money system, into useless arguments over 
bimetallism. 

2) America would re-monetize silver, walking into a well-laid mon- 
etary trap, 

AMERICA RE-MONETIZES SILVER AGAINST THE WORLD 

Cemuschi had warned them in his testimony: 

"In my opinion no country can coin silver alone. . .it is better to main- 
tain the paper-money (Greenbacks) than to issue a national currency of 
silver, if the other nations do not use that metal as money." 

But even the young Alexander Del Mar was swept up in the outraged 
emotion created by the "Crime of 73," and he drafted the silver re-mon- 
etization bill It led the U.S. Government into a highly ill-advised policy 
of re-monetizing silver against the World, while the U.S. was already 
committed to redeem bonds and Greenbacks in gold. 

The Bland bill of February 16, 1878 to re-monetize silver passed 
205 to 72. It called for the coinage of from 2 to 4 million dollars per month 
of new silver dollars. President Hayes' veto of the bill was overridden. 
This law by itself wasn't so dangerous to America, because the new sil- 
ver could come fi*om American mines, rather than Europeans unloading 
their recently demonetized silver hoards. Over $378 million new silver 



18 i9TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 501 



dollars were coined through the Bland Allison Act; close to the number 
of Greenbacks outstanding. 

But the 1890 Sherman Act was a different matter. It required the 
U.S. to purchase 4.5 milHon ounces of silver per month. That was about 
17 million more ounces per year than American mines could produce. 

The Sherman Act thereby allowed European financiers to exchange 
their abundant demonetized silver hoards for American gold at the fixed 
artificially advantageous price of the American 16 to 1 gold/silver ratio, 
about $1.29 per ounce of silver. The U.S. paid for the silver with 
Treasury notes, which the Europeans quickly redeemed for gold. 
Furthermore, as the process went on, America would be forced to bor- 
row back the same gold at interest, to meet continuing European 
redemption of notes and bonds and silver, for gold! This drastically pres- 
sured the Treasury's gold reserves: 

"The withdrawal of gold from the U.S. Treasury pursued an almost 
uninterrupted course from the moment of the enactment of the Sherman 
silver law until the outbreak of the (1893) panic," wrote Charles A. 
Conant. The net gold exportations were: 1891 - $68.1 million; 

1892 - only $ .5 million; 1893 - $87.5 million.^^ 

At an 1892 monetary conference, at which the U.S. was urging 
bimetallism, Alfred de Rothschild attempted to fleece European govern- 
ments as well as American. He proposed that European states buy £5 
million of silver annually, on condition that the Americans continue to 

buy 54 million ounces per year! The plan was not accepted."^^ 

The U.S. failed to prod France or any other European nation into re- 
monetizing silver. All hope of accompHshing this ended in May, 1893, 
when the British Government in India ceased the free coinage of silver, 
which closed the market for one-third of the silver production of the 
world. 

It took three years for America to repeal the Sherman Act, in 1893, 
after $147 million in silver had been purchased. Sherman had to go back 
to his European syndicate for more gold loans, which came into and left the 
U.S. as through a revolving door. The passage of the act has always been 
blamed on American silver mining interests, but some of its main benefici- 
aries were European bankers. Without the support of the law, the market 
price of silver dropped to 60 cents an ounce in 1893 and 49 cents in 1894. 

THE WORLDWIDE PANIC IN THE 1890s 

Concurrent with these silver antics was the collapse of Baring 



502 The Lost Science Of Money 



Brothers of London in 1890, due to their fooUsh speculations in 
Argentina. Its ripple effect eventually caused distress in all the world's 
financial centers, including the U.S. in 1893. 

An example of how economists really are "pests" is the spin that 
Charles Conant put on this event, blaming American politics for the 
effects of Baring's South American fiasco: 

"U.S. railways, breweries, cattle ranges and public securities were 
heavily in debt to Europe.. .This debt was estimated at over $2 billion, 
requiring $350 million of annual interest... The withdrawal of a large por- 
tion of this productive loan (the withdrawal of gold from the U.S. 
Treasury) was the price which the U.S. were called upon to pay for the 
political maneuvers which aroused the fear they would abandon the gold 
standard and make silver the basis of their monetary system." 

THE U.S. MONEY DROUGHT: 1860s - 1890s 

For all these reasons the post-Civil War period in America (and 



Index 


The Appreciating Doixar, 1865-1895 




300 

250 

200 

150 












\ 


J 








/ 


U 




m^ 




/ 


A 


/ 










/ 


J 














100 
18€ 


/ 














i>5 


1815 ld85 


16< 


?5 



18d. 1865-95 DOLLAR DEFLATLON. The value of the dollar rose about 
200% over a 30-year period against agricultural products; a condition that 
farmers understood well, but which was, and still is, denied by some 
economists (source: J. D. Hicks: The Populist Revolt). 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 503 



abroad) was one of too scarce a money supply for a period of two-and- 
a-half to three decades. Population, railroads, mechanization and pro- 
duction were growing as the industrial revolution progressed and more 
land was cultivated. Yet by many yardsticks, money was too scarce. 

Some economists have claimed that there was no deflation, just 
overproduction. But that sounds like banker apologia. There was still 
great poverty in America and overproduction should have alleviated it. 
Every farmer knew the value of money was increasing. 

Anecdotal evidence was sufficient for Benjamin Anderson, an 
important early 20th century monetary theorist, to conclude that a pun- 
ishing deflation had occurred: 

"Nor is the tremendous agitation over bimetallism, involving a liter- 
ature so great that no man could dream of reading it all, involving great 
political movements, presidential campaigns, great congressional 
debates, repeated legislation, international conferences, etc, for 20 years, 
to be explained on any other ground than that the world felt practical, 
important, and unpleasant effects on industry and trade from the inade- 
quacy of the money supply.'"^^ 

By one index, the dollar appreciated in value from 100 in 1865 to 
about 300 in 1895. This index was derived from the statistics of the 

Aldrich Report (see next chapter) and the U.S. Bureau of Labor. "^-^ 

Later, Friedman and Schwartz's study established the monetary facts 
statistically: 

"(Between 1867-1879) there are 5 calendar years in which the 
money stock declined and 7 in which it rose... The money stock in 
February 1879 was only 17% above its level 12 years earlier. ..One must 
go more than half a century forward from 1879 all the way to 1933 to 
find another 12 year period within which the money stock declined in as 

many as 5 calendar years. '"^"^ 

This money supply increase of only 17% over 12 years, or about 
1.4% a year, during a period of very high growth in population and 
in economic activity, must be considered deflationary. 

This important example underscores the principle that it is not the 
absolute amount of money in existence that measures inflation or defla- 
tion, but the amount relative to population and economic activity, which 
the money must service. The money supply must be compared to how much 
money there should be for optimal results. Nor is it accurately measured by 
price levels - the mistake the Federal Reserve System has been making since 
at least 1987, when Allan Greenspan became its Chairman. 



504 The Lost Science Of Money 



How will the optimal amount be determined? This is something yet 
to be discovered, once the question has been sufficiently studied under a 
govemmentally issued money system. This question should be among 
the top items on the agenda of economic science. 

THE GREENBACK LEGACY CONTINUED 

The machinations of the bankers could not hide the truth from most 
Americans. The people were not fooled, so much as they were over- 
powered! Henry George, an important 19*^ century reformer, wrote: 

"It is not the business of government to direct the employment of 
labor and capital. . ."0« the other hand it is the business of government 
to issue money,,. To leave it to every one who chose to do so to issue 
money would be to entail general inconvenience and loss, to offer many 
temptations to roguery, and to put the poorer classes of society at a great 
disadvantage...." 

"Yet instead of doing what every public consideration impels us to, 
and assuming wholly and fully as the exclusive function of the General 
Government the power to issue money, the private interests of bankers 
have, up to this, compelled us to the use of a hybrid currency, of which 
a large part, though guaranteed by the General Government, is issued 
and made profitable to corporations. The legitimate business of banking 
- the safekeeping and loaning of money, and the making and exchange 
of credits, is properly left to individuals and associations; but by leaving 
to them, even in part and under restrictions and guarantees, the issuance 
of money, the people of the United States suffer an annual loss of millions 
of dollars, and sensibly increase the influences which exert a corrupting 

effect upon their government. "^^ 

In Summary 

The purposely executed 19th century deflations, generally demone- 
tizing silver in favor of a gold standard, began in England and proceed- 
ed under English influence. These silver demonetizations demonstrated 
the utter insincerity of the metallists theoretical positions on the nature 
of money. The 1868 presidential election gave us a glimpse of how the 
bankers operated behind the scenes to neutralize the Democratic party, 
in effect splitting the nationwide majority that favored the Greenbacks 
into several populist parties. England continued sending "experts" to 
influence monetary matters and especially to attack the Greenbacks. 

The great importance of a correct concept of money was evident in 
how the populists were diverted onto the silver question, away from the 



18 19TH CENTURY MONETARY CRIMES-THE GREAT DEFLATIONS 505 



main issue of societal control of the money system. This false silver 
issue was nursed along by bankers and mining interests, derailing real 
monetary reform. And again we saw the great importance placed by the 
bankers on removing the American Greenbacks from the view of the 

world. 



Notes to Chapter 18 

^ Michel Chevelier, The Probable Fall in the Value of Gold, (New York: 

Appleton, 1 859), appendix notes on his 1 853 Remarks on the Precious Metals 

and on the Depreciation of Gold. 

^ Chevelier, cited above. 

^ Henri Cemuschi, The Anatomy of Money, (London: RS. King, 1886), p. 27. 

4 Knapp, George, State Theory of Money, ( 1 909, New York: Macmillan, 1 924), p. 275 . 

5 W.A. Shaw, The History of Currency 1252-1896, (Putnam, 1896, repr., New 
York: A. M. Kelley, 1967), pp. vii, xii, 91, 

^ Henry Parker Willis, The History of the Latin Monetary Union, (Univ. of 

Chicago Press, 1901). 

^ 1876 U.S. Monetary Commission Report, (Washington DC: 1876), p. 33 

^ Charles A. Conant, A History of Modern Banks of Issue, (New York: Putnam, 

1926) p. 199. 

^ Masayoshi Takaki, The History of Japanese Paper Currency, (John Hopkins 

Univ. Press, 1903), p. 58, & quoting the U.S. Consular report V.19, #68, p. 654. 

^^ see John Roberts, Mitsui, Three Centuries of Japanese Business, (New York: 

Weatherhili, 1973). 

*' Alexander Del Mar, Monetary Crimes, (Washington DC: Del Mar Soc, 1899). 

^2 J. G. Randall, The Civil War and Reconstruction, edit. David Donald, 

(Boston: Heath, 1961), p. 356. 

^^ Woloski, Aug. 15, 1866, & Parkinson, as quoted by Andreas Andreades, 

History of the Bank of England, (London University, 1909), pp. 350-90. 

^^ Charles Bullock, Monetary History of the U.S., (New York: Macmillan, 

1900), pp. 90-100. 



506 The Lost Science Of Money 



^^ Del Mar, Science of Money, (New York: Cambridge Encyl.,1904),.pp. 50-70. 

^^ Milton Friedman & Anna Schwartz, A Monetary History of the U.S. 1867-1960, 

National Bureau of Economic Research, Princeton Univ, Press, 1971), pp. 45, 72. 

^^ Del Mar, Monetary Crimes, cited above, p. 62. 

^^ Del Mar, Monetary Crimes, cited above, contains his eyewitness account over 

several sections. 

'^ Irwin Unger, The Greenback Era, (Princeton Univ. Press, 1964), p. 85. 

^^ Charles B. Spahr, The Present Distribution of Wealth in the United States, 

(Boston: T. Crowell, 1896), p. 37. 

^' Unger, cited above, p. 272, 

^^ Unger, cited above, p. 289. 

^^ Walter Bagehot, The Assimilation of the English amd American Money, in the 

Economist, 1869, (repr., CN: Greenwood Press, 1969), pp.xii, 19. 

24 Bonamy Price interview. Daily Tribune, Oct. 1, 1874, TF-PV105, pp. 7-12. 

2^ Unger, cited above, p. 278. 

2^ Unger, cited above, p. 315. 

2'^ Labor Standard, September 2, 1876, as quoted in Unger, cited above, p. 3 15. 

2^ Unger, cited above, p. 213. 

2^ Unger, cited above, p. 289. 

30 Unger, cited above, p. 290-291. 

3^ Unger, cited above, Chapter 10. 

^^ Del Mar, Monetary Crimes, cited above, pp. 84-6. 

33 Bullock, cited above. Section on the Greenbacks. 

34 William G. Sumner, Essays, (Yale Univ. Press, 1914), p. 176 
3^ Del Mar, Monetary Crimes, cited above, p. 86 

3^ 1876 U.S. Monetary Commission Report, pp. 89, 91. 

3'^ 1876 U.S. U.S. Monetary Commission Report, p. 38. 

3^ WiUiam Harvey, Coin's Financial School, intro by R. Hofstadter, (Harvard Univ. 

Press, 1963), pp. 222-32. 

3^ Studenski & Kroos, cited above, pp. 185-92. 

4^ Conant, cited above, section on 1890 crisis. 

4^ Shaw, cited above, Netherlands chapter. 

42 Benjamin Anderson, The Value of Money, (New York; R. Smith, 1936), p. 22L 

43 John D. Hicks, The Populist Revolt, (Univ. of Nebraska Press, 1961), p. 88. 

44 Friedman & Schwartz, cited above, p. 31. 

45 Henry George, Social Problems, (New York: R. Schalkenbach Foundation, 
1992), pp. 178-9, 



507 



CHAPTER 19 



TRIUMPH OF THE BANKERS: 

ESTABLISHMENT OF THE 

FEDERAL RESERVE 

SYSTEM 



"The bankers will favor a course of special legislation to increase 

their power... They will never cease to ask for more, 

...so long as there is more that can be wrung from the 

toiling masses of the American People." 

Peter Cooper to Ulysses Grant 

June, 1877 



The Greenback battles of the 1860s and 1870s were the "real thing." 
For the first and only time in our history, the primary secular problem of 
American society was being accurately attacked: the private control of 
the money system and the special privileges that elements of society - 
the bankers - had usurped for their personal benefit at society's expense. 

The earlier attacks by Jefferson were accurate, but hadn't reached 
that level of popular participation. The programs of Jackson and Van 
Buren had much more popular support but lacked an accurate solution, 
and erroneously instituted a system more dependent on metal. 

In contrast, the Greenbacks were (and still are) a viable solution to a 
large part of America's monetary problems. They are a method of creat- 
ing money without interest costs or debt, and without alienating the con- 
trol of the money system from the government of the people. However, 



508 The Lost Science Of Money 



by the 1880s and 1890s the battle lines had already been skilfally shift- 
ed into "side show" arguments over silver and bimetallism. Then, with 
the establishment of the Federal Reserve System in 1913, serious dis- 
cussion of who should control the nation's money system became almost 
impossible to carry on in the American mainstream. 

POPULISM - BAGGED BY THE BANKERS 

One reason for populism's failure was its diversity, with various 
interests from different parts of the country. Populists didn't always 
share common goals and could be divided and discouraged. They didn't 
fully recognize the deviousness of their opponents. Furthermore, as 
average people they were always in need of money and their political 
activities reduced their meager resources. 

The bankers on the other hand were more closely knit with a nar- 
rowly defined objective. Elements among them could draw on centuries 
of recorded experience in European court intrigue. Most importantly, the 
bankers' treachery was self financing. 

In one sense the populist movement was a rising of the victims of a 
financial oligarchy, against their oppressors; the victims of usury rising 
against the usurers - defining usury in its macro sense as "a misuse of 
society's monetary mechanism for illicit gain." 

BELMONT "FACTOR" SPLITS THE DEMOCRATS 

The very existence of a populist movement demonstrated a fatal 
political weakness. The presence of August Belmont, Baron 
Rothschild's American agent, in the top echelons of the Democratic 
party would be enough to keep the Democrats from becoming the logi- 
cal focal point for the popular forces on the crucial Greenback issue - the 
control of the nation's money system. 

This neutralizing of the Democrats was of pivotal importance. For 
had they solidly embraced the Greenbacks, as they logically should 
have, these splinter parties would never have formed and the nation- 
wide-majority which in fact existed for the Greenbacks could have 
found a more powerful and possibly successful expression through the 
Democratic Party. 

HIGHLIGHTS OF THE GREENBACK MOVEMENT 

This chronological summary briefly highlights some monetary 
events of the diverse movement: 

*1872 - The National Labour Reform Party demanded an irredeemable 
paper currency issued by the Government, "directly to the people." 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 509 



*1876 - The National Independent Party was organized for the presi- 
dential election and nominated Peter Cooper at their Indianapolis con- 
vention. Cooper, a civil engineer, was one of the first major industrial- 
ists with an outstanding reputation of supporting labor as well. He was 
eighty five years old and was to resign in favor of his Vice President. 
After losing the election, Cooper sent an open letter to President Grant 
on the Money Power: 

"This bondage has its manifold center and secret force in more than 
2,000 banks that are scattered throughout the country... Such a power of 
wealth, under the selfish instincts of mankind, will always be able to 
control the action of our government unless that government is directed 
by the strict principles of justice and of the public welfare. The bankers 
will favor a course of special legislation to increase their power.. They 
will never cease to ask for more,.., so long as there is more that can be 
wrung from the toiling masses of the American People.... The struggle 
with this money power has been going on from the beginning of the his- 
tory of this country. ''^ 

*In Chicago, an "Independent Greenback Party" organized Cook 
County ward by ward. The agitation for a permanent Greenback curren- 
cy reached a climax in the congressional elections of 1878. After 1880, 
interest began to wane in the face of political defeats dealt to it by the 
scandal ridden Grant Administration, from the sheer exhaustion of bat- 
tle, and by being diverted on the false silver issue. 

*1884 - General Benjamin R Butler ran for president on a paper money 
platform (see Chapter 15). 

*1892 - The "Peoples Party" nominated James B. Weaver as their pres- 
idential candidate. He received over 1 million votes, and called for the 
government to issue a national currency at $50 per capita of population; 
this money was to be paid out for public improvements and loaned to cit- 
izens at 2% interest. 

*March 1893 - General Jacob Coxey of Massillon, Ohio marched on 
Washington with thousands of the unemployed. "Coxey's Army," as it 
was called, demanded that the government issue $500,000,000 in non 
interest bearing legal tender notes (Greenbacks), to employ 4 million 
men in the construction of roads. Coxey 's monetary theory appears 
sound and his implied threat of force was justified, but he didn't carry 
through his thinking to its logical conclusions in terms of his personal 
security. The Washington police force was able to arrest him for walking 



510 The Lost Science Of Money 



on the grass at the Capitol building! 

THE 1896 WILLIAM JENNINGS BRYAN CAMPAIGN 

The Democrats had been kept confused on the money issue. For 
example in the 1876 Presidential election, they nominated a "hard 
money" advocate (Tilden) for President and a "paper money" supporter 
(Hendricks) for Vice President. 

When the Democratic Party finally made the money issue their main 
thrust, it was done on the false silver question and in a manner the 
bankers could live with. John D. Hicks, in The Populist Revolt, noted 
that the populist groups learned in the Presidential elections of 1892 that 
their silver plank was the most popular position. It was concrete and easy 
to understand, and the "Crime of 1873" aroused strong emotions. 

Thus William Jennings Bryan's 1896 and 1900 Democratic campaigns 
concentrated on the issue of silver coinage, even though Bryan's speeches 
indicate that he personally knew more about the nature of money: 

"Man is the creature of God and money is the creature of man. 
Money is made to be the servant of man and I protest against all theories 

that enthrone money and debase man."^ 

"The right to coin money and issue money is a function of the 
Government. It is a part of sovereignty and can no more be delegated 
with safety to individuals, than we could afford to delegate to private 

individuals the power to make penal statutes or to levy taxes." ^ 

Free coinage of silver arguments dominated the 1896 Presidential 
election: 

"City dailies... were forced by an irresistible public demand to give 
liberal space to discussions of the money question," wrote Hicks."^ By 
this time the various populist parties had managed to elect only 6 
Senators and 25 Congressmen. The populists backed Bryan. 

BRYAN'S "CROSS OF GOLD" SPEECH 

William Jennings Bryan had gone into the Democratic Party's con- 
vention relatively unknown and emerged as a national figure thanks to 
his famous "Cross of Gold" speech, which ended like this: 

"If they dare to come out in the open field and defend the gold 
standard as a good thing, we will fight them to the uttermost, having 
behind us the producing masses of this nation and the world. 
Supported by the commercial interests, the laboring interests, and 
the toilers everywhere. We will answer their demand for a gold stan- 
dard by saying to them: You will not press down upon the brow of 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 511 



labor this crown of thorns. You shall not crucify mankind upon a 
cross of gold." 

Bryan stood before the hall with his arms outstretched as a cross, his 
head tilted to the side toward his shoulder. For a long moment there was 
a stunned silence, and then an uproar, and he was nominated. It was one 
of the great moments in American political history. 

In two weeks Bryan, the great orator, visited two-thirds of all the 
states giving 400 speeches. Nothing like it had been seen before. The 
campaign became known as the "Honest Money Campaign," 

But in reality the campaign offered the American people a choice 




1 9a. William Jennings Bryan supported coining more silver money in his 
1896 run for the Presidency. Later his support was crucial in passing the 
Federal Reserve Act, and later still, he deeply regretted that fact. 



512 The Lost Science Of Money 



between two systems, either of which could be controlled by the 
bankers. As Henry George had pointed out: 

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

nation. *'^ 

The main difference was that Bryan's proposals would mean more 
silver money in circulation. That at least was a good thing as money was 
too scarce. However, remember that the nation had before it the suc- 
cessful example of a superior money system: the Greenbacks. Thus 
Bryan's Democratic campaign was a major retrogression from the posi- 
tions of the Greenback parties. 

DECENTRALIZATION REDUCES SOME PROBLEMS 

Populist fervor was not only diffused by their defeats and the silver 
diversions but was also reduced because some of the problems they were 
protesting were actually improving. 

The historian Gabriel Kolko, in The Triumph of Conservatism makes 
the case that the economy was becoming less centralized; crops were 
good and their prices were improving; and the continued availability of 
new land and influx of immigrants spurred growth. 

Industrial production itself was becoming more decentralized. For 
example, in 1890, ten industrial stock issues were quoted in financial 
journals. In 1 893 there were thirty, and in 1 897 there were more than two 

hundred.^ 

Furthermore, much of the manufacturing was potentially independ- 
ent of the banks. According to Kolko, between 1900 and 1910 about 
70% of new manufacturing funds were generated internally from prof- 
its, not from borrowing. 

While there would be some overlap between the financial operators 
and the manufacturers, there is an essential distinction between the two. 
It takes a different kind of mind for an entrepreneur like Peter Cooper to 
build real industries and produce real products, than for a financial oper- 
ator such as Morgan to manipulate paper claims and for the most part 
create nothing, functioning as a parasite. 

At the turn of the century, the Morgan interests were promoting cen- 
tralization through mergers. While economists once justified these com- 
binations as rationalizations of industry, almost no one, Kolko asserts, 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 513 



"could consider them that, now" (times and attitudes since Kolko wrote 
have retrogressed dramatically back to the earlier view!). 

The mergers were mainly a way to sell watered down [diluted] 
stock. Morgan's method was to overcapitalize the companies and take 
large underwriting fees in the process of selling the stock to the public. 
The Morgan interests would then gain control of the boards of directors 
of the new entity through the merger process. For example, in 1908, out 
of 183 industrial mergers, stocks and bonds of $3,085 billion were 

issued based on capital worth only $1,459 billion.^ 

As in the present day, the short term outlook dominated stock mar- 
ket activity: 

"Insofar as Morgan's profits were not immediate or short range, but 
tied to the managerial and profit performance of the new company, 
Morgan tended to do relatively poorly," wrote Kolko, 'The new merg- 
ers, with their size, efficiency and capitalization were unable to stem the 




19h. J.P. Morgan, 
American pluto- 
crat, began his 
career by selling 
defective rifles 
back to the gov- 
ernment in the 
Civil War, after 
purchasing them 
as discounted 
damaged goods 
from the govern- 
ment. 



514 The Lost Science Of Money 



tide of competitive growth. Quite the contrary! They were more hkely 
than not unable to compete successfully or hold on to their share of the 

market, and this fact became one of utmost political importance."^ 

THE GROWING COMPETITION 

Bankers tell us that competition is a hallmark and requirement of the 
capitalist system. That's what they say and what they pay professors to 
profess, but not what they do. They demand that others compete to better 
serve them but abhor competition for themselves. Then they concentrate 
on corrupting governments into legislating special privileges for them. 
Yet competition and decentralization was even increasing in the field of 
banking at the turn of the century. By 1892 state chartered banks sur- 
passed nationally chartered banks in importance. The national banks' 
share of business continued to decline from that point: 

Year State banks accounted for: 

1896 61% of total # of banks and 54% of total bank resources. 

1913 71% of total # of banks and 57% of total bank resources.^ 

In 1908 national bank notes represented only 20% of the total circu- 
lating currency.^^ The number of banks grew from 10,000 in 1900 to 
25,000 in 1912. 

Still, the New York banks controlled about one-half the total 
deposits. Furthermore, because the national bank law wisely limited 
their loans to any one borrower to 10% of the banks capital, in 1912 
there were only 12 banks capable of making loans over $1 miUion to any 

one firm.^^ 

GOLD AND TECHNOLOGY DISCOVERIES BRING RELIEF 

Toward the end of the 19th century the worldwide need for more 
money in the existing mixed system of metals, bank created paper and 
credits, and government created money was alleviated by some fortu- 
nate developments: major gold discoveries in South Africa, Alaska and 
Australia; and the invention of the Cyanide leaching process which 
extracted a lot more gold from the crushed rock. Annual gold produc- 
tion more than doubled in only eight years: ^^ 

1890 - 5.7 million ounces of gold produced 

1896- 9,8 " 

1898-13.9 " 

It is difficult to accurately estimate the amount of coinage in exis- 
tence, because often the same precious metal gets coined and re-coined 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 515 



by more than one country's mint. Del Mar estimated the gold and silver 
coinage available country by country, and concluded that the world's 
total grew from $3.7 billion in 1879, up to $6.34 billion in 1899.^^ 

CURRENCY ACT OF 1900 

This law estabhshed the single gold standard in the U.S. at $1 ^ 25.8 
grains of gold. The deflationary effects normally to be expected from 

19c, DEL MAR'S TABLE OF GOLD AND SILVER COINAGE 
(source: Del Mar; History Of The Precious Metals) 



Stocks of Metallic Money in Various Countries 

Table showing the Population and Stock on Hand in public depositories and in cir^ 

cnlation^ of Gold and Silver coins and Bar Bullion^ in the Roman and Oriental 

Worlds^ at dates nearest to tSjg and i8<^gy respectively^ Population in millions; 

sums of coins and hullion in millions 6 f dollars^ In the Roman •world the silver is 

computed at the mint value; in the Oriental world at the market value* 

I&79 1 8^ 



Countries 

France 

United Kingdom 

German Empire . 

Russia in Europe 

Russia in Asia . 

United States 

Mexico, 

Other Independent States in 
America 

Canada 

Spain 

Portugal 

Austro- Hungary 

Italy , , . . 

Netherlands 

Belgium 

Switzerland 

Greece 

Sweden , 

Norway 

Denmark 

European Colonies 

Egypt .... 

Turkey in Europe 

Roumania, Servia and Bul- 
garia . , . . 

Turkey in Asia» and Tripol 
in Africa . 

Total Roman, . 

India 

China .... 

Japan 

Siam 

Other Oriental 

Total Oriental 



r — 

Pop. 


Gold and 

Silver 


Pop. 


Gold 


Silver 


Total 


37 


1020 


39 


1 100 


500 


1600 


34 


520 


40 


400 


roo 


500 


44 


400 


52 


500 


200 


700 


74 


250 ) 










8 


25 i 


130 


750 


250 


1000 


49 


250 


75 


600 


517 


1117 


10 


60 


13 


3 


97 


roo 


36 


50 


41 


14 


40 


54 


4 


30 


5 


20 


20 


40 


17 


170 


19 


35 


35 


70 


4 


55 


5 


5 


i3 


23 


37 


So 


46 


120 


100 


220 


27 


40 


32 


50 


40 


90 


4 


60 


5 


30 


50 


80 


6 


as 


7 


30 


40 


70 


3 


10 


3 


10 


8 


18 


2 


10 


2 


I 


5 


6 


4 


10 


5 


13 


7 


20 


2 


5 


2 


5 


2 


7 


2 


5 


2 


15 


5 


20 


10 


50 


16 


40 


40 


80 


7 


20 


9 


15 


10 


25 


'[ 


=si 


5 


? 


'I 


25 


lO 


( 


II 


? 


? ) 




17 


25 


17 


? 


•> 

■ 


25 


454 


3255 


581 


— 


— 


5890 


29s 


250 


297 


5 


250 


255 


120 


40 


120 


«- 


35 


35 


40 


50 


45 


25 


30 


55 


5 


5 


5 


I 


4 


5 


75 


TOO 


75 


— 


— 


100 


535 


445 


542 




— 


450 



516 The Lost Science Of Money 



such a move did not materialize because the production of gold had 
more than doubled from 1890 to 1898. 

When gold enthusiasts refer to the sound workings of a gold stan- 
dard in this period, they ignore that it was a highly unusual time for gold 
production, where the supply of gold available for money grew much 
faster than the population, rather than at its usual inadequate historic rate 

of under 1.2% per year.^^ They also ignore that the supply of gold was 
augmented by paper notes and deposits issued by banks and government. 

TREASURY SECRETARY SHAW'S INNOVATIVE SOLUTIONS 

Though the U.S. had been independent for 125 years, there was 
still no uniform currency system, and there was no structural flexibility 
whereby the banking system could easily adjust to changing economic 
conditions. 

From 1902 to 1906, Treasury Secretary Leslie M. Shaw faced a 
banking system that was limited and inflexible. Nationally chartered 
banks were allowed to create only about $800 million in currency, based 
on their holdings of government bonds as reserves or collateral. The sys- 
tem could not respond well to real business needs or even to the neces- 
sary seasonal requirements for money. There was no lender of last resort 
when the banks got into trouble and the system was susceptible to booms 
and panics over minor events. 

Shaw wanted to change the banknotes to read that they were guar- 
anteed by the government, since in effect they were. He also proposed 
implementing what became known as the real bills doctrine, then used 
in Europe, where banks could finance industry based on commercial 
paper guarantees. 

Shaw initiated a program to avert banking panics by depositing gov- 
ernment funds or bonds into banks when money was tight. Then, to calm 

down boom periods, he would withdraw them.^^ 

"In his final report to Congress, written at the end of 1906... he wrote: 
'If the Secretary of the Treasury were given $100 million to be 
deposited with the banks or withdrawn as he might deem expedient, and 
if in addition he were clothed with authority over the reserves of the sever- 
al banks, with power to contract the national bank circulation at pleasure, 
in my judgment no panic, as distinguished from industrial stagnation could 
threaten the U.S. or Europe that he could not avert...' 

"If [the Treasury's powers] had been expanded as Shaw requested, 
the Treasury would have been clothed with effective power different, but 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 517 



not clearly inferior to that later assigned to the Federal Reserve System," 
wrote Friedman and Schwartz. ^^ 

THE POSTAL SAVINGS SYSTEM 

Another solid banking initiative was inaugurated by the Post Office 
in January 1911. The Postal Savings System offered savings accounts to 
depositors, operating as a deposit bank and making no loans, like the 
theoretical operation of the Bank of Amsterdam. 

The Postal Savings system became popular. It held 4% of the 
nation's savings in 1919. This declined to 2% in 1929, but rose to 13% 
in 1933 and to 20% in 1947. By the end of 1960 it was back down to 2%. 
The percentage declined just before the 1929 crash, perhaps because of 
the aggressive atmosphere of the times. The rise into 1933 might indi- 
cate a flight of depositors to safety, and the continued growing share to 
1947 could indicate that distrust of the banking system extended long 
beyond the Depression. 

BANKERS THWART SOCIETAL SOLUTIONS: PANIC OF 1907 

Our thesis would predict that Shaw's balanced approach in the hands 
of Government would be unwelcome to those seeking to make a business 
of manipulating the money system. In 1906 Jakob Shiff was a partner of 
Kuhn Loeb, agent for the Rothschild's American interests. Shiff and oth- 
ers (including Shaw) publicly warned that the U.S. would face its worst 
financial crisis. These warnings foreshadowed the Panic of 1907. 

The hidden source of the panic of 1907 was the Bank of England's 
instruction in September 1906 to British banks not to negotiate 
American finance bills but to have them all paid in gold as they matured. 
There was also a crisis situation in banking in Amsterdam and Hamburg. 
The result was that about 1% of the U.S. gold supply was shipped 
abroad, causing a decline in the total U.S. money supply of about 2 V2 %. 

This was enough to generate the banking panic of October 1907.^^ 
But it was an unusual panic: 'The Panic of 1907 was exclusively 

banking," wrote Studenski and Kroos.^^ 

The banks refused to honor their deposits - to pay out cash to their 
depositors; however, all of their other financial operations continued 
normally. It was a manufactured, unnecessary panic. The major New 
York City Banks were later criticized for restricting their payments while 
their reserves were still adequate, and for delaying the issue of clearing 
house loan certificates to the banking community: 

"The six large banks (in NY) acting in concert could have sustained 



518 The Lost Science Of Money 



the local situation. ..and could have supplied the demands of outside 
banks," wrote Sprague.^^ 

The stock market took a major tumble, dropping 46%. 

Thus by forcing the export of only 1% of the U.S. gold, foreign 
bankers purposely or inadvertently created a nationwide banking crisis! 
If the system had been 100% gold money, without any fractional reserve 
banking, then the Friedman study would indicate that 2 1/2 % of the 
money supply would have had to be exported to create the same crisis 
(assuming the bankers' reactions were the same). 

The panic of 1907 is also a modem demonstration of the danger to 
public safety posed by a gold money standard, which foreign interests 
can manipulate at will and easily enough withdraw from circulation. 

GOVERNMENT COMES TO THE RESCUE - AGAIN 

As usual the bankers were extracted from yet another crisis by help 
from the U.S. Government. In November 1907 the Treasury issued $150 
million of bonds and certificates and allowed the banks to use them as 
additional reserves, and the crisis was overcome. Had it been necessary 
for the government to find gold to back the new money it might have 
been unable to rescue the banks from their dilemma. The gold standard 
ideologues ignore this necessary governmental intervention to save the 
system, when they praise the workings of their mythical gold standard 
during this period. 

THE ALDRICH-VREELAND SYSTEM 

The shock over the Panic of 1907 was used by the bankers in their 
campaign to gain greater control over the U.S. money system: 

"The weakness had long been recognized in the banking litera- 
ture.. .It took the dramatic experience of 1907 to make some measure of 

reform politically imperative," wrote Friedman and Schwartz.^^ 

The first step was the formation of the Aldrich-Vreeland system, 
which was government controlled through the Comptroller of the 
Currency and had the power to authorize some banks to issue new money. 
It is perhaps the only example in U.S. history where the bankers 
wanted to increase the monetary powers of government officials. What 
was going on? It appears to have been a part of the longer term plan to 
establish a privately owned central bank. For the Aldrich-Vreeland act 
was only for a limited period - it was scheduled to go out of existence in 
just six years, in 1914. A secfion of the act called for a national Monetary 
Commission of nine Congressmen and nine Senators to do a study and 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 519 



make recommendations on the nation's money and banking system. 

Senator Aldrich, a bankers man, was Chairman of the commission. 
He was in the Rockefeller camp, and was the maternal grandfather of 
former New York Governor Nelson Aldrich Rockefeller and his brother 
David Rockefeller of Chase Manhattan Bank. 

Aldrich- Vreeland worked well, but the plan was to substitute the 
Federal Reserve System in its place. Aldrich's monetary commission 
issued 24 large volumes, but according to Del Mar nowhere in these 
publications was the nature of money defined. The final volume called 
for the creation of a privately owned central bank, the "National Reserve 
Associafion" in which "Control was to be exercised completely by pri- 
vate bankers," wrote Studenski and Kroos.^^ In the passage of legisla- 
tion this would evolve into the Federal Reserve Act. 

During its six years, Aldrich- Vreeland fianctioned well, giving yet 
another historical example of monetary powers being effectively and 
properly administered by the U.S. Government. 

The Aldrich-Vreeland system ultimately issued around $400 million 
in currency, representing about 1/4 of the total currency in the publics 
hands. It successfully met the one crisis it faced on the outbreak of World 
War I in Europe, when there were large withdrawals from American 
banks. 

The successful handling of that crisis led Friedman and Schwartz to 
remark: "The episode strengthens our view that it would have been 
equally effective on the occasion of the next threat of an inconvertibili- 
ty crisis which arose in late 1930."^^ 

FED ESTABLISHED BY STEALTH - BUT IS IT A CONSPIRACY? 

Webster's New Twentieth Century Dictionary Unabridged defines 
conspiracy as: "A planning and acting together secretly, especially for an 
unlawful or harmful purpose, such as murder or treason." By that defi- 
nition, I think the evidence indicates that there was a conspiracy to estab- 
lish the Federal Reserve System, by a small group, who knew it would be 
harmful to the nation. But readers should consider the information in this 
and the next chapter and evaluate the conspiracy question for themselves. 

Gabriel Kolko, not a child in such matters, wrote: 

"There was no conspiracy during the Progressive era... (while) peo- 
ple and agencies acted out of public sight and official statements fre- 
quently had little to do with operational realities. ..There was a basic con- 
sensus among political and business leaders as to what was the public 
good, and no one had to be cajoled in a sinister manner. "^^ 



520 The Lost Science Of Money 



But one must consider the work of Georgetown Professor Carroll 
Quigley. Historian Quigley also belittled the idea of a childish conspira- 
cy, with secret handshakes, and other signs, where orders are given and 
obeyed in a top to bottom hierarchy. But he affirmed - even exposed - 
the existence of a serious and secret power network that he labeled the 
Anglo American Establishment; and which he demonstrated held inordi- 
nate power in determining historical outcomes. However, this group 

came into existence just at the end of the 19^*^ century, and did not appear 
to be involved in creating the Federal Reserve System. 

One of the most significant sections of Quigley 's book Tragedy and 
Hope is on Financial Capitalism and contains this intriguing paragraph: 

"The influence of financial capitalism and of the international 
bankers who created it was exercised both on business and on govern- 
ments, but could have done neither if it had not been able to persuade 
both these to accept two "axioms" of its own ideology Both of these 
were based on the assumption that politicians were too weak and too 
subject to temporary popular pressures to be trusted with control of the 
money system; accordingly, the sanctity of all values and the soundness 
of money must be protected in two ways: by basing the value of money 
on gold and by allowing bankers to control the supply of money To do 
this it was necessary to conceal^ or even to mislead, both governments 
and people about the nature of money and its methods of operation. ^^ 

Readers will recognize that conclusion as one of the primary theses 
of this book. Quigley gave one example of the deception: 

"...bankers, as creditors in money terms, have been obsessed with 
maintaining the value of money, although the reason they have tradi- 
tionally given for this obsession - that 'sound money' maintains 'busi- 
ness confidence' - has been propagandist rather than accurate." 

Quigley noted that: "Inflation, especially a slow steady rise in 
prices, encourages producers, because it means they can commit them- 
selves to costs of production on one price level and then, later, offer the 

finished product for sale at a somewhat higher price level."^"^ 

Such a situation is usually best for working people, while "price sta- 
bility" the Federal Reserve's 1990s mantra, has been really good for 
paper manipulations, but bad for the average working man. We'll discuss 
this point again. 

The caution for Europeans now in the process of forming a new 
money system is to be certain of a diversity of outlook, background, reli- 
gion and interest on the part of those who are to structure and operate 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 521 



that money system. 

The people of the bank knew what they wanted and actually gave the 
nation a small sample of it with Aldrich/Vreeland except that 
AldrictiA^reeland was government controlled. But no matter - they 
would make it appear that the new private central bank was to be gov- 
ernment controlled also. 

Woodrow Wilson, a professor of political economy, whom the king- 
makers whisked from his ivory tower at Princeton into the Presidency in 
1912, was a Calvinist, trained at John Hopkins University in "Classical 

Laissez-Faire, and the political Whiggery of Burke," wrote Kolko.^^ 
Professor H. Parker Willis described his meeting with Wilson: 
"My first talk with President-elect Wilson was in 1912. Our conver- 
sation related entirely to banking reform. I asked whether he felt confi- 
dent we could secure the administration of a suitable law, and how we 
should get it applied and enforced. He answered: 

'We must rely on American business idealism.'"^^ 

However much we may blame Willis for his naivete in helping to 
establish the Federal Reserve System, at least he was asking the right 
question. How can you trust bankers to run the money system? Here we 
have two professors of political economy with little knowledge of busi- 
ness history or practical business, Wilson's answer, "We must rely on 
American business idealism," was received seriously, and not greeted 
with uproarious laughter, as it deserved to be. 

'To precisely what was Wilson committed?...'! am for big business, 
and I am against the trusts,' but he could not define the major difference 
between the two and he never gave the matter serious thought," wrote 

Kolko,^^ 

Professors like Wilson, Willis, and J. Laurence Laughlin, (Willis' 
teacher), without real knowledge of the business or trading world but 
with over-inflated egos and a religious attachment to the inaccurate 
theories of Adam Smith, were easy prey for Europe's and America's 
banking operators. With the sharper mindsets of Oriental traders (to use 
Butler's phrase), or stock market manipulators, they ran circles around 
these sluggard professors and foisted the Federal Reserve System onto 
the American people. 

THE WORK OF EZRA POUND AND EUSTACE MULLINS 

Until the late 1950s, very few Americans had an idea how the 
Federal Reserve System functioned. It was only on the initiative of the 



522 The Lost Science Of Money 



American poet Ezra Pound, and his student Eustace MuUins, that it 
would be clearly documented in a readable form. 

Mullins had studied under Ezra Pound in the late 1940s, as had the 
poet T. S. Elliot. Pound understood the abstract nature of money, and the 
importance of that concept to society. One of the requirements he set for 
his students was that they read all of the available writings of Alexander 
Del Mar. T.S. Elliot went on to become one of America's greatest poets; 
Mullins' work would be just as important, exposing the fraudulent 
money and banking system. For a deeper insight into Ezra Pound and 
Mullins, I recommend a biography Mullins wrote on a part of Pound's 
life, called This Difficult Individual. 

Eustace Mullins was working as a librarian at the Library of 
Congress, and had the world's greatest research library on this subject 
at his fingertips, plus the knowledge of how to use it. He also had the 
willing assistance of other research librarians. To put together the 
information that they assembled would otherwise have required a 
small fortune, and could not have been done, 

Mullins' book, The Federal Reserve Conspiracy, was published in 
1952, and continues to be the definitive work on the Fed (Federal 
Reserve System), from that viewpoint. Through Mullins' work, many 
behind the scenes activities of highly placed financiers came to light. 

The book is generally banned from discussion in Economics depart- 
ments of American universities, as it doesn't hesitate to mention the 
names of the people responsible for foisting the Fed onto us. Many of 




19d 

American poet Ezra 
Pound (1885-1972) 
had a deep awareness 
of monetary princi- 
ples, and some of his 
poetry deals with the 
destructive moral and 
social effects of usury. 
Pound required his 
students (including 
T.S. Elliot) to read all 
the writings of mone- 
tary historian Alex- 
ander Del Mar. 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 523 



these names are among the "cream" of America's financial estabhsh- 
ment, whose donations and foundations finance the colleges and univer- 
sities. Some of the names are Jewish, and it is almost impossible to 
discuss that in America. MuUins book is especially valuable to read in 
conjunction with Milton Friedman and Anna Schwartz's classic, A 
Monetary History of the United States; 1867-1960. 

ORGANIZING THE FED 

In 1901 J.P. Morgan interests and the Kuhn Loeb group formed an 
alliance known as Northern Securities. Paul M. Warburg, a recent immi- 
grant from Germany and a partner of Kuhn Loeb, was rumored to be 
paid $500,000 per year to travel the East Coast and write and lecture on 
monetary reform. 

"The first detailed plan of central banking came in 1910 when Paul 
M. Warburg. . .made public his plan for a 'United Reserve Bank,'" wrote 

Studenski and Kroos.^^ 

Senator Aldrich was said to have expressed despair to J.P. Morgan, 
over not being able to devise a suitable central bank plan, after receiving 
so much conflicting expert testimony at his monetary commission. 

Morgan then introduced Aldrich to Warburg, as the one man who 
could professionally come up with a viable plan, according to Ely 
Garrison in his memoirs of the events surrounding the creation of the 
Fed. Colonel Ely Garrison was one of Teddy Roosevelt's "Rough 
Riders," and a friend and financial advisor to Presidents Theodore 
Roosevelt and Woodrow Wilson. He had a lifelong interest and devotion 
to monetary reform, and believed that was his special destiny. 

On November 22, 1910, an evening train left New Jersey with 
Warburg, Senator Aldrich, Frank VanderLip of Nafional City Bank and 
other top members of the New York banking establishment, for a nine- 
day stay at their hunting lodge on Jeckyll Island, Georgia. 

This Jeckyll island meeting devised the "Aldrich" banking plan, pri- 
marily authored by Warburg, who objected that it couldn't pass Congress 
with Aldrich's name on it, since he was so closely identified with banker 
interests. Warburg turned out to be correct; the bill failed to pass with 
Teddy Roosevelt, a Republican, in the White House. 

AUTHOR? AUTHOR? 

In 1912 Wilson won the Presidency and the bankers had the bill re- 
written by Prof. H. Parker Willis and Senator Carter Glass, as the Owen- 
Glass Bill. Ely Garrison maintained that Willis and Glass really re-wrote 



524 The Lost Science Of Money 



a bill that he and Professor Wilham A. Scott of the University of 
Wisconsin had re-written and given to Wilson. 

Professor Laurence Laughlin, Willis' old teacher, also thought he 
was the author. But Colonel Garrison relates how the bankers' controlled 
him: "Laughlin is in the pay of Kuhn Loeb & Company through a big cloth- 
ing manufacturing company which offers so-called economic essay prizes 
every year in a competition run by Laughlin," and, getting a bit nasty: 

"... Professor Laughlin of Chicago who, Warburg said, was decid- 
edly muddle-headed and therefore easy to lead by the nose."^^ 

Garrison placed great emphasis on his favorite proviso of the pro- 
posed legislation; that loans must be based on the short term commercial 
paper connected with new production, not on government bonds or brokers' 
loans. This was the "real bills doctrine." It was argued that as new money 
creation brought new goods into existence, it would not be inflationary. This 
was an important feature. 

Later observers concluded that the two banking plans were virtually 
the same: 

"No economic journal dared to compare the [Federal Reserve] Act 
with the Aldrich Plan, but such a comparison would show that... there 

was no appreciable difference between the two plans," wrote MuUins.^^ 

"[The Federal Reserve Act] Establish(ed) a system very similar in 

general structure to, and identical in many details with the specific plan 

of reform recommended by the (Aldrich) Commission," wrote Friedman 

and Schwartz.^ ^ 

But some newspapers did point out how similar the Federal Reserve 
Act was to the Aldrich plan, and opposition was building from two mem- 
bers of the Glass banking committee, Robert L, Henry, and Joe H. Eagle: 

"These men attacked the Glass bill as being virtually identical to the 

Aldrich Bill in its basic principles," wrote Kolko.-^^ 

If the bill became accurately identifled as the Aldrich bill in 
Democratic disguise, it probably could not have been passed into 
law. Into the breach stepped William Jennings Bryan: 

"It required all the political strength of William Jennings Bryan, the 
dominant power in the democratic Party, to get Congress to pass the act" 
...(Wilson) could do little towards actually getting Congress to pass the 
Federal Reserve Act. That job was done by...Winiam Jennings Bryan. He 
acted as Democratic whip to get the act passed, and he was rewarded by 

being made Secretary of State," wrote MuUins.^^ 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 525 



THE BANKERS PRETEND TO OPPOSE THEIR OWN BILL 

Eustace Mullins was the first to uncover this tricky tactic, which 

Colonel Garrison had obscured: 

"To still further confuse the American people and to blind them to 

the real purpose of the Federal Reserve Act, the chief proponents of the 

Aldrich plan. Senator Nelson Aldrich and Frank VanderLip, set up an 

enthusiastic hue and cry against the bilL"-^"^ 

The American Bankers Association echoed them with: 
"For those who do not believe in socialism it is very hard to accept 
and ratify this proposed action on the part of the government," stated 
their official publication. 

This was a bit strange since the executive committee of the American 
Bankers Association had actually revised the virtually identical Aldrich 
plan, with the comment that they "heartily approve the plan," wrote 
Studenski and Kroos.-^^ 

The result of all these machinations was that the bill passed the 
Senate on December 19, 1913 by a vote of 54 to 34 and the House on 
December 22, by 298 to 60. Wilson signed it into law on December 23, 1913, 
The stated purpose of the Federal Reserve Act was: 
"An act to provide the establishment of Federal Reserve banks to 
furnish an elastic currency, to afford a means of rediscounting commer- 
cial paper, to establish a more effective supervision of banking in the 
U.S., and for other purposes." 

Cynical observers would later assert that the real reason for the act 
was indeed "for other purposes." Only much later would it become more 
clear what had transpired, partly as a result of biographies and obituar- 
ies being published, congressional hearings, and then Mullins' book, 
which drew heavily on such sources. 

PARALLELS TO ESTABLISHING THE BANK OF ENGLAND 

The historical parallels between the establishment of the Federal 
Reserve System in 1913, and the Bank of England in 1694 are striking: 

First, the secret efforts surrounding the formation and passage of the 
legislation for both institufions. In Chapter 11, we read Paterson's 
description of how the Bank of England's legislation was promoted: "All 
the while the very name of a bank or corporation was avoided, though the 
notion of both was intended..." The Bank of England legislation was not 
even framed in its own act, but quietly passed as a rider to a shipping 
bill. With the Federal Reserve, we see the maneuvers of creating the 



526 The Lost Science Of Money 



temporary Aldrich-Vreeland system; the secret Jeckyll Island meeting; 
the disguising of the Republican bankers' bill as a Democrats' bill; and 
the bankers pretending to oppose their own bill! 

Second, both laws depended heavily on wealthy and more sophisti- 
cated foreign supporters and organizers. The Bank of England was 
organized largely by Dutch and Jewish financiers, who provided the 
formula and the impetus for it. The formula for the Federal Reserve 
System came largely from the Kuhn Loeb bankers connected with the 
European Rothschild interests; for Paul Warburg's overriding impor- 
tance in the formation of the Federal Reserve System cannot be denied. 
However, the impetus also came from Morgan and it could not have 
been done without the complicity, support and organization of America's 
financial estabHshment. 

Third, both insfitutions were very complex and not understood. This 
resulted partly from the need to cloak their effect - to obscure that the 
nation's sovereignty over its money was being transferred to private per- 
sons. Paterson wrote that few persons could understand the Bank pro- 
posal. And few could understand the Federal Reserve. Even among the 
American press: 

"The Nation magazine was the only public organ, so far as I can find 
out which pointed out that the issue of the money of the U.S. was being 
turned over to a body of men who were neither elected nor answerable 

to elections," wrote MuUins.^^ 

This lack of understanding was fiirther compounded by the vague- 
ness of the act itself Friedman and Schwartz pointed out that: 

"The Federal Reserve System therefore began operations with no 
effective legislative criterion for determining the total stock of money... 
the discrefionary judgment of a group of men was inevitably substituted 
for the quasi-automafic discipline of the gold standard. Those men were 
not even guided by a legislative mandate of intent (except the title of the 
act)."^^ 

Even within the Federal Reserve itself, almost no one besides 
Paul Warburg and Benjamin Strong had a clue as to what would 
happen: 

'Tn 1914 when these 12 banks were organized, a large staff of offi- 
cers were gathered from all parts of the country and to them was deliv- 
ered.. .just exactly what is contained in the Federal Reserve Act - and no 
more. With the exception of Paul Warburg and the writer, there was not 
one man in the entire organization who ever had the slightest experience 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 527 



in foreign banking, nor the opportunity to study the methods and poh- 
cies of the banks of issue of Europe," wrote Benjamin Strong, the first 

President of the New York Federal Reserve Bank.^^ 

This lack of understanding continued for decades as evidenced in 
Thomas E. Dewey's questions to Marriner Eccles (then Chairman of the 
Federal Reserve System) in a June 17, 1942 appearance before a con- 
gressional committee: 

Eccles: "I mean the Federal reserve, when it carries out an open 
market operation, that is, if it purchases government securities in the 
open market, it puts new money into the hands of the banks which cre- 
ates idle deposits." 

Dewey: "There are no excess reserves to use for this purpose?" 

Eccles: "Whenever the Federal Reserve System buys government 
securities in the open market, or buys them direct from the treasury, 
either one, that is what it does." 

Dewey: "What are you going to buy them with? You are going to 
create credit?" 

Eccles: "That is all we have ever done. That is the way the 

Federal Reserve System creates money. It is a bank of issue."^^ 

Dewey was no slouch; he was to become Governor of New York, 
and nearly defeat Truman for the presidency in 1948; yet he had trouble 
grasping how the Federal Reserve created money out of thin air. He 
probably had believed the normal misinformation that banks mainly re- 
lend the money that their depositors place with them. 

Fourth, both institutions were privately owned but made to appear as 
government bodies. 

The introduction to Garrison and Scott's re-written plan submitted to 
Wilson made nine points of supposed "difference" with the Aldrich plan. 
Point number three was: 

"The machinery and organization provided under this plan will work 

in the open, and are absolutely under government control.'"^^ 

Point number four was: 

"The ownership of this institution is not confined to banks and can 
never be controlled by any special interest or in any section of the country," 

A fifth parallel was that some important early supporters would later 
condemn both institutions. In the case of the Bank of England, William 
Paterson became so disaffected that he published a book condemning the 
Bank's buildup of the nafional debt. 



528 The Lost Science Of Money 



And with the Fed, several important early supporters regretted it 
later. William Jennings Bryan would write: 

"In my long career, the one thing I genuinely regret is my part in get- 
ting the banking and currency legislation enacted into law."^^ 

Professor H. Parker Willis, who thought he wrote the Federal 
Reserve act, began to attack it when he saw the extensive foreign influ- 
ence on it. Striking out against the Directors of the Fed, Willis wrote: 

"What could be expected from a group of men such as composed the 
board, a set of men who were solely interested in standing from under 
when there was any danger of friction, displaying a bovine and canine 
appetite for credit and praise, while eager only to 'stand in' with the 'big 
men' whom they know as the masters of American finance and banking." 

Woodrow Wilson also regretted his role in establishing the Fed, and 
later wrote a scathing statement against the Money Power. 

Sixth, both institutions gave the impression that their notes were 
backed by gold. In fact the Federal Reserve's notes (not its created 
deposits) started out as gold backed, but that would soon be changed. 

Seventh, both England and America were quickly pushed into major 
wars. England warred needlessly for over a century, as Cantillon told us 
in Chapter 11. America was immediately drawn into World War One. 

THE AGE OLD TECHNIQUES OF MONETARY DOMINATION 

The Federal Reserve System employed the standard false monetary 
concepts used for centuries to make domination possible. As early as 
1735 (see Chapter 12) the philosopher Bishop Berkeley had warned 
about them, in the English language. Those false concepts were: 

* Money's nature is a commodity. 

* Money must be gold. 

* Bankers were the source of money in a society, rather than the society 
itself. 

* Bankers could somehow be trusted to control the money system. 

Some of these misconceptions contradict each other, but different 
impressions were given to different groups at different times. The result- 
ing misunderstanding and confusion is the private central bank's best 
protection, as it was with the Bank of England. 

"SAFEGUARDS" IN THE FEDERAL RESERVE ACT 

It had been easier for the Dutch and Jewish financiers, and their new 
Orange Monarchy, to establish the Bank of England as the monetary 
sovereign in that nation. In America, a paper money nation from the 
start, there was more awareness of the far reaching privilege and power 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 529 



that such an establishment signified. The sensitivity to the injustice of 
such schemes uMmately kept the First and Second U.S. Banks of the 
U.S. from evolving into a permanent central bank - even kept them from 
surviving - and though this viewpoint could seldom dominate politics, it 
posed a substantial block to the ultimate alienation of society's monetary 
power to a privately owned central bank. 

Thus there were substantial restrictions in the Federal Reserve Act, 
which appeared to block arbitrary abuses by bankers, including: 

* All printed Federal Reserve notes were to be 100% backed by gold. 

* The "real bills doctrine:" all commercial loans created as a deposit in 
a bank were to be backed 100% by commercial obligations based on 
new production, plus an additional 14%o by gold. 

* The Governors of the Federal Reserve Board in Washington were 
appointed by the President. 

* Both the Secretary of the Treasury and the Comptroller of the 
Currency were members of the board. 

The bankers accepted limitations to get the plan enacted. Changes 
would be made later. Benjamin Strong, the first Chairman of the New 
York Fed, wrote to Paul Warburg on November 1, 1913: 

"I can reluctantly force myself to admit the necessity of compromise 
in matters of management, in the number of institutions to be organized, 
in the method of treatment of the national bank notes in fact, as to any 
other of the disputed questions raised by the Owen-Glass Bill, but as to 
the obligation of the U.S. Government being gratuitously added to these 
circulating notes... (no)"And: 

"Paramount in importance.. .is the provision that the note issues.. .are 
to bear the obligation of the United States Government. This is a provi- 
sional return to the heresies of Greenbackism and fiat money. "^^ 

Strong was concerned that if the notes had the U.S. Government's 
obligation printed on them, they'd eventually become a government 
issued currency. Then there is no need for the agency of the Fed in the 
process, and no need for the government to pay interest on such a cre- 
ation of money into perpetuity. What Strong insisted on as crucial was 
that Federal Reserve obligations, not U.S. money, be made the 
money of the land. Over time, as conditions changed, the bankers could 
use that power to remove some restrictions to which they had initially 
agreed. 

As early as June 21, 1917 the 100% gold backing rule on printed 
notes was reduced to 40% gold and 60% acceptable commercial paper. 



530 The Lost Science Of Money 



What determined whether commercial paper was acceptable - i.e. as 
good as gold? To a large extent Paul Warburg did. He founded and was 
Chairman of the International Acceptance Bank until his death in 1932. 
Any commercial paper that he and other bankers deemed acceptable 
could be used as reserves in the Federal Reserve System. 

A. MITCHELL INNES "LEADS" THE WAY 

Thus the Federal Reserve System appeared to be based on gold as 
money, but the Fed had the potential to substitute bank credit for money. 
Just around the time of its inception, two articles appeared in the 
Bankers Law Journal (in May 1913, and in February 1914), written by 
A. Mitchell Innes, then Consul of the British Embassy in Washington, 
DC. They had the effect of preparing the mindset of those bankers who 
actually believed in a gold based money system, for the new "reality." 

The articles "evoked much comment" according to the Journal, 
whose advance announcement of them lionized their author. Innes 
attempted to substitute the idea of credit for the idea of money. To do this 
he first had to disavow Adam Smith's erroneous metallist position of 
money being gold and silver by weight. That was well and good. The 
best and easiest way to attack Smith was to promote an historical analy- 
sis of money - so far so good. 

But then in order to promote the notion that all money is credit, 
Innes had to ignore the historical examples of government money, espe- 
cially the American examples such as the Greenbacks and the colonial 
currencies. He presented a fictional history substituting credit for money, 
erroneously claiming that even coins were credit. In effect Innes 
attempted to define money out of existence. He was yet another English 
expert befuddling American minds. 

This is the general direction 20th century establishment economists 
followed: they made inappropriate and false distinctions between "high 
powered money" (actually money) and lower powered money (actually 
credit). Instead of doing their jobs as economists, and clarifying the cru- 
cial distinctions between money and credit, they confused and obfuscat- 
ed the concepts. 

THE FED IS A FRACTIONAL RESERVE BANKING SYSTEM 

In 19^^ century America, when bankers issued ten fimes the amount 
of banknotes than the actual coinage they held, and still pretended that the 
banknotes were convertible to coinage, that was a primitive form of frac- 
tional reserve banking. When too many holders of the notes tried to redeem 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 531 



them for coinage, the bank would suspend redeemability or go under. 

Most people have been led to believe that the modem banking busi- 
ness consists of taking in deposits and then loaning them out at a higher 
rate of interest. But fractional reserve systems like the Federal Reserve 
generally allowed the system to loan out about ten times the amount of 
reserves that exist in the banking system. 

The individual banks no longer issue the banknotes; they now make 
loans by creating a credit for the borrower on the bank's books, against 
which the borrower can write checks. These checks get deposited in 
other banks, and cash is seldom withdrawn. However, bankers pretend 
to be able to pay out cash for the created credits that the public holds in 
their bank. This is similar to the earlier bankers pretending to be able to 
pay coinage for banknotes they had issued. 

The problem arises when the public gets worried over the solvency 
of their bank, and prefers to hold cash, rather than bank account credits. 
Fractional reserve systems are unstable because when depositors get 
scared and withdraw cash from the bank, it doesn't take much to start a 
run and close the bank. 

Europeans may be surprised to learn that for the past three decades 
the American people have not had confidence in their banks and most of 
the large banks would have been destroyed by runs for one reason or 
another. There may be one or possibly two exceptions. 

Only one thing has kept this from happening. The Federal Deposit 
Insurance Corporation (FDIC, enacted in 1935) guarantees the bank 
accounts. People know that the FDIC could not really handle a system- 
wide collapse, but they trust and assume that the U.S. Government will. 
Thus it is government credit that keeps the banks open in America. 

It must be pointed out that the Federal Reserve System turns over 
90% of its net income to the U.S. government, from the interest it earns 
on money creation. However, most of the money in the system is created 
by the Feds member banks, and they keep the net interest income they 
get from that process. This is referred to as seigniorage, and it rightfully 
belongs to society. Depending on reserve requirements, individual banks 
can loan about 1 .5 times the amount deposited with them. But then those 
loans go out and become further deposits in the banking system, so that 
new loans are made on them, etc. Eventually, system wide, a rule of 
thumb is that the deposits are multiplied about 10 times. 

It must also be pointed out that despite demands from time to time, 
the Federal Reserve System has never been independently audited. 



532 The Lost Science Of Money 



THE INCOME TAX ALSO CREATED IN 1913 

The small income tax started during the Civil War had been ruled 
unconstitutional by the Supreme Court. To establish a new income tax, 
it was necessary to pass the 16th amendment to the Constitution. It was 
proposed in 1909 and proclaimed ratified in 1913, 

The income tax started out at 1% tax on personal incomes over 
$3,000 if single, $4,000 if married. This was upper middle class in 1913. 
There were also surtaxes on higher incomes, starting at 1% on $26,000 
income, going up to 6% on incomes over $500,000. These tax rates were 
doubled in September 1916. 

As the U.S. entered WWI the basic rates were doubled again on 
April 6, 1917, from 2% to 4%. The maximum surtax rate was raised 
from 13% to 63%, giving a top rate of 67%o for those earning over 
$500,000 annually. 

A POSITIVE NOTE 

Democratic Chairmen of the House Banking Committee have regu- 
larly developed a genuine distaste for the Federal Reserve System, and 
put forward legislation to nationalize or abolish it. For example. 
Congressman McFadden moved in the House to impeach the Federal 
Reserve Board in 1933, as we describe in Chapter 20. Chairman Wright 
Patman introduced a bill in Congress in 1938 to nationalize the Fed, but 
it failed to pass. Chairman Gonzales in the 1980s and 90s introduced leg- 
islation to rescind the Federal Reserve Act, but it could never reach the 
floor for a vote. 

Shortly after the Federal Reserve Act had passed, Congress passed 
the Overmann Act, which gave the U.S. Government the power to take 
over all the assets of the Federal Reserve and take back control of the 
money system. The act expired after two years without being exercised. 
However, this is easily corrected. Our government doesn't need an 
"Overmann'' Act to regain its legitimate monetary powers. The 
United States can and should nationalize the Federal Reserve sys- 
tem, and the sooner the better. 

In Summary, the populist parties arose after the Democrats were 

neutralized by European bankers, splintering the national majority that 
favored the greenbacks. They were then diverted away from reclaiming 
the monetary power, onto the silver issue, leading finally to Bryan's 
Honest Money Campaigns. Their concerns abated as new gold discov- 
eries and extraction processes softened the money drought. 

Treasury Secretary Shaw was methodically stabilizing the banks 



19 TRIUMPH OF THE BANKERS - THE FEDERAL RESERVE SYSTEM 533 



when an artificially induced panic in 1906 provided the catalyst for 
establishing the Federal Reserve System. Senator Aldrich's monetary 
commission laid the theoretical framework but failed to define money, 
and the banking community pretended to oppose their own bill in order 
to get it passed. It took 40 years for the story to come out, thanks large- 
ly to the public spirited concern of American poet Ezra Pound. 

Parallels to the formation of the Bank of England were evident: the 
secretive efforts surrounding the legislation; the role of foreign bankers; 
the indecipherable complexity of the systems; that the central banks 
were presented as government entities but were privately owned and 
controlled. But the Fed's legislation had enough advertised benefits for 
the farming community to convince some leading populists to mistaken- 
ly lend critically needed support to pass the bill. 



Notes to Chapter 19 

^ Peter Cooper, open letter to President Grant, June 1, 1877. 

2 W.J. Bryan, The Second Battle, (Chicago: W.B. Conkey, 1900), p. 207 

^ WJ. Bryan and the Campaign of 1896, edit., G. Whicher, (Boston: Heath, 

1953), section by James A. Barnes quoting the Nation magazine, p. 25. 

^ John D. Hicks, The Populist Revolt, (Univ. of Nebraska Press, 1961), p. 340. 

^ Henry George 1896 N.Y. Journal interview, quoted by Henry George, Jr., Life 

of Henry George, (New York; R. Schalkenbach Foundation, 1960), p. 558. 

^ Gabriel Kolko, The Triumph of Conservatism, (Chicago: Quadrangle, 1967). 

^ Kolko, cited above, pp. 18-22. 

^ Kolko, cited above, pp. 24, 7. 

^ Kolko, cited above, pp. 120-40. 

^^ P. Studenski & H. Kroos, Financial History of the U.S., (New York: McGraw Hill, 

1952), pp. 210-15. 

^^ Kolko, cited above, pp. 145-50. 



534 The Lost Science Of Money 



^^ Studenski & Kroos, cited above, pp. 233-46. 

^^ Alexander Del Mar, History of the Precious Metals, (1902, repr., New York: 

A.M. Kelley, 1969), p. 456. 

^"^ William F. Hixson, The Triumph of the Bankers, (Westport: Praeger, 1993), p. 13. 

^^ Leslie M. Shaw, Current Issues, (New York: Appleton, 1908), pp. 304-11. 

^^ Milton Friedman & Anna Schwartz, A Monetary History of the United States, 

1867-1960, (Princeton Univ. Press, Natl. Bureau of Econ. Res., 1971), p. 150. 

^^ Friedman & Schwartz, cited above, p. 161. 

'^ Studenski & Kroos, cited above, p. 252. 

'^ see Oliver M. Sprague, History of Crises Under the National Banking System, 

(repr.. New York: A.M. Kelley, 1968). 

^^ Friedman & Schwartz, cited above, p. 168. 

^^ Studenski & Kroos, cited above, p. 255. 

^^ Friedman & Schwartz, cited above, pp. 180-185. 

^^ Kolko, cited above, p. 282. 

^4 Carroll Quigley, Tragedy and Hope, (New York: Macmillan, 1 966), pp. 46-7, 53. 

^5 Kolko, cited above, p. 190-215. 

^^ Eustace Mullins, The Federal Reserve Conspiracy, (New Jersey: Common 

Sense Press, 1954), as quoted on p. 94. 

^^ Kolko, cited above, p. 255. 

^^ Studenski & Kroos, cited above, p. 255. 

^^ Elisha Ely Garrison, Roosevelt, Wilson, and the Federal Reserve Law, 

(Boston: Christopher Publishing House, 1931), pp. 260, 283. 

^^ Mullins, cited above, p. 30. 

^^ Friedman & Schwartz, cited above, Chapter 4. 

^^ Kolko, cited above, p. 234. 

^^ Mullins, cited above, pp. 27-9. 

^"^ Mullins, cited above, p. 30. 

^^ American Bankers Assoc, magazine, April 23, 1911, The Aldrich Plan, Suggested Plan 

for Monetary Legislation, as quoted in Studenski & Kroos, cited above, pp. 258-60. 

^^ Mullins, cited above, p. 30. 

^^ Friedman & Schwartz, cited above, p. 193. 

^^ Jan. 3, 1924 Letter from B. Strong to J. Hollander, quoted by Lester V. Chandler, 

Benjamin Strong, Central Banker, (Washington: Brookings, 1958), p. 17. 

^^ as quoted by Mullins, cited above, p. 130. 

^^ Garrison, cited above, p. 247. 

"^^ as quoted by Mullins, cited above, p. 29 

^^ Strong's Oct. 17, 1913 letter to Col. Millard Hunsiker, as quoted by Chandler, 

cited above. 



535 



CHAPTER 20 



THE FEDERAL RESERVE 
WRECKS AMERICA 



"What is banking?... The most dangerous as it is the 

most ridiculous form of universal tyranny 

the World was ever called upon to destroy." 

Frederick Soddy, Nobel Laureate, 1933^ 

". . .the result is to make into the master 
what ought to be the servant." 

The Archbishop of Canterbury, 1942 

". . .no one can breathe against their will." 

Pius XI, Quadragesimo Anno, 1931 



The Federal Reserve System was poorly defined from the start. It 
arose out of Aldrich's National Monetary Commission, which didn't 
bother to define money. The System's objectives were not spelled out 
carefully and its image differed considerably from its underlying poten- 
tial. Publicly it continued the retrogression toward gold, away from the 
advanced Greenback concept. More privately, it confiised money with 
credit, in the real bills doctrine. Prominent Democratic leaders such as 
William Jennings Bryan and Robert LaFollette, the populist Senator 
from Wisconsin, did not see where it would lead and were convinced to 
support its passage because they thought parts of it would help farmers. 

As the Fed's monetary engines were fired up to finance WWI, we 
see as much confusion as conspiracy, right up to the Depression, as an 



536 The Lost Science Of Money 



unstable fractional reserve monetary system based on a false concept of 
money, controlled by bankers for private profit, went into high gear. 

It was a central bank but its central Board in Washington, D.C., ini- 
tially had little or no control over the 12 regional Federal Reserve Banks 
around the country (Boston, New York, Philadelphia, Cleveland, 
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Denver, Dallas, 
and San Francisco). These 12 banks are separate corporations, owned by 
their member banks, which receive a 6% annual dividend on their 
shares. Each of these "FRBs" (Federal Reserve Banks) has nine direc- 
tors: six are elected by their member banks, and three (non bankers) are 
appointed by the Board in Washington. 

Initially the 12 FRBs set most of their own policy, following the lead 
of the New York FRB, where the system's real power was concentrated. 
Its president, Benjamin Strong, was reputedly one of the two men who 
actually understood the Federal Reserve System. The other was its pri- 
mary author, Paul Warburg, who was on the Washington board. 

BANKERS PREFER AMBIGUITY 

The Federal Reserve Act gave no specific guidelines for maintaining 
a proper money supply, but gave the bankers discretion. One lesson 
from the Federal Reserve System is that bankers must not be given 
such discretion. The Systems requirements need to be spelled out in 
great detail with regard to the desired outcomes to be reached on an 
ongoing and sustainable basis. 

Ambiguity allows the Fed's image makers to stress the non-banker 
directors; but they don't elect an activist or real labor union leader, or 
anyone devoted to social justice. Thus the system is firmly in the hands of 
bankers and their sycophants. 

The bankers have usually pretended that the Fed is a government 
body. Even today conservatives and many Libertarians falsely assert that 
the "government" and not private bankers control it. The Fed's booklets 
assert that the system operates as a "public service," But rather than take 
their word, we'll examine their real life performance. 

FED IN THE "NICK OF TIME" FOR WORLD WAR ONE 

The Fed started operations on November 16, 1914 with total assets 
listed at $143 million. National banks were free to remain outside the 
system, and they were slow to join. Still the Fed got rolling "just in the 
nick of time" for World War One, wrote Secretary of State Cordell Hull. 
Other observers marveled at the happy coincidence. Prof. Edwin M. 



20 THE FEDERAL RESERVE WRECKED AMERICA 537 



Kemerer of Princeton commented: 

"One shudders when he thinks what might have happened if the war had 
found us with our former de-centrahzed and antiquated banking system." 
The Journal of Political Economy reacted similarly: 
"The effect of the war upon the business of the Federal Reserve 
Banks has required an immense development of the staffs of these banks 
...Without of course being able to anticipate so early and extensive a 
demand for their services in this connection, the framers of the Federal 
Reserve Act had provided that the Federal Reserve Banks should act as 

fiscal agents of the Government."^ 

Mullins commented on this naivete: 

"Mr. Kemmerer's shudders are wasted. If we had kept our 'anti- 
quated banking system,' we would never have been able to finance the 
allies or enter the war ourselves... the primary function of the central 

bank mechanism is war finance."^ 

U.S. SELLS ARMS TO BOTH SIDES 

From December 1914, both sides turned to the U.S. for war supplies 
at any cost. Gold poured in as America's factories were channeled into 
war production and exports grew 600%. When the war began the U.S. 
was a net debtor in foreign exchange of $3-4 billion; by the end, a net 

creditor of $5 billion.^ 

America's largest bankers also financed England and her allies. By 
1917 the Morgans and Kuhn Loeb Co. had floated a billion and a half 
dollars of loans to the allies in bonds sold through New York's big 

finance houses.^ 

Wilson refiised to heed Secretary of State William Jennings Bryan's 
warning that "Money is the worst of all contraband," and Bryan finally 
resigned over the financiers drawing the U.S. into the war. But our 
Ambassador to England pushed Wilson toward war: 

"The greatest help we could give the allies would be credit. Our gov- 
ernment could make a large investment in a Franco-British loan or might 
guarantee such a loan. Unless we go to war with Germany, our 
Government, of course cannot make such a direct grant of credit," wrote 

Walther Hines Page.^ 

Less than a month later, Wilson asked Congress for a declaration of 
war over the sinking of the Lusitania. Earlier he had tried to declare war 
over false reports of the sinking of the Suffolk, which had been attacked 
but not sunk. On April 6, 1917 the U.S. declared war on Germany. 



538 The Lost Science Of Money 



WORLD WAR ONE LEAVES THE U.S. IN SERIOUS DEBT 

Hostilities ended on November 11, 1918 after just 19 months; but 
one of the primary objectives of the Money Power was achieved - the 
U.S. was saddled with an unprecedented debt. The war cost the U.S. 
about $33 billion, or 20-25% of the GNP, leaving the Federal 
Government $24.3 billion in debt in 1920. This was about ten times 

greater than the previous high of the debt, back in 1866.^ 

THE FED DESTABILIZES AMERICA'S MONEY SYSTEM 

The effects of the Fed were opposite what the country had been led 
to expect: 

"The (Federal Reserve System), intended to promote monetary sta- 
bility, was followed by about 30 years of relatively greater instability in 
the money stock than any experienced in the pre-Federal Reserve period 

our data cover...," wrote Friedman and Schwartz.^ 

1914-1919 -A CLASSIC GOLD INFLATION 

As gold poured into America for war materials, there was a large 
increase in the money supply. With plant and equipment and labor 
already running at high capacity, this caused a corresponding decrease in 
the value of money. From June 1914 to April 1917 the money stock was 
up 46% and wholesale prices increased 65%. From April 1917 to May 
1920, the money stock rose another 49% and wholesale prices rose 
another 55%. Gold coins thus lost over 75 % of their value against com- 
modity wholesale prices during the first six years of the Feds rule.^ The 
self-described "hard money" advocates who preach that gold money 
always keeps its value should study these facts. 

Responding to criticism over this gold inflation, the Federal Reserve 
Board insisted that the inflation was caused by "increased business 

activity."!^ 

Thus the Fed's gold standard was not an effective limit on infla- 
tion. Only a monetary system that sets objective limits on the money 
supply can protect from a rampant inflation. A commodity money 
system can't do that; nor can basing money on land, buildings, or 
new production. The method of limitation must be defined in the 
law. 

EMERGENCY ATMOSPHERE UNDERMINES 
THE CONSTITUTION 

Many obstacles to the monetary conquerors were swept aside under 

the guise of "war emergency measures." The closure of the New York 



20 THE FEDERAL RESERVE WRECKED AMERICA 539 



Stock Exchange from July 31, 1914 until April 15, 1915 created an air 
of emergency even before the U.S. entered the war. During WWI the 
nation's railway system was nationalized, adding to the crisis atmos- 
phere in which American values were cast aside - sometimes secretly - 
and unconstitutional powers were handed over to Wall Street operators: 

"...Woodrow Wilson did turn over this country to the worst elements 
in it during the First World War. The American people were put in the 
hands of three dictators, all three being Wall Street gamblers who had 
never held any elective office in the United States," wrote MuUins. 

"Bernard Baruch, Eugene Meyer Jr., and Paul Warburg... exercised 
more direct power over the American people than any president, because 
back of these men was the strength of the financial oligarchy which had 
maintained undisputed sway in this country since 1863...," wrote 
MuUins. He then cited an example of this power, in Baruch's own words: 

"Baruch as chairman of the War Industries Board exercised dictato- 
rial powers over American manufacturers. At the Nye committee hear- 
ings in 1935, Baruch testified: 

'President Wilson gave me a letter authorizing me to take over any 
industry or plant. There was Judge Gary, President of United States 
Steel, whom we were having trouble with, and when I showed him that 

letter, he said "I guess we will have to fix this up," and he did fix it up.'"^^ 
Eugene Meyer Jr., the son of the dominant partner of Lazard Freres, 
was appointed at Baruch's insistence to the Chairmanship of the War 
Finance Corporation and was later appointed Governor of the Federal 
Reserve Board in 1931. Meyer handled the war finance of those agen- 
cies and banks not under the control of the Federal Reserve System. 
Meyer eventually bought the Washington Post newspaper, run by his 
daughter Katherine Graham until her death in mid 2001. 

Paul Warburg was the subject of a U.S. Naval Secret Service Report 
of Dec. 12, 1918: 

"Warburg, Paul, New York City. German. Naturalized American 
Citizen 1911, was decorated by the Kaiser in 1912, was Vice Chairman 
of the Federal Reserve Board, handled large sums furnished by Germany 
for Lenin and Trotsky. Has a brother who is leader of the espionage system 

of Germany," related MuUins. ^^ 

BANK OF ENGLAND DICTATES AMERICAN 
MONETARY POLICY IN THE 1920s 

"...after W.W.I a close cooperafion was established between the 
Bank of England and... the Federal Reserve Bank of New York... largely 



540 The Lost Science Of Money 



due to the cordial relations existing between Mr, Montagu Norman of the 
Bank of England and Mr. Benjamin Strong... On several occasions, the 
discount rate policy of the Federal Reserve Bank of New York was guid- 
ed by a desire to help the Bank of England," wrote monetary historian 
Paul Einzig.^^ 

Fed Governor Leffingwell complained to the Washington Board: 

"It is very painful for me to say but when Governor Strong got back 

from London he told me that he had agreed on a program with the 

Governor of the Bank of England. . .1 regard it as exceedingly unfortunate, 

in view of all that history, that this agitation of rates comes about when we 

must raise $500 million every two weeks to keep from defaulting."^^ 

In January 1920, the Fed raised its discount rate by 1 .25% to 6%. On 
June 1, 1920 it was raised again to 7%. Wholesale prices, which peaked 
in May 1920, fell 56% by June 1921. This was the sharpest decline in 
U.S. history, and led to an unnecessarily severe depression in 1920-21. 
That depression pushed American farmers into a financial crisis from 
which they did not recover, even as the stock market later soared. 




20a, On September 16, 1920 at 11:59 AM, a wagon carrying a bomb of dyna- 
mite and scrap iron was detonated at Broad and Wall Street, killing 38 and 
wounding hundreds. The driver had walked away and was never caught. 



20 THE FEDERAL RESERVE WRECKED AMERICA 541 



BENJAMIN STRONG AND MONTAGU NORMAN: 
LOVE AT FIRST SIGHT? 

It's pretty clear from their correspondence that Benjamin Strong and 
Montagu Norman were involved in more than a business relationship for 
years. Norman wrote to Strong on September 6, 1928, on learning that 
Strong was to retire due to illness: 

"Dear old friend, 

I accept the decision that you resign... then the curtain will be rung 
down on our stage and then I would like to be on the spot so as to hold 
your hard hand at the moment of announcement... But what a stage ours 
has been over these 10 or 12 years!... Your dreams have come true and 
over these years I have watched the process (as no one else has done) 
with affection and pride. For the rest of my life that belongs to me as a 
memory which none can take away. 

"Whatever is to happen to us - wherever you and I are to live - we 
cannot now separate and ignore these years. Somehow we must meet 
and sometimes we must live together... I have a feeling that in one way 
or another you will still be useful to those whom you have given service 
and made sacrifices and they are international and almost world wide. So 

I believe the best is yet to be."^^ 

Exactly who were these people that Benjamin Strong had been "use- 
ful" to, "given service" and "made sacrifices" to? These "international, 
almost world wide" people? Montagu Norman does not say. He is certain- 
ly not referring to the American public. 

Since it appears that Strong carried out Norman's wishes and sacri- 
ficed his Americans, one might guess he was the submissive partner. But 
then when Norman refers to Strong's "hard hand" all sorts of possibili- 
ties arise in the meting out of "manly discipline" to naughty upper class 
Enghshmen. 

WHAT MADE THE "ROARING TWENTIES" ROAR? 

Long after WWI ended, the Bank of England still called the tune at the 
Fed, fueling the "Roaring Twenties," and culminating in a great speculative 
binge. The two Banking systems, not the government, were responsible: 

In 1920, U.S. Government expenditures were 8% of the national 
income. In 1929 these expenditures were only 4% of national income. In 
1920 the Federal government's debt was $24.3 billion. In 1929 the 
Federal Government's debt dropped to $16.9 billion. Clearly it was not 
U.S. government programs that fueled the roaring twenties. If anything, 



542 The Lost Science Of Money 



the government did the opposite. ^^ 

Studenski and Kroos point out that in the 1920s the banks aban- 
doned the "real bills" doctrine of financing industrial production, and 
instead "financed" the financial bubble: "For while member bank com- 
mercial loans remained about the same fi'om 1921 to 1929, their securi- 
ty loans increased 121%; real estate loans 178% and investments 
[increased] 67%."^^ 

We can see the effects on a chart of the Dow Jones Industrial 
Average, as stock prices were shifted into high gear starting around 
1926, 

ENGLAND'S GOLD STANDARD IDEOLOGY CAUSES 
THE 1920s FRENZY 

The British pound had been heavily inflated during WWl , with over 
5 billion pounds in new debt created. The cost of living index rose from 



Dow Jones Industrial Average, 1900-1947 

400 



381.7 

(Sept.) 




41.2 

(July) 







> > I i i ) 1 I t 
1900 



1910 



' 1 i I I I i ( I 
1920 



t t I r ) I t I i 
1930 



t i I I i I 

1940 



20b, The Dow Jones Industrial Average really took off after the Bank of 
England's influence was brought to bear on the Fed in 1926 to support 
England's foolish gold standard policy, a major cause of the Great Depression. 



20 THE FEDERAL RESERVE WRECKED AMERICA 543 



100 in 1914 to over 276 in 1920.^^ Yet in 1925 the Bank of England 
made the pound convertible into gold at pre-war parity levels and paid 
out gold for paper at the old rate, which was not realistic; in fact it was 
perverse. 

The effects were not felt in England and Europe for a time because 
the Federal Reserve System supported the Bank of England by keeping 
interest rates low in America, encouraging the export of gold to 
Europe. However, the U.S. money supply became progressively more 
leveraged, being based on smaller reserves, and the low interest rates 
helped to fuel the stock market bubble, driving prices up to unrealistic 
levels, from which a collapse was likely. 

H. Parker WiUis confirmed the foreign source of the policy: 
"In the autumn of 1926 a group of bankers. . .[met] in a Washington 
hotel. One asked if the low discount rates of the system were not likely 
to encourage speculation. 'Yes' replied the famous banker, 'they will, but 

that cannot be helped. It is the price we must pay for helping Europe.'" ^^ 

The Congressional "Stabilization" hearings of 1928 confirmed that 

Europeans [i.e. the English] had determined the Fed's policy, especially 

the testimony of Federal Reserve Board Governor Adolph Miller:^^ 

Governor Miller: "I think we are very close to the point where further 
solicitude on our part for the monetary concerns of Europe can be 
altered. The Federal Reserve board last summer, 1927 [began]... to ease 
the credit situation and to cheapen the cost of money. The official 
reasons for that departure in credit policy were that it would help stabi- 
lize international exchange and stimulate the exportation of gold." 
Committee Chairman McFadden: "...Where did the suggestions 
come from that caused this decision...?" 

Governor Miller: "The three largest central Banks in Europe had sent 
representatives to this country. There were the Governor of the Bank of 
England, Mr. Montagu Norman, the President of the Reichsbank, Mr. 
Hjalmar Schacht, and Professor Rist, Deputy Governor of the Bank of 
France. These gentlemen were in conference with officials of the Federal 
Reserve Bank of New York. After a week or two, they appeared in 
Washington for the better part of a day... They came down the evening of 
one day, and were the guests of the Governors of the Federal Reserve 
Board the following day, and left that afternoon for New York." 
Chairman McFadden: "Was it a social affair, or were matters of 
importance discussed?" 



544 The Lost Science Of Money 



Governor Miller: "I would say it was mainly a social affair. 
Mr. Kinat "What did they want?" 

Governor Miller: These gentlemen were all pretty concerned with the 
way the gold standard was working. They were therefore desirous of 
seeing an easy money market in New York, and lower rates, which 
would deter gold from moving from Europe into this country. 
Mr. Beedy: "Was there some understanding arrived at between the rep- 
resentatives of these foreign banks and the Federal Reserve Board or the 
New York Federal Reserve Bank?" 
Governor Miller: "Yes." 
Mr. Beedy: "It was not reported formally?" 
Governor Miller: "No. 

Chairman McFadden: "You have outlined here negotiations of very 
great importance." 

Governor Miller: "I should rather say conversations." 
Chairman McFadden : "Something of a very definite character took place?" 
Governor Miller: "Yes." 

Chairman McFadden: "A change of policy on the part of our whole 
financial system which has resulted in one of the most unusual situations 
that has ever confronted this country financially." 
Mr. Steagall: "The visit of these foreign bankers resuhed in money 
being cheaper in New York?" 
Governor Miller: "Yes, exactly." 

Governor Miller: "A situation had been created that was distinctly 
embarrassing to London by reason of the impending withdrawal of a cer- 
tain amount of gold... deposited in the Bank of England by the French 
Government... France was beginning to put her house in order for a 
return to the gold standard." 

Mr. Steagall: "Is it true that that action stabilized the European curren- 
cies and upset ours?" 
Governor Miller: "Yes, that is what it was intended to do." 

So the American currency was destabilized to help the Bank of 
England fulfill its gold obligations to France. The so-called automatic 
functioning of the Bank of England's gold standard required the 
Americans to ignore national interests and sacrifice to that British Temple. 

The testimony reveals that the "automatic gold standard" was a 
myth, and that back then the Federal Reserve System's power really 
resided in the New York Fed. The European Bankers spent two 
weeks there, and not even one full day in Washington, DC. 



20 THE FEDERAL RESERVE WRECKED AMERICA 545 



THE FED CONCENTRATES MONEY IN TOO FEW HANDS 

The credit creation up to 1919 was directed into war production for 
an unnecessary war. After the war ended, much of the new money put 
into circulation concentrated into the hands of the wealthy. While the 
money supply in the 1920s rose only $2.5 billion, wealth became dra- 
matically more concentrated in fewer hands. In 1929, one percent of the 
population in America owned 36.3% of all the wealth in the country, one 
of the high peaks up to then. The rich already owned houses, cars, fur- 
niture, etc. Thus it did not greatly encourage production of much more 
of such items. Even commodity prices were hardly affected after 1921. 
A significant portion of the money went into financial instruments, the 
stock market, and office building speculation: 

Elgin Groseclose, the late, much under appreciated head of the 
Monetary Research Institute in Washington D.C. wrote: 

"From 1922 to 1929 the ratio of loans on securities to total loans and 
investments of reporting member banks advanced from 25% to more 
than 43%. ..On September 30, 1929 New York banks and trust companies 
alone had over seven billion dollars loaned to New York Stock Exchange 
brokers to finance security speculation... 

"A huge building boom followed, the Federal Reserve Board index 
of building contracts awarded, rising from 63 in 1913 to 122 in 1925 and 
135 in 1928. ..This boom occurred chiefly in skyscraper offices and 
expensive apartment house developments, whose notes were more read- 
ily marketable, rather than in the modest single family accommodations. 
The result was that when the era had passed the slums still existed, like 
rats nests around the whitened skeletons of downtown mastodons. ..By 
1929, member bank loans against real estate, other than farm land, 

amounted to $2.76 billion, against $875 million in 1921."'^^ 

THE 1929 STOCK MARKET PEAK 

As the market soared in 1927, '28, and '29, no doubt most citizens, 
other than farmers, thought the Federal Reserve was doing a great job. 
The only inflation was in the stock market. But remember this principle: 
when the dynamics of a financial situation depends for its rewards and 
expectations to be fiilfilled, that the stock market be valued over 20 
times earnings, the system is headed for big trouble. 

By early 1929 the more informed bankers were getting out of the 
market. Until then, they had reassured Congress and the country that all 
was well: 



546 The Lost Science Of Money 



"In March 1928, Roy A. Young, Governor of the Board, was called 
before a Senate Committee. 'Do you think the brokers' loans are too 
high?' he was asked. 

"I am not prepared to say whether brokers' loans are too high or too 
low," he replied, "but I am sure they are safely and conservatively 
made." 

"Secretary of the Treasury Mellon in a formal statement assured the 
country that they were not too high, and President Coolidge, using mate- 
rial supplied him by the Federal Reserve Board, made a plain statement 
to the country that they were not too high. The Federal Reserve Board, 
charged with the duty of protecting the interests of the average man, thus 
did its utmost to assure the average man that he should feel no alarm 
about his savings. Yet the Federal Reserve Board issued on February 2, 
1929, a letter addressed to the Reserve Bank directors cautioning them 
against the grave danger of further speculation," wrote H. Parker Willis, 

who became much disillusioned with "his" Federal Reserve System.^^ 

THE BANKERS WERE WARNED AGAINST "SPECULATION" 

Then On February 6, 1929 four days after its warning to the 12 
Federal Reserve Banks, the Board warned the system's member banks 
that their purpose was not to finance speculation in the stock market 
through loans on securities. But the New York FRB ignored the warning 
and advertised the availability of another $25 million for brokers' loans. 
The System's monetary base had already been moving toward con- 
traction. At the end of 1928 the System's holdings of U.S. bonds dropped 
from over $600 million to only $230 million, having sold about $400 
million of them in the open market during the year. They fell further to 
$145 million in the first half of 1929. Since these holdings could be used 
as reserves in the fractional reserve system, selling them could remove 
multiples of that amount of money from circulation; or it would require 

a more leveraged position, or substitution of other, inferior collaterals^ 

BENJAMIN STRONG WAS READY 

Strong's correspondence of August 1928 showed an awareness of 
the problem, and how to handle it: 

"...the very existence of the Federal Reserve System is a safeguard 
against anything like a calamity growing out of money rates. . .we (have) 
the power to deal with such an emergency instantly by flooding the 
street with money... the country is well aware of this." Strong knew 



20 THE FEDERAL RESERVE WRECKED AMERICA 547 



how much power he personally held to avert a crisis: 

'^Ifthe system is unwilling to do ity then I presume the NY Bank 

must do it alone... "^"^ 

Such action could buy the time needed for a more gradual adjust- 
ment, without panic. Those who regard "market forces" as deities won't 
understand Strong's confidence that, as president in control of just one 
of the Federal Reserve Banks, he could avert a crisis and turn back the 
seas. They don't appreciate how artificial their market gods really are. 
Benjamin Strong knew what he was talking about, and the New York 
FRB was the strongest of them. 

Unfortunately, Strong became ill on a trip to see Montagu Norman 
and died at age 56, before the crash. Remember that it was Strong and 
Warburg, among all the high officials in the system, who really under- 
stood the nature of the power they wielded. 

WARBURG WARNS OF 'THE ULTIMATE COLLAPSE" 

Paul Warburg, who had been out of the Federal Reserve system 
since 1918, painted a very different picture from Strong. Writing in a 
March 1929 annual report to the stockholders of his Intemational Acceptance 
Bank: 

"If the orgies of unrestrained speculation are permitted to spread, the 
ultimate collapse is certain not only to affect the speculators themselves 
but to bring about a general depression involving the whole country." 

The British press picked up on what was afoot in New York. On May 
25, 1929, the London Statist presciently wrote: 

"The banking authorities in the United States apparently want a 

business panic to curb speculation."^^ 

THE LAST STRAW 

While insiders like Warburg were predicting the "ultimate collapse" 
as early as February and March 1929, the stock market went its merry 
way, reaching a peak in August. This demonstrates the difficulty of pick- 
ing market turning points. The last straw was when the Federal Reserve 
Bank of New York raised its discount rate to 6% on August 6, 1929. 

Other historic market tops have occurred in August. For example, 
the South Sea bubble in August 1720; the Panic of 1873; and the 1987 
crash. The crash type of activity has been generally associated with mid- 
to-late October, when the declines turned into panics. Seasonal money 
supply increases are needed then, to move harvested crops in the north- 
em hemisphere. 



548 The Lost Science Of Money 



THE CRASH 

The great crash of 1929 was much more than an economic or mar- 
ket phenomenon. It was Hfe and death to hundreds of thousands of 
human beings, about 36 miUion, if one includes the related World War II 

casualties.^^ The collapse spread from the U.S. to Europe and the rest of 
the world, except China, which was on a silver standard, not a gold stan- 
dard, and was hardly affected. 

It was also an event of deep sociological importance because laissez- 
faire ideas had ruled in the 1920s. But the crash made clear to virtually 
everyone that "capitalism," to the extent it was defined by the American 
political, economic and market system, had fundamentally failed. That 
is the history we have been in the process of unlearning; it is the his- 
tory that we appear doomed to repeat once more. 

MONEY SUPPLY PLUNGES IN 
THE GREAT DEPRESSION 

The really crucial data - the money supply figures - were not being 
watched at the time. In fact, the figures were not being published in a 
timely way and were not readily available. From August 1929 to March 
1933 the U.S. money stock fell by one-third ! 

At the same time, the number of commercial banks fell by about 
one-third. The first wave of bank failures came in October, 1930. 
Another wave of failures hit in March, 193 1 . Domestically, currency was 
being withdrawn fi^om the banks, depleting their reserves and creating a 
multiple effect on the money supply. Externally, except for 1929 and 
1930, gold was being withdrawn from the system by foreigners, having 

a similar negative effect on the U.S. money supply.^^ 

Today the money supply figures are watched but are not understood. 
Thanks to confusion over the nature of money, the Fed's measurements 
of the money supply are primarily measuring the credit supply. But cred- 
it and money are two different things, and Fed Chairman Greenspan 
admitted in recent testimony that he was having diflHculty defining money. 

BRITAIN FORCED TO ABANDON ITS 
GOLD STANDARD FOLLY 

Even after the crash, up to mid- 1931, the Fed continued to support 
the Bank of England's failing gold standard, extending loans to 
European banks while denying them to domestic industry. In mid- 1931, 
the FRB of New York and other FRBs were buying commercial paper 
from the Bank of England and the central banks of Austria, Hungary and 



20 THE FEDERAL RESERVE WRECKED AMERICA 549 



Germany, totaling $145 million. 

"Charles E. Mitchell, a director of the New York FRB, was quoted 
as saying in all of these cases he was concerned about the soundness of 
the operation.., and the thing which bothered him with regard to these 
foreign credits was the risk involved when, at home, the Federal Reserve 

Banks take no risks," noted Friedman and Schwartz ?^ 

On September 21, 1931 Britain finally abandoned the attempt to 
maintain the gold standard at the pre-war price level. Within a year 25 
other countries also quit this senseless position. Holding the pound ster- 
ling convertible to gold at the pre-WWI price represented an overvalu- 
ing of the British currency to the detriment of anyone who owed money 
and to the advantage of the creditors. 

BARUCH'S DISMAL ADVICE TO ROOSEVELT 

Bernard Baruch advised President Roosevelt to: 

''...balance the budget and let nature take its course. But the grind- 
ing down of prices and wages that would result from such action might 
very well have led to a revolution. It wasn't reasonable to expect 12 mil- 
lion idle men in the presence of idle machinery to wait that long," 
observed Robert De Fremery, noting that: 

'The orthodox banking theorists took the stand that a liquidation of 
bank credit would be a "wholesome" thing. . .But obviously a contraction 
of the supply of money is not a wholesome thing in terms of the effect it 

has on human beings. "^^ 

Roosevelt had experience in the bond trading business and was 
"street-wise" enough to ignore much of Baruch's advice. Many present- 
day Libertarians and conservative economists still ignorantly repeat 
Baruch's advice and criticize Roosevelt for resisting it. But the President 
was not in charge of the monetary system, the Fed was, and under cover 
of the "orthodox" monetary theories, such as Baruch's, the Fed's Board 
did little or nothing to improve the situation. 

SOME CONGRESSMEN UNDERSTOOD 

In January 1931, Congressman A.J. Sabath of Illinois took to the 
House floor after Eugene Meyer had turned down his suggestion that the 
proper response to the increase in bank failures was relaxation of eligi- 
bility requirements in order to encourage re-discounting, meaning more 
Fed lending to banks. Since a main reason given for establishing the Fed 
was to be a lender of last resort during emergencies, Sabath wrote: 

"Does the board maintain that there is no emergency existing at this 



550 The Lost Science Of Money 



time? To My mind if ever there was an emergency, it is now, and this I 
feel, no one can successfully deny. For while 439 banks closed their 
doors in 1929, during the year 1930, 934 banks were forced to suspend 
business." 

But Meyer refused to act. On the Floor of the House of 
Representatives Sabath said: 

"I insist it is within the power of the Federal Reserve Board to 

relieve the financial and commercial distress."^^ 

THE SILENT ECONOMISTS 

Many economists simply ignored the Great Depression. Friedman 
and Schwartz would later write: 

"Some academic people, such as Harold Reed, Irving Fisher, J.W. 
Angell, and Karl Bopp expressed similar views (to Congressman 
Sabath). ..Most surprising, some of those whose work had done most to 
lay the groundwork for the Federal Reserve Act, or who had been most 
intimately associated with its formulation - for example, O.M. Sprague, 
E.W. Kemmerer, and H. Parker Willis - were least perceptive.. .One can 
read through the academic economic journals and find only an occa- 
sional sign the academic world even knew about the unprecedented 
banking collapse in progress, let alone that it understood the cause and 

the remedy."^ ^ 

THE "PUSHING ON A STRING" ARGUMENT 

There was a widespread belief that just making reserves available in 
banks wouldn't solve the problem because businessmen couldn't be 
forced to borrow in such bad times. Apologists for the bankers claimed 
there were not good loans to be made - that there was no loan demand. 
They say the Fed would have been "pushing on a string" in trying to 
make loans. We can rephrase their argument: the destruction created by 
the bankers made businessmen overly cautious. 

However, the 1935 study of C.C. Hardy and Jacob Viner showed 
there was loan demand, and gave the real underlying explanation for the 
lack of loans: 

"There exists a genuine unsatisfied demand for credit on the part of 
solvent borrowers, many of whom could make economically sound use 
of working capital.. .that one of the most serious aspects of this unsatis- 
fied demand is the pressure for liquidation of old working-capital loans, 
even sound ones. That this pressure is partly due to a determination on 
the part of bankers to avoid a recurrence of the errors to which they 



20 THE FEDERAL RESERVE WRECKED AMERICA 551 



attribute much of the responsibility for the recent wave of bank fail- 



ures... 



'02 



So the bankers were not trying to make loans and were calling in 
existing good loans. Under the disastrous conditions created by the 
banking system itself in confusing credit with money, and then using 
their creation of that credit to fuel a speculative bubble, normal business 
practices had utterly broken down when panic set in. The bankers were 
scared to death and for good reason: they were operating a fractional 
reserve system that had lost the confidence of its depositors. 

Studenski and Kroos point out that those banks that survived were 
the ones able to quickly convert their operations from fractional meth- 
ods into deposit institutions. Thus the assets of surviving banks shifted 
in two directions during the depression: 

1) A sharp rise in the portion held in cash; and 

2) A sharp rise in investments (mainly government bonds) relative to 
loans. In 1929, 40% of bank investments were in government bonds. In 
1933 it rose to over 50%. 

But if banks are acting as deposit institutions, then some other entity 




20c. The "Bonus Vets" of WWI gathered in Washington in 1932 at the 
depth of the Depression, to petition Congress to pay the $1,000 bonus 
already promised. It was a perfect way to make much needed increases in 
the money supply but "conservatives" were again "worried about infla- 
tion" and blocked it. On July 28, D.C. police clashed with the veterans. 
General Douglas MacArthur then set their camps on fire. 



552 The Lost Science Of Money 



must create the money. The Federal Reserve refused to do it, and the 
conservatives blocked Roosevelt from doing much. 

THE BANKERS DIDN'T HELP END THE DEPRESSION 

It was within the Fed's power to alleviate the tragedy. In 1929 about 
37% of all the banks, controlling about 76% of all the banking resources, 
were members of the Federal Reserve System. In August 1929 the 
money stock was 10.6 times the gold reserves. By August 1931 the 
money stock was only 8.3 times the gold reserves, and gold reserves 
were falling. But the Federal Reserve System wouldn't use its 
reserves.^^ Why didn't they act decisively? 

The first reason why the System failed to help the nation is that it 
was not really set up to serve the nation ^s monetary needs. That 
would have required a different structure - a nationally owned system, 
with explicit societal goals aimed at promoting the general welfare. The 
privately owned Fed was designed and set up to promote the short term 
profits of the largest bankers, while taking minimal risks. That is ulti- 
mately exactly what it did, as the system collapsed. 

They never undertook to carry out the responsibilities to society that 
this power implies and requires. Contrary to the present day misty-eyed 
corporate ads prevalent on TV, which falsely portray a concern for their 
social responsibilities to humanity, the essential method of large 
American corporations is generally to grab privilege while denying 
responsibility. They privatize profits and socialize losses. In the Great 
Depression the bankers demonstrated that they felt little or no responsi- 
bility towards the American people whose financial lives they con- 
trolled. 

The second reason for the Fed's dismal performance is that, as 
a fractional reserve system, it depended on the public's confidence 
in it The Federal Reserve System could not restore that confidence. 

The important monetary moves to get out of the depression came 
from Congress, not the Fed. In April 1932, under heavy Congressional 
pressure, the System embarked on large scale open market purchases of 
about $1 billion in government bonds, injecting the new money into the 
economy. 

FOLLOWING ADAM SMITH TO THE DOORS OF HELL 

The whole spectrum of erroneous ideas that made up Adam Smith's 
free market ideology dominated American economics and politics of the 
1920s. Of course a real free market, like a free society, cannot be created 



20 THE FEDERAL RESERVE WRECKED AMERICA 553 



by "laissez-faire," but requires rational legal limits. Especially damaging 
was Adam Smith's false analogy of running the government like an indi- 
vidual or shopkeeper's budget. That's why Herbert Hoover made these 
mistakes, trying to save and economize, in the firm belief that he was 
doing the right thing for the nation: 

* Hoover ran federal budget surpluses through 1931; 

* He put through a major tax increase in 1932; 

* He sent federal workers home one day a week to save money. 

The poor man followed his training in conservative economic theol- 
ogy to the letter, and just made things worse. For those concepts were 
not concocted with national interests in mind. The one good move 
Hoover made (besides starting the Reconstruction Finance Corporation) 
was to double expenditures on public works as depression gripped the 
nation. Today conservative ideologues even condemn him for that! 

So it should be understood that the nation's depression nemesis was 
not just the Federal Reserve mismanaging the money system. The grip 




20d. Mariner Eccles, with roots in the American West (Utah), became 
Chairman of the Fed during the Depression, and brought a somewhat 
less doctrinaire though apparently dour viewpoint to the job. 



554 The Lost Science Of Money 



that the false economic concepts held on the nation was equally dangerous. 
Everyone was so sure that Adam Smith's erroneous ideas were correct. 

A ROUGH CHANGE OF THE GUARD FROM 
HOOVER TO ROOSEVELT 

There was a four-month wait in the changeover to the new adminis- 
tration. The laissez-faire viewpoint dominated America to such an extent 
that Roosevelt, too, had advocated cutting spending and balancing the 
budget. However, his monetary intentions were unclear. He realized that 
a wider distribution of buying power was necessary for a recovery and 
he had promised a "new deal" with vast social reforms. 

In Hoover's final days, panicky gold withdrawals pressured the 
banking system. The Federal Reserve asked Hoover to close the banks, 
but he refused. The Republicans then tried to bluff Roosevelt into pub- 
licly promising to continue the gold standard, as the only way to stop the 
panic and avoid a banking collapse. But Roosevelt had other ideas. 

Roosevelt chose a policy of economic and monetary nationalism, 
putting the U.S. national interests above the cosmopolitan (internation- 
al) objectives of "classical economics." John Maynard Keynes had 
developed an economic theory to support government deficit spending, 
to boost economic growth during down periods. Fortunately the new 
Chairman of the Fed, Marriner Eccles, agreed with Keynes and told a 
Senate committee that the concept of a balanced budget was archaic. But 
Keynes merely promoted a fiscal solution, not really a monetary solution. 

KEYNES TO THE RESCUE? 

In December 1933 at the request of the New York Times (with some 
involvement of Supreme Court Justice Felix Frankfurter), English econ- 
omist John Maynard Keynes wrote an open letter to President Roosevelt, 
Keynes wisely advised Roosevelt that "Only the expenditures of public 
authority" could turn the tide of depression. Well, that was obvious 
enough! 

However, Keynes inappropriately warned Roosevelt not to cre- 
ate the money for this, but only to borrow it, and wrongly advised 
him that there was already enough money in circulation, and that: 

"increasing the quantity of money. . .is like trying to get fat by buy- 
ing a larger beh." 

Several times, his letter attempted to influence Roosevelt to drop his 
program of necessary reforms, and to concentrate on short range actions: 
...even wise and necessary reform may, in some respects impede 



t( 



20 THE FEDERAL RESERVE WRECKED AMERICA 555 




20e. A typical Depression era scene of unemployed men waiting in line for 
free soup. It has become increasingly difficult to find such photos as the 
modern whitewash of financial capitalism has gained strength. 

recovery... N.I.R.A. [National Industrial Recovery Act of June 1933] 
which is essentially reform and impedes recovery..." 

Keynes was therefore not "revolutionary" except in relation to the 
utter backwardness of the financial estabHshment and their economists. 
He did not come close to a real solution. That would have been another 
issue of Greenbacks, through which the U.S. government would have 
taken back the monetary power from those who had abused it. 
Ultimately Keynes protected his class fi-om their own stupidity; he was 
yet another kind of "English expert." 

Thus the continuing argument over "Keynesianism" is, in large part, 
another false monetary debate, such as that between the Currency 
School and the Banking School after England's "Bullion Report" (see 
Chapter 12); or between "inflation versus hard money" after the 1819 
debacle of the 2nd Bank Of The U.S. (see Chapter 16), The real question 
has always been whether the nation's money should be created under 
law, by government, or under the private caprice of bankers. 



556 The Lost Science Of Money 



ROOSEVELT "CLOSES" THE BANKS 

One fiction put forward is that Roosevelt's executive order closed 
many "unwilling" banks. But most of them had already been closed 
when he took office. Bank holidays began with Nevada in October 1932. 
By March 3, 1933, state governors had declared banking holidays in 
about half the states, including New York, Illinois, Massachusetts, 
Pennsylvania, and New Jersey. The Federal Reserve Banks and the 
Stock Exchanges closed on March 4, 1933. On March 6th, Rooseveh 
declared a bank hohday to last until March 15, 1933. 

FINANCIAL LOSSES OF THE DEPRESSION 

The losses of depositors of the 9,000 American banks that suspended 
operations during the four years from 1930 through 1933 were $2.5 bil- 
lion. The bank failures were the mechanism through which most of the 
decline in the money stock was produced, and this brought on the Great 
Depression. The decline in the value of all common stock was about $85 
bilhon. 

Though losses on stocks were 34 times the losses on bank deposits, 
it was the banking and money system that had caused the debacle. But 
the financial losses can't measure the full cost of the lives damaged or 
destroyed in the depression. 

THE WRECKAGE 

In less than two decades under the Federal Reserve System, 5,096 
banks went bankrupt; 88% of them had less than $100,000 capital; 94% 
of them were in the South, the Midwest, and the West. They took the 

nation down with them:^^ 

Item 1929 1932 Change 

National Income $87,8 billion $42.5 billion - 52% 

Industrial Producfion $110 billion $58 billion - 47% 

D.J. Industrial average 381.17(Sept. high) 41.22 (July low) - 89% 

Wholesale price index 95.3 64.8 - 32% 

Unemployed 3,5 million 15 million + 329% 

The value of international trade fell 63% during this period. By the 
end of 1934 there were an estimated 5 million households on Federal 
relief, about 18 million citizens. Roosevelt began direct relief programs 
(FERA) and started work programs that hired people to build roads, 
dams, national parks and other projects. 



20 THE FEDERAL RESERVE WRECKED AMERICA 557 



While such expenditures would build the national debt and benefit 
the bankers, some of the money spent would also build real infrastruc- 
ture. Under a government money system, the U.S. could have as easily 
created the money itself, and not have been saddled with the debt. Yet 
even with this disadvantage, the nation's monetary system was so 
starved for money, that this small government deficit spending helped 
the situation. 




20f. Franklin Roosevelt understood the possibility of revolution and 
attempted to re-build the money supply wiped out in the stock market 
crash, with infrastructure projects such as the Hoover Dam and other 
work programs. But he was blocked at every turn by conservatives wor- 
ried about inflation in the middle of the Great Depression! The financial 
establishment finally allowed the creation of bank credit for warfare, when 
it was certain the new products of industry would be blown up or sunk, 
rather than become useful infrastructure, increasing the nation's wealth 
and independence, as Hoover Dam still does. The water and sewer systems 
in our upstate New York area were also constructed under Roosevelt. 



558 The Lost Science Of Money 



SUMMARY OF DEPRESSION WORK AND RELIEF 

PROGRAMS - 1933 to 1940:^^ 

RFC (Reconstruction Finance Corp.) set up by Hoover loaned $3 billion 

to distressed financial institutions. 

Total cost: $283 million 

FERA (Federal Emergency Relief Administration) made grants to the 

states for direct relief of $34 per family per month from 1933-37. 

Total cost: $3.08 billion 

CWA (Civil Works Administration) For work programs of the Federal 

Government, but not in competition with private industry. 

Total cost: $818 million. 

WPA (Works Progress Administration) paid $80 a month per person 

employed. About 2 million were employed annually. 

Total cost: $8.12 billion. 

These and several other programs expended a total of $15.51 billion 
between 1933 and 1940, only about a sixth of the financial losses of the 
depression. 

FARMERS CAUGHT IN DEBT TRAP 

The temporary rise in commodity prices from 1914 to 1920 had 
enticed farmers into too much debt, as the average value per acre rose to 
a high of $69.3 1 . From there it plunged along with average farm income 
and farm value:^^ 

Avg. Farm Value Net Income 

$10,295 $1,199 

8,107 781 

7,764 1,041 

7,524 651 

4,569 304 

But while farm income and value dropped dramatically, examine 
how debt, interest payments, and taxes remained high, per average farm: 

Year Total Debt Mortgage Interest Taxes per Farm 

1920 $ 8,448 $574 $483 

1923 10,785 679 516 

1925 9,912 612 517 

1930 9,630 570 567 

1933 8,466 472 398 

This spelled disaster for the farmers. It would take until 195 1 for the 
price per acre to again reach the 1920 level. 



Year 


Value per acre 


1920 


$69. 


1923 


56. 


1925 


54. 


1930 


48. 


1933 


30. 



20 THE FEDERAL RESERVE WRECKED AMERICA 559 



As important as the work relief efforts, but less well known, were 
Roosevelt's programs to assist farmers. The first was by executive order 
in the 1935 Resettlement Administration, which became the Bankhead- 
Jones Farm Tenant Act of 1937. "Supervised credit," estimated at about 
$2 billion, was successfully offered to bankrupt farmers from 1935 to 
1940: 

"Under provisions of the 'supervised credit system' we monetized. . . 
the integrity and work skills of the family. . .a viable improved farm and 
family business plan... improved technology into the farming operation 
(and) utilized sound guides for re-appraising farm land," wrote Lee 

Fryer, who had been an agricultural finance officer. -^^ 
During this period the gross Federal debt was: 

1933 - $22.5 billion 
1935 -$28.7 billion 
1937 -$36.4 billion 
1939 -$40.4 billion 
1940 -$43.0 billion. 

AT LEAST THE GOVERNMENT ACTED 

Some still criticize the government's actions as being ineffective in 
ending the Depression. In some ways they were. Remember, the reins of 
monetary control were not in government hands, but in those of the 
Federal Reserve. And since the depression had a monetary/banking 
cause, it required a monetary solution. These critics ignore that and pre- 
tend the Federal Reserve was/is a part of the government. 

The government generally had to act indirectly, "borrowing money" 
created by the Federal Reserve System to pay for its programs instead of 
creating the money itself In effect the Fed held a veto power over the 
governments financial actions. This is just one reason why the monetary 
power should never be alienated from our government, 

ANOTHER GREENBACK IS NEEDED 

It is clear from our presentation, especially Chapter 17, that the eco- 
nomic destruction cried out for another large issue of new Greenbacks 
by the Federal Government. It is clear that this would have created rapid 
progress toward recovery. 

English economists, such as Keynes, had a small excuse for their 
ignorance of the possibility of using Greenbacks - their nation had vir- 
tually no tradition of govemmentally created money since the late 
1600s, Thus in Keynes' 1930 Treatise on Money, there is no significant 



560 The Lost Science Of Money 



mention of the events of American monetary history, certainly the most 
fertile ground for monetary thought and experience. This failure led 
Keynes into several historical and theoretical errors. 

The American economists should have known better, but thanks to 
the purposeful neglect of the historical study of economics and econom- 
ic thought, most of them were (and still are) as ignorant of the history 
of the Greenbacks as the English economists are. 

But not all American economists were ignorant. Some, including 
Paul Douglas (later a Supreme Court Justice) joined to promote the 
100% reserve solution, discussed in Chapter 24. This would have sub- 
stituted government paper money notes in place of the existing, but sus- 
pect, bank-created credit money. Intelligent economists must also have 
helped frame the Thomas Amendment described below, authorizing the 
creation of $3 billion in Greenbacks, if the banks failed to act. 

McFADDEN CHARGES THE FEDERAL RESERVE 
WITH TREASON 

On May 23, 1933 Congressman Louis T McFadden, Chairman of the 
House Banking and Currency Committee, presented Articles of 
Impeachment in the House of Representatives against the Federal 
Reserve Board of Governors, the Officers and Directors of the Federal 
Reserve Banks, the Secretary of the Treasury, and two Assistant 
Secretaries of the Treasury, for collusion in causing the Great Depression. 

But McFadden stood almost alone, and the impeachment articles 
were defeated: 

"His fellow congressmen started a whispering campaign that 
McFadden was losing his mind.. .in the next congressional elections 
McFadden was defeated by thousands of dollars poured into his home 
district of Canton, Pennsylvania [from outside sources]/' wrote Mullins. 

1933-35 CHANGES IN THE BANKING LAWS 

In just 20 years, the Federal Reserve System had wrecked the 
American Economy. Clearly, changes were needed in the banking laws. 
The old Federal Reserve Board in Washington DC was dissolved and 
replaced by a seven-member Board of Governors, appointed by the 
President for 14-year terms. The Treasury Secretary and the Comptroller 
of the Currency were no longer on the Board, and the Board's real pow- 
ers were greatly increased: 

'^ The Fed Governors were given the power to regulate margin require- 
ments on stocks. 



20 THE FEDERAL RESERVE WRECKED AMERICA 561 



* Their power over reserve requirements, rediscount rates, and market 
operations was increased. 

* They had the power to appoint the presidents of the 12 FRB banks. 

* Their regulations were given teeth. FRBs that didn't comply could 
have their credit foreclosed. 

* The Open Market Committee was created, with one representative 
from each FRB. This committee could inject new money into the econ- 
omy by creating money to purchase government bonds. It could 
remove money by selling its holdings of bonds. 

* It is forgotten now, but of great importance back then was that in 
May 1933 the Thomas amendment authorized the 12 FRB's to buy $3 
bilhon in government bonds; and if they didn't, it gave the U.S. 
President the power to issue $3 billion in Greenbacks. The legal foun- 
dation was thus put into place to issue Greenbacks, no matter what 
the banks wanted to do. 

In 1934 the Federal Deposit Insurance Corporation was established, 
starting out insuring a maximum deposit of $2,500. This act truly revo- 
lutionized the banking system, because of the guarantee that depositors 
now had, from non-banking sources. The maximum insured deposit was 
increased over the years to its present $ 1 00,000 per account. It is main- 
ly this guarantee that has kept the nation's banking system from collaps- 
ing on several occasions since the Great Depression. And while the 
Federal Deposit Insurance Corporation has never had the assets to stop 
a general collapse of the system, the public has accurately concluded that 
the U.S. government would step in for a rescue. 

CHANGE IN THE GOLD STANDARD LAW 

The 1934 Gold Reserve Act raised the price of gold from $20.67 per 
ounce to $35 per ounce. The U.S. went off the gold standard domesti- 
cally, but stayed on for international payments. Citizens were allowed to 
keep $100 per person in gold coin or gold certificates. The rest was to be 
exchanged for Federal Reserve notes. Of $571 million in coin outstand- 
ing, $284 million was turned in. 

The 69% rise in the legal price of gold was in terms of dollars which 
had themselves become much more valuable. Naturally gold mining 
shares benefited; but this had little to do with gold's intrinsic properties, 
and everything to do with the law! 



562 The Lost Science Of Money 



SECURITIES LAW CHANGES 

Long overdue legislation was passed which mainly increased mar- 
gin requirements and limited short selling. The "up-tic" rule required 
that a stock's price had to be higher than its previous sale price before a 
short sale could be made. This meant that actual holders of a stock were 
first in line if they wanted to sell it. Also, those who wanted to make a 
short sale had to borrow the same amount of existing shares from a cur- 
rent shareholder of the stock (Brokers provided this service). And it 
meant that short sellers could no longer sell more of a company's stock 
than actually existed. Thus manipulators could not simply drive down a 
stock at will. 

Margin requirements were raised from the 10% level generally 
applied in the 1920s. The Glass-Steagall act separated banking from the 
brokerage and insurance businesses, with good effect. 

"MODERN" TRADING TOOLS CIRCUMVENT 
THOSE LAWS 

By the mid 1980s and 90s, virtually all of these good regulations had 
been circumvented by the nation's exchanges. Trading in index futures 
got around the short sale regulations, because they can be sold in quan- 
tity, without up-tics, and without borrowing stock. Adding trading in 
options on these futures has further served to emphasize the gambling 
hall aspect of the nation's exchanges, while further minimizing the role 
they might incidentally play in financing industry. Furthermore, when 
such financing of real industry appeared to occur, as in Initial Public 
Offerings, the exchange mentality quickly turned most of them into 
fiascos for 'investors." That these speculators may be getting what they 
deserve is still no excuse for running the exchanges in such a rapacious 
manner. This is the "economic man" (as both prey and predator) which 
our Chapter 12 described as more monster than human. 

As for Glass-Steagall, the politically powerfiil financial sector has 
had legislation passed that has completely neutralized it. The elements 
are thus in place for a re-enactment of the Great Crash, in a more mod- 
em format. 

THE SOCIAL SECURITY ACT 

On August 14, 1935, the single most important poverty fighting leg- 
islation in America was passed - the Social Security Act. The idea for a 
social security plan was first proposed by Thomas Paine, father of the 

American Revolufion.^^ In addifion to old age pensions, Tom Paine's 



20 THE FEDERAL RESERVE WRECKED AMERICA 563 



plan had called for giving young families money to set up their house- 
holds. Some conservatives condemn Roosevelt as socialistic, for enact- 
ing Social Security. But they have allowed a kind of ideological bitter- 
ness to distort their consciousness and are not seeing this clearly. They 
must also look at the real world effects of policies, not simply use ideol- 
ogy to condemn. Would they attack Thomas Paine, father of the 
American Revolution, as a socialist, for first proposing such a program? 
Since the early 1970s the financial elite has incessantly worked to 
destroy Social Security: first by convincing Americans that it won't be 
there when they retire; second by pretending that Social Security has to 
be funded by tax payments, when in reality it would be best to have the 
money created directly by government, and paid to recipients. 

HISTORIC COLLAPSE OF THE GOLD/SILVER RATIO 

The Great Depression served up another classic monetary lesson in 
the collapse in the price of commodity silver. The monetary theories of 
Adam Smith, David Ricardo, Karl Marx, and of Von Mises and the 
Austrians, all of which assert a commodity or quasi commodity nature 
of money, are refuted by the reality of the silver collapse. This was the 
second great collapse of the ratio; the first occurred from the 1 870s when 
silver was demonefized as described in Chapter 18. 

Silver had dropped from $1.38 per ounce in 1919, to 44 cents an 
ounce in 1932, down 75%. Since at that time gold was still $20.67 per 
ounce, this meant that the ratio was at 47 to 1 instead of the old 16 to 1 . 

The reason for the ratio collapse was that gold's value was still pro- 
tected by law. It demonstrated that legal forces, not market or economic 
forces, determine the value of the precious metals. This is a crucial con- 
cept to grasp. 

The "sanction" of the law (and earlier the "sanctification" of the 
Temple) was still valid for commodity gold, but had been withdrawn 
from commodity silver. The law is what determined the ratio. The 
sanction of the law is what determined the value of the precious met- 
als as money. 

THE SILVER PURCHASE PROGRAM 

In December 1933 Roosevelt directed the U.S. mints to receive all 
newly mined domestic silver and pay 65 cents an ounce. This increased 
the money supply slightly by subsidizing silver mining. But the Silver 
Purchase Act of June 1934 directed the Treasury to purchase all silver, 
both at home and abroad, until the price reached $1.29 or the silver 



564 The Lost Science Of Money 



Stockpile reached one-third the value of the U.S. gold stockpile. 

Like the Sherman silver purchase program of 1890, described in 
Chapter 18, it allowed wealthy foreign holders to sell their silver to the 
U.S. government at a higher than market price. From 1933 to 1961, 
about $2 billion in silver was purchased. Monetary reformers should run 
whenever they see the silver (or gold) mining interests coming. 

In the mid- 1930s, an irreparable break occurred between Rooseveh 
and the business community when he imposed several meaningful taxes 
upon them. These taxes have now been reduced to inneffectual rates, 
which do not adequately compensate society for the educational, 
social, legal, and physical infrastructure, on which commerce and 
industry depend. 

Serious consideration can be given to lowering payroll taxes and re- 
imposing the higher levels on the super-rich, for many reasons. 
Especially on unearned income and "paper shuffling" activities which 
produce nothing, are often of questionable legality and harm the average 
citizen. The overwhelming majority of Americans seemed better off 
under the old, higher, progressive tax rate system. 

THE MONEY SUPPLY FINALLY STARTS INCREASING 

From 1933 to 1937 the money stock rose by 46% and wholesale 
prices rose by 45%. Stock exchange prices measured by the Dow Jones 
Industrial Average rose to 194.4 in March 1937, up 370% from the exag- 
gerated 1932 crash low of 41. 

ONE MORE INSULT FROM THE FED 

Then as recovery was getting underway, the newly constituted Fed 
Board of Governors made a last ignorant gesture of obstructionism and 
doubled the reserve requirements in the 1936 to 1937 period, cutting 
short the recovery, and hamstringing the money supply. This demon- 
strated the continuing banker domination of the system. 

It would not be until World War II that full monetary expansion was 
allowed and full employment was sought, when it was assured the 
employment and money would be channeled into destruction rather than 
production of infrastructure, houses, and other useful items. In that way 
the nation would remain dependent, and unable to resist the future mon- 
etary predations of the People of the Bank. The vehemence of Professor 
Soddy's statement opening this chapter now becomes understandable. 

IF IT HAPPENS AGAIN. . . 

If something like the Great Depression is again inflicted upon us, 



20 THE FEDERAL RESERVE WRECKED AMERICA 565 



should Americans be blamed if they demanded more than money penalties 
from the financiers? Such matters are best handled by law. But what if 
the law proved too immature or too corrupt (watch the unfolding Enron 
case) to punish the perpetrators? Americans have shown great restraint 
toward those engaged in financial genocide, mainly because they 
haven't understood how the financiers are inflicting more than just 
financial harm on the citizenship, causing untold numbers of unneces- 
sary and premature deaths. Americans haven't understood that it is 
the financiers who are the ones initiating real violence, under cover 
of economic theory. 

FINANCING WW II - HOW EASY IT IS TO CREATE MONEY 

The reader is reminded that we are examining the monetary history 
of this period, not all the factors leading up to war. It is far beyond the 
scope of this work to pass judgement on President Roosevelt's actions 
and motivations in this regard, for example in the events leading up to 
Pearl Harbor. 

When WWII started in Europe in September 1939 the U.S. had eight 
million unemployed workers, a vast unused plant capacity, and: 

"a huge reservoir of idle capital funds," wrote Studenski and Kroos.^^ 

Knowing that the monetary expansion would go mainly into 
destruction, the financiers opened the monetary gates in America: 

"From July 1, 1940 to December 1, 1941 expenditures totaled 
$21.7 billion, far in excess of anything previously spent by the New 
Deal. National defense accounted for 12.7 billion or about 59%." See 
how easy it is to create money? In mid 1941, prices were at 92% of the 
1926 price level. From 1941 to 1946: 

". , .the only bank lending which showed an increase was that which 

constitute the financing of the War," wrote Studenski and Kroos."^^ 
From July I, 1940 to June 30, 1946, the Government was allowed 

(encouraged!) to spend $387 billion, of which 95% was for the military. 

During that period a total of $44.2 billion in taxes were collected 

(income tax rates had been raised to l9%o for the low end, up to 88% for 

the high end). The rest, about $343 billion, was paid for by going into debt. 
The national debt in February 1946 was $279.8 billion. The 31% of 

this debt ($87 billion) that was held by the commercial banks can be 

considered as money that they created out of thin air. 

At the war's end, prices were at 105,8, based on 1926 prices =^ 100. 

When wartime price controls were lifted, prices rose to 169.5 in 1948, 



566 The Lost Science Of Money 



then fell to 157.3 in June 1950. But before accepting the economist's 
assertion that big price rises must follow such money creation consider: 

1) Would cars have been more or less expensive if the created money 
had gone to build millions of new cars instead of military jeeps, trucks 
and tanks? Less. 

2) If the money blown away on shells, airplanes and sunken ships 
had been spent on housing and consumer appliances, wouldn't that have 
lowered the cost of those items? Yes. 

3) Had the billions wasted on innumerable campaigns of destruction 
gone instead into modernizing American plant and equipment, wouldn't 
that help keep the cost of goods low for many years to come? Yes, etc. 

4) And aside from economic production, don't forget about the dead, 
not just the loss of their future production, but the devastation of their 
families. 

In other words, channeling the new money into production 
rather than destruction would have tended to create value, keep 
prices down, and not required unnecessary loss of life, 

THE "GI" BILL AND THE MARSHALL PLAN 

Two important governmental programs for rebuilding after WWII 
should be noted - the Marshall Plan to rebuild Europe, and the GI Bill 
for the United States, The Marshall plan was funded at only $12 billion, 
but had a positive effect, many multiples of that. The GI Bill provided 
funds for education to the hundreds of thousands of returning soldiers, 
who would become engineers, architects, scientists and teachers. 
Though funded at $14 billion, the actual cost can be considered to be less 
than zero, considering the productive abilities released and the many bil- 
lions in taxes the government would collect on that. The GI Bill of 
Rights was said to have finally achieved (within a more limited group) 
many of the objectives Roosevelt had attempted earlier. 

PROPAGANDA TO RESURRECT CAPITALISM'S 
MORAL STANDING 

Philosophically, the 1920s had been an orgy not only of speculation, 
but of so-called "free market" policies. It had been a time of the belit- 
tlement of government and a trusting belief in laissez-faire Capitalism 
and markets to serve mankind. The crash and depression put an end to 
that. Roosevelt's inaugural address in March 1933 had made it clear: 

"...the rulers of the exchanges of mankind's goods have failed 
through their own stubbornness and their own incompetence, have 



20 THE FEDERAL RESERVE WRECKED AMERICA 567 



admitted their failure and have abdicated. Practices of the unscrupulous 
money-changers stand indicted in the court of public opinion, rejected 
by the hearts and minds of men.,. The money-changers have fled from 
their high seats in the temple of civilization. We may now restore that 
temple to its ancient truths..." 

Decades later, when many participants and memories were dead, 
concerted attempts began by a cabal of economists and financiers to shift 
blame for creating and prolonging the depression away from the finan- 
ciers and the Federal Reserve System and onto the government. These 
economists couldn't admit that the crash and depression was a real life 
repudiation of their beloved theories and the financiers' activities. They 
created plausible sounding but false rationales to show that it couldn't 
have happened that way; it must have been the government's fault. 
Eventually they indoctrinated ideologically driven youngsters (today's 
Libertarians), who had no real experience or accurate knowledge of the 
depression, and were easy prey. 

For example, Alan Greenspan shifted blame from the financiers to 
the government for prolonging the depression. Writing in support of the 
position of the orthodox economists in books such as Ayn Rand's 
Capitalism the Unknown Ideal, Greenspan repeated Menger's theory of 
the origin of money which places the money power into the hands of the 
merchants. Others repeated Baruch's vicious advice on allowing a total 
deflationary wipeout to occur, and blamed government interference for 
prolonging the depression! 

Greenspan used the Conservative's basic ploy - blaming the evils 
of the private Federal Reserve System on the government. He wrote: 

"(T)he twelve regional Federal Reserve Banks (are) nominally 
owned by private bankers, but in fact government sponsored, con- 
trolled and supported.""^^ 

This false view ignores the attempts of several past Democratic 
Chairmen of the House Banking Committee to pass laws to nationalize 
or do away with the Federal Reserve System. Henry Gonzales, 

Chairman until 1994, introduced such a bill.'*^ Well, if the Fed is already 
a government entity, these economists shouldn't mind too much when it 
gets nationalized! 

It was from this article and Greenspan's anointed position in the eyes 
of Ayn Rand's devoted followers that presidential candidate Nixon made 
Greenspan one of his campaign's economic advisors in 1967. Later as 
President, Nixon appointed him to the Council of Economic Advisors. 



568 The Lost Science Of Money 



Then in 1987 he was appointed Chairman of the Fed. 

Americans have watched Alan Greenspan's mannerisms and heard 
his nasal voice, and seen him in his $10 suits often enough on television 
to understand he is not an evil figure. Where then did Greenspan get 
such foolish notions? It was from the conservative Austrian school of 
Economics, which his mentor, Ayn Rand, had anointed as the only econ- 
omists. Her book service brochures from the 1960s offering books by 
many authors on various topics allow only one author in the economics 
section - Austrian economist Ludwig Von Mises. The message was clear! 

Another "Austrian" economist, R A. Hayek, could rarely write two 
pages without condemning or attacking government in some way, 
whether deserved or not. This is most evident in his childish polemic 
Denationalisation of Money: 

'The long depression of the 1930s... was wholly due to the misman- 
agement of money by government - before as well as after the crisis of 

1929,'"^^ and, "It was not 'capitalism' but government intervention 

which has been responsible for the recurrent crises of the past. . .a theme 

repeatedly argued by the late Ludwig Von Mises." 

This chapter demonstrates that Hayek's statement is false. But 

whether he is merely wrong, or lying, only Hayek himself could say. It 

is difficult to imagine he was so ignorant of the facts presented here. 

Greenspan and the Libertarians were duped, but Hayek was probably 

prevaricating. 

THE CATHOLIC REACTION TO THE DEBACLE 

Quadragesimo Anno 

In May 1931 Pius XI issued 
his encyclical Quadragesimo 
Anno (On Reconstruction of the 
Social Order) - a remarkable doc- 
ument. The title refers to the 40^^ 
anniversary of Leo XIII's Rerum 




20g. Pope Pius XI's 1931 encycli- 
cal Quadragessimo Anno is the 
Catholic Church's most explicit 
statement on the evils of finance 
capitalism. It condemned the 
money system as "a dictatorship" 
where "No one can breathe 
against their will." 



20 THE FEDERAL RESERVE WRECKED AMERICA 569 



Novarum (On the Condition of Workers) which was the Church's initial 
effort at spiritual guidance in the modem industrial economy. 

While the 1891 Rerum Novarum did call for justice to workers, it 
gave the impression of being more concerned with protecting the status 
quo of property relations and the social order. It indirectly attacked 
reformers such as Henry George. Remedies were to be left to charity! 

But Quadragesima Anno of 1931 was a different matter entirely and 
represented a major shift toward real justice. No longer would the 
Church automatically provide easy moral support for powerful systems 
and rich individuals doing evil under cover of "conservative" economic 
theory: 

"(71) In the first place the worker must be paid a wage sufficient to 
support him and his family." 

"(88) The right of ordering economic life cannot be left to a free 
competition of forces... (this poison spring destroys) through forgetful- 
ness or ignorance the social and moral character of economic life, (and 
holds) that economic life must be... altogether free from and independ- 
ent of public authority, because (the) market... principle of self direc- 
tion. . .governs it much more perfectly than would the intervention of any 
created intellect. But free competition... cannot direct economic hfe - a 
truth... more than sufficiently demonstrated." 

Pius XI then addressed some key monetary matters: 

"(105)... it is obvious that not only is wealth concentrated in our 
times but an immense power and despotic economic dictatorship is con- 
solidated in the hands of the few, . ." 

"(106) This dictatorship is being most forcibly exercised by those 
who since they hold the money and completely control it, control credit 
also and rule the lending of money Hence they regulate the flow,., of the 
life-blood whereby the entire economic system lives, and have so firmly 
in their grasp the soul.., of economic life that no one can breathe 

against their will "^"^ 

The encyclical pointed out with foresight in 1931 that this financial 
system was inexorably moving towards warfare: 

"(107) This concentrafion of power and might... lets only the 
strongest survive... those who fight the most violently, those who give 
least heed to their conscience..., "generating three kinds of conflict: 

"First there is the struggle for economic supremacy itself (then) the 
bitter fight to gain supremacy over the state in order to use in economic 
struggles its resources and authority; finally there is conflict between 



570 The Lost Science Of Money 



states themselves." 

Very significantly, while noting the importance of charity, 
Quadragesimo Anno suggested that juridical actions - legislative remedies - 




20h. Archbishop of Canterbury William Temple's eloquent 1942 statement 
that banking had become the master, when it should be the servant of soci- 
ety, paved the way for the nationalization of the Bank of England in 1946. 



20 THE FEDERAL RESERVE WRECKED AMERICA 571 



were also called for. This represented an important shift towards real 
reform. Although the church moves very, very slowly, when the theme 
matures, events could move with proper speed as they did in England 
after the War. 

CHURCH OF ENGLAND DE-FANGS THE BANK OF ENGLAND 

While the Catholics in America faced great difficulty translating 
these ideas into practice, not so the Anglicans in England. Perhaps two 
world wars and a worldwide depression all in less than 35 years, were 
enough. The Church of England took the greatest monetary initiative of 
the 20th century when it called for the nationalization of the Bank of 
England. Using typical English understatement, but making one of the 
most morally important public pronouncements on the Money Power of 
this or any other century, the Archbishop of Canterbury wrote: 

"In the case of money, we are dealing with something which is han- 
dled in our generation by methods that are extremely different from 
those in vogue a century or half century ago. When there was a multi- 
tude 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 - name- 
ly 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 modem 
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 
abihty 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 ser- 
vant. '' Reverend William Temple, 

The Archbishop of Canterbury, 
London, September 26, 1942^^ 

The Bank of England was nationalized in 1946. The Catholic 
Church could learn a lot from this courageous act of its younger off- 
spring. But unfortunately it was no longer in England, but in America 
where the problem was now concentrated. The nexus of financial control. 



572 The Lost Science Of Money 



which had earlier jumped from Holland to England, had once again 
shifted westward, to the United States. But it cannot move westward 
again. 

To summarize, In less than 20 years the Federal Reserve brought our 
money system, banks, exchanges and economy to utter ruin. The "fear 
of inflation" argument, used as an excuse for the bankers to do nothing 
positive, was carried to an absurd level in the middle of the century's 
worst deflation. 

Again, it was government, not the banks, that rescued the situation. 
The crash also momentarily woke the Catholic hierarchy. The Pope con- 
demned the money system as a financial dictatorship, and the Anglican 
hierarchy paved the way for nationalizing the Bank of England. 

Bankers allowed a large creation of new money only when it was 
devoted to warfare, not the creation of values for life. Later their propa- 
ganda whitewashed what financiers had done, shifting the blame onto 
government, the organization that did most to mend the financial 
destruction. 

The "free market" culture prevalent in the 1920s was re-established 
thanks in large part to the polemic writings of Ayn Rand, and the 
Austrian economists. The nations exchanges circumvented the regula- 
tions put into place by government, to stop another crash. They did this 
by using "derivatives" and by pressuring the Congress to remove the 
restrictions. 



20 THE FEDERAL RESERVE WRECKED AMERICA 573 



Notes to Chapter 20 

^ Frederick Soddy, The Arch Enemy Of Economic Freedom, (London: self pub- 
lished, 1943), p. 6. 

2 Eustace MuUins, The Federal Reserve Conspiracy, (New Jersey: Common Sense 
Press, 1954), quoting Oct 1917 Notes of Journal of Political Economy, p. 56 
^ Mullins, cited above, pp. 55-6. 

"^ P. Studenski & H. Kroos, Financial History of the U.S., (New York: McGraw Hill, 
1952), p. 284. 

^ MuUins, cited above, p. 54. 

^ Mullins, cited above, quoting Walther Hines Page, Ambassador to Britain, 
March 5, 1917 letter to Woodrow Wilson, p, 55. 
^ Studenski & Kroos, cited above, p. 298. 

^ Milton Friedman & Anna Schwartz, A Monetary History of the United States, 
1867-1960, (Princeton Univ. Press, Natl. Bureau of Econ. Res., 1971), p. 698. 
^ Friedman & Schwartz, cited above, pp. 196-210. 
^^ Studenski & Kroos, cited above, p. 329. 
^^ as quoted by Mullins, cited above, pp. 51-60. 
^^ Mullins, cited above, pp. 50-60. 

^^ Paul Einzig, The Fight for Financial Supremacy, (London: Macmillan, 1931). 
^^ Lester V. Chandler, Benjamin Strong, Central Banker, (Washington: 
Brookings, 1958), quoting Leffmgweirs comments to the Federal Reserve 
Board in Washington, DC, on November 24, 1919. 
^^ Chandler, cited above, pp. 440-60. 
^^ Studenski & Kroos, cited above, pp. 306-26. 
^^ Studenski & Kroos, cited above, p. 336-40. 

^^ Albert Feaveryear, The Pound Sterling, (Oxford Univ. Press, 1963), p. 353. 
^^ as quoted by Mullins, cited above, p. 95. 
^^ Mullins, cited above, quoting the Miller testimony. 

^^ Elgin Groseclose, Money: The Human Conflict, (1934, Univ. of Oklahoma 
Press, 1976), pp. 223-25. 

^2 Mullins, cited above, quoting H. Parker Willis, p. 96. 
2^ Mullins, cited above, quoting H.Parker Willis, from The North American 
Review, May 1929, pp. 94-101. 
2"^ Chandler, cited above, pp. 460-62. 
^^ as quoted by Mullins, cited above, p. 100. 

2^ Antony C. Sutton, Wars and Revolutions, (Hoover Inst, on War, Revolution 
and Peace, 1974), on page 25 quotes Ernest & Trevor Dupuy's Encyclopaedia 
of Military History, (Harper and Row, 1970, p. 1198). 
^^ Friedman & Schwartz, cited above, p. 299. 

2^ Friedman & Schwartz, cited above, p. 345, footnotes quoting Harrison, 
Notes, vol.1, June 22, 1931. 



574 The Lost Science Of Money 



^^ Robert de Fremery, Money and Freedom, (Self published, 1957), p. 61. 

^^ as quoted in Friedman & Schwartz, cited above, p. 409. 

^^ Friedman & Schwartz, cited above, pp. 410-11. 

^^ Friedman & Schwartz, cited above, p. 457, quoting the Report on the 

Availability of Bank Credit in the Seventh Federal Reserve District^ Submitted 

to the Secretary of the Treasury, GPO, 1935, pp. vi, 3. 

^^ Studenski & Kroos, cited above, pp. 336-43. 

^^ Studenski & Kroos, cited above, pp. 334-40. 

^^ Historical Statistics of the United States, Colonial Times to 1970, 

(Washington: U.S. Dept. of Commerce, Census Bureau, 1975), Series K 361- 

375, Series K 256-285, Series K 1-16. 

^^ Studenski & Kroos, cited above, pp. 350-400. 

^^ Lee Friar, Reflections, in The Economics of Convulsion by Harold E. Wills 

and Charles Walters Jr., (Kansas City, Mo: Acres USA, 1992), pp. 107-13. 

^^ Thomas Paine, Agrarian Justice, Paris, 1797, The Writings Of Thomas Paine, 

Vol 3, edited by M. D. Conway, (New York: AMS Press, 1967), pp. 332-38. 

^^ Studenski & Kroos, cited above, p. 436. 

"^^ Studenski & Kroos, cited above, p. 455. 

^^ Alan Greenspan's Gold & Economic Freedom essay in Ayn Rand's 

Capitalism The Unknown Ideal, (New York: NAL paperback, 1967). 

42 HR4358 in the 97^^ Congress, July 31, 1981, 

^^ F.A. Hayek, Denationalisation of Money, (London: Institute of Economic 

Affairs, 1978, 2^^ edition), pp. 97, 127. 

4"^ Quadragesimo Anno and Rerum Novarum can be viewed at 

http://www.osjspm.org/cst/qa.htm 

^^ As quoted by Bernard W. Dempsey, Interest and Usury, (London: Denis 

Dobson, 1948), p. v. 



575 



CHAPTER 21 



GERMANY'S 1923 

HYPER-INFLATION UNDER 

A PRIVATE CENTRAL BANK 



"The terms of the peace appear immeasurably harsh and 

humiUating, while many of them seem to me impossible of 

performance... The League (of Nations) as now constituted will 

be the prey of greed and intrigue. . ." 

Robert Lansing 
U.S. Secretary of State, 1919 

We now examine some of the monetary events that occurred on the 
enemy side, in World Wars I and II, especially the German hyper-infla- 
tion of 1923. Discussions of the dangers of inflation inevitably end up at 
this worst ever case in the West. Accompanied by economists' wamings 
of the dire results of govemments printing paper money, the German 
hyper-inflation is used to promote the idea that only private bankers can 
be trusted to control society's money system. 

However, as in other cases, when the monetary facts are actually 
examined it becomes clear that those private banking elements were 
deeply involved in the speculation that helped to bring down the 
Reichsmark. This was not stopped until the govemment repeatedly took 
decisive action against them. First, the broad historical context of this 
event: 

EMERGING GERMANY 

Peter Spufford described how capital towns arose from the medieval 
period when the nobility set up hotels near their sovereign's main 



576 The Lost Science Of Money 



residence and left the countryside to spend at least part of the year near 
him. This formation of capital towns spurred the division of labor. 
Because Germany had no central monarchy, no capital city formed there; 
nor did as much division of labor develop in the later medieval period. 
Thus Germany was late to centralize. 

In 1815 Germany had what could be considered a centralized national 
state with the formation of the German Federation. The major "German" 
finance houses of the medieval period had been quick students of Italian 
finance methods at Venice's German compound, the Foundacio De 
Tedeschi. Some, like the Fuggers of southern Germany, had grown to 
international prominence as factors in financing the election of emperors. 

However, Portugal's opening of the Cape Route around Africa shat- 
tered geopolitical relations and from the 16*^ century Germany's relative 
importance declined as a middle station in East- West trade. The Cape 
Route to India circumvented them and shifted power away from Venice 
and the Mediterranean up to the North Sea area, as described in Chapters 6 
and 8. 



BAGHDAD RAILWAY 

Germany began altering that situation in 1900 when the Deutsche 
Bank financed construction of the Turkish-Baghdad Railway. This 
meant German industry, already linked to Istanbul (the "Orient Express" 
line) could be directly linked to further eastern markets, circumventing 
Britain's naval supremacy. The reformation historian Tawney confirms 

the importance of this link and Hjalmar Schacht, one of 20^^ century 
Germany's key financial figures, noted that this railway really "irked" 
England. 

There are other reports of British concern over German dynamism. 
Francis Neilson, a former British Member of Parliament and author of 
The Makers of War presented the viewpoint that England's old boy net- 
work didn't consider itself up to competing with Germany industrially. 

In 1907 the widely respected American diplomat Henry White was 
instructed to ascertain British views. He met with his fi:*iend Arthur 
Balfour. White's daughter "overheard" (probably White's way of not 
directly violating secrecy pledges) one of White's conversations with 
Balfour as follows: 

"Balfour (somewhat lightly) 'We are probably fools not to find a 
reason for declaring war on Germany before she builds too many ships 
and takes away our trade." 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 577 



White: \., If you wish to compete with German trade, work harder.' 
Balfour: 'That would mean lowering our standard of living. Perhaps 
it would be simpler for us to have a war,' 

Balfour, reacting to White's shock 'Is it a question of right or 

wrong? Maybe it is just a question of keeping our supremacy.'"^ 

CORRUPT DIPLOMACY 

European heads of state were still largely hereditarily selected. 
Court intrigue and the system of secret treaties played a large role and 
lent itself to warmongering. According to then member of Parliament, 
Francis Neilson, the British Parliament had not been informed that 

England was committed to a continental war to defend France, if necessary.^ 
Adding to the problem, the Schlieflfen Plan for the emergency military 
mobilization of Germany did not allow time for diplomatic negotiations. 
Thus the assassination of Austrian Archduke Ferdinand in Sarajevo by 
anarchists was given the power of a trigger in starting World War One. 

THE ECONOMIC SIEGE 

Alfred E. Zimmem's rare 13-page monograph The Economic 

Weapon,^ written during World War I, deserves attention because of its 
content and its source. According to Professor Carroll Quigley, Zimmem 
was part of an elite group which he called the "Anglo American 

Establishment.'*"^ 

Zimmem sums up the situation on page one: 

"What is the economic situation? It can be stated in one sentence: 
"The Central Powers are being besieged by practically the entire world 
and they have no means at their disposal for bringing the siege to an end." 

Zimmem pointed out that this was the first time in history that such a 
large siege had been attempted, and Germany didn't think it was possible. "In 
December 1915 the Chancellor remarked 'Does anyone seriously believe 
that we can lose the war on account of a shortage of rubber?' Germany's war 
preparations were made on an estimate "of a war of one year's duration 
at the outside." 

Then Zimmem indicated what was planned for Germany: 

"What will happen in the normal course when peace is 
signed?- . .will the cessation of the physical blockade of German harbors 
by itself involve the raising of the siege?. . .But without raw materials there 
can be no industrial employment; and demobilization without employ- 
ment ready to hand for the disbanded soldier spells social disorder. , .The 



578 The Lost Science Of Money 



Allies... by their command of essential supplies control the demobiliza- 
tion of the German army and therewith the whole process of German 
recuperation. 

"The whole civilized world will be faced... with the prospect of a 
shortage, if not a famine over a period calculated... at no less than three 
years." And "Some will have to go short. Who more naturally than 
Germany? It is not as if the boycott had to be organized. It will come 
about almost of itself unless special provision is made in the peace." 

THE TREATY OF VERSAILLES, 1919 

But Lord Lothian (who Quigley lists as a fellow member with 
Zimmem of the Anglo American Establishment), was the co-author of 

the treaty of Versailles^ and it would not provide for a just peace. The 
Treaty of Versailles turned out to be an instrument of continuing warfare. 
Even at the time, it drew strong condemnation. The American Secretary 
of State Robert Lansing wrote: 

"The impression made by it is one of disappointment, of regret, and 
of depression. The terms of the peace appear immeasurably harsh and 
humiliating, while many of them seem to me impossible of perform- 
ance... The League (of Nations) as now constituted will be the prey of 
greed and intrigue..." 

Lansing noted that: 

"On May 17, 1 received Mr. Bullit's letter of resignation and also let- 
ters from five of our principal experts protesting against the terms of 
peace and stating that they considered them as an abandonment of the 

principles Americans had fought for."^ 

Francisco Nitti, the Prime Minister of Italy, wrote: 
". . .It will remain forever a terrible precedent in modem history that, 
against all pledges, all precedents and all traditions, the representatives 
of Germany were never even heard; nothing was left to them but to sign 
a treaty at a moment when famine and exhaustion and threat of revolu- 
tion made it impossible not to sign.../w the old canon law of the Church 
it was laid down that every one must have a hearings even the devil.., the 
new society of nations, did not even obey the precepts which the dark 

Middle Ages held sacred on behalf of the accused. "^ 

The cost of the war of all participants totaled three times the value 
of all property in Germany. She was eventually ordered to pay a stag- 
gering 1.7 billion marks a year (in foreign exchange) for 59 years, until 
1988. Even worse, according to the normally circumspect banker. 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 579 



Hjalmar Schacht: 

"The Treaty of Versailles is a model of ingenious measures for the 
economic destruction of Germany," adding: 

"Every natural economic advance, every step toward the restoration 
of economic confidence was made impossible by the influence of the 

foreign political factor."^ 

Further complicating matters, immediately after the surrender, on 
November 9, 1918, the threatened leftist/communist coup was carried 
out, when the Revolutionary Council of Commissioners of the People 
overthrew the German government and temporarily took power. 

MONETARY DESTRUCTION OF GERMANY 

England had financed 20% of WWI through taxation; France 0%; 
and Germany 6%. Schacht wrote that Germany's money supply rose 
from 7.2 Billion Marks in December 1914, up to 28.4 Billion Marks on 
November 7, 1918, the end of the open warfare. This meant that the cir- 
culation went from 110 to 430 marks per person. 

An index of wholesale prices had risen from 100 in 1913 to 234 in 
late 1918, performing close to British indexes. The effect on working 
people was cushioned as the index of workmen's wages rose from 100 

to 248 during the period.^ Thus the 1 st World War seriously damaged but 
didn't destroy Germany's money system. That came under the occu- 
pying forces. 

GERMANY'S 1923 HYPER-INFLATION BY A 
PRIVATE CENTRAL BANK 

The great German hyper-inflation of 1922-23 is one of the most 
widely cited examples by those who insist that private bankers, not gov- 
ernments, should control the money system. What is practically 
unknown about that sordid affair is that it occurred under the aus- 
pices of a privately owned and controlled central bank. 

Up to then the Reichsbank had a form of private ownership but with 
substantial public control; the President and Directors were officials of 
the German government, appointed by the Emperor for life. There was a 
sharing of the revenue of the central bank between the private share- 
holders and the government. But shareholders had no power to deter- 
mine policy. ^^ 

The Allies' plan for the reconstruction of Germany after WWI came 
to be known as the Dawes Plan, named after General Charles Gates 
Dawes, a Chicago banker. The foreign experts delegated by the League 



580 The Lost Science Of Money 



of Nations to guide the economic recovery of Germany wanted a more 

free market orientation for the German central bank.^^ 

Schacht relates how the Allies had insisted that the Reichsbank be 

made more independent from the government: 

''On May 26, 1922, the law establishing the independence of the 

Reichsbank and withdrawing from the Chancellor of the Reich any 

influence on the conduct of the Bank's business was promulgated."^^ 
This granting of total private control over the German currency 
became a key factor in the worst inflation of modern times. 

The stage had already been set by the immense reparations pay- 
ments. That they were payable in foreign currency would place a great 
continuing pressure on the Reichsmark far into the future. 

HOW IS A CURRENCY DESTROYED? 

In a sentence, a currency is destroyed by issuing or creating tremen- 
dously excessive amounts of it. Not just too much of it but far too much. 
This excessive issue can happen in several ways, for example by British 
counterfeiting as occurred with the U.S. Continental Currency, and with 
the French Assignats. The central bank itself might print too much cur- 
rency, or the central bank might allow speculators to destroy a currency 
through excessive short selling of it, similar to short selling a company's 
shares, in effect allowing speculators to "issue" the currency. 

The destruction of an already pressured national currency through 
speculation is what concerns us in this case, A related process was* 
recently allowed to destroy several Asian currencies, which dropped 
over 50% against the Dollar in a few months time, in 1997-98, threaten- 
ing the livelihood of millions. 

It works like this: First there is some obvious weakness involved in the 
currency. In Germany's case it was World War One, and the need for for- 
eign currency for reparations payments. In the case of the Asian countries, 
they had a need for U.S. Dollars in order to repay foreign debts coming due. 

Such problems can be solved over time and usually require some 
national contribution toward their solution, in the form of taxes or tem- 
porary lowering of living standards. However, because currency specu- 
lation on a scale large enough to affect the currency's value is still erro- 
neously viewed as a legitimate activity, private currency speculators can 
make a weak situation immeasurably worse and take billions of dollars 
in "profits" out of the situation by selling short the currency in question. 
This doesn't just involve selling currency that they own but making 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 581 



contracts to sell currency that they don't own - to sell it short. 

If done in large enough amounts, in a weak situation, such short selling 
soon has self-fulfilling results, driving down the value of the currency 
faster and further than it otherwise would have fallen. Then at some 
point, panic strikes, which causes widespread flight from the currency 
by those who actually hold it. It drops precipitously. The short selling 
speculators are then able to buy back the currency that they sold short, 
and obtain tremendous profits, at the expense of the producers and work- 
ing people whose lives and enterprises were dependent on that currency. 

The free market gang claim that it's all the fault of the government 
that the currency was weak in the first place. But by what logic does it 
follow that speculators take this money from those already in trouble? 
Currency speculation in such large amounts should be viewed as a form of 
aggression, no less harmful than dropping bombs on the country in question. 

Industrialists should realize that when they allow such activity to be 
included under the umbrella of "business activity," they are making a 
serious error. They should help isolate such speculation and educate the 
populace on how destructive it is, so that it can be stopped through law. 

Limitations could easily be placed on speculative currency transac- 
tions without limiting those that are a normal part of business and trad- 
ing, while stopping the kind of transactions that are thinly disguised 
attacks on the country involved. Placing a small tax on such transactions 
would be a healthy first move. 

TOO MANY GERMAN MARKS ISSUED 

By July 1922 the German Mark fell to 300 marks for $1; in 
November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; 
by July 1923 it was at 1,100,000 to $1. It reached 2.5 trillion marks to 

$1 in mid November, 1923, varying from city to city.^-^ 

In the monetary chaos Hamburg, Bremen and Kiel established pri- 
vate banks to issue money backed by gold and foreign exchange. The 
private Reichsbank printing presses had been unable to keep up and 
other private parties were given the authority to issue money. Schacht 
estimated that about half the money in circulation was private money 
from other than Reichsbank sources. 

CAUSE OF THE INFLATION: 
SCHACHT'S FIRST "EXPLANATION" 

There is often a false assumption made that the government allowed 
the mark to fall, in order to more easily pay off the war indemnity. But 



582 The Lost Science Of Money 









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27a. This German hyper-inflation currency is the most widely l<:nown 
example in the West. But never discussed is that it occurred under a pri- 
vately owned and controlled central banli, which actually helped specula- 
tors to attacli the mark, (top: 20 thousand marks, February 1923; middle: 
one million marks, July 1923; bottom: 100 million marks, August, 1923) 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 583 



since the Versailles Treaty required payment in U.S. Dollars and British 
Pounds, the inflationary disorder actually made it much harder to raise 
such foreign exchange. 

Hjalmar Schacht's 1967 book, The Magic of Money, presents what 
appears to be a contradictory explanation of the private Reichsbank's 
role in the inflation disaster. 

First, in the hackneyed tradition of economists, he is prepared to let 
the private Reichsbank off the hook very easily and blame the govern- 
ment's difficult reparations situation instead. He minimized the connec- 
tion of the private control of the central bank with the inflation as mere 
co-incidence: 

"The Reichsbank upon which this responsibility (to control infla- 
tion) fell could not make up its mind to take action. It held the view that 
it was useless to attempt to stabilize the currency so long as the Ruhr was 
occupied and the war debts remained unfixed." Schacht lamented: 

"[The] ever growing extent the Reich had to resort to the Reichsbank 
if it was to prolong its existence, and because the point at issue was the 
survival of the Reich, the Reichsbank did not regard itself justified in 
refusing even after the passing in 1922 of the law which gave it formal 
autonomy. The legislation of 1922, which was intended to free the 
Reichsbank from the claims of the state, came to grief at the decisive 
moment because the Reich could not find any way of holding its head 
above the water other than by the inflationary expedient of printing 

banknotes. "^"^ 

In other words they did it to save the government, assumedly making 
the new issues of Reichsmarks available for government expenditures. 

THEN SCHACHT GIVES THE REAL EXPLANATION 

Schacht was a lifelong member of the banking fraternity, reaching 
its highest levels. He may have felt compelled to give his banker peers 
and their public relations corps something innocuous to quote. But 
Schacht also had a streak of German nationalism, and more than that, an 
almost sacred devotion to a stable mark. He had watched helplessly as 
the hyper-inflation destroyed "his mark." 

For whatever reasons, after 44 years he proceeded to let the cat out 
of the bag, with some truly remarkable admissions, which shatter the 
"accepted wisdom" the Anglo-American financial community has prom- 
ulgated on the German hyper-inflation. But first, some monetary back- 
ground to the events of 1923 are needed. Schacht gives the details. 



584 The Lost Science Of Money 



STABILIZING THE MONETARY SITUATION 

As the hyperinflation wreaked destruction many plans were put for- 
ward to stabilize the currency. In 1923 the Conservative monetary theo- 
rist, Karl Helfferich, advanced a plan basing the currency on rye grains 
and putting its administration into the hands of a private bank run by 
agricultural interests. The support of the farming community was not 
sufficient to have it adopted. 

INTRODUCING THE RENTENMARK 

Because the Mark had been so badly ruined for 18 months, it was 
felt that psychologically an altogether different currency was necessary. 
Plans centered on a new currency to be called the Rentenmark. The plan 
was simple: introduce the new currency in a limited quantity and don't 
over-issue it so that it keeps its value and re-establishes confidence. 

In order to create a psychological separation from the Reichsbank, 
the Rentenbank was set up to loan Rentenmarks to the Reichsbank; and 




21b. Hjalmar Schacht 
developed currency 
controls and bilateral 
trade methods for 
Germany to continue 
international trading, 
even after she had 
been stripped of her 
gold reserves in the 
early 1930s. De 
Fremery theorized 
that this independ- 
ence from the gold 
standard was an 
important factor 
among English and 
American bankers in 
the progression to 
WWII. 



21 GERMANY'S 1 923 HYPERINFLATION UNDER A PRIVATE BANK 585 



the Reichsbank issued Rentenmark credits. But the Rentenbank was not 
truly independent of the Reichsbank, through various regulations. 

SCHACHT PUT IN CHARGE OF STABILIZING THE MARK 

Schacht, with 23 years of banking experience, agreed to be made the 
government's Commissioner of Currency, a new position created to sta- 
bilize the currency. At the time, monetary theorists such as Helfferich 
were arguing that the German State wasn't powerful enough to "create 
money that would command public confidence and that only the busi- 
ness elements of the country acting of their own free will were compe- 
tent to accomplish this task."^^ Schacht knew better. 

THE GOVERNMENT STABILIZES THE CURRENCY 

It took time to convince the population that the new currency would 
not be over-issued: 

"The invention of the Rentenmark did not stabilize the mark, the 
battle for stabilization continued for a year, passing through many a dif- 
ficult phase," Schacht wrote, asserting that it was not the Rentenmark 
but the subsequent credit restrictions on how many were created, that 

stabilized the currency. ^^ 

The formal structure of the Reichsbank had apparently not been 
altered in this stabilization period, but it was clearly the government and 
society that now actively exercised the monetary control: 

"The concurrent political and economic difficulties of the Reich 
threatened rapidly to culminate in a catastrophe, when the government at 
length braced itself to the resolve to take into its hands once more the 
control of the destinies of the German people. In this poHcy the princi- 
ple item was the endeavor to stabilize the mark,"^ '^ 

The Rentenmarks were put into circulation in three days, from 
November 15, 1923. They were not legal tender. There was no fixed 
relation to the fallen Reichsmark, and the Rentenmarks could not be 
used for international payments. 

Schacht stopped all other money issuers and sent all Reichsbank 
holdings of private money back to their source for immediate payment, 
despite great howls of pain from all those private moneyers. 

The Rentenmarks were expressly forbidden to be transferred to for- 
eigners. This meant that speculators could not trade them for foreign 
exchange to support their speculations when prices went against them. 
Schacht's initial actions thus crushed the speculators, a necessary first 



586 The Lost Science Of Money 



step in most monetary reform: 

"The speculators had learnt that the Reichsbank was now able, if it 
decided to do so, to put an end to all speculation on the foreign exchange 
market. The success of the campaign meant an immeasurable increase in 

the confidence of the public in the stabilization of the mark."^^ 

How did Schacht determine the value of the Rentenmarks? By the 
"seat of his pants." On November 20, 1923, it was set at $1 - 4.2 trillion 
Rentenmarks. Fixing it there was convenient because in peacetime it had 
been $1 to 4.2 marks (Readers of Shacht's book published in England 
should keep in mind that billion in England means trillion in America). 
Schacht remarked that: 

"There was no mathematical formula that could provide the solu- 
tion. It was a question of instinct, and ultimately of experiment; but the 
form of the experiment remained one and the same - namely, the con- 
traction of the legal currency."^ ^ 



SCHACHT'S REVELATION 

It was in describing his 1 924 battles in stabilizing the Rentenmarks 
that Schacht made his revelation, giving the private mechanism of the 
hyper-inflation. Schacht was obviously very upset when the speculators 
continued to attack the new Rentenmark currency. By the end of 
November 1923: 

"The dollar reached an exchange rate of 12 trillion Rentenmarks on 
the free market of the Cologne Bourse. This speculation was not only 
hostile to the country's economic interests, it was also stupid. In previ- 
ous years such speculation had been carried on either with loans which 
the Reichsbank granted lavishly, or with emergency money which one 
printed oneself, and then exchanged for Reichsmarks." 

"Now, however, three things had happened. The emergency money 
had lost its value. It was no longer possible to exchange it for 
Reichsmarks. The loans formerly easily obtained from the Reichsbank 
were no longer granted, and the Rentenmark could not be used abroad. 
For these reasons the speculators were unable to pay for the dollars they 

had bought when payment became due (and they) made considerable losses."^^ 
Schacht is telling us that the excessive speculation against the mark 
- the short selling of the mark - was financed by lavish loans from the 
private Reichsbank. The margin requirements that the anti-mark specu- 
lators needed and without which they could not have attacked the mark 
was provided by the private Reichsbank! 



21 GERMANY^S 1923 HYPERINFLATION UNDER A PRIVATE BANK 587 



This contradicts Schacht's earlier explanation, for there is no way to 
interpret or justify "lavishly" loaning to anti-mark speculators as "help- 
ing to keep the government's head above the water." Just the opposite. 
Schacht was a bright fellow, and he wanted this point to be understood. 
He waited until he wrote the Magic of Money in 1967. His earlier book, 
The Stabilization of the Mark (1927), discussed inflation profiteering but 
did not clearly identify the private Reichsbank itself as financing such 
speculation, making it so convenient to go short the mark. 

Thus it was a privately owned and privately controlled central 
bank, that made loans to private speculators^ enabling them to specu- 
late against the nation's currency. Whatever other pressures the cur- 
rency faced (and they were substantial), such speculation helped create 
a one way market down for the Reichsmark. Soon a continuous panic set 
in, and not just speculators, but everyone else had to do what they could 
to get out of their marks, further fueling the disaster. This private factor 
has been largely unknown in America. 

HJALMAR SCHACHT'S BACKGROUND 

Why did the banker Schacht give these details after 44 years, when 
he could have easily "forgotten" about it? Probably because his sense of 
justice was deeply offended over the destruction of the mark aided by 
elements of Germany's business and financial community. 

For hundreds of years Schacht's family lived in the Ditmarschen 
area between the Elbe and Eider rivers, a land of free fanners. Schacht 
studied German Philology, then did his doctorate on the English 
Mercantilists, demonstrating how they were aware of the quantity aspect 

of money from the 1500s and 1600s.^^ 

Finally, Hjalmar Horace Greeley Schacht was his full name. His 
father was a naturalized American citizen who had returned to Germany 
as a newspaper editor. Horace Greeley was an important populist lean- 
ing U.S. newspaperman of the mid 1870s, and Hjalmar was probably 
influenced by his namesake's high reputation. 

SCHACHT APPOINTED REICHSBANK PRESIDENT 

In December 1923, Schacht was made President of the Reichsbank, 
but, before assuming office, he went to England for a meeting with 
Montague Norman, Governor of the Bank of England. Schacht wrote, "I 
have never engaged in academic controversy either with the nominalists 
or with the advocates of an index currency. I have invariably said frankly 
that I do not set great store by currency theories, but should be prepared at 



588 The Lost Science Of Money 



any moment to accept any currency adopted by America and England,"-^^ 

SPECULATORS TAKE ANOTHER SHOT 

Legitimate credit demands led to a rapid growth of credit extended 
by the Reichsbank and the Rentenbank from 609 milUon Rentenmarks 
at the end of 1923, to 2 biUion at the end of March 1924. Sensing weak- 
ness, the speculators again moved in for a kill, ignoring the law regard- 
ing foreign exchange purchases. 

In March of 1924 Schacht's regulations (he calls them 'instruc- 
tions') were being violated by the banks: 

"(W)hereby foreign exchange purchase orders were to be executed 
by the banks only if full cover in German currency was provided by the 
purchaser, had not been heeded by various banking firms." These banks, 
including one of the largest (Schacht doesn't name it), impudently 
ignored Reichsbank reminders, so their bills were denied re-discounting 
by the Reichsbank, effectively blocking them and ending the violations. 

From April 7, 1924 the Reichsbank refused to issue new credits for 
two months. "The Reichsbank plumped for the stability of the mark," 
wrote Schacht. The speculators had to turn their foreign holdings over to 
pay their debts as their trading positions against the Rentenmark lost 
money. In this way the Reichsbank increased its foreign exchange 
reserves from 600 million marks worth, at beginning of April 1924, to 

more than double that by August 7, 1924.^^ This indicates a still 
immense amount of anti-Mark speculation: 

"...and the country was still filled with numbers of such specu- 
lators, who were not in the least concerned as to whether their good 
name and reputation suffered so long as they could pocket the prof- 
its/' wrote Schacht.^"* 

HARSH DEFLATION IMPOSED 

The contraction pursued by Schacht was brutal One month money 
rates went from 30% to 45%. Overdraft charges rose from 40% to 80%! 
After July 1924 they began falling. Schacht's restriction of money was 
so harsh that the German government-operated Post and Railways 
formed their own banks and began building capital much faster than the 
private sector. 

By the end of 1924 merchants and others were treating the 
Rentenmark and the old Reichmark as equal and Schacht converted the 
Rentenmarks into Reichsmarks. He had always been against the 
Rentenmarks, considering them a monetary error: 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 589 



"I made every endeavor to take the Rentenmark out of circulation as 
quickly as possible... to this end the Reichsbank gave the Rentenmark 
parity with the new Reichsmark" and converted them into Reichsmarks. 

THE DAWES PLAN 

In 1923 the League of Nations had invited General Charles Gates 
Dawes to chair a committee to deal with the controversial problem of 
German reparations payments. The Dawes Report recommended reduc- 
ing the reparations from 132 billion marks down to 37 billion marks. The 
U.S. would loan Germany money for reparations payments to France 
and England, which countries would then be able to pay some of their 
war debts to the U.S. General Dawes was a banker who owned the 
Central Republic Bank and Trust Company of Chicago. 

The Allies implemented the plan; Dawes shared the Nobel Peace 
Prize for 1925 with Austen Chamberlain, and then became Vice 
President of the United States from 1925-29, under President Coolidge. 
In 1932 Dawes became chairman of Hoover's depression era 
Reconstruction Finance Corporation (the RFC), but then Dawes' bank 
failed and became the largest loss of the RFC, costing the U.S. 
Government $90 milhon. 

When the Dawes Plan experts structuring a new Reichsbank law 
wanted to lengthen from 10 to 50 years the length of time between the 
German Government's periodic renewal of the note issuing power of the 
Reichsbank, Schacht managed to convince them of the need for some 
Government approval of Reichsbank leadership. The Dawes committee 
proposed a revenue sharing arrangement of roughly 40% to the private 

Banks shareholders, and 55% to the govemment.^^ But eventually it was 
agreed the Shareholders got half the first 50 million marks profit, 25% 

of the 2"^ 50 million profit, and 10% of profits thereafter, 

FOREIGN LOANS USED CAREFULLY 

After the Dawes Plan loan to the Reichsbank came through in 1924, 
foreign credits began to pour in. Foreign bankers had confidence in 
Schacht. He was against the loans and insisted that any foreign borrow- 
ings only be to finance production, not luxury or consumption. This pol- 
icy, from 1924 to 1929, resulted in Germany establishing Europe's most 
modem factory system of the period. 

In July 1925 laws were passed to go back and examine and adjust 
inflation transactions. Injured parties could receive up to 25 % of the real 
value of property they had exchanged for the bad paper. Schacht would 



590 The Lost Science Of Money 



resign the Reichsbank Presidency in 1930, in protest over some eco- 
nomic rulings of the Allies. In 1932 the WWI war reparations claims 
were buried at the League of Nations in Geneva. 

HITLER TAKEN BY FEDER'S MONETARY VIEWS 

When World War I ended, a destitute Adolf Hitler was given an 
assignment by German Army intelligence to watch a tiny political group 
called the German Workers Party. He attended a small meeting where 
Gottfried Feder's monetary views made a very deep impression on him. 

The basis of Feder's ideas was that the state should create and con- 
trol its money supply through a nationalized central bank rather than 
have it created by privately owned banks, to whom interest would have 
to be paid. From this view was derived the conclusion that finance had 
enslaved the population by usurping the nation's control of money. 

Feder's views could easily have originated from the work of German 
monetary theorists such as George Knapp, whose book The State Theory 
of Money (1905) is still one of the classics in the monetary area. Right 




21c. Gottfried Feder's 
monetary views 
deeply impressed 
Hitler when he joined 
the tiny German 
Worker's Party. 
Feder's ideas were 
only partially put into 
effect by the Nazis 
during the Great 
Depression; yet 
Germany quickly 
recovered while 
America and England 
remained mired in 
depression. It was not 
armaments spending, 
but mainly middle 
class housing and 
then roads that were 
built. 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 591 



on page one, Knapp got it right: 

"Money is a creature of the law. A theory of money must therefore 
deal with legal history." 

Knapp describes the invention of fiat money in these terms: 

"The most important achievement of economic civilization, the 
chartalism of the means of payment [using tokens for money]." For 
Knapp, the determination of whether something was money or not was: 

"Our test, that the money is accepted in payments made to the States 

offices."^^ 

Near the end of that book, Knapp casually mentions how German 
monetary theorists of his day and earlier would study and discuss 
American monetary theories. Thus the ultimate source of Feder's view- 
point may have been the ideas of the American Greenback movement of 
the 1 870s. 

Unfortunately, Feder's monetary views were mixed up with an all- 
consuming anti-Semitism. While the origins of those feelings in 
Germany at that time are beyond the scope of this book, some attention 
should be drawn to the strange personage of H. S. Chamberlain, an early 

20^^ century figure who helped instigate racially based anti-Semitism in 
Germany, 

H. S. CHAMBERLAIN PROMOTES RACISM 

An Englishman by birth, Houston Stuart Chamberlain had been 
brought up in France with French as his mother tongue. But "at age 27 

he accomplished the astounding feat of acquiring a new nationality." ^ '^ 
He became thoroughly German, wrote two books on the great compos- 
er Richard Wagner, eventually marrying one of his daughters. 
Chamberlain's family ranked high in the British power structure; his 
uncle Neville ("peace in our time") Chamberlain was later Prime 
Minister of England. 

In 1910 Chamberlain published Foundations of the 19th Century - a 
thousand pages in two volumes. The book made him a trusted confidant 
at Kaiser Wilhelm's court. The book is like a sandwich - the first section 
is readable; the next half is a jumble of mostly rambling emotional gen- 
eralities; and the concluding section is again readable. 

German and other biblical scholars had been examining Judaism, 
Christianity and the Bible on a historical basis. They had worked out a 
fairly good idea of the Old Testament's various authors in terms of their 
periods and their political motives. The Bible was being critically 



592 The Lost Science Of Money 



analyzed as an historical document rather than as the word of God. This 
developing knowledge had important negative implications for Judaism 
and for Christianity as well, especially those sects that had deified the 
Bible as the absolute word of God. 

Chamberlain's Foundations over simplified and distorted these con- 
clusions and redirected them into a racial attack on the Jews. The key to 
Chamberlain is that he based this attack on race, not on culture, not on 
particular activities or deeds. Anticipating the objection that there are 
good and bad among all groups. Chamberlain incredibly wrote: 

"There are no good and bad men... on the other hand there are cer- 
tainly good and bad races."^^ 

Who Chamberlain really served can be guessed from those his book 
supported and those he attacked. Germany was about half Catholic and 
half Lutheran. He attacked Luther; he attacked Catholicism; he praised 
Calvin as a purely religious reformer. 

Chamberlain supported William IIF^ of Orange and the Puritans, 
"The glorious Puritans," he calls them. "It was about the year 1700 when 
William of Orange had banished the treacherous Stewarts and finally 

laid the foundations of the constitutional state," he wrote.-^^ 

This is the same William IIF*^ whose regime quickly allowed the 
nefarious Bank of England to be founded as discussed in Chapter 11. 

Chamberlain attacked Aristotle for "fettering science," when it was 
Aristotle who helped invent science. His history ignored the great body 
of work the Catholic Scholastics did for economic justice, as if to say 
forget about isolating anti-social behavior; just look at race. 

Thus among Chamberlain's "friends" are those whom this book has 
identified as directly connected with monetary trouble making. Some of 
those he attacked are among our monetary heroes. His emotional, racial 
attack against Judaism was very harmful for Germany and that may not 
have been an accident. 

SCHACHT BATTLES FEDER 

When the National Socialists came to power, Schacht was re- 
appointed head of the Reichsbank, partly to reassure German big busi- 
ness and foreign bankers. Schacht battled against Feder's un-orthodox 
monetary views: 

"Nationalization of banks, abolition of bondage to interest payments, 
and introduction of state Giro 'Feder' money, those were the high sound- 
ing phrases of a pressure group which aimed at the overthrow of our 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 593 



money and banking system. To keep this nonsense in check I called a 
bankers' council which made suggestions for tighter supervision and 
control over the banks. These suggestions were codified in the law of 
1934... In the course of several discussions I succeeded in dissuading 
Hitler from putting into practice the most foolish and dangerous of the 

ideas on banking and currency harbored by his party colleagues."^^ 

Conrad Heiden noted that: 

"Industry did not want to put economic life at the mercy of such men 
as Gregor Strasser or Gottfried Feder, who marching at the head of small 
property owners incited to revolution, wanted to hurl a bomb at large 
scale wealth. Feder announced that the coming Hitler government would 
create a new form of treasury bills, to be given as credits to innumerable 
small businessmen, enabling them to re-employ hundreds of thousands 
and millions of workers. Would this be inflation? Yes ! said Walter Funk, 
one of the many experts who for the past year or two had advised Hitler; 
an experienced and well known finance writer, collaborator of Hjalmar 
Schacht and, in Hitler's own eyes, a guaranty that big business would 
treat him as an equal. . .Hitler decided to put an end to the public squab- 
ble by appointing Goring to [oversee the questions]." 

Feder 's faction was then given the four year plan to keep them busy.^^ 

FEDER LOST 

Feder quickly lost the battle with Schacht and the German business 
establishment. Little is written about this. Perhaps he was in over his 
head monetarily, or maybe he just lost his confidence in opposing cen- 
turies of English political economists who were quite good at pretending 
they knew what they were doing. Feder wrote of his monetary plan: 

"Intensive study is required to master the details of this problem,., 
a pamphlet on the subject will shortly appear which will give our mem- 
bers a full explanation of this most important task,.,."^^ But this was 
1934, which means he hadn't clearly reduced the problem to written 
form since 1919, over 15 years earlier. 

"When the time comes we shall deal with these things in further 
detail. . .," Feder wrote, but indeed his party was in power, and the time had 
come. 

Feder was "put out to pasture" by the National Socialists, serving as 
an under secretary in the Ministry of Economic Affairs. He was later 
transferred to commissioner for land settlement, and then completely 
sidetracked as a lecturer at the Technische Hochschule in Berlin. 



594 The Lost Science Of Money 



BUT "FEDER MONEY" WORKED WELL 

Hitler and the National Socialists came to power on January 30, 
1933. Germany's foreign exchange and gold reserves had dropped from 
2.6 billion marks in late 1929, down to 409 million in late 1933, and to 

only 83 million marks in late 1934.^^ According to classical economic 
theory Germany was broke and would have to borrow, but Germany was 
to demonstrate that "classical" monetary theory is not very accurate. 
This period of German monetary history has received far too little 

attention in English. On May 1, 1933 Hitler outlined the P^ Reinhardt 
Program - a four-year plan to end unemployment by attacking it on sev- 
eral fronts: 

* Spending 1 billion marks worth of "employment creation bills." 

* Tax benefits for industry, agriculture, and the employment of domes- 
tic help. 

* Marriage bonus loans up to 1,000 marks and 

* Government control of the money and capital markets, under 
Schacht. 

Although elements of this program had already started under the 
predecessor Von Papen and Schleicher Regimes, they had not been all 
out efforts against unemployment. 

On May 3P^ the German government decided to issue 1 billion 
marks of short term public works bills, designated to pay for specific 
infrastructure projects: 

"These were negotiable certificates paid out to employers who 
undertook projects of replacement or maintenance projects. Anyone who 
equipped a factory with new machines or who had his house repainted 

could finance his operations with these work drafts. . .," wrote Heiden.-^"^ 
These bills paid about 4 V2% interest, and as they were taken into the 
banking system, they were renewed indefinitely, and made eligible for 
rediscounting by the Reichsbank. This means that they became part of 
the underlying basis for the nation's money supply, along with gold and 

foreign exchange and long term Government Bonds.-^^ 

The author has seen these bills referred to as "Feder money," and as 

"work drafts" (Arbeits-Schatzanwersungen). Schacht later referred to 

MEFO bills, mentioning no connection with Feder. 

Many of the bills never found their way to the Reichsbank, since the 

interest they paid was an incentive for banks and others to hold onto 

them. Roberts estimated that as much as 1 5 billion marks worth of such 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 595 



bills were issued.^^ Heiden made a lower estimate: 

"All in all the public Treasury poured out approximately 3 billion 
marks... for projects which according to the view hitherto prevailing 
(e.g. Schacht's) in those times of crisis, were senseless or at least unnec- 
essary...."^^ 

Guiliebaud also estimated an upper limit of 15 billion marks of all 
types of bills used to finance public works in this period, but noted that: 

"No exact figures exist for the circulation of employment bills, but 
they can be estimated with reasonable accuracy at 1,2 billion RM at the 

end of December 1933, and at 2.6 billion RM a year later."^^ 

When the process started in 1933, Reichsbank holdings of all such 
instruments, including normal treasury issues, totaled 3.03 billion marks. 
At the end of 1934 total holdings were 3.86 billion and at the end of 

1936 there were 4.91 billion marks.-^^ 

Thus Germany did not take the full step and create a German equiv- 
alent to the American Greenback. The Greenbacks themselves were 
money, had no interest payments due on them and did not add to any 
national debt. These German infrastructure bills were a form of debt cer- 
tificate, promising to pay money; they paid interest and did add to 
Germany's national debt. 

But this very close money substitute still had dramatic effects. 
They were an excellent way to get purchasing power into the hands of 
newly employed workers. Unemployment had been at six million in 
1933, and was down to around one million at the end of 1936. 
Furthermore, whereas the American Greenbacks had been spent mostly 
on warfare and destruction, the "Feder money" had gone almost entire- 
ly into public works projects, especially the construction of new mid- 
dle class housing. In 1934 there were 283,995 dwellings built com- 
pared to 141,265 in 1932. Then there were the thousands of kilometers 

of Autobahn construction."^^ 

Thus it can be argued that the cause of Hitler's immense popularity 
among Germans was that he temporarily rescued Germany from English 
economic theory. For while these activities strongly benefited the 
German middle and lower classes, they were of great concern to some 
foreign bankers. Although Germany's move away from gold was more a 
matter of necessity than choice, it still threatened "vested interests." 
Robert de Fremery quotes from the June 1940 National City Bank 
Bulletin which admitted that: 



596 The Lost Science Of Money 



".. .not only the United States but other countries as well have large 
vested interests in gold. The British Empire alone accounts for nearly 
half of the gold output of the world, and in many other countries gold is 
an important national asset. These countries would not look with favor 
upon the displacement of gold as a monetary metal; and even in the 
event of political changes resulting from the war these vested interests 

will remain, though possibly shifted to other national jurisdictions."^^ 

The reader will notice that these "vested interest" countries were the 
ones that warred with "goldless" Germany. De Fremery thought this 
could have been one of the causes of the Second World War. However, 
that decision may have been made earlier, and itself led to Germany 
being without gold. Perhaps she was expected to borrow gold interna- 
tionally, and that would have meant external control over her domestic 
policies. Her decision to use alternatives to gold, would mean that the 
international financiers would be unable to exercise this control through 
the international gold standard, as described in Chapter 22, and this may 
have led to controlling Germany through warfare instead. 

SCHACHT ATE SOME CROW OVER FEDER MONEY 

Schacht clearly had to "eat crow" and swallow his own words as 
regards the new monetary issues that he earlier condemned. Thirty years 
later he justified his change of theory: 

"...it was repeatedly asked whether the success of the MEFO bill 
scheme did not mean that whenever there was a shortage of capital sav- 
ings one could compensate by replacing such capital savings with cred- 
its granted by the central bank, and thus by money specially granted for 
the purpose. The English economist J.M, Keynes has delt with the prob- 
lem theoretically, and MEFO transactions prove the practical applicabil- 
ity of such an idea.""^^ 

But Schacht insisted that certain conditions must exist. There had 
been no stocks of raw materials; factories were empty; machines were 
idle and 6 Vi million willing men were unemployed: "The capital which 
could be expected to result from such developments (putting men to 

work) was used in advance to grant credit through the MEFO transactions."^-^ 

SCHACHT FIRED OVER THESE MATTERS 

These bills were used from 1934 to 1938. Schacht relates how he got 
himself fired by refusing to continue renewing the bills: 

"In January 1939, the Reichsbank handed Hitler a memorandum in 
which it indicated its refusal to grant the Reich any fiirther credits. The 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 597 



consequences were drastic. On January 19, I was dismissed from my 
office as President... on the following day Hitler issued an edict which 
ordered the Reichsbank to grant the Reich all credits for which the 
Fuhrer asked. It is true the MEFO bills were now honored when they 
came due, but only with the inflated money produced by the printing 

presses. The second inflation had begun.'"^"^ 

Schacht's firing was not made public for five months. His refusal to 
continue financing the Reich was probably what saved him at Nuremberg. 

THE AMERICAN PROFESSORS ATTACK 

In 1948 a number of American professors were given the task of 
devising a currency reform for defeated Germany. The Morgenthau- 
Tannenbaum plan introduced the Deutsche mark. Initially everyone 
received 40 DMarks. Employers received 60 DM per employee. Authorities 
received a month's requirements, post and railways two weeks worth. 

But all money claims, savings accounts, debts, etc. were reduced to 
1/10 their nominal amount. On the other hand, shares, properties and 
other material assets remained undiminished! This represented an unfair 
redistribution of wealth to the rich. Schacht noted that the poor mans 
assets were in his savings account, while the assets of the rich were in 
their properties. 

"This transmogrification was... a deliberate brutal interference with 
the whole social structure of German society, more diabolic in its results 
than the inflation of 1923... here malevolent intention was involved," 
wrote Schacht in 1967. 

DEUTSCHE BUNDESBANK FORMED AS A 
GOVERNMENT OWNED BANK 

After World War II, American General Lucius Clay wanted the 
German Government to have more say in running its central bank. In 
1956 the present Deutsche Bundesbank was formed by the merger of the 
Deutsche Laender Bank with the Berlin Central Bank and the Land 
Central Banks from the various regions of Germany. The Bundesbank is 
a federal corporation owned by the German government. 

The Bundesbank issues the currency, sets interest and discount rates, 
and sets reserve requirements for the banking system. Its main guide for 
determining monetary policy is the level of its M3 money stock, which 
counts currency and non bank deposits in credit institutions, including: 
sight deposits, time deposits (under four years) and savings deposits (at 
three months notice). 



598 The Lost Science Of Money 



Officers and directors are nominated by the Federal Cabinet and 
appointed by the state president. The Bank has been successfully insu- 
lated from political domination. While the Bank is required to support 
the general economic policy of the Federal Cabinet, it must do so in a 
manner consistent with its primary responsibility: to regulate the amount 
of money and credit in the economy with the aim of safeguarding the 
currency. This is stated in oversimplified form, as maintaining "price 
stability." 

This policy has derived partly from the horrible experience of the 
1923 hyperinflation, and the ten for one devaluation after World War II, 
as well as from the influence of people like Hjalmar Schacht. 

THE BUNDESBANK'S IMPRESSIVE RECORD 

The Bundesbank is widely recognized as one of the best central 
banks in the world, along with the Swiss National Bank. This has result- 
ed from a combination of factors: it has been run for the national inter- 
est, not for private profit; its management has a strong public service tra- 
dition; and the German people have worked very hard. Up to the mid- 
1960s the German government ran budget surpluses, and it remained a 

net creditor until 1974.^^ This saved the nation large amounts that would 
have gone for interest payments, had Germany financed government by 
borrowing, the way the U.S. has. 

Moreover, when an American learns of the highly diverse nature of 
banking in Germany, with the many different types of institutions 
designed to fulfill particular needs, the word that comes to mind is "serv- 

ice,'"^^ Unfortunately in America the word that most often comes to 
mind regarding our ever consolidating, monolithic, fee raising banking 
establishment, is "rip off." 

MUCH GREATER CHALLENGES UNDER THE EMU 

At first the Bundesbank management resisted joining the European 
Monetary Union. It signed on only after Germany's political leadership 
threatened changes in the law organizing the Bank. Some momentous 
changes will be needed to operate the EMU successfully. It will not for 
long have certain luxuries that the Bundesbank has been able to enjoy. 

For example, the Bundesbank has relied on foreign trade surpluses 
to obtain U.S. dollars, which constitute a large part of its reserves: about 
$80 billion, or 33%, at present (early 1998). These dollars have served 
as the basis for issuing currency and credit in Germany. Furthermore 
these dollar reserves are invested at interest. 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 599 



The fact is that the EMU, if it is to be independent, must have a 
rational and practical substitute for using the Dollar as a reserve, and to 
date the EMU has not properly faced this pivotal matter, which we dis- 
cuss in detail in Chapter 23. 

SCHACHT FINALLY SEES THE LIGHT 

Schacht began his banking career as a believer in the gold standard, 
the system then used in England and America. But by 1967, it appears 
he had come to agree with some of Gottfried Feder's "unorthodox" mon- 
etary views: 

"Modem paper money, the banknote is backed by its creator, the 
sraie. . . 

Thus Schacht made a monetary pilgrimage similar to that of Thomas 
Jefferson, Alexander Del Mar, and many others, away from the primitive 
commodity view of money as metal, to an awareness of the "nominal," 
fiat nature of money as being based in law. 

"The granting of credit is unthinkable without a central bank. No 
central bank can be allowed to act against the government of the coun- 
try. The government is over the central Bank... A central bank cannot 

allow any competition," wrote Schacht."^^ 

But then Schacht qualified this, stating that a higher law above both 
the government and the central bank is the constancy of the value of 
money. Stated in a more political manner, he is saying is that above both 
the central bank and the government is the bondholder. 

Schacht insisted that only by keeping the currency stable could the 
small savers ever have a chance to accumulate substantial savings. He 
rejected their use of investments as indoctrinating them into gambling. 

However, the use of well managed instruments such as balanced 
mutual funds can now overcome this objection. And after all, when 
unemployment caused by an overly restrictive monetary policy strikes, 
it is the small saver who generally suffers most. 

In Summary 

An examination of the German hyperinflation of 1923 shows that 
the simplistic anti-governmental interpretation of the economists and 
financiers is without basis. Nearly the opposite of what they contend, 
was true: the hyperinflation followed the complete privatizafion of the 
German central bank and elimination of governmental influence on it. 

Again it was governmental action - this time the German govern- 
ment - not private bankers - that rescued the monetary situation. 



600 The Lost Science Of Money 



One could not ask for a more dramatic contradiction of the English 
school's interpretation. This leaves that school without any valid histor- 
ical justification for its anti-government prejudice concerning the control 
of money systems. However, the author does not expect this to alter their 
monetary stance against the public interest. 



21 GERMANY'S 1923 HYPERINFLATION UNDER A PRIVATE BANK 601 



Notes to Chapter 21 

^ Allan Nevins, Henry White: Thirty Years of American Diplomacy, (New York: 

Harper Bros., 1930), pp. 257-58. 

^ Francis Nielsen, The Makers of War, (Appleton, WI: Nelson Publishing Co., 

1950), pp. 32-47 

^ A.E. Zimmem, The Economic Weapon, (New York: George Doran), 1913-17. 

^ Prof. Carroll Quigley, The Anglo American Establishment, (New York: Books 

In Focus, 1982). 

^ Konrad Heiden, The Fuerher, (Boston: Houghton Mifflin, 1944, written 1934), pp. 

639-49. 

^ Robert Lansing, The Peace Negotiations, (Boston: Houghton Mifflin, 1921), 

pp. 272-75. 

^ Francisco Nitti, The Wreck of Europe, as quoted by Nielsen, cited above, p. 151. 

^ Hjalmar Schacht, Stabilization of the Mark, (London: George Allen & Unwin, 

1927), pp. 46-51. 

^ Schacht, cited above, pp. 10-25. 

^^ Schacht, cited above, pp. 116-7. 

^^ Schacht, cited above, pp. 116-7. 

^^ Schacht, cited above, p. 50. 

^^ Schacht, cited above, pp. 50-51. 

^^ Hjalmar Schacht, The Magic of Money, (London: Oldboume, Trans. P. 

Erskine, 1967), pp. 65-6. 

^^ Schacht, Stabilization of the Mark, cited above, p. 84. 

^^ Schacht, The Magic of Money, cited above, p. 68. 

^^ Schacht, Stabilization of the Mark, cited above, p. 89. 

^^ Schacht, Stabilization of the Mark, cited above, p. 112. 

'^ Schacht, Stabilization of the Mark, cited above, p. 102. 

^^ Schacht, The Magic of Money, cited above, p. 70. 

^^ Norbert Muhlen, Schacht - Hitler's Magician, (New York: Alliance, 

Longmans Green, trans. Dickes, 1939), 

^^ Schacht, Stabilization of the Mark, cited above, p. 208. 

2^ Schacht, The Magic of Money, cited above, p. 72. 

'^^ Schacht, Stabilization of the Mark, cited above, p. 159 

^^ Schacht, Stabilization of the Mark, cited above, p. 181. 

^^ George Knapp, State Theory of Money, (London: Macmillan, 1924), pp. 92-95. 

^"^ Konrad Heiden, Der Fuerher, Hitlers Rise to Power, (Boston: Houghton 

Mifflin, trans. Ralph Manheim,1944, written 1934), p. 223. 

^^ Houston Stuart Chamberlain, Foundations of the 19^^ Century, (New York: , 

John Lane, trans John Lees, 1912), p. 490. 

^^ Chamberlain, cited above, v. 2, p. 387. 

^^ Schacht, Magic of Money, cited above, p. 49 



602 The Lost Science Of Money 



^^ Heiden, cited above, p.480. 

^2 Gottfried Feder, Hitlers Official Program, (New York: George Allen & 

Unwin, 1934, repr. New York, Howard Ferbig, 1971), p. 59, 92. 

^^ Stephen M. Roberts, The House that Hitler Built, (New York: Harper Bro., 1938), 

pp. 146-7. 

^"^ Heiden, cited above, p. 662. 

^^ Roberts, cited above, pp. 160-163. 

^^ Roberts, cited above, p. 165. 

^"^ Heiden, cited above, p. 662. 

^^ C.W. Guillebaud, The Economic Recovery of Germany 1933-1938, (New 

York: Macmillan, 1939), p, 53. 

^^ Roberts, cited above, pp. 164-69. 

"^^ Heiden, cited above, p. 663. 

"^^ Robert de Fremery, Money and Freedom, (San Francisco: self published, 

1957), pp. 117-8, quoting the National City Bank Bulletin of June, 1940. 

"^^ Schacht, The Magic of Money, cited above, p. 116. 

"^^ Schacht, The Magic of Money, cited above, p. 116. 

"^^ Schacht, The Magic of Money, cited above, p. 117. 

"^^ Ellen Kennedy, The Bundesbank, Council on Foreign Relations, 1991. 

^^ See Francke & Hudson, Banking and Financing in West Germany (New York: 

St. Martin's, 1984). 

'^^ Schacht, The Magic of Money cited above, p. 76. 



603 



CHAPTER 22 



INTERNATIONAL 

MONETARY 
ORGANIZATIONS 



"There is no international law of money 

and there can never be one. . .for the law of money 

is an important part of domestic law." 

Alexander Del Mar, 1899 

"There is no universal money." 
Henry George, 1897^ 

There is no such thing as an international currency." 

Hjalmar Schacht, 1967 



International monetary institutions are a recent development in 

human social organization, beginning only in the mid- 19^^ century, if we 
count the Latin Monetary Union as such an organization. But as the 
development of warfare, political organization, rapid transportation, 
instant communications, and world trade advanced, the possibililty of 
international law emerged; and the need and viability of intemational 
institutions to smooth the way in the monetary area became clear. 

This development has been made more difficult by the immaturity 
of national legal systems and the misdirection of monetary thought that 
resulted in the near religious enthronement of the intemational gold 



604 The Lost Science Of Money 



standard in the 19^^ and early 20^*^ centuries. Since the system was adver- 
tised as "automatic," little need was recognized (except by those who ran 
it) for organizations or government to administer it. 

Those benefiting fi*om control of that system used their power of the 
purse to effectively dominate the schools of economics, assuring that the 
economists trained there would be "fixed" regarding those concepts. A 
trusting belief in the workings of the gold standard was so well 
entrenched that a remnant of it continues today, especially among con- 
servative and religious groups, which can be characterized as well mean- 
ing, but monetarily illiterate. 

But all of the plausible sounding gold standard theory could not 
change or hide the fact that, in order to function, the system had to mix 
paper credits with gold in domestic economies. Even after this addition, 
the mixed gold and credit standard could not properly service the grow- 
ing economies. They periodically broke down with dire domestic and 
international results. 

The worst such breakdown, the Great Crash and Depression of 
1929-33, described in Chapter 20, can be traced directly to England's 
gold standard moves from 1 925 to 1 93 1 ; and this breakdown occurred in 
peacetime. China was not on the gold standard and was hardly affected 
at all by the Great Depression. It was widely noted that those countries 
did best that left the gold standard soonest. 

THE PROBLEM OF INTERNATIONAL PAYMENTS 

The problem originates in the nature of money as a creature of the 
legal system. This makes money a national rather than an international 
instrument. Because international law is still very limited, so is the pos- 
sibility of international money at this time; but that could change rapidly. 
Several diverse observers have noted the "nationality" of money: 
Alexander Del Mar commented on this limitation in most of his mone- 
tary writings. In 1967, Hjalmar Schacht observed, "There is no such 

thing as an international currency."^ But just two years later the 
International Monetary Fund (the IMF) introduced the SDR (Special 
Drawing Rights), which is intended as a kind of international money 
reserve for governments. 

EARLIER EXAMPLES OF INTERNATIONAL PAYMENTS 

Egypt had a central banking system that could effect payments 
through branches in various cities. In its near-2,000 year history, Rome 
never used a central banking system within its territory, and the Old 



22 INTERNATIONAL MONETARY ORGANIZATIONS 605 



World Order carried on international trade in kind, or transported gold 
and silver in a form of barter. 

In the medieval period the great regional trading fairs, held under the 
auspices of various princes, used an extra-territorial payments clearing 
mechanism for participants from various countries. They also had the 
ability to arrange for credit and deferred payments to be made at anoth- 
er fair, in a different jurisdiction. 

The Knights Templar organization could clear payments across bor- 
ders without shipping metal, by balancing credits and debits in different 
countries. From the early 1700s the Bank of England could be drawn 
upon to effect payments around the world. 

THE INTERNATIONAL 
GOLD STANDARD 

"Gold may not be capricious, but the men who 
manipulate gold between countries are capricious." 

Robert de Fremery^ 

After England demonetized silver in 1816, the Latin Monetary 
Union followed in the 1860s (see Chapter 18), So we consider that the 
international gold standard dominated from the mid- 1800s to 1931. 

However, it was well recognized that international trade was almost 
entirely an exchange of goods. In theory, when a country's imports and 
exports got out of balance, it would have to import or export gold to 
bring them into balance. For example, if a country imported more than 
it exported, enough gold to make up the difference would be shipped 
abroad. In theory this kept imports and exports in line: 

"Any important dis-equilibrium in the balance of trade will cause 
gold to flow, and the movement of (gold) will set in motion forces which 
remove the initial cause of the disturbance." 

That's how a 1935 study of British gold movements by W.E. Beach 
phrased it. The original theory held that these "forces" worked by chang- 
ing the price level of goods and services in the country that was out of 
balance. With less gold in the country, in theory prices would fall, caus- 
ing exports to rise, leading to a balance in trade.^ 

However, the theory was later altered when it was learned through 
investigation of the facts that there was not always the expected correlation 



606 The Lost Science Of Money 



between prices and exports - that for some periods high exports co- 
incided with high prices for goods. The justifying theory of the gold 
standard called for the opposite. 

The theory was adjusted yet again to include the fact that the level 
of bank credit in a country might be altered, at least temporarily, to make 
up for gold exports. As late as 1982, a symposium of economists could 
not really agree on how the gold standard system had functioned. 
However, they did agree that the international gold standard was not 
automatically adjusting, and though they are not quite certain how it 

worked, they realize it didn't function in the advertised manner.^ 

At its base the international gold standard attempted to attribute an 
objective value to gold. This made gold a kind of fetish and did not ade- 
quately take into consideration that the value of gold itself was not 
objective and fixed, but was variable. 

Nor did it take into account the value that legal actions imparted to 
gold. More simply stated, the gold standard theory was based on a false 
concept of money's nature. 

THE GOLD STANDARD GIVES FOREIGN BANKERS 
LOCAL CONTROL 

There is one indisputable aspect of the international gold standard 
that economists recognized but ignored: the control of a country's inter- 
nal credit policy - whether there would be contraction or expansion - was 
ultimately in the hands of those who could move gold into or out of the 
nation. So long as a country's balance of payments were cleared through 
a gold standard system, forces outside the country could quietly bring on 
a depression and thereby a (likely) change of government within the 
country. 

WORLD WAR I LEADS TO THE BANK FOR INTERNATIONAL 
SETTLEMENTS (THE BIS) 

The unprecedented level of horror endured in the first World War 
gave strength to movements toward international law, that for better or 
worse found expression in the League of Nations. WWI also led to the 
formation of the first truly international monetary organization, the Bank 
for International Settlements, known as the BIS, which was organized as 
a result of suggestions by the Experts Committee on German WWI 
Reparations as a way to facilitate reparation payments. 

As the first international monetary organization, the BIS was not 
organized as an authority superior to central banks, nor was it to engage 



22 INTERNATIONAL MONETARY ORGANIZATIONS 607 



in the banking business. Its purpose was to establish an international gold 
clearing system, balancing credits and debits between member countries, 
thereby reducing the necessity of actual gold shipments. The BIS was 
also to assist countries to go back onto the gold standard after leaving it 
in WWI. 

Organized at the Hague Conference in January 1930, the BIS is sit- 
uated in Basel Switzerland and has a Swiss charter but as an interna- 
tional organization under international, not Swiss, law. It was founded 
by six central banks, and a group of three private U.S. Banks: J.R 
Morgan, First National Bank of New York, and First National Bank of 
Chicago. 

OWNERSHIP AND CONTROL OF THE BIS 

The organization is owned and controlled by government central 
banks except that all the American and part of the Belgian and French 
shares have been sold to private parties, so that about 14% of the bank 
is in private hands. Private shareholders have no voting power and are 
not allowed to attend the bank's meetings. 

The Bank's authorized share capital is 1.5 billion gold francs, divid- 
ed into 600,000 shares, giving each share a par value of 2500 gold 
francs. The actual paid-in capital is 323.2 million gold francs. The gold 
franc is used as a unit of account for bookkeeping purposes and under- 
scores the original gold bias of the BIS. It was the gold value of the 
Swiss Franc in 1930, at 0.29 grams of gold per franc. 

The Bank's assets and liabilities in U.S. dollars are converted to gold 
francs (for accounting purposes) at $208 per ounce, meaning that one 
gold franc equals $1.94. 

THE BIS UNDERTAKES BANKING SUPERVISION 

While the Bank was primarily set up as a gold standard institution to 
facilitate German war reparations, by 1931 England was forced to aban- 
don its ill-conceived gold standard and many other countries followed 
(see chapter 20). Then in 1932, the question of German WWI reparations 
was buried and forgotten at the League of Nations in Geneva. 

Thus the original reasons for founding the bank quickly evaporated 
and the Bank shifted its activities into other areas. From 1961 the Bank 
coordinated the "Gold Pool," a last ditch effort to maintain the facade of 
an international gold standard. Pool members contributed gold towards 
keeping the U.S. dollar internationally redeemable to gold at $35 per 
ounce. But in 1967 France pulled out of the Pool and it collapsed in 1968. 



608 The Lost Science Of Money 



One change the Bank made was to actually engage in the banking 
business, but as a bank whose depositors are confined almost exclusively 
to central banks. As such, the Bank holds a significant part of the 
world's foreign exchange reserves; 113 billion dollars in such 
deposits were held in March 1997, representing 7% of all foreign 
exchange reserves. It is also probably the world's largest single hold- 
er of gold. 

Though the BIS states that it doesn't advance money to governments 
or open accounts in a government's name, most of the BIS deposits are 
held in short term government securities. 

MONEY CREATION POWERS 

The BIS has no formal money creation powers, and is not a bank of 
issue. However, Paul Einzig, writing in 1930, noted that conservatives 
were alarmed that the BIS would become an instrument of great infla- 
tion by creating excessive credits to central banks, based on fractional 
reserves. That is, it would credit the central banks with several times 
their deposits; and those credits would then be used as further reserves 

by the central banks to create more money, etc.^ Only conservatives 

could worry about inflation during the 20^^ century's worst deflation. 

Of course it didn't work out that way. But it can be mentally filed 
away that this potential engine for money creation in the form of the BIS 
still exists out there, and under proper regulation, the author would con- 
sider that a good thing in the present deflationary environment. If, that 
is, the bank could be placed under public authority. 

The Bank promotes itself as an important meeting place for central 
bankers to "Facilitate international co-operation in areas of common 
interest in particular as regards to monetary matters and support to the 
international financial system," especially its stability. It devotes a sig- 
nificant effort to research and statistical work in the area of internation- 
al loans; and more recently it has directed its attention to the volatile and 
potentially de-stabilizing trading in financial derivatives. 

In the 1988-1992 period, it fostered an international agreement 
on how to evaluate the adequacy of a bank's capital and set mini- 
mum requirements that internationally operating banks are expect- 
ed to follow. These ^'regulations" are now having a greater effect on 
how banks operate than is realized - arguably more than local regu- 
lators have. 

In 1996-97, an additional nine central banks from Asia, Latin 



22 INTERNATIONAL MONETARY ORGANIZATIONS 609 



America and the Middle East were admitted into the organization, bring- 
ing the total BIS membership to 41 central banks. The administration of 

the Bank includes an annual general meeting held the 2"^^ Monday in 
June. It has a Board of Directors drawn from 11 major industrial coun- 
tries and there is a management and staff of nearly 500 people from 27 
countries. 

The BIS as an organization tended to look backward toward gold. 
Thus it would be the more forward looking IMF which became central 
to international monetary developments between 1945 and 1973. 

THE INTERNATIONAL 
MONETARY FUND 

For the second time in the 20^^ century, European regimes proved 
unable to stop the forces that warmongers unleashed upon them, deci- 
mating their people and nations in WWII. Power over international 
finance flowed to the Federal Reserve System, as American industry sup- 
plied both sides during most of WWI, and the Allies during WWII. Almost 
sixty percent of the West's monetary gold was in New York at the end of 
WW2. 

Confident of victory, planning for the post-war monetary system 
began in 1941. The central institution of this reform would not be the 
BIS but the International Monetary Fund (IMF), which took shape at the 
1944 conference at the Hotel Mount Washington in Bretton Woods, New 
Hampshire. Seven hundred and thirty persons descended on the hotel for 
the conference. 

The Englishman John Maynard Keynes, whose theories had encour- 
aged governments to borrow money to get out of the Great Depression, 
wanted to go all the way and create an international central bank - a cen- 
tral bank of central banks - with the power to create money and interna- 
tional reserves based on a new monetary unit which he called the 
"Bancorp." But world conditions were not ready for this. In practice it 
would require the member states to give up a part of their sovereignty to 
the new central bank, and it was unrealistic to expect the U.S. to cede 
sovereignty - to give up power - just when it had emerged as the world's 
only financial superpower. 

The IMF would be much more limited. Formulated mainly by the 



610 The Lost Science Of Money 



American Henry Dexter White, it would reflect the fact of American 
power. It began operations in 1946 with 29 member countries, growing 
eventually to 181. Each country deposited a quota of gold, dollars, and 
their currency, which comprises the IMF reserves. The original U.S. 
quota was $2.8 billion. 

Hans Aufricht, Counsellor to the IMF, noted that: 

". . .there is every indication that the amount of the U.S. quota in the 
fund was, in all likelihood not entirely unrelated to the book gain of the 
U.S. Treasury which resulted from the reduction in the weight of the 
gold dollar in 1934... (when Roosevelt raised the price of gold from 

$20.67 to $35 per ounce) which amounted to $2.81 billion."^ 

AMBIGUITY OF ORGANIZATIONAL STATUS 

Again we find a degree of ambiguity into which the Anglo- 
American bankers love to place their operations. The IMF is nominally 
a special organ of the United Nations, under UN Article 57, #3, but the 
UN has no control whatsoever over IMF policies. Thus the IMF operates 




22a. Harry Dexter 
White (left) and 
John Maynard 
Keynes. The IMF 
would reflect 
American power - 
the dollar ruled. 
Keynes' proposal 
for an abstract 
international 
reserve unit, the 
"Bancorp," had to 
await the creation 
of SDKs in 1970. 
But by then it 
couldn't stop the 
IMF from degener- 
ating into a strong- 
arm collection 
agency for the big 
banks. 



22 INTERNATIONAL MONETARY ORGANIZATIONS 61 1 



with whatever advantages the prestige of its UN "affiliation" status gives 
it, but without the responsibility implied in that. 

The IMF is ruled by a Board of Governors, which meets annually, 
with one representative from each member country. In practice it is run 
by its 24-member Executive Board, with strong representation of the 
major industrial nations. This board meets at least three times a week. 
Votes are generally not taken but consensus of members is sought for 
IMF decisions and much weight is given to the views of the Managing 
Director. 

Traditionally the managing director is a European or at least a non- 
American, while the president is normally an American. The total staff 
at the IMF numbers about 2200. Like UN employees, their salaries and 
benefits are tax free - any taxes they pay are made up by the organiza- 
tion. IMF staff take an oath that they "will accept no instruction in regard 
to performance of . . .duties from any government or authority external to 
the fund."^ 

IMF OBJECTIVES 

While the original stated objectives of the IMF included full 
employment and the maximum development of resources, its core activ- 
ity was initially to try to institute fixed exchange rates between curren- 
cies. Each country was to establish a parity level (a "price") between its 
currency and gold, and stay within one percent of it. Exchange stability 
and stopping countries from making competitive devaluations were 
emphasized. Later, currencies could move in a 10% band, as long as 
advance notice was given of changes. 

By 1949 major currency exchange adjustments occurred when the 
British Pound had to be devalued from $4.03 to $2.08. But the IMF had 
made substantial progress. In 1947 there had been a severe worldwide 
dollar shortage; but from 1948 to 1954 the gold and dollar holdings of 
the non U.S. members doubled. By 1958 twelve countries were able to 
establish external convertibility for their currencies. By mid 1967 the 
consumer price level was only 1.4 times the 1948 level, even though 
Europe and Japan had been rebuilt. The Marshall Plan's $12 billion of 
assistance to Europe was also of immense importance. 

THE U.S. DOLLAR RULES 

The U.S. dollar held a special position in the system, reflecting U.S. 
strength. Dollars were given equal status with gold, as reserves for cur- 
rency creation. This meant that U.S. gold reserves counted twice in 



612 The Lost Science Of Money 



creating world reserves. First they could be used to create dollars, then 
those dollars could be used as reserves to create other currencies. So at 
least twice as much money would be created worldwide than if gold 
alone were the reserve. The IMF was a mixed system of gold and a priv- 
ileged paper dollar. 

This was a "gold-exchange standard," similar to that which emerged 
from the 1922 Genoa Conference. In the 1920s the U.S. Dollar and the 
British Pound were maintained convertible to gold by their central bank- 
ing systems, while other European currencies were convertible not to 
gold, but to the Dollar and the Pound. Thus the term "gold-exchange 
standard" was a more accurate description than gold standard. 

The paper nature of the system was slightly hidden because the 
United States (and only the U.S.) undertook to maintain the dollar con- 
vertible into gold for other members, at $35 per ounce. 

But from the founding of the IMF, U.S. gold holdings were in a 
downward trend, until they reached a level around $11 billion in 1971, 
at the $35 valuation. It can be argued therefore that this system was 
never really functioning as a sustainable gold based system, but began 
"running out of gas" right from the start. 

Use of the dollar for reserves by other central banks allowed the U.S. 
to run large balance of payments deficits, prompting leaders like Charles 
De Gaulle to attack Dollar Imperialism - the use of American dollars to 
buy up European assets in the 1960s. 

FLOATING RATES 

The parity system broke down on August 15, 1971 after the Gold 
Pool and U.S. gold reserves proved inadequate and President Nixon 
closed the "gold window," refusing to honor the commitment to 
exchange dollars for gold. This was the end of the Bretton Woods agree- 
ment, but the IMF continued. From March 1973 the exchange rates of 
various major industrial currencies floated, with smaller countries' cur- 
rencies pegged to larger ones. Monetary theorists such as Robert de 
Fremery, and several economists such as Friedman, Haberler and 
Meade, had advised using floating rates for years, and they seemed to 
function well. 

SPECULATORS UNDERMINE THE IMF 

The speculation problem began with gold and the way the "Gold 
Pool" allowed private speculators to take risk-free positions speculating 
in gold against the U.S. dollar. In 1968, Xenophon Zolotas, Greece's 



22 INTERNATIONAL MONETARY ORGANIZATIONS 613 



foremost monetary scholar, warned in The Gold Trap and the Dollar that: 

"...the financial set up of the world - and thereby its freedom of 

trade and economic prosperity - has become subservient to the interests 

of gold speculators and hoarders. As a result more and more experts 

agree on the necessity for gold to be phased out."^ 



70 



MMMMMW 



60 



50- 



40 



so- 



lo- 



10. 







Billions of 

U.S. $ 



U.S. Gold Reserves under the 
IMF's Bretton Woods system 



Totai external $ liabilities 







U*S. Monetary gold 



Rest of world's 
Monetary gold .* '^ 



liabilities held by foreign 
monetary authorities 



t I M I t M I I I I M I I 1 I 11 I I f t 
1950 1955 1960 1965 1970 



1945 



22b, An examination of U.S. Gold reserves shows the system under pressure 
from 1949, near the beginning of Bretton Woods. Declining U.S. holdings 
meant the system was only running on reserves, which were draining away. 



614 The Lost Science Of Money 



The IMF's official historian, Margaret de Vries, implied that the sys- 
tem was brought to its knees by some of its own biggest beneficiaries - 
large corporate speculators: 

''The extreme volatility of capital flows (e.g. around $200 billion in 
1976), in response to interest rate difference or anticipation of exchange 
rate changes, was in large part responsible for undermining the inter- 
national monetary order that existed until the late 1960s, "^^ 

Thus by the IMF's reckoning, large capital flows by major specula- 
tors severely harmed the system, which had been designed not for their 
speculative games but to facilitate liquidity, production and trade 
between nations. Michael Bordo has noted that: 

"The architects of Bretton Woods envisaged a system characterized 

by limited international capital mobility."^ ^ 

The early 1970s were a critical moment for the IMF. Which would 
take precedence, the ability of corporate and other speculators to shift 
huge amounts of capital overnight without warning, in order to take 

advantage of a 1/20* of a percent interest rate differential between cur- 
rencies, or the ability of producers to create and trade goods, upon which 
the world's peoples depended? 

The IMF and the world community would either have to resist such 
misuse of the world's monetary facilities and mechanisms, or be ruled 
by them. It surrendered without a fight, subjecting its operations to the 
notion that "free markets" in currency and interest rate speculation take 
precedence over all else. It did this without any evidence that would 
demonstrate a benefit to the world community arising out of the instability 
such a viewpoint would bring to currency holdings. Perhaps Adam Smith's 
market deity "Hand the Invisible" was supposed to take care of that. 

In 1974, rather than negotiate a reformed system, the Governing 
Board decided to let the new system evolve, until a revised charter was 
approved in April 1978. The role of gold was reduced substantially and 
the SDR was chosen to become the IMF's "primary" reserve asset. 

HOW TO END PRIVATE CURRENCY MANIPULATION 

This author proposes three simple changes which would greatly 
reduce the ability of speculators to manipulate national currencies, 
which endangers the livelihoods of millions of persons, 

A tax on currency transactions 

For some years economists have called for placing a small tax on all 
speculative currency transactions and using the proceeds to better service 



22 INTERNATIONAL MONETARY ORGANIZATIONS 615 



the markets involved. This is a fine idea, but does not go far enough 
because it will not stop the large currency debacles, where a small tax 
won't be enough to stop currency manipulators. 

Prohibit speculative short-selling of currencies 

The currencies of some developing areas (for example Southeast 
Asia during the 1997 crisis) could have been placed into a category of 
no short selling allowed, or setting low position limits for short sales. 
Such a restriction would not affect those actually involved in production 
and commerce in those areas, but would present a substantial block to 
those attempting to take advantage of them. Appropriate exceptions 
could be made by exchange authorities. 

Settlement should be in "kind'' instead of in "cash" 

Economists still haven't recognized the potential importance of set- 
tlement of futures and forward contracts in "kind," rather than allowing 
settlement in "cash." Settlement in cash means that when it comes time 
for short sellers to deliver the currency they sold, they have the option to 
value the contract in dollars, and then pay in dollars. Thus they need only 
the ability to deliver dollars, to protect their position. 

However, requiring the contracts to be paid in "kind" would create 
a very different situation. If the short sales of the currency drive down 
the value of the currency, then when the delivery date approaches, those 
who sold the contracts have to actually buy back the physical currency 
to be able to deliver it. Such purchases push the price of the currency 
back up, and conceivably the short sellers could get caught in a "short 
squeeze" where they could not obtain the currency for delivery and 
would have to default, with serious losses to themselves. Defaults in the 
futures markets can bankrupt the largest speculators, as the billionaire 
Hunt brothers discovered in the 1981 silver markets, and as Baring 
Brothers Bank found in 1996. 

These modest suggestions could help insulate currency markets 
from typical forms of manipulation. 

IMF'S MONEY CREATION POWERS 

Originally the primary money creation mechanism of the IMF was 
the use of dollars as a reserve on which other currencies were created. 
U.S. balance of payments deficits could fuel monetary creation in coun- 
tries such as Germany, which obtained the dollar reserves through for- 
eign trade surpluses. But this was an automatic structural feature, not a 
discretionary power. 



616 The Lost Science Of Money 



The IMF can also create limited liquidity by extending loans to 
members. The source of the funds are the reserve quotas that the mem- 
bers deposit with the IMF. Countries in trouble can borrow up to three 
times their quota, however, from 1982, the members limited the total 
amount that could be loaned out to 60% of the total of all IMF reserves. 

SPECIAL DRAWING RIGHTS (SDRs) 

Special Drawing Rights (SDR's) were first agreed to as an interna- 
tional reserve asset in August 1969 after four years of negotiation, in 
order to reduce "the problem of international liquidity and to. . .(create) a 
new reserve unit to supplement gold, the supply of which was insuffi- 
cient, or of national currencies such as the U.S. $," wrote De Vries.^^ 

This was more along the lines envisioned for the IMF by John 
Maynard Keynes, and was a truly momentous development. Managing 
Director Pierre Paul Schweitzer hailed the SDRs as: 

"The most significant development in international financial co- 

operafion since Bretton Woods."^^ 

The SDRs were activated on January 1, 1970, causing the price of 
gold to actually drop ten cents under the official $35 per ounce. From 
January 1970 to the end of 1972 there were $9.5 billion of SDRs creat- 
ed to augment the IMF's $39 billion in gold holdings, and total interna- 
tional reserves of $75 biUion. SDRs are valued in terms of a weighted 
basket of the five leading industrial currencies. 

From 1975, not only the dollar, but also the D mark, yen, swiss 
franc, pound sterling, and French franc became usable as reserves. 
Eventually the Special Drawing Right (SDR) was decided on as the pri- 
mary reserve asset, and from late 1978 there was a gradual reduction in 
the role of gold in the system. One-sixth of the IMF's gold was sold to 
the public. Another sixth was returned to members, who could thereafter 
buy and sell it like a market commodity. 

The IMF has not created any new SDRs since January 1981, and as 
of the present, only 21.4 billion SDRs are in existence, each worth about 
$1.38, or 2 Swiss Francs. The IMF is presently proposing an expanded 
issue of SDRs, which should be a welcome and long overdue addition to 
international liquidity. SDRs have also had a very limited commercial 
usage, for example, in defining Suez Canal rates, airline fares, and some 
Eurobond issues. 

INTERNATIONAL BAILOUTS 

After the gold parity system collapsed in 1971, IMF activities have 



22 INTERNATIONAL MONETARY ORGANIZATIONS 617 



22c. The International 
Monetary Fund (IMF) 
in Washington, DC. is 
not living up to its 
potential to facilitate 
international liquidity. 
Instead it condones 
de-stabilizing currency 
speculation and forms 
of international loan 
sharking. 




focused on supervision, surveillance, and consultation with its members. 
The IMF developed into a major lending institution and in the second 
half of the 1970s, when lending to its troubled members became its pri- 
mary activity (especially to the U.S. and Britain). 

When lesser developed countries needed bailing out of loans 
improperly advanced to them by the world's largest private banks, the 
IMF has served to bail out the bankers, generally shifting their costly 
errors onto the average citizens of the member states. 

UNFAIR "CONDITIONALITY" 

In that process, the IMF has come under some of its harshest criti- 
cism, and engaged in some of its most questionable actions in the area 
of "conditionality" - the terms it sets for the debtor nation to receive 
assistance. Critics make the case that the IMF's demands fall mainly on 
the poor, causing brutal income reductions - far more than necessary. A 
frequent feature is the elimination of food program subsidies. Frequently 
the IMF demands reductions in wages and increases in corporate profits. 
In the Brazilian bailout, the IMF insisted on cutting Brazil's public 
expenditure by 50% from 1982 to 1983, then another 50% in 1985. 
Imagine the effect of cutting 75% of public expenditure in America, 
Germany or Switzerland in four years! 

To a large extent, the (IMF) makes debtor countries bear the entire 
burden of balance of payments adjustment through recession. In addi- 
tion, Robert Meir notes that: 

"(The) Funds definition of good economic management encourages 



618 The Lost Science Of Money 



a certain kind of development: export orientation, reduced protection- 
ism, less forced import substitution, more efficient public corpora- 
tions. . .reduced public sector deficits. . ."^^ 

The IMF conditions also have a very strong bias toward urban rather 
than rural or agricultural areas. But Meir's most serious charge is that 
the IMF's adjustment programs are not designed to succeed, but 
only to get debt payments made as fast as possible. 

There are important lessons from the IMF to date. First, through the 
failure of the IMF gold parity mechanism, members found that common 
sense responsibility, production, and trade, not gold, was the key to an 
international monetary order. Second, an organization created and con- 
trolled mainly by bankers will act as an agent for bankers and neglect its 
larger responsibilities toward society. Third, the successful operation of 
the SDR to date indicates that international liquidity can be created 
through legal agreements, at least between those nations not threatening 
each other by warfare. 

Fourth are the important and inevitable conclusions from the current 
experience with laissez faire in currency speculation, a lesson that the 
powers that be at the IMF apparently do not want to acknowledge. What 
is urgently needed is not an ideologically driven set of regulations 
carved in stone, but reasonable guidelines for acceptable activity. 

The benefits of generally convertible currencies are immense. The 
author recalls that time in the 1960s, that Englishmen who went on vaca- 
tion could only take a maximum £150 out of England! Imagine carrying 
on an import-export business where each transaction payment requires 
central bank approval. 

Likewise there is a valid role that currency speculation can have in 
providing some very limited added liquidity to currency markets and in 
serving as an advance warning system that can alert the community to 
otherwise hidden problems. 

The danger arises when reasonableness, proportionality and bal- 
ance are cast aside; where the basic purpose of the monetary system is 
subverted to a near sociopathic greed; where under cover of one ideol- 
ogy or another, currency institutions and mechanisms, upon which the 
livelihood of millions of people depends, are destroyed without a second 
thought. That must be stopped - it is a form of cannibalism. 

Furthermore, the past gains obtained through such piratical activities 
should not be considered as property, as though they were earned by the 
speculators. It's more appropriate to consider them as stolen, and to 



22 INTERNATIONAL MONETARY ORGANIZATIONS 619 



legally confiscate and apply them to healing their victims. 

It is becoming clear that if the IMF continues in its ill conceived 
course as handmaiden and enforcer for corrupt banking practices world- 
wide, that its time is limited. Already politically unpopular, even in the 
United States, unless substantial changes occur, it would not take much 
to see this once important and useful organization slip into oblivion. The 
danger then will be that the more conservative, more privately ori- 
ented Bank for International Settlements will assume the role that 
the IMF once played, and that would not be a wholesome monetary 
development. 

REFORMING THE IMF 

International monetary reform is desperately needed, especially by 
the poorer nations. The youthful demonstrators who have managed to 
focus a spotlight on injustices at the IMF, World Bank, and World Trade 
Organization (the "WTO") meetings should be applauded. 
Unfortunately, after the September Uth destruction of the World Trade 
Towers, it is easier for the financial establishment and their media hacks 
to portray those highly moral, youthful demonstrators as merely hooli- 
gans and terrorists, and to take harsh actions against them. That is very 
convenient for those who control Western capitalism. 

It may still be possible to reform the IMF, if the corruption is limit- 
ed to its top echelons. But they have been involved in so much evil doing 
these past two and a half decades, that it may call more for punishment 
than reform. Especially if the diseased attitudes have been spread 
throughout the organization, it would be preferable to dissolve the IMF 
and start over with a new institution. The answer is not yet clear. 

The focus of the American Monetary Institute has been more on 
national monetary reform. Because of the dominant position of the 
United States and the dollar in the international monetary arena, real 
reform of the U.S. money system would automatically solve many of the 
most pressing international monetary problems. 

Regarding the difficulties of the un-payable debt burdens of the less- 
er developed countries, Pope John Paul 2nd is the best economist: debt 
forgiveness, plain and simple, makes sense in most of those cases. 



620 The Lost Science Of Money 



THE WORLD BANK GROUP 

The Bretton Woods Agreement in 1 944 also created the 
International Bank For Reconstruction and Development (the IBRD) 
also under UN Article 57 (section #4). Its purpose was to help in the 
reconstruction of Europe and Japan after WWII. From 1945 it became 
known as the World Bank, 

When the job of reconstruction was completed by the early 1960s, 
the IBRD shifted to financing projects in under-developed countries, 
with the stated purpose of reducing poverty around the world. Critics of 
the Bank find serious shortfalls in its operations. Cheryl Payer, a long- 
time critic of the Bank, charges that it actually increases local poverty by 

demanding and getting special privileges for its often elitist projects, ^^ 

OWNERSHIP AND CONTROL OF THE WORLD BANK 

The World Bank (IBRD) is owned by its member governments. 
They have committed an amount of capital to the Bank's operations, but 
only a small part has been paid in, with the rest remaining on call, to 
guarantee the Bank's bonds. This gives the bonds a very high credit rat- 
ing. The bonds are sold worldwide and are the World Bank's main 
source of loanable funds. 

The World Bank is ruled by a Board of Governors, where each of the 
180 member countries sends one governor, usually the minister of 
finance, to the September annual meeting. On a daily basis the Bank is 
run in Washington, D.C. by its 20 resident executive directors and its 
president, who normally meet several times a week. Five of these 26 
directors are selected by the five member nations with the largest num- 
ber of shares, and the other 15 are selected by the rest of the members. 
Traditionally the president of the World Bank is a U.S. citizen, 
though the U.S. share ownership of the Bank is shrinking: 35% in 1947, 
21% in 1981, and 17% in 1997. 

WORLD BANK PROJECTS DO MAKE MONEY 

World Bank projects have a very high average rate of return: 18% as 

of 1987;^^ and 16% in 1997. IBRD loans are typically paid back over a 
lO-to-15 year period. The same rate of interest is charged to all borrow- 
ers: Vi % above the cost of borrowing to the Bank. 

One of the criteria for measuring the success of a project is that it 
have at least a 10% rate of return. World Bank projects do not fail. Since 



22 INTERNATIONAL MONETARY ORGANIZATIONS 621 



it began, the World Bank has lent about $400 biUion. All of the IBRD's 
clients are governments, but it works closely with private enterprise. 

The Bank's website stresses how it helps to reduce poverty: 

"In the past few decades, East Asia has achieved some of the most 
remarkable poverty declines in history; 27% from 1975 to 1985 and 35% 
from 1985 to 1995. Along with substantial improvements in the educa- 
tion and health of the poor," However, what will the 1997-98 Asian 
financial debacle (brought on by large scale currency speculation) do to 
these statistics? 

The World Bank's public relations materials are a bit disingenuous. 
For example their website states: 

"Our Articles of Agreement explicitly prohibit the Bank from inter- 
fering in the country's political affairs and require it to take only eco- 
nomic considerations into account in its decisions."^ ^ But the Bank's 
"economic considerations," its definitions of good and bad, like those of 
the IMF, are heavily loaded with political implications which work to 
maintain or increase the disparity of wealth and income between rich 
and poor. 

THE INTERNATIONAL FINANCE CORPORATION (IFC) 

This affiliate of the World Bank Group was founded in 1956 and is 
the only one that invests in private sector projects in developing coun- 
tries, and without a government guarantee. The IFC also arranges private 
financing for these projects. Since its founding, it has committed about 
$21.2 bilHon of its own money, and arranged another $15 billion in 
underwrifing syndications for 1,852 private companies in 129 develop- 
ing countries. 

In 1997 the IFC invested more than $8 billion. It also "helps" gov- 
emments to privatize state owned enterprises, and raises private finance 
for ventures. 

The IFC management, shareholders and Articles of Agreement are 
independent from the rest of the World Bank Group. Its share capital is 
provided by its 173 member countries, and it raises most of its funds by 
issuing bonds. 

THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) 

This most recent addition to the World Bank Group came into exis- 
tence in 1960. Today it is proudly put forward as the "good deeds" work 
of the bank, because it makes 35 to 40-year interest-free loans to really 
poor countries (those with less than about $1,000 per capita annual 



622 The Lost Science Of Money 



income). At present 80 countries are eligible for IDA loans. The popula- 
tion of these countries is about 3.3 billion people, or 69% of the devel- 
oping world's population! 

The IDA charges an annual administrative fee of 0.75%. Critics say 
that the IDA was only formed when there was a threat that the United 
Nations was going to set up its own lending agency (the Special UN 
Fund - SUNFUND for economic development). Eugene Black, 
President of the IBRD at the time, admitted that the IDA "was really an 

idea to offset the urge for SUNFUND."^^ 

IDA and the IBRD share the same staff and offices and report to the 
same President. All IDA funds come from taxpayers of the IDA's mem- 
ber governments, through cash contributions from its member govern- 
ments, which are refreshed every three years. Since 1960 the IDA has 
loaned about $108 billion to 106 countries. It generally lends $5 to 6 bil- 
lion per year. According to the Bank's Website, IDA projects are target- 
ed in the following categories: 

Human resource development (education, health, 

population, nutrition, water supply and sanitation) 33%o 

Agriculture and rural development 23% 

Infrastructure 23% 

THE "STRATEGIC COMPACT" 

The World Bank Group is currently engaged in a 30-month 
"makeover" to re-examine and re-vamp all aspects of its activities. Its 
description looks like a corporate efficiency drive, which goes so far as 
to discuss how it will get rid of non-performing personnel at the Bank 
itself! They do mention probably the most important area to reform, to 
"design more appropriate conditionality." However, their focus on firing 
their own employees undercuts the grandiose announcements, and indi- 
cates a retrogression may be coming, rather than a progression. 



22 INTERNATIONAL MONETARY ORGANIZATIONS 623 

ISLAMIC MONETARY 
DEVELOPMENTS 

Echoes of Scholasticism 



"Social justice is the hallmark of the Islamic economic System." 

International Center For Research 
in Islamic Economics^^ 

Just as concepts of exclusivity and elitism in capitalism are ulti- 
mately based on and excused by the Old Testament's legacy of a "cho- 
sen people," Moslem economic thought has also been framed by its holy 
book - the Koran. While the Old Testament had strong prohibitions 
against usury, it was slightly ambiguous regarding the practice of usury 
against non-Jews. This "loophole" allowed some elements to drive a 
truck through the otherwise strong condemnations, and to create a repu- 
tation for the Jews as history's greatest userers. 

But the Koran is very clear that all usury is forbidden: 

"Those who devour usury... will not stand except 

as stands one whom... The Evil one by his touch 

Hath driven to madness... That is because they say: 

Trade is like usury', ...but God hath permitted trade 

and forbidden usury." 

Koran; Sura II, 275 

In addition, the Koran contains a kind of "inoculation" for its read- 
ers, against some of the hypocrisy so evident in Western Capitalism. 
That is in a section that explicitly warns the Jews to beware of a partic- 
ular segment of their fellow Jews and Christians: 

"O Ye People of the Book. . .It is a wish 
of a section of the People of the Book to lead you astray... 

Ye People of the Book! 

Why do you clothe the truth with falsehood 

and conceal the truth while ye have knowledge?" 

The Koran; Sura III. 65-71 

Furthermore, perhaps because the Prophet Muhammad had been a 
merchant in his youth, Moslem writings on business ethics have been 



624 The Lost Science Of Money 



taken more seriously by the faithful. Of particular interest are the devel- 
opments occurring in Moslem monetary thought. For it turns out that 
Mohammed understood the nature of money as a legal creation, and 
taught his followers that nominally valued copper coinage w^as to be 
as acceptable as gold and silver: 

"According to Muhammad, the property of currency attaches to cir- 
culating fulus (copper coins), and they are to be considered as an 
absolute currency. . .They are in his view suitable for partnership invest- 
ment like all other absolute currencies, viz., dirhams (silver) and dinars 

(gold)." Kasani, 6:59-60.^^ 

Imagine the effect on Christian money systems had Jesus Christ 
made a similar observation. 

"SHARIA" AND "FIQH" 

"Sharia" refers to Islamic sacred law. Out of this was developed the 
"Fiqh" - Islamic jurisprudence or a religious doctrine of duties and man- 
ners. But in business, the Fiqh has been viewed as an ideal of how things 
ought to be, and is not often followed. The Koran forbade the taking or 

paying of interest, and when the interdiction was first imposed in the 7^^ 
century, business flourished: 

"With the abolition of interest, economic activity in the Moslem world 
did not suffer any decline. In fact there was increased prosperity," wrote 

M.U. Chopra, financial advisor to Saudi Arabia's Monetary Authority.^ ^ 
This is interesting, but it was also a period of great expansion for 

Islam. As early as the 11^^ century a person conducting "commerce in 
accordance with the law was looked upon as ridiculous by all other mer- 
chants," according to Hurgronge.^^ Thus there has been a large gulf 
between Islamic practice and theory. Moslem countries over the last two 
centuries gradually adopted an interest-based money and banking system, 
under the influence of colonialism. But that is now beginning to change. 

Chopra distinguishes three phases in the recent Moslem economic 
revival. First, a re-evaluation of the Moslem position was begun in the 
1930s (after viewing the West's Great Depression?) and was conducted by 
non-economist Moslem scholars who re-affirmed the classical Moslem 
positions. Then from about 1965, Moslem economists have worked on 
analyzing these ideas. The third phase is the effort underway to actually 
develop interest-free banking and financial institutions. Chopra says the 
fourth phase will be in the area of monetary theory and implementation. 

Pakistan especially has given impetus to these developments 



22 INTERNATIONAL MONETARY ORGANIZATIONS 625 



through its 1973 Constitution in which article 227 provides that all exist- 
ing laws shall be "brought into conformity with the injunctions of the 
Holy Quran and Sunnah" and that Riba (usury) be eliminated as soon as 
possible. Chopra comments that this is "the first time that a serious 
commitment of this nature has been expressed by the government to 

mold the economy in the framework of Islamic values."^^ 

RIBA AND ZULM 

The two terms Riba and Zulm are close in meaning to the way the 
Christian Scholastics used the term "usury." Riba covers more than 
interest, but applies to all forms of unfair financial exploitation. Islam 
seeks to eliminate "the injustice perpetrated in the form of the financier 
being assured of a positive return without doing any work or sharing in 
the risk, while the entrepreneur, in spite of his management and hard 

work is not assured of such a positive retum."'^'^ 

"Zulm" is an even more comprehensive Islamic term referring to all 
forms of iniquity, injustice, exploitation, oppression and wrongdoing. 
Islamic economic thought actively seeks to remove Riba and other forms 
of exploitation and does not separate justice and morality from econom- 
ics. Islam has an "Unflinching dedication to the brotherhood of 

mankind," Chopra tells us in his book Toward a Just Monetary System?^ 

NISAB AND ZAKAA 

An interesting Moslem concept is of a three-sector economy: the 
Public Sector; the Private Sector and the Voluntary Sector. Faridi 
describes how those with "Nisab," the ability to easily be generous, are 
acting honorably when they give "Zakaa," at 2 Vi % of income, which 

goes from the rich to the poor and is something more than alms.^^ 

INTEREST-FREE FINANCE IN THE ISLAMIC WORLD 

By the early 1980s interest-free banks were functioning in Egypt, 
Jordan, the United Arab Emirates, Kuwait, Sudan and Bahrain. Chopra 
counted 38 banks operating interest free in Africa and Asia, and even in 
the Bahamas, and Geneva, Switzerland. In Pakistan, 6,500 bank branch- 
es had opened interest-free sections where separate counters accepted 
deposits for interest-free investment accounts. According to one report 
these accounts were earning 8 to 15% per year from dividends and capital 
gains. They're like mutual funds. 

Pakistan also started a "National Investment Trusf to accept small 
household savings for investment, through bearer and registered shares. 
It will be interesting to see how these various interest-free mechanisms 



626 The Lost Science Of Money 



work and develop over time, 

Pakistan and most other Moslem countries do belong to the IMF, and 
the World Bank Group. But her current development and testing of 
nuclear weapons is highly unfortunate and far riskier than the political 
leaders can imagine. They may be providing "interested" (pun intended) 
parties with the cover excuse to annihilate their evolving interest-free 
system, by warfare. The existence and demonstration to the world that 
such a system can function well, would be far more powerful than a 
nuclear weapons arsenal. 

FUTURES "DEALING" IS ALLOWED 

The Koran explicitly refers to futures dealing: 

"When ye deal with each other... in transactions involving 

future obligations. ..in a fixed period of time, 

reduce them to writing." 

Koran; Sura II, sect. 39, # 282 
But this does not apply as a blanket approval to all types of futures trading. 

ISLAMIC ECONOMISTS PROMOTING MONETARY JUSTICE 

Thus when moral concepts are applied to money, whether from a 
Christian, Moslem or secular viewpoint, they appear to move toward 
similar conclusions. Dr. Mabid Ali Al-Jahri proposes a 100% reserve 
requirement on all commercial banks, and Dr. Anas Zarqa strongly 
agrees, because in part: 

"Money creation is a social prerogative, and hence the benefits of 

money creation should accrue to the whole society."^^ 

Chopra advises that good monetary reform should bring about a 
larger number of smaller enterprises, and discourage large scale busi- 
nesses except where they are unavoidable. 

The Moslems also appear to have a healthier attitude toward mar- 
kets: 

"While Islam recognizes individual freedom, it does not give any 
sanctity to market forces. The Blind operation of market forces need not 
automatically reward socially productive effort, curb exploitation or 

help the weak and the needy," writes Chopra.^^ 

Some of the Moslem economists appear to be more scripturally ori- 
ented than the Christian Scholastics were. But hopefully, enough ration- 
ality will be applied, as well as attention to desired outcomes and actual 
results. Unfortunately, prescriptions regarded as having a sacred origin 
can too easily go wrong and even run amuk. 



22 INTERNATIONAL MONETARY ORGANIZATIONS 627 



It will be interesting to follow monetary and banking developments 
in the Moslem world and to see whether opportunities arise for co-oper- 
ative reform activities. 

PAKISTAN'S PRECARIOUS POSITION 

After the World Trade Center attack of September 1 1 , 2001 , the U.S. 
pressured Pakistan to help take action against Afghanistan's Taliban rul- 
ing religious clique. It would be extremely serious if Pakistan's govern- 
ment, also under presure from India, were to be de-stabilized and 
replaced by a fundamentalist regime. After September Uth, the thirty 
nuclear weapons, "advertised" as in Pakistan's arsenal, wouldn't be 
allowed to remain in fundamentalist Moslem hands. A war between 
America and Islam, being promoted by the worst elements from around 
the world, would be underway for the foreseeable future. 

IT IS U.S. MONETARY REFORM THAT IS NEEDED 

In summary, after WWII the U.S. emerged as the monetary super- 
power. This meant the dollar ruled in the International Monetary Fund. 
Though ostensibly based on a gold exchange system, right from the start 
the gold just drained away. 

Ambiguously organized under the United Nations, but with no pub- 
lic responsibilities, over time the IMF degenerated into a strong arm col- 
lection agency for the major banks, applying biased economic theory to 
maintain the power of the super-wealthy. This corruption may have 
placed it beyond reform. (For example the IMF forced Pakistan to 
reduce educational funding, leaving the field open to the religious 
Mishrams promoting fanatical hatred of America.) 

The positive developments among Moslem economists are noted 
and encouraged. The author suggests that international reform will fol- 
low quickly from U.S. reform. Therefore reforming our own money sys- 
tem should be the primary focus of Americans desiring a fair interna- 
tional system. 



628 The Lost Science Of Money 



Notes to Chapter 22 

^ See Stephen Zarlenga, Henry Georges Concept Of Money, Robert 

Schalkenbach Foundation, 2001. 

^ Hjalmar Schacht, The Magic of Money, (London: Oldboume, 1967), p. 75. 

^ Robert de Fremery, Rights vs. Privileges, (Provocative Press, 1993), p. 116 

"^ W. Edwards Beach, British International Gold Movements and Banking 

Policy 1881-1913, (Harvard Univ. Press, 1935), pp. 8-9. 

^ See Michael Borda & Anna Schwartz, A Retrospective on the Gold Standard, 

(Univ. of Chicago Press, Natl. Bureau of Econ. Research, 1983). 

^ Paul Einzig, The Bank for International Settlements, (London: Macmillan, 1930. 

"^ Hans Aufricht, The International Monetary Fund, (New York: Praeger, 1964). 

^ IMF rule N- 10. 

^ Xenophon Zolotas, The Gold Trap and the Dollar, (Athens: Papasissus, 1968), p. 21. 

Margaret G. De Vries, The IMF in a Changing World, 1945-1985, 
(Washington: IMF, 1986), p. 98, 

Michael Bordo & Barry Eichengreen, A Retrospective on the Bretton Woods 
System, (Univ. of Chicago Press, 1993), p. 623. 

^ De Vries, cited above, p. 76. 

^ De Vries, cited above, p. 88. 

^ Robert J. Myers, Political Morality of the IMF, (New York: Transaction 
Books, Carnegie Council on Ethics & Intematl. Affairs, 1987), pp. 25, 44-5. 

^ Cheryl Payer, The World Bank -a Critical Analysis, (Monthly Review Press, 1982). 

^ Barend A. de Vries, Remaking the World Bank, (Washington: Seven Locks, 
1987), Ch. 1. 

^ World Bank Website at: http://www, worldbank.org 

^ Payer, cited above, quoting IDA historians Mason and Asher, p. 33. 

^ Money and Banking in Islam, ten papers delivered at the January 1981 con- 
ference of the Institute of Policy Studies, Islamabad, Pakistan. Published by the 
International Center for Research in Islamic Economics, King Abdul Aziz 
Univ., Jeddah, Saudi Arabia. From p. 3 of the Introduction. 
^^ Abraham L. Udovitch, Partnership and Profit in Medieval Islam, (Princeton 
Univ. Press, 1970), p. 53 

^^ M, Umer Chopra, Toward a Just Monetary System, (London: The Islamic 
Foundation, 1985), p. 76. 

^^ Udovitch, cited above, quoting Hurgronge, Selected Works. 
^^ Money and Banking in Islam, cited above, p. 212. 
2^ Chopra, cited above, p. 64. 
^^ Chopra, cited above, p. 27. 

^^ Money and Banking in Islam, cited above, papers by Faridi and Chopra. 
2^ Money and Banking in Islam, cited above, paper by Al-Jarhi. 
^^ Chopra, cited above, p. 47. 



629 



CHAPTER 23 



THE EUROPEAN 
MONETARY 



UNION 



A 



"Many (governments) make a mistake, not only in giving too 

much power to the rich, but in attempting to overreach the people. 

There comes a time when out of a false good there arises a true 

evil, since the encroachments of the rich are more destructive 

to the state than those of the people." 

Aristotle (Politics) 

"Europe will be built through a currency 
or it will not be built at all." 

Jacques Rueff 

It's well to keep Aristotle's and RuefF's words in mind as Europeans 
embark on the greatest monetary reform since Bretton Woods and the 
International Monetary Fund. This development is going to affect the 
lives and economies of all people, everywhere, far into the future. 

This is a rare moment in time to "get it right" as much as possible, 
while attention is focused on creating the new system. After that moment 

^ Much of this Chapter first appeared as Special Report #2 of the American 
Monetary Institute in May 1997, commissioned by the Conzett Investment 
Management group of Zurich, Switzerland. A part of its intent was to influence 
in some small ways how the EMU would structure its definition of money and 
other matters; therefore several explicit suggestions are made. The number ref- 
erences are to the sections of the treaty as given at the European Community's 
Web site at: http://www2.echo.lu/legal/en/treaties/ec/ecbstat.html#HD_NM_14 



630 The Lost Science Of Money 



passes it becomes more difficult. However, even the process of making 
necessary revisions later can be aided with some extra forethought and 
planning now. We can now apply the main principles of money we've 
observed in numerous historical cases to the formation of the European 
Monetary Union. 

The primary institutions of the European Community (hereafter 
referred to as the "Community'') are seen as the European Parliament, 
the Court of Justice, the Council and the Commission. These include the 
legislative, judicial, and executive powers and are set forth in Article 4, 
Section 1 of the Maastricht treaty. The monetary power is primarily to 
be embodied in the European Central Bank (the ECB), described in the 
Protocols of the treaty. Because it is set forth separately from the other 
institutions, in Article 4, Section A, and is being formed years after the 
others, there's the impression that it is subsidiary to them. It is not. 

The overriding importance of the monetary power in determining 
the fate of nations and empires is evident from our historical examples. 
Thus the ECB deserves the same organizational status as the European 
Parliament, Council, and Court of Justice. Viewing it that way would 
help to draw the attention of the whole Community to properly formu- 
lating and monitoring it. 

EUROPEAN MONETARY UNION STRUCTURES 

These descriptions will sound a bit legalistic, since for accuracy we 
paraphrase the various points of the treaty. The key central institution of 
the European Monetary Union (the EMU), is the European Central Bank 
(ECB). It, along with the central banks of the member states, comprise 
the European System of Central Banks (ESCB). The ESCB is governed 
by the decision making bodies of the ECB, which are its Governing 
Council, its General Council, and its Executive Board. 

The ECB Governing Council is composed of the heads of the nation- 
al central banks and the members of the ECB Executive Board. Each 
national central bank governor has one vote, except on certain specified 
categories, where the votes are weighed according to the article 29 for- 
mula (where half the voting weight is determined by the members rela- 
tive gross domestic product, and the other half by its relative popula- 
tion). The votes of the Executive Board members get no extra weighting. 
The Governing Council acts by majority vote, except on some matters, 
where a "qualified majority" is required. Then action requires afiFirma- 
tive votes representing at least 2/3 the subscribed capital of the ECB, and 
one half of the shareholders. 



23 EUROPEAN MONETARY UNION 631 



The executive board is to be drawn from recognized professionals in 
the monetary/banking area, and appointed by agreement at the head of 
state level, after being recommended by the European Council, in con- 
sultation with the European Parliament and the ECB Governing Council. 
The executive board has a president serving for eight years, a vice pres- 
ident serving for four years, and at least four other members serving for 
five-to eight-year terms. President and vice president are appointed in 
the same manner as Board members. 

The Executive Board implements the decisions of the Governing 
Council, and is responsible for the current business of the ECB. 

The General Council of the ECB is composed of the president and 
vice-president of the ECB and the Governors of the national central 
banks. The others members of the Executive Board may participate in 
meetings, without having the right to vote. 

The European Monetary Institute (EMI) is a temporary body formed 
to lay the groundwork for, and prepare the transition, to Monetary 
Union. It's structured nearly as a twin of the ECB, and goes into liqui- 
dation upon the ECB's establishment. 

COMMENT 

The institutional structure of the ESCB has sufficient centralized 
power to wield effective control over the European money system. Real 
sovereignty and power are being ceded by the national central banks, 
and their respective nations, to the ECB. There are no visible structural 
leaks whereby money can be created or liquidated by unilateral national 
decision. The structure appears efficient, except that perhaps the ESCB's 
General Council may end up as too redundant to its Governing Council. 

This centralization of monetary power can be good or very bad, 
depending on how wisely it is implemented. There are clear benefits of 
having a single currency for the whole community: it will simplify trade, 
pricing, and payments. It can also protect the community from capri- 
cious foreign currency meddling. 

The danger is not well recognized: that the potential for catastroph- 
ic error is greater from one single power center than from twelve some- 
what independent ones, closer to their constituencies. Consider 
Byzantium's golden grip on Europe's throat for 900 years. 

One can say that we know better today, and we do. However, 
Byzantium's rigidity stemmed partly from a form of religious ideology, 
which is still a big part of human nature. Today we see its manifestation 
not so much in churches or temples, but in the rigid ideological bias of 



632 The Lost Science Of Money 



most members of the economics profession. Their prejudices are based 
on unproven theories rather than demonstrated reaUties. 

The stated intention to restrict management of the ECB to recog- 
nized professionals in the monetary or banking area is not a good idea. 
It will probably result in management with a monolithic viewpoint, 
which tends to follow the dictates of monetary theories, rather than to 
carefully observe the results of their monetary actions upon the econo- 
my and people. 

Restricting the management of the institution to people who have 
been indoctrinated into essentially the same economic theories is dan- 
gerous because, as we've observed in Chapters 12 and 13, those theories 
themselves have been structured over time to serve particular interests. 

The highest degree of technical expertise must be obtained for those 
positions requiring it. But technocracy is not equivalent to the leader- 
ship, vision and judgment that running a monetary system requires. 
Extra effort needs to be made to achieve diversity of viewpoint among 
the management. 

THE OWNERS 

The ECB will be owned entirely by the national central banks, with 
their individual share subscriptions to its 5,000 million EURO capital set 
according to the Article 29 weighting formula. The shares can't be sold 
or transferred. (28.2.) 

The national central banks will provide the ECB with foreign 
reserve assets, other than Member States' currencies, ECU's, IMF 
reserve positions and SDRs, up to the equivalent of EURO 50,000 mil- 
lion. The Governing Council decides on the proportion to be called up 
on the establishment of the ECB, and the amounts called up later. (30. L) 

The "monetary income" accruing to each of the national central 
banks in the performance of the ESCB's monetary policy function will 
be determined by their individual income generating activities. It will be 
allocated at the end of each financial year according to an accounting, 
after a portion up to 20% goes into a reserve fund. (32.1.) 

COMMENT 

By avoiding private ownership of the European Central Bank, the 
Community has wisely avoided creating an institution that is liable to 
take important monetary actions in the interest of its owners, rather than 
for the proper functioning of the money system. 

There is still the potential for those who manage the central bank to 



23 EUROPEAN MONETARY UNION 633 



take actions that favor their former/future employers, their perceived 
class affiliation, or even their friends and associates. This is another rea- 
son for requiring diverse backgrounds among management. 

REPORTS AND SCRUTINY 

The ECB will publish a consolidated financial statement each week, 
an ESCB activity report at least quarterly, and an annual report on ESCB 
activities, including the monetary policy of both the previous and the 
current year. 

The ECB and the national central banks will be audited by inde- 
pendent external auditors recommended by the Governing Council and 
approved by the General Council. The auditors have full power to exam- 
ine all books and accounts of the ECB and the national central banks and 
obtain full information about their transactions. (27.1.) 

However, monetary decisions will not be made openly. The 
Proceedings of all meetings are to be confidential for all time. Members 
of the governing bodies and the staff of the ECB and the national central 
banks will be required to maintain "professional secrecy," even after 
they leave the organizations. 

COMMENT 

Timely publication of reports and independent auditing may seem 
obvious, but this is in fact a key feature. Europeans would probably be 
surprised to learn that the U.S. Federal Reserve System has never been 
independently audited. Its Bank of England model had also gone for 
years without issuing reports, even to shareholders. 

The secrecy to the grave requirement, on meetings and other mat- 
ters, raises some concern. Certainly the ECB should not make it easy for 
speculators and others to thwart or unfairly benefit from its policies. But 
that can be done without giving the institution too much of an air of 
secrecy, which could lead to worse problems. 

CONVERGENCES 

In the steps toward monetary union, member states had to bring cer- 
tain key monetary measurements into convergence: 

Fiscal Deficits had to be no more than 3% of the planned or actual 
gross domestic product at market prices; and government debt no more 
than 60% of gross domestic product, both at market prices. (104c(2)) 

Price Stability had to be sustainable at an average annual rate that 
doesn't exceed by more than 1 1/2 percent, the three best performing 
member states in terms of price stability. Inflation is measured by adjusted 



634 The Lost Science Of Money 



consumer price indexes. (109j(l)) 

Exchange Rate Stability of currencies had to stay within normal 
fluctuation margins specified by the Exchange Rate Mechanism, without 
severe tensions or unilateral devaluations for at least two years.(109j(l) 

Interest Rates on Member's average long-term government bonds 
(adjusted) had to be within 2% of the three best performing Member 
States in terms of price stability. (109j(l)) 

COMMENT 

The convergence requirements, especially on deficits, proved to be 
a real test of the ability of member states to conform to some tight 
requirements, which even the economically strongest had great difficul- 
ty meeting. This indicates the conditions were too arbitrary and demand- 
ing. Perhaps there is nothing sacred in keeping deficits under 3% of 
Gross Domestic Product, and at times fluctuations to higher levels must 
occur. The real meaning of the convergence tests may have been to see 
whether the Community could demonstrate the kind of flexibility need- 
ed for the ESCB to be workable over time. But such flexibility was not 
demonstrated. 

The willingness of Germany to go to 12% unemployment in its 
effort to meet the pre-ordained requirements and set a kind of example 
for the community represents a danger signal that ideology may be 
allowed to dominate the system, rather than requiring that the money 
system work effectively to improve life in the community. 

MONEY CREATION PROCESS 

Usually the key feature of a monetary system is how new money is 
created and added to the system, or removed from circulation. This is of 
paramount importance because it is the main way the money system is 
controlled. It determines whether sufficient money is circulating and 
industry is thriving, or whether money is too scarce and the economy 
and people are suffering, while bondholders are enriched. 

It is normally through the creation of new money that a self styled 
elite makes its grab for power; thanks to the obfuscations of economists, 
the process is not generally understood by the public, or even by many 
economists. 

It is also important because in the process of defining how the 
money supply is created, it is normally necessary, and always desirable, 
to clearly state the exact definition of money in the system. 

The ECB takes effective control of the several methods of creating 



23 EUROPEAN MONETARY UNION 635 



and liquidating money: 

Policy determination 

The ECB Governing Council formulates the monetary policy of the 
Community including intermediate monetary objectives, key interest 
rates and the supply of reserves in the ESCB, and establishes the guide- 
lines for their implementation. The Executive Board implements the 
monetary policy guidelines and decisions of the Governing Council, and 
gives the necessary instructions to the national central banks. The ECB 
will have the power to instruct the national central banks to carry out 
operations that form part of the tasks of the ESCB, (Art. 12) 

The national central banks as an integral part of the ESCB must fol- 
low the guidelines and instructions of the ECB. The Governing Council 
will take the necessary steps to ensure compliance and require that any 
necessary information be given to it. (14.3.) 

To conduct their operations, the ECB and the national central banks 
may open accounts for credit institutions, public entities and other mar- 
ket participants and accept assets, including book-entry securities, as 
collateral. 

Bank notes 

The most visible method of creating money is the printing of gov- 
ernment notes or of banknotes, and the minting of coins. 

The ECB's Governing Council has the exclusive right to authorize 
the issue of bank notes within the Community. Both the ECB and the 
national central banks may issue such notes. The bank notes issued by 
the ECB and the national central banks will be the only such notes to 
have the status of legal tender in the Community. (105a(l)) Coinage will 
be minted in limited amounts by the national central banks. 

Monetizing debt 

A more important method of money creation is the monetization of 
government debt. Article 104 forbids the monetization of national debts 
by the ESCB or the ECB, by forbidding overdrafts or the direct purchase 
of bonds from member governments and their institutions. Furthermore, 
the European Community will not be responsible for the commitments 
of the member states. 

(Article 1 04) Overdrafts or any other type of credit facility with the 
ECB or with the national central banks in favor of Community institu- 
tions or bodies, central governments, regional, local or other public 
authorities, other bodies governed by public law, or public undertakings 



636 The Lost Science Of Money 



of Member States shall be prohibited, as shall the purchase directly from 
them by the ECB or national central banks of debt instruments. (21.1.) 

Open market and credit operations 

Central banks have also "monetized debt" by purchasing govern- 
ment and other debt instruments in the open market. This injects new 
money into circulation. If they sell their bond holdings, they remove that 
money from circulation. The ECB and the national central banks may 
operate in the financial markets by buying and selling outright (spot or 
forward) or under repurchase agreement and by lending or borrowing 
claims and marketable instruments, whether in Community or in non- 
Community currencies, as well as precious metals; conduct credit oper- 
ations with credit institutions and other market participants, with lending 
being based on adequate collateraL(18.1.) 

The ECB establishes general principles for open market and credit 
operations carried out by itself or the national central banks, including 
the announcement of conditions under which they stand ready to enter 
into such transactions. (18.2.) 

Loan creation through fractional reserve banking 

Since the fall of Byzantium, commercial banks have created money 
by making loans - by entering credits on their books. The European 
Central Bank can increase or decrease this potential for money creation 
by raising and lowering the minimum reserve requirements that banks 
must have to extend loans. 

Minimum reserves 

The ECB may require credit institutions established in Member 
States to hold minimum reserves on accounts with the ECB and nation- 
al central banks in pursuance of monetary policy objectives. Regulations 
concerning the calculation and determination of the required minimum 
reserves may be estabhshed by the Governing Council. In cases of non- 
compliance the ECB can levy penalty interest and impose comparable 
sanctions, (19,1.) 

The Governing Council will define the basis for minimum reserves 
and the maximum reserves and the maximum permissible ratios between 
those reserves and their basis, as well as the appropriate sanctions in 
cases of non-compliance. (19.2.) 

The emergency clause 

Presumably for emergencies, or to meet other evolving conditions 
the Governing Council may, by a two thirds majority of the votes cast. 



23 EUROPEAN MONETARY UNION 637 



use other operational methods of monetary control as it sees fit, respect- 
ing Article 2. The Council shall, in accordance with the procedure laid 
down in Article 42, define the scope of such methods if they impose 
obligations on third parties. 

COMMENT 

There are two important things missing regarding the money cre- 
ation power that should be corrected. First, the ECB is about the cre- 
ation, control, and liquidation of money. But there is no clear definition 
of money. Do they think it is unnecessary? The lack of a good money 
definition in the U.S. Constitution eventually allowed the monetary 
power to overwhelm the whole structure. 

Fixing the exchange rate of the Euro in terms of the national cur- 
rencies will define its value at that starting point, but does not define the 
nature of the Euro. One can infer a jumbled definition of this money, as 
"backed" by, (but not redeemable for) various existing assets, commodi- 
ties, government and other securities. In this system, money is what the 
ECB says is money, and rightfially so, but it should clearly declare what 
money is! For example, see pages 656-57. 

To avoid confusion and error, not only of participants, but of the 
ECB itself, it should make explicitly clear its definition of money now. 
In doing so, even if it moved forward with a less than perfect definition, 
that error will become easier to correct as the definition is examined and 
brought into convergence with the real nature of money. 

The second crucial item missing is a discussion of exactly how the 
ECB will create the new money needed as Europe's population, indus- 
try and commerce grow. Which guidelines will be used? Will money 
growth be geared to population growth? Adjusted upwards for growth in 
production and services? Be dependent on foreign trade balances? Left 
largely to the discretion of private bankers as in the U.S.? The 
Community needs to know and seriously discuss these things now, if 
confidence in the overall fairness of the system is to be fostered. The 
ECB will also need such guidelines to execute its own duties. 

THE FRACTIONAL RESERVE PROBLEM IN THE EMU 

Another important matter is the ECB's intent to allow banks to 
engage in fractional reserve lending. We have noted the problems with 
fractional reserves in Chapters 19, 20, and 25. It shifts the power to cre- 
ate money from the government (in effect the people) to the bankers. 
While European bankers may be a different breed from American 



638 The Lost Science Of Money 



bankers and have not acted as recklessly in the past, this does not change 
the fact that a great privilege is bestowed upon bankers in the power to 
create money. This privilege leads to a continuing concentration of 
wealth and power into the hands of bankers, without their earning it. It's 
wrong. 

Furthermore, as discussed in Chapters 19 and 20 it is the source of 
panics and crashes in money and banking markets. 

One hundred percent reserves could be implemented as in the plan 
discussed in Chapter 24, except that presumably this would be political 
death to the EMU, with the bankers preferring fractional reserve bank- 
ing under their old national systems, instead of 100% reserves in the 
European Community. If fractional reserves are a political necessity at 
present for the EMU to move forward, removing this problem should be 
on the reform agenda. 

It would negate much of the ultimate purpose of the ECB to rely on 
fractional reserve banking as its main method of creating money. The 
ECB needs the ability to do that independently and directly. It needs the 
ability to create reserves or simply money out of thin air, when it deter- 
mines that is the best way to monetarily serve the Community. Without 
that power it would be a eunuch among world central banks, and the 
European Community would be accepting the disadvantages of central- 
ized control, without the main advantage. 

Yet there is not sufficient reference to the ECB's power to create 
reserves - or its intended use in the ECB protocols: "The Governing 
Council shall formulate the monetary policy of the Community includ- 
ing... the supply of reserves in the ESCB and shall establish necessary 
monetary guidelines for the implementation." (Ch. 3, Organization of 
the ESCB, art. 12.1) 

This is simply not an adequate discussion of how reserves will be 
created by fiat. It's as though the organizers don't want to clearly state 
the power (which is there) for fear that it might bring on demands for 
more monetary expansion by sections of the Community. They are like 
temple priests bowing low to the ground in the presence of the holy of 
holies, afraid or forbidden to even to look directly at "the power." 

NEW MONEY TO BE BASED ON FOREIGN TRADE SURPLUSES? 
Because the Bundesbank previously relied heavily on trade surplus- 
es to obtain U.S. dollar monetary reserves, perhaps there is a hope of 
continuing to do this with the ECB. But this method of obtaining 
reserves is problematic, and misses the point on the nature of money. 



23 EUROPEAN MONETARY UNION 639 



Consider that German labor, which used to be less expensive than 
American labor, must now compete against Asian labor, which is so 
cheap that it approaches slave labor. 

In a situation where American banks finance state of the art factories 
in Asia, European labor can compete with that only if they too enter into 
a form of slavery. There is no modem tradition for that in Europe and it 
may be fought with blood, and rightfully so. Ultimately, free trade can 
be a good idea if its benefits are truly shared by the peoples of the 
respective nations, rather than their ruling elites. 

The European System of Central Banks will have to directly face the 
question of creating new money within the system. In any case selling 
more than you buy creates friction with your trading partners. It is a 
mentality that treats the money system like a game of marbles, where the 
"winner" takes the marbles home to his hoard. The only period it worked 
well was when it was desirable to spread reserves that were overly con- 
centrated in the U.S. to the rest of the world. It is time for the central 
bankers to face their real responsibilities toward their own and other 
nations. They need to stop acting as facilitators for international curren- 
cy speculation, which does not produce anything, and can only destroy. 
"Free trade" should never include unlimited speculative trading of 
national currencies. 

If the intent of some is to twist up Europe into a Puritanical knot of 
scarce money and "pious" monetary morbidity, that will become appar- 
ent fairly soon. At such a point, Europeans should remember that the 
ESCB contains the monetary power to help make the economy flourish, 
not merely to grow. It can be used when there is the will to do it. 

IT WAS IN THE HANDS OF THE EMI 

Until recently, the task of defining money, and of creating the guide- 
lines on how and how much new money will be created, was in the 
hands of the European Monetary Institute (EMI). According to the EMI 
Protocol (art. 4.2): "the EMI shall specify the regulatory, organizational, 
and logistical framework necessary for the ESCB to perform its tasks. . . 
in particular... to prepare the instruments and procedures necessary for 
carrying out a single monetary policy." 

Back in 1997 we invited the EMI to specify these guidelines in 
greater detail, so that the community could discuss them and be assured 
of their adequacy. These are not minor matters. 

Why proceed with an unjust and unstable fractional reserve system? 

The EMU must go forward because there is really no choice, 



640 The Lost Science Of Money 



considering what Europe faces in the monetary hegemony of the Federal 
Reserve System, and those who control the world's dollar based finan- 
cial order, using it as a club to bludgeon weaker states. 

We saw in Chapter 2, in the Caesar's establishment of a gold stan- 
dard in Rome, the danger of placing the control of the money system 
outside the community. The recent monetary debacle of Southeast Asian 
countries in 1997-98 demonstrated the danger of basing one's economy 
on a money system and monetary unit that someone else controls. 

Previously, international firms could employ Indonesians for 15 or 
20 U.S. dollars a week equivalent in local currency. Now, by cutting the 
value of Indonesia's currency by 75%, the wages paid to these people 
was also reduced 75% in dollar terms. This brought a change of govern- 
ment, and thereby removed politically entrenched local competitors. 

This experience highlights a system of unlimited free trade in cur- 
rencies, and the resultant mobilization of billions of dollars that can be 
deployed with no advance notice, at the speed of light, plus Vi minute 
(the maximum time it should take for the order to go from the telephone 
or computer to the trading pit). This system has shown itself capable of 
producing even worse results than the old international gold standard, in 
giving financial manipulators the ability to decide the fate of nations. 
Today, almost five years after the Asian currency debacle, the 
Indonesian government is still in tatters. 

The European Central Bank, properly empowered to create money, 
backed up by the fact of Europe's combined size and production capa- 
bility, can be strong enough to keep the monetary manipulators at bay. 
That would be good for the peoples of Europe, the America's and Asia. 

In fact. Articles 73f and 73g provide the decisive power to stop cur- 
rency manipulations. Under the terms of those sections the ECB can 
block disruptive movement of currency to and from 3rd countries for up 
to six months. Any member state can also take such action unilaterally 
against non-member countries. This valuable and appropriate power 
could be combined with further measures such as denial of visas, and 
even arrest warrants against those in the corporate chain of command of 
offending organizations. 

REGARDING GREAT BRITAIN 

Great Britain has not yet signed on to integrate the British Pound 
into the Euro system, though it would be clearly beneficial to the English 
people. Even at this distance we catch glimpses of a propaganda cam- 
paign out of London, aimed at politically swaying the citizenry against 



23 EUROPEAN MONETARY UNION 641 



joining. It appears in its present phase, as a somewhat racially oriented 
campaign based on English chauvinism. As in the past, we observe some 
of the best, and the worst, coming out of England. 

The nasty element has given up trying to scare European leaders 
with economic theories, as in 1976 when Frederich Hayek, a professor 
at the London School of Economics, attempted to throw a theoretical 
monkey wrench into the plans for the Euro, in his essay 
Denationalisation of Money, Ridiculing the proposal of the new Euro as 
"Utopian" he proposed instead that private banks in the Common Market 
be given full leeway for: 

"...free dealing throughout their territories in one anothers curren- 
cies (including gold coins) or of a similar free exercise of the banking 
business by any institution legally established in any of their territo- 
ries... This seems to me both preferable and more practicable than the 
Utopian scheme of introducing a new European currency, which would 
ultimately only have the effect of more deeply entrenching the source 
and root of all monetary evil, the government monopoly of the issue and 
control of money... I have grave doubts about the desirability of (unify- 
ing Europe) by creating a new European currency managed by any sort 

of supra national authority."^ 

The American Libertarians have bought into Hayek's "grave 
doubts;" the non-English speaking European nations (and of course 
Ireland) have not. 

The question of British participation in the European Monetary 
System is more important than would appear on the face of things. It is 
not that the Euro needs Britain in order to succeed. But if done correct- 
ly, integrating Britain into the European monetary system can help 
resolve a three centuries old problem that has plagued the world. 

THE EURO AND THE "PROBLEM OF EUROPE" 

In his last book, Tragedy and Hope, Prof. Carroll Quigley defined 
the "problem of Europe" - i.e. that a united German powerhouse tends to 
become dominant - as really being the problem of England's reaction 
toward that potential dominance. He analyzed the English problem in 
terms of its financial establishment's desire or belief that England was 
an Atlantic rather than a European power and must be allied, or even fed- 
erated, with the United States and must remain isolated from Europe. 
We see the fundamental relevance of Quigley's analysis to the present 
day, as elements in England try to keep the nation aloof from the 



642 The Lost Science Of Money 



European Union.-^ 

Without being too melodramatic, one visualizes that within England 
there still lurks the dark and powerful remnants of the "Bank of England 
Gang," for want of a better term. A doctrinally, hereditarily, or finan- 
cially linked residue. If Britain were firmly in the European Monetary 
System that gang's power to disrupt either in America or Europe would 
be dramatically reduced, and they would be isolated there in the Atlantic, 
between two great powers, where they can wither away before doing any 
further damage to humanity. 

The actions of the Continental Powers have been wise in terms of 
helping bring England into the system. The Community's soft approach 
toward England should be continued until the British people can relax 
and fully understand its in their best interest to align with Europe. Come 
what may, the door should remain open to them on favorable terms. 

ACCOUNTABILITY 

Article 35,1 is an important one - it gives the Court of Justice juris- 
diction to review and interpret acts or omissions of the ECB. Presumably, 
not providing an adequate money supply sufficient for industry and com- 
merce would be an omission. Central banks have been sued for this in the 
past, for example in the U.S. as we saw in Chapter 16. 

The reader will sense that we are more concerned with the danger of 
too little, rather than too much money in circulation. That has historical- 
ly been the case. It's doubtful the European wartime inflations could have 
been stopped. They were the result of paying for wars, not necessarily of 
monetary mismanagement. Chapter 22 discussed the German case. 

Institutionalize a formal review process 

One suggestion would be to establish an automatic formal review 
process providing for critical reviews of how the ECB is functioning 
after 5, 10, and 20 years. A broad based commission, working with the 
Court of Justice, could make recommendations with the necessary 
"teeth" in them to alter the ECB's performance, if that is called for. It's 
best that the process be automatic, and not subject to political decision 
later. In 1956 the U.S. Congress tried to organize such a review of the 
Federal Reserve System, but the bankers blocked it politically. 

STATED GOALS 

Article 105 states that "The primary objective of the ESCB shall be 
to maintain price stability." Continuing, the ESCB's task shall be to 
"define and implement the monetary policy of the Community. . .conduct 



23 EUROPEAN MONETARY UNION 643 



foreign exchange operations ...[and to] hold and manage the official 
foreign reserves of the member states." 

But what may well turn out to be the most important statement of 
purpose in the ECB's founding documents are in the objectives listed in 
the amended B) Part One "Principles," Article 2: 

"To promote throughout the Community a Harmonious and balanced 
development of economic activities, sustainable and non-inflationary 
growth respecting the environment, a high level of employment and of 
social protection, the raising of the standard of living and quality of life, 
and economic and social cohesion and solidarity among Member States." 

However, it says this is to be done "without prejudice to the objec- 
tive of price stability," by which they mean less than 2% inflation. 

COMMENT 

Here we clearly see the division in attitudes that hopefully will 
evolve into a healthy balance of forces in the Community. On the one 
hand there are the heavy footprints of the "High Priests" of economics 
and banking who appear to sincerely believe that "price stability" is a 
sufficient measure of success or failure of the EMU! 

Price stability, while important, could never be the primary 
objective. Price stability of what? Of a well functioning currency sys- 
tem that has been properly provided to the community - providing 
that currency system is clearly more primary than "price stability." 

In Article 2 we see the importance of clearly stating the obvious. For 
it is not obvious (or even desirable) to all, that the money system must 
be held accountable to foster desirable results. Article 2 is the human 
face of the EMU, the provisions that can serve to tame the worst misus- 
es of the ECB, which the most myopic management might someday 
attempt to impose. Such poor policies have been imposed, for example, 
by the Federal Reserve System. A typical American banker's view would 
be that the money system is fine, as long as their own profits are being 
maximized. 

In Article 2 is embodied a "silent" but important monetary principle: 
the correct vision that the money system must be managed to produce 
superior living results, not just to conform to dead theory. In other 
words, its success is defined in terms of the desired outcomes. The 
money system must be the servant and not the master. 

POLITICAL INFLUENCE BLOCKED 

Article 7 : "neither the ECB, nor a national central bank, nor any 
member of their decision-making bodies shall seek or take instructions 



644 The Lost Science Of Money 



from Community institutions or bodies, from any government of a 
Member State or from any other body. The Community institutions and 
bodies and the governments of the Member States undertake to respect 
this principle and not to seek to influence the members of the decision- 
making bodies of the ECB or of the national central banks in the per- 
formance of their tasks." 

COMMENT 

Again, we see the footprints of the bankers/economists. Is the ECB 
prohibited from reciprocal influence attempts on the member states? Are 
the political implications, already embodied in the (banker promoted) 
economic and monetary theories that will guide the ECB, going to be 
honestly acknowledged for all to understand? 

LIKELY OUTCOME 

As presently constituted the ECB appears superior to the Federal 
Reserve System. Consider for example the public ownership of it and its 
broad statement of social goals, which have no counterpart in the Federal 
Reserve. As presently written, however, the ECB does not stop an over- 
ly technocratic approach to running the money system, without enough 
thought (?) and detailed written provision for the human, social and eco- 
nomic requirements, which the money system must serve. To try to sub- 
ordinate these elements to the mantra of "price stability" may indicate 
what some of the organizers intend. It is no secret that price stability, if 
achieved through overly restricting the growth in the money supply, will 
favor wealthy bondholders at the expense of both industrialists and the 
less well off, increasing the gulf between rich and poor, not through nat- 
ural talents, abilities, or productive effort, but based rather on one group 
controlling the money system, measuring and proclaiming the success of 
that system in terms specially designed to favor itself 

That has almost always been the rule for monetary systems. 
However, the EMU need not repeat this mistake of the past. A stronger 
provision can be made in the founding documents to protect from such 
injustice and its resulting effects. If that proves impossible, then the 
question becomes whether the structure can react intelligently, after an 
overly harsh implementation, and become self correcting, or will it dis- 
integrate in the direction of its national parts? 

CONCLUSION 

For the first time in three generations Europeans do not have the bur- 
den of rebuilding destroyed infrastructure, factories and homes. Instead 



23 EUROPEAN MONETARY UNION 645 



they are poised to create a significant advance in their material well 
being and the social benefits that can accompany it. The main obstacle 
to such success may be poorly defined monetary theory. 

The European Community's approach to monetary union - carefijlly 
deliberating the matter, publishing and then reworking its articles with 
informed input firom many quarters and nationalities - is unique in the 
history of monetary reforms. Compare this to the secrecy, special deal- 
ing, and deception that has marked major reforms of the past such as the 
founding of the Bank of England, the First and Second Banks of the 
U.S., and the Federal Reserve System. This bodes well for the future of 
the Community. 

However, the plan as formulated (May 1998, latest available docu- 
ments) does not yet present sufficient detail in several areas. There are 
warning signs and contradictions in the stated objectives of the plan, 
which could become system breaking problems, depending on how the 
plan is implemented. The potential obsession with price stability is one 
problem. The system must avoid ideological rigidity, be alert to feed- 
back, and be flexible to adjust course. 

These trouble signs can be substantially reduced by clarification of 
the fiat nature of money as a legal institution of the Community, and the 
specificafion of the initial guidelines that the ECB will use in making 
increases in the money supply. Also, it should be clarified what condi- 
tions would cause a re-thinking, upward or downward. These are not 
matters that should be left vague, or couched in overly concise technical 
jargon. 

The attempt to disconnect the money system fi"om politics reflects a 
distrust of the citizenry in such matters. Of course it should have inde- 
pendence, like the Judiciary. But it must also be accountable, and it is 
through politics that the citizens express (indirectly) whether the money 
system is functioning well or not. In fact, they are the ultimate judges of 
that, not the high priests of an undefinable ideology, not some bank's 
board of directors, not an arbitrarily drawn list of statistics. 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. If anything, the balance of monetary history 
indicates the opposite. 

The Europeans are flexible and wise enough to make the necessary 
adjustments over time. The only question is the extent and type of exter- 
nal pressure that will most certainly be brought against them by elements 



646 The Lost Science Of Money 



in the U.S. and England to discourage a proper running of their money 
system. 

THE EURO'S LAUNCHING AND AFTERMATH 

In the last third of 1998, just prior to the introduction of the Euro (in 
January 1999), the U.S. dollar fell in foreign exchange markets. This 
meant that European currencies such as the German Deutschmark rose 
substantially, and thus the initial launching value of the Euro in terms of 
Dollars was artificially higher that the 1 to 1 (par) value desired by the 
ECB managers. 

Starting out at about $1.18, or 18 cents over par, the Euro was over- 
priced and proceeded to decline in terms of dollars for 21 months. The 
English language press reported on this as though it indicated major 
problems for the Euro, and succeeded in scaring most market partici- 
pants, even some sophisticated players, that the Euro might be dead on 
arrival. Much was made of its falling through par, and continuing down- 
ward. They forgot the events prior to launch, and they ignored that over- 
priced items tend to keep falling until they become underpriced. 

Just as we predicted, the Euro bottomed at about 82 cents, almost 
exactly as much under par as it had started out over par. 

At that point our projection was that it would rise through par to 
about $1.07-1.10, and could then be expected to oscillate around $1. We 
continue to hold that opinion. 

Remember that, prior to the Euro's introduction, there was only one 
"world class" currency in existence - the U.S. dollar. Now there are two, 

and that truly represents progress 



DEUTSCHE MARK RISE -1998 

.65 



\ 



fig- 

23a. 



m 



■ 

mmmSL 
I (I 



1998 



.60 



.55 



.50 



1999 



for humanity. No one country 
should ever control the world's 
moneys. The next major develop- 
ment will be for China, Japan and 
others to introduce an Asian 
equivalent to the Euro. 

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. The phrase 
"dollar hegemony" refers to finan- 
cial elements, generally but not 



23 EUROPEAN MONETARY UNION 647 



exclusively in the U.S., using the monetary dominance of the U.S. dol- 
lar to politically dominate other countries and regions. This has reached 
the point where growing numbers of lesser developed countries have 
adopted the U.S. dollar as their official standard (for example, in South 
and Central America). 

Although monetary control differs from military dominance, some 



Par 



Value of the Euro 



;.::,( : .^a^vj" 



11 



\ 



1 



T 



in 

$ 



1.10 



1.05 



4.00 



.95 



.90 



.85 



1999 2000 2001 

23b. The ECB intended to launch the Euro at par with the U.S. dollar, but 
currency markets forced European currencies higher just prior to the 
launch so that the Euro came out at about $1.18. The decline from there 
may have been intended to spook the ECB into foolish actions, but 

failed to do so. A good sign for the new currency. 



648 The Lost Science Of Money 



of the effects are similar. As noted, in the 1960s General Charles 
DeGaulle understood how abstractly created U.S. credits were being 
used to buy up and control tangible French industry and property. He 
tried to restrict that process, but with only limited success, since 
Europe's de facto standard was to a large extent not gold or their indi- 
vidual national currencies, but the U.S. Dollar. 

The Euro has changed that, beginning the process of taking Europe 
out from under the Federal Reserve's dollar hammer. Faced with 
European monetary independence, some really bad people may attempt 
a form of military domination instead. This possibility is raised, because 
NATO (North Atlantic Treaty Organization) appears to be emerging as a 
vehicle for such dominance. This became visible in NATO's dispropor- 
tionate (and illegitimate?) bombing of Serbia including the city of 
Belgrade last year. This was done mainly under the direction of British 
and U.S. elements. These elements could be characterized as an Anglo- 
American Establishment, comprising the worst elements from both 
countries. In England, the same financially powerful element is present- 
ly blocking England's full entry into the European Community. 

Thus, even without direct attacks, NATO (i.e. the Anglo-American 
Establishment) - has been militarily determining the political landscape 
of parts of Europe, At some point we expect to see the European Union 
develop a process to begin breaking free of NATO and to eventually seek 
its dissolution. Such moves are to be encouraged. Unfortunately, after 
the tragedy of the World Trade Towers on September 11, 2001 and the 
ensuing Bush Administration's "war on terrorism," nasty elements are 
finding it easier to promote this NATO vision of Europe, under cover of 
the crisis. 

We must especially beware of those forces prodding the U.S. to take 
military actions that increase the probability of a long term religious 
conflict with Islam. Just who would that be convenient for? Not 
America; not Europe; certainly not the hundreds of millions of Moslems 
who would die. Such a development has the potential to derail the 
progress of humanity more than all the past tricks these groups have 
pulled, put together. One would have to seriously consider whether their 
real goal is not further riches and power for themselves, but death and 
destruction for much of humanity. 

THE EURO RESULTS THUS FAR 

The results of the Euro have been impressive: upon introduction in 
1999 it immediately became the world's second most important money. 



23 EUROPEAN MONETARY UNION 649 



even before actual coin and currency began circulating in January 2002. 
Inflation has been kept near its target level of 2% annually and is expect- 
ed to be under that in 2002.^ 

Production and economic growth have increased - 3.4% in 2000 - 
the strongest growth in a decade. Unemployment, though still high by 
U.S. standards, has dropped from around 12% to about S%, These lev- 
els are less ominous than they would be in the U.S. because of the exten- 
sive safety nets Europeans maintain, including universal health care. 
Also because unemployment figures in the U.S. are understated. 

The Euro area reported a strong balance of trade surplus but a weak 
balance for services and financial transfers. This resulted in a balance of 
payments deficit of E70 billion in year 2000. This deficit dropped to 
E9.3 billion in 2001, and the month of December 2001 showed a balance 
of payments surplus of E2.9 billion. 

ECB President Willem F. Duisenberg's letter in their 2000 Annual 
Report notes that: "Financial markets have shown confidence in the 
determination and ability of the ECB to maintain price stability, its 



23c. 

Actual Euro coin 
and currency 
introduced in 
January 2002. A 
one Euro coin 
and a 20 Euro 
note are pictured 
here (not to 
scale). Notes have 
a common Euro 
theme on one 
side, and a 
national French, 
German, or 
Italian, etc, 
theme on the 
reverse. All are 
current through- 
out Europe. 





650 The Lost Science Of Money 



primary objective.. .The ECB has already built up considerable credibility." 

Yet even in this "price stability" regime the managers have been able 
to adopt a general target of 4.5% annual growth in the money supply. 
That should be enough to avoid deflationary problems. The test will 
come when a situation arises where the banks don't want to create the 
new money, and the ECB will have to find a way to make that happen. 

Duisenberg reports that "The first two years of the Euro have also 
shown that the policy-making framework at the European level is satis- 
factory. No major flaws emerged, as had been feared by some." 

Also interesting is that the ECB had a net profit of 2.6 billion Euro 
in year 2000, and especially that "The profit made in the context of the 
ECB's intervention in the foreign exchange markets was a significant 
element of this result." Thus while the attack on the Euro in the foreign 
exchange markets temporarily interfered with building popular confi- 
dence, it was not without cost to the speculators. 

All in all an auspicious launching of this important new develop- 
ment for humanity. 



Notes to Chapter 19 

^Frederich Hayek, Denationalisation of Money, (London: Institute of Economic 
Affairs, 2nd edition, 1978), pp. 19 - 20. 

^ Carroll Quigley, Tragedy and Hope, (New York: Macmillan, 1966), p. 950 

^ These statistics and those that follow are from the ECB's Annual Report for 
the year 2000 and from from its January and February 2002 Bulletins. 



651 



CHAPTER 24 



PROPOSALS FOR U.S. 
MONETARY REFORM 



TOWARD A FOURTH BRANCH 
OF GOVERNMENT 



"These tremendous powers have been wielded 

with such a lack of scientific or financial skill, and 

in so narrow and selfish a spirit, that its arbiters have 

repeatedly plunged the commercial world into bankruptcy, 

and confiscated or inequitably redistributed its accumulated 

earnings, either for their own benefit or else to save themselves 

from the effects of their own blundering." 

Alexander Del Mar^ 

Portia to Shylock: "For as thou urgest justice, 
be assured thou shalt have justice, more than thou desirest." 

Shakespeare's Merchant of Venice 



Portia's words could be appropriately directed to those holding the 
U.S. monetary power. They piously call for ''law and order" and ask for 
greater individual responsibility and harder work from their subjects, 
even as they make life more inhumane. Ever larger numbers of working 
families are slipping into poverty as more and more wealth concentrates 
in the hands of the very rich. In 1985 there were 33 million Americans 
living in poverty, but by 1995 it increased to 37 million. During that 



652 TOWARD A FOURTH BRANCH OF GOVERNMENT 



period 234,000 family farms were lost, and now close to 20% of 
American farmers live in poverty!^ 

As Americans go further into credit card debt just to make ends 
meet, they are subjected to obscene rates of interest, around 20%. That 
this has been "legalized" makes a farce of the law. The usurers have had 
usury limits removed and are now actively bribing legislators to change 
the personal bankruptcy laws in order to assure that American debtors 
can be held in a form of perpetual bondage to them. 

American vacations are a thing of the past, or have been reduced to 
a break too short to shake off the psychological stresses of an increas- 
ingly pressurized work atmosphere. The average vacation is now ten 
days, Americans hear of Europeans' five week vacations in disbelief 

In the enforcement of the laws, property, especially that held by 
financial institutions, is sacred, but industry is treated as subordinate, 
and labor is merely a pawn. Too many of the American poor, facing this 
bleak existence, and the American wealthy facing a meaningless one, try 
to escape into chemically induced hallucinations through drugs and alco- 
hol. Their "wars on crime" have now imprisoned a larger percentage of 
America's population than any other nation on earth, over 1.5 million 
citizens, mainly on drug charges. They have made the building of pris- 
ons America's leading "growth industry." 

An even darker side of the U.S. prison situation is the growth of pri- 
vate corporations' systematic substitution of prison labor (at 23 cents to 
$1 per hour) for normal labor. Prison labor is a form of slave labor. Some 
factories have been closed in order to move the production into nearby 
prisons. This has moved so fast that the various main line religious 
denominations have not yet reacted to this important development. 

Europeans should understand where the policies of the free market 
gang lead, so they can reconsider whether they really want to blindly fol- 
low the U.S. In any case our current direction toward some strange form 
of "disneyland fascism," must change. 

Much of the crime in the U.S. arises from an inequitable money sys- 
tem, which rewards those skilled in manipulating the financial rules, and 
neglects those doing an honest day's work. Some minorities succumb to 
the illegal drug trade because they have no alternative employment. 

American blacks especially are limited from meaningful participa- 
tion in the economy. On an individual basis they can rise above the obsta- 
cles and many capable individuals do. System wide, however, in an econ- 
omy designed to ration work and keep a standing army of unemployed 



24 PROPOSALS FOR U.S. MONETARY REFORM 653 



available to put downward pressure on wages, it's not possible for the 
group as a whole to overcome the disadvantages, which take their toll on 
large percentages of its members. It should come as no surprise then that 
blacks make up a disproportionate part of the U.S. prison population. 

WHO IS RESPONSIBLE? 

Those in charge of the U.S. money system, and their predecessors, 
must bear a large part of the responsibility for this inequitable situation. 
They broke the banks in 1929-32 and would not re-establish the money 
supply except to make war. They proceeded to base the economy on the 
military industrial complex for five decades, amassing many thousands 
of thermonuclear weapons which could only be used if the Earth was 
being destroyed. In 1970-74, the system was kept from total collapse 
only by the perception that the Federal Deposit Insurance Corporation 
was government guaranteed. 

The banking disasters of Penn Central, Continental Illinois, Franklin 
National, and the B.C.C.L among others, have kept U.S. banking fraud 
in the headlines over the years. The Savings and Loan scandals of the 
late 1980s and early 1990s were a direct result of their removal of gov- 
ernment banking regulations, and finally cost the American taxpayers 

over $100 billion to bail them out.-^ There is no comparable banking mis- 
management to be found in any European country. 

It appears to be a pillar of the U.S. "justice" system that the banking 
crime connected with these disasters must go essentially unpunished. 
This pattern for non-punishment of grand scale financial crime is 
ingrained in the English speaking world, beginning with the scandals 
surrounding the South Sea Bubble in 172L Chapter 11 described how 
England's ruling elites were involved in that swindle. We must find a 
way to give these "financiers" the justice they deserve. 

The author is not advocating a view of justice that ignores individ- 
ual differences between men, or in which nature is denied, but is sug- 
gesting that the cannibalism, as embodied in our present money system, 
must stop. It is degrading to the human species, 

MISDIAGNOSIS OF AMERICA'S PROBLEMS 

Maintaining a confused concept of the nature of money has allowed 
the money system origin of so many of society's serious problems to be 
obscured. For example: 

Balancing the federal budget 

Balancing the federal budget is sold to the American public as a fiscal 



654 TOWARD A FOURTH BRANCH OF GOVERNMENT 



problem of balancing income and expenses. In the 1990s about 14% of 
the U.S. annual budget has been going to pay interest on the national 
debt. But this debt is unnecessary and arises out of a flawed money sys- 
tem. The problem thus becomes re-defined as one that requires monetary 
reform, not penny-pinching and parsimony. 

Actually there is no federal "budget" 

The budget debates are meaningless because the U.S. Federal 
Budget does not distinguish between capital outlays and operating 
expenses. Money for new buildings and equipment, computers, air- 
planes, roads, bridges, airports, etc. are treated like operating expenses 
and there is no capital side to the budget, where such items should be 
amortized over their many years of use. This fact alone sabotages the 
operation of our government. 

Deterioration of the American infrastructure system 

Again this results from not understanding that money should be cre- 
ated by government for such expenditures. Infrastructure spending is an 
excellent way to introduce new money into circulation, distributing it 
geographically, funding decent paying jobs and leaving valuable infra- 
structure for the citizens to use for many years. Good roads and bridges 
and brightly painted divider lines on highways also save lives. 

The American Society of Civil Engineers' 1998 Report for 
America's Infrastructure is an unanswerable indictment of the current 
way America's monetary resources are allocated. The Report graded 10 
major infrastructure categories and estimated how much money is need- 
ed to remedy the ills: 



Department 


Present Condition 


$ Needed for Repairs 


Roads 


D- 






$357 billion 


Bridges 


C- 






$ 80 billion 


Mass Transit 


C 






$ 72 billion 


Aviation 


C- 






$ 60 billion 


Schools 


F 






$172 billion 


Drinking Water 
Wastewater 


D 
D+ 






$138 billion 
$140 billion 


Dams 


D 






$ 1 billion 


Solid Waste 


C- 






$ 75 billion 


Hazardous Waste 


D- 






$750 billion 


Grade average: 


D 


Total Needed: 


$1.8 Trillion 



24 PROPOSALS FOR U.S. MONETARY REFORM 655 



Nullification of local government 

The monetary strangulation of government occurs at the federal, 
state, and local levels. Small towns are forced into more debt in order to 
perform necessary functions. The interest costs on this debt approximate- 
ly doubles the cost of all equipment, construction, or services provided. 

Where the towns are up against debt limits, the lenders have con- 
trived to lend to newly created quasi-official agencies, whose debts are 
guaranteed by the municipality. Local governments are being advised to 
merge activities with other localities to save money. Recently in our 
upstate New York area the emergency medical services (ambulances) 
were told to merge. That means a drop in services, with no drop in taxes. 

Rescuing Social Security and Medicare/Medicaid 

Lack of money to pay for crucial programs is again not a fiscal but 
a monetary problem caused ultimately by the false idea that government 
must get money only by taxation or borrowing. The distribution of 
newly created government money through such programs is an excellent 
method of getting new money into circulation; it would be widely dis- 
tributed by population and geography, in small amounts. 

A broken down educational system 

Overcrowded schoolrooms and dilapidated buildings plague the 
education system. The problem is that most of the funding for schools 
comes from property taxes mainly on middle class homes. Its not unusu- 
al to pay $3,000 per $100,000 house valuation, each year in school taxes 
alone. This has gone beyond reasonable limits and more retired 
Americans are forced to slowly trade their homes for the tax payments. 
The federal government could be supporting education much more if it 
were in control of the money system. 

Another larger problem of the schools is what's being taught: 

"Everything is relative; there are no absolutes" translates in the stu- 
dents' minds into "there's no right or wrong." What's not being taught is 
how to think, how to reason and evaluate facts and experience to arrive 
at absolute, or probable conclusions. 

But a financial system based upon so many falsehoods requires a 
high degree of ignorance in the population or the system will be seen 
through and be overthrown. 

Teen-age suicide and murder 

A regular anguish of American life are the news reports of yet anoth- 
er teenager who snaps mentally and shoots teachers and classmates. In 
addition, the suicide rate among American teenagers has risen dramati- 



656 TOWARD A FOURTH BRANCH OF GOVERNMENT 



cally: up 300% in the last 30 years. Whatever the individual facts and 
failings related to these tragedies, an important factor on the teenagers is 
the unbearable level of hypocrisy that our system now embodies. 

Even the super-rich are not shielded from the violence. Consider the 
1996 Colorado murder of 6-year-old Jean Bennet Ramsay right in the 
home of her multi-millionaire parents; the 1996 New York murder of the 
son of the billionaire Chairman of Time Warner company; the 1996 mur- 
der in North Carolina of the father of half-billionaire basketball super- 
star Michael Jordan; the 1997 murder of the son of half-billionaire enter- 
tainer Bill Cosby in California; the 1997 Florida murder of multi-mil- 
lionaire designer Gianni Versace. 

Absence of a national caretaker 

Behind these problems is the fact that the nation is controlled more 
from behind the scenes by financial institutions than by the citizens 
through elections. 

When society loses control over its money system it loses whatever 
control it might have had over its destiny It can no longer set priorities 
and the policies for achieving them. It can't solve problems, which then 
develop into crises and continually mount up. 

Its leaders substitute public relations for action and although the 
media is part of this pretense, an awareness slowly develops that there is 
"nobody home" in Washington. Nobody is taking care of America. 
People stop voting and a deep sickness of the spirit develops. 

MONETARY REFORM IS CRUCIALLY NEEDED 

It's long overdue to admit that the money system is responsible for 
so many social crises. Basic monetary principles can then be applied to 
reforming the money system to help resolve society's most serious prob- 
lems. Implementing the reforms requires effective political action. 

MONEYS' NATURE MUST DICTATE MONETARY REFORM 

Readers should now understand what money is - what it is we are 
reforming. We've noted our inheritance from past genius: 

from Aristotle - "Money exists not be nature but by law;" 

from Plato - "a money token for purposes of exchange;" 

from Paulus - "This device being officially promulgated, circulated and 
maintained its purchasing power not so much from its substance as from 
its quantity." 
Then after a long darkness, 



24 PROPOSALS FOR U.S. MONETARY REFORM 657 



from Berkeley - "Whether the true idea of money as such, be not aho- 
gether that of a ticket, or counter?;" 

from Locke and Franklin who viewed money as a pledge for weaUh 
rather than wealth itself; 

from Del Mar we have: 

"...what is commonly understood as money has always consisted, 
tangibly, of a number of pieces of some material, marked by public 
authority and named or understood in the laws or customs: that its pal- 
pable characteristic was its mark of authority; its essential characteristic, 
the possession of value, defined by law; and its function, the legal power 
to pay debts and taxes and the mechanical power to facilitate the 

exchange of other objects possessing value.";"^ 

and from Knapp - "Our test, that the money is accepted in payments 
made to the states offices." 

We accept these concepts and add: Money's essence (apart from 
whatever is used to signify it), is an abstract social power embodied 
in law, as an unconditional means of payment. 

This can be referred to as a socio/legal Constitutional Concept of 
Money. Wordsmiths are invited to submit a nicer sounding title to the 
AMI. The term ''Societal Concept of Money'' also fits well. Perhaps sim- 
ply thQ^'Nomisma Concept of Money, " or just "Nomisma'' is sufficient. 
We could also call it the ''Aristotelian concept of money " in his honor, 

A good money system will accomplish the above goals in a just and 
efficient manner, assisting the widespread creation of values for living. 
A bad one will raise unnecessary obstacles to the production of values, 
establish privilege and corruption, and concentrate wealth and power 
into undeserving hands. We presently have a very bad one. 

This book has shown that it is historically self evident that the best 
money systems have been controlled and monitored through law, by 
public authority. Leaving the money power in private hands has invited, 
even assured, disastrous results. This is also consistent with the logic of 
money: since the money system is a creature of law, it rightfiiUy belongs 
within government, just as the law courts do. 

We propose that ultimately the monetary power should be 
constituted as a fourth branch of government, like the execu- 
tive, judicial and legislative branches. We have concluded that 
the nature of man and of society requires four, not three, 
branches of government. 



658 TOWARD A FOURTH BRANCH OF GOVERNMENT 

REFORMING THE U.S. MONETARY 

SYSTEM 

"Specialists without spirit, sensualists without heart; 
this nullity imagines that it has attained a level of civilization 

never before attained." 

Max Weber ^ 

Max Weber's comment was directed at "victorious capitalism... In 
the field of its highest development, in the United States." The smug atti- 
tude he observed in the early 1900s continues today and presents a sub- 
stantial obstacle to reform. A pre-condition of reform is usually to appre- 
ciate why it is needed. 

In America today, monetary reform is not yet a mainstream issue. 
Among those who are interested, many fall into error in several margin- 
al and futile areas: those supporting a gold standard; supporters of so- 
called "free banking;" advocates of various LETS systems; and lastly the 
"all money is debt" people. 

THE GOLD PROMOTERS 

There is always a small fervent faction composed of conservative 
elements, some fundamentalist religious folk and lots of people with a 
financial interest in gold mining or coin investments. Unaware of all the 
historical evidence to the contrary, they have convinced themselves that a 
gold standard would be good for the country. 

But history shows that over and again the so-called gold standard 
has been little more than a ruse and a way to concentrate special mone- 
tary privileges into the hands of a plutocracy. Examples include the first 
and second Banks of the United States, the various state banks, and the 
early Federal Reserve System, all described in previous chapters. 

The misinformation being spread that a gold standard helps the com- 
mon man because it stops inflation misses the point. First, it does not 
always stop inflation, as we saw in the doubling of prices from 1917- 
1920, or the 400% rise in prices in the sixteenth century. More recently, 
from 1971 to 1974 gold rose over 500% from $38 to $200 an ounce. In 
1975, gold dropped 50%, to $103. It then rose 700% to over $800, and 
then declined to $238. These movements were not due to changes in the 
dollar. Gold does not represent an objective value and to base a money 
system on it would be folly. 

Secondly, labor and industry have suffered far more from deflation 



24 PROPOSALS FOR U.S. MONETARY REFORM 659 



or restriction of the money system than from inflation and a metallic- 
based money system is normally a formula for deflation. In a deflation, 
it is those with money or to whom money is owed, who automatically 
benefit without giving anything in return. Those in debt are harmed 
because they must repay in more valuable money. As industrialists in a 
society are usually large debtors, industry is harmed and this harm is 
quickly passed through against labor, while also harming production. 

In the late 1800s Henry George derided the idea of metallic money: 
"We are digging silver out of certain holes in the ground [called mines] 
in Nevada and Colorado and poking it down other holes in the ground 

[called vaults] in Washington, New York, and San Francisco," he wrote.^ 
Robert de Fremery made these salient comments on a gold standard: 
"Would it be wise to have such a currency convertible into gold? 
Certainly not. That would make it a credit currency - the very thing that 
has caused so much trouble. There are people who look with distrust 
upon 'printing press' or 'fiat' money. But they overlook one of the basic 
facts about money. It is true that we need a 'hard' money. But we should 
not make the mistake of associating 'hardness' with convertibility into 
gold. The essence of a hard money is not determined by the material of 
which it is composed - or the material into which it is convertible. The 
essence of a hard money is that its supply is fairly stable and there are 
precise limits to it... And a purely paper or 'fiat' money can be a hard 
money if we set precise limits to its supply, or it can be a soft money if 

we set no precise limits to its supply."^ 

THE "FREE BANKING" IDEOLOGUES 

The term "fi'ee banking" is vague, because its supporters have not 
uniformly defined it. We take it to mean a system where bankers are 
allowed to create the money supply in the form of their credits, or notes, 
which are allowed to circulate without restriction or regulation, to the 
extent that the markets will allow. But isn't it really up to these advo- 
cates to define their own terms if they want to be taken seriously? 

The "free banking" advocates misuse the deductive method and take 
laissez-faire beyond applicable limits, insisting bankers can be allowed 
to issue unlimited amounts of money, as long as customers are willing to 
accept it. But Professor Soddy explained why this can't be allowed: 

"The issuer of money who first passes it into circulation cannot 
help getting something for nothing, namely the exchange value of the 
money.. .the value of everyone's holdings of money is directly affect- 
ed by every new issue or cancellation... It reduces to a hypocritical 



660 TOWARD A FOURTH BRANCH OF GOVERNMENT 



sham all the enactment's... to insure just weights and measure,"^ 

Remember, if government issues the money, it is essentially a tax, 
the proceeds of which are available to benefit the society. If the bankers 
are allowed to issue money, they will primarily enrich themselves. 

We discussed several of the problems with the free bankers in 
Chapter 16. These fellows realize that men can have the freedom of most 
action that does not harm others; but they don't understand that when a 
private party creates money it represents a punch in the face to everyone 
else! By now our readers should be aware of that. 

The economist Milton Friedman, after years of resisting the free 
banking supporters, then appeared to embrace their position, or at least 
acquiesce with it. Hopefully he will take another look. 

LOCAL CURRENCY ("LETS") ADVOCATES 

A third grouping has apparently given up on reform and is attempt- 
ing to establish local currencies called LETS (Local Exchange Trading 
System) to supplement the national circulation. These LETS systems 
vary from locale to locale, and are not always as well defined as one could 
ask. They are normally well meaning attempts to remedy the shortage of 
national currency that undeniably exists in many localities. Mainly they 
enable participants to trade their labor and some other items with one 
another without using the national currency. 

These systems can be traced back to Josiah Warren, the originator of 
the Labour Exchange idea, put into practice by Robert Owen in London 
in 1832 following a very tight money period. The problem is that while 
these local systems do no financial harm and can alleviate local cash 
shortages, they have been of very limited benefit, and generally soon end. 

These currencies will continue to be limited unless they can qualify 
as a true money form. That means taxes, at least local taxes, have to 
become payable in them. One would then expect them to be issued by 
the taxing body. At present this is not possible, except in emergencies. 
Even state governments are forbidden from issuing their own currencies. 

Furthermore, such local currencies do not stop the continued mis- 
management of the money system at the national level - they can't stop 
the continued dispensation of monetary injustice from above through the 
privately owned and controlled Federal Reserve money system. Ending 
that injustice should be our monetary priority. Thus the real harm done 
by "LETS" systems is to distract otherwise concerned citizens from 
advocating real reform. 



24 PROPOSALS FOR U.S. MONETARY REFORM 661 



THE "ALL MONEY IS DEBT" FACTION 

This group confuses the nature of money, through their observation 
of one perverted form of it. They say that since most of the money in cir- 
culation is in the form of credits issued by banks (which are also debts 
to those being credited), that therefore the nature of money is that it is 
always debt, and some of them define money as "assignable debt"! 

This viewpoint was especially spread out of England (see the dis- 
cussion of A. Mitchell Innes in Ch. 1 9) and in considering why they have 
so much difficulty understanding the concept of money apart from debt, 
the author realized that the English have no historical tradition of gov- 
ernment issued money comparable to our own. For as we have seen, 
while the Massachusetts colony issued government paper money in 
1690, in 1694 the privately owned Bank of England took over England's 
money issuing process, and kept it in private hands until the national- 
ization of that bank in 1946. 

Credit can function imperfectly as money, when it has been (improp- 
erly) monetized under the law. For example the legal treatment of the 
private Federal Reserve notes as money by accepting them for taxes and 
making them a legal tender. 

But these credits are only one form that money has taken, as rec- 
ognized both in Del Mar's and in Knapp's definitions. Those who 
argue that it is the only form of money, should realize that they are 
actually defining "money" out of existence, and substituting "cred- 
it" for it. Money and credit denote two different things. That's one 
of the reasons we give them separate names. 

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 issu- 
ing the credit - the bankers. As Prof. Soddy and others have shown, this 
cannot help but do serious harm to the population as a whole. 

It is contrary to the spirit of the U.S. Constitution, and, if one con- 
siders that this monetary privilege amounts to the formation of an aris- 
tocracy, it is also contrary to the letter of the Constitution (Art. I, Sect 9), 

Such immorality leads to serious troubles. Properly constituted 
government money, except when spent on warfare, tends to be used for 
those things and items of infrastructure of concern to the state - the 
broad interest of the citizens such as bridge and road and water infra- 
structure; public health and education. 

Private credit tends to go for fast profit, defined in its least productive 



662 TOWARD A FOURTH BRANCH OF GOVERNMENT 



manner; for quickly getting back more than one gives, in terms of shuf- 
fling paper instruments. As we have seen, monetizing credit - in partic- 
ular private bank credit - can lead to such poor results that it even makes 
the primitive practice of monetizing "precious metals" look good! And 
in that regard, the "goldbugs" do have a point. 

The apologists for banking privilege argue that the banking business 
is open to all those who have enough money to satisfy the legal and 
financial requirements. But that is a variation of the argument put for- 
ward by John Law in the early 1700s, who remarked: "All may share in 
the establishment of the bank through ownership of it." 

We discussed this in Chapter 12, and noted how much more appro- 
priate and convenient, for all to benefit, if the bank of issue is a National 
Bank, owned and operated by society. It's a mystery why otherwise 
intelligent persons don't see that such a privilege would necessarily fall 
into the hands of the already wealthy, unjustly enriching them, and fur- 
ther aggravating the obscene concentration of wealth in America. 

To say that this "business" is open to all, is also reminiscent of the 
Roman "Ager Publicus," the lands that were owned by the Roman state 
in the 1st and 2nd centuries BC and were, in theory, available to be used 
by all Roman citizens. But only the wealthy could take advantage of the 
possibility, as discussed in Chapter 2. 

Modem apologists also assert that bankers are generally of "high 
moral character." But why would moral people seek to gain an unfair 
advantage over their fellow citizens, through a little understood legal 
privilege, to engage in a process that necessarily robs from society and 
historically gives little or nothing back to society? This is very different 
from the kind of license a doctor obtains to practice medicine. For the 
doctor must provide valuable services to his patients, for which he is 
paid. Bankers, with the privilege to create money can pay themselves, 
one way or another. 

Some apologists assert that the modem profit margins of banking are 
not unreasonably high, again missing the point. Instead of eaming prof- 
its from their operations, bankers would probably be willing to pay for 
their banking privilege if necessary, because of the power it gives them; 
a power that can always translate into riches. 

More important than their "eamings" is the power they usurp: they 
control the rationing of credit. If that credit has been improperly substi- 
tuted for money, the bankers are more in control of the society than is the 
legislature, executive, and judiciary, not to mention the citizens. 



24 PROPOSALS FOR U.S. MONETARY REFORM 663 



GOVERNMENTS RESPONSIBILITY TO PROVIDE THE MONEY 

We regard the provision of the money mechanism to society by gov- 
ernment as a major advance over any prior barter or credit arrangements. 
The author agrees with Knapp's evaluation of this step: "The most 
important achievement of economic civiUzation, the chartaHsm (using 
tokens for money) of the means of payment." 

Private credit being used as money is conditional; it depends on the 
ability of the issuer of the credit to stay solvent and to maintain an image 
of solvency. It unfairly transfers wealth and power to a privileged few. 

As long as we maintain our memory of the Greenbacks, the "money 
is debt" position will be seen as false. For we know that they were not 
debts, but money. We can understand why the bankers were so anxious 
to remove the Greenbacks from circulation, where they provided a daily 
practical lesson in "monetary theory." 

The effect of the "all money is debt" viewpoint is to eliminate the 
real concept of money. That only serves the interests of bankers, 

REFORMING THE FEDERAL RESERVE SYSTEM 

Fortunately there is a monetary reform that can reach our goal for 
the nation to control its own money system, and to end the monetary 
privileges that the financial classes have grabbed. This is our best and 
most direct course of action - the real thing. Reform can begin, even 
without a complete and detailed blueprint of the ideal money system to 
be ultimately reached as long as reform is consistent with the nature of 
money, and considerations of justice play the major role. 

That is not to say reform can proceed in a half-baked way with 
under-developed knowledge. That could do more harm than no action at 
all. Special care must be taken to avoid a program that leads to deflation, 
as some past monetary reforms have. In chapter 15 we saw how Van 
Buren and Jackson's well meaning anti-bank reforms adopting metallic 
money resulted in the worst depression the country had seen. The not so 
well meaning English reform after the Bullion Report, discussed in 
chapter 11, also led to deflation and depression. 

The American Monetary Institute's strategy for monetary reform is 
to concentrate on three minimal reforms that place time on the side of 
justice instead of against it as at present. Then other questions can be 
resolved and refinements can be made over time without a crisis atmos- 
phere. These minimal reforms should be agreeable to thoughtful, honest 
observers; but on these three points there should be no compromise: 



664 TOWARD A FOURTH BRANCH OF GOVERNMENT 



REFORM # 1 : NATIONALIZATION OF THE FEDERAL RESERVE 

Since issuing money is a proper function of government the first 
essential point is for the government to regain direct control over the 
nation's money system and become the sole issuer of money. How? At 
the onset of the next (or the next) banking created crisis, instead of once 
again bailing out the bankers and saving them from their latest malfea- 
sance, our government, with sufficient political support, should nation- 
alize the Federal Reserve System as England nationalized the Bank of 
England in 1946. 

This is not as far fetched as some people tell themselves. Several 
past Chairmen of the House Banking Committee have introduced bills to 
do away with the private Federal Reserve System, including Wright 
Patman, and later Henry Gonzales, the chairman until 1994. But these pro- 
posals did not receive any attention from the media, and little popular sup- 
port was generated for them. That is what has to change. 

Henry Gonzalez' bill would have repealed the Federal Reserve Act, 
but the American Monetary Institute prefers to keep the Fed intact, in 




24a, Congressman 
Henry Gonzales, 
Chairman of the House 
Banking and Currency 
Committee until 1994, 
regularly introduced 
legislation to repeal the 
Federal Reserve Act. 



recognition of the extensive experience, know-how and administrative 
procedures developed there over the past nine decades. For example, 
their knowledge of the necessary seasonal variations needed in the 
money supply. However, the Fed's role and mandate would change, as it 
would be nationalized and function as part of the U.S. Treasury. 

The process of reform starts with an understanding of money's 
nature as a legal institution, not a commodity, or so-called economic 
good. The legislation nationalizing the Federal Reserve System must 



24 PROPOSALS FOR U.S. MONETARY REFORM 665 



24b. Congressman Wright 
Patman, Chairman of the 
Banking and Currency 
Committee from 1963 to 
1975, did his best to alert 
Americans to the dangers 
of the Federal Reserve 
System. Patman was also 
the first to call for the 
Watergate investigation, 
repaying an old "debt" to 
President Richard Nixon. 




explicitly recognize that fact, v^ith an accurate definition of money. 

The process of building political support for nationalization of the 
Fed could use market oriented actions such as boycotts. The selective 
direction of pension fund assets and mutual fund investments could be 
used as a means of both moving toward reform and alerting investors to 
its necessity. For example, most banking shares and their satellite cor- 
porations would be boycotted as part of a socially conscious investment 
policy. The impact could be enormous. 

An important project the American Monetary Institute is working 
on, and seeking funding for, is the development and testing of guidelines 
for socially responsible investing, using such monetary "filters." 
Socially conscious investment managers could then consult our grad- 
ings. To keep abreast of our work on this, periodically check our web site 
(http : //www. monetary, org) . 

Short term, once in charge of the money system, the U.S. Treasury 
could carefully start to use modem American Greenbacks - debt free 
U.S. money - to break the current depression and near subsistence levels 
so much of the population is still mired in, even as Wall Street had 
soared. For example, debt-free money could be used to build and re- 
build roads, bridges, water and sewer systems, and schools and air traf- 
fic control systems called for by the American Society for Civil 



666 TOWARD A FOURTH BRANCH OF GOVERNMENT 



Engineers. In addition, quality low-cost housing and the Internet free- 
ways are worthy projects. New U.S. money could be used to clean the 
environment and to assure that the Social Security and Medical pro- 
grams continue to function and improve. Universal health care is also a 
priority. Above all else, the general level of education - the reading and 
thinking abilities - achieved by the typical American needs to be raised. 
By careful trial and error, not just isolated theory (which has been 
custom designed for bankers), the Treasury will determine about how 
much money should be in circulation, and to what degree to base it on 
population figures, industrial production, and other measures. The man- 
agers would be aware of Ben Franklin's observation that it is better to err 
on the side of a little too much money, rather than too little. 

WHAT WOULD SUCH MONEY BE LIKE? 

To see an example of this superior money form, the reader need only 
check his or her pockets for quarters, nickels, dimes, pennies, or dollar 
coins. The United States Government puts these coins into circulation 
through the Treasury's mints. No interest is paid on them and they do not 
add to the national debt. 

Such copper-clad coinage could also be minted in much higher 
denominations. But since paper is more convenient, cheaper, and now 
harder to counterfeit, most U.S. money would take that form. In future 
money may be in an electronic form, but the essential point is that only 
our government should issue American money. 

HOW DOES THE PLUTOCRACY RESPOND? 

Those holding the money power have promoted a two century smear 
campaign against government to raise the fear of inflation under such a 
system, even though the evidence clearly shows greater monetary abuse 
by privately controlled money systems than by government ones. That's 
why economists are steered away from the study of history. 

In this smear campaign they still advertise the 600-700 year old 
cases of monarchs "debasing" their coinage, but never give the context 
that this kingly abuse occurred after the collapse of monetary order with 
the fall of Byzantium in 1204 AD. They don't mention that much of the 
alteration in coinage was an accepted form of taxation, or that Republics 
generally fared much better monetarily than monarchies. Nor do they 
discuss the much greater monetary problems caused by private bankers 
during these times (all discussed in Chapters 4 to 8). 

In more recent times, during warfare, the money power acquiesced 
in government issued money to assure their own survival, as in the 



24 PROPOSALS FOR U.S. MONETARY REFORM 667 



Revolution and the Civil War. Or when allowed to get away with it, as 
in WWI and WWII, they issued the money in large quantities them- 
selves. 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, benefitted 
the populace, and made the people more independent of the bankers. 

Warfare thus became associated with "getting the economy mov- 
ing." But it wasn't the warfare; it was the accompanying monetary and 
production activity that did it. 

We haven't seen modem cases in the EngUsh speaking world where 
such high levels of money creation were directed into real production, 
and not specifically destined for destruction. Partial exceptions are the 
limited efforts undertaken by Roosevelt after the Great Depression, 
which gave us projects like Hoover Dam, and the water and sewer sys- 
tems 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 
modem miniaturized computerization. 

In short, the Plutocracy's inflation theme is "the big lie." 

TOWARD A FOURTH BRANCH OF GOVERNMENT 

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

This fourth branch would refine and codify its protocols in ever- 
increasing accuracy, starting from the point of considerable technical 
knowledge and expertise already embodied in the Federal Reserve appa- 
ratus. The overall objective, however, would be changed. Instead of 
managing the money system to further enrich the leisure class, helping 
them create and rule their "New World Order," the goal would be to 
"promote the general welfare," an explicit objective of our Constitution. 
And yes, a new order of the world would evolve out of this, but not the 
slave system we are presently headed for. 

NEARLY ALL CITIZENS WOULD GAIN 

Those who want smaller government would be happy to see that it 
could shrink, since so many of its present day activities, started to coun- 
teract the inequitable effects of an unjust money and banking system, 
would no longer be needed. Those who want more government controls 



668 TOWARD A FOURTH BRANCH OF GOVERNMENT 



would be happy to see the need for such controls disappear as the type 
of corporate predators now in charge would find most of their funding 
and power cut off. Those who want to abuse government for their own 
private gain would find it much harder to do that. 

AND THE LOSERS WOULD BE...? 

Those presently benefitting from special monetary privileges would 
find those benefits ended; but even for the majority of them the improve- 
ments in the quality and security of life and the release of new creative 
and industrial energy resulting from a fair money system would likely 
outweigh any loss. 

Only that tiny fraction of a percent at the very top would be big los- 
ers; but considering what they have been doing, shouldn't they be happy 
to escape with their lives - if they can? 

There's one more group of losers: the type of ideologues who value 
so-called free markets above life itself - other people's lives, that is. 
These apologists, largely economists, devote careers to justifying the 
worst predations upon mankind. In their hands those economic theories 
are used as bludgeons to beat down their most vulnerable fellow men. 

THE FACE OF EVIL 

Most would agree that, where evil is being purposely done under 
cover of economic theory, it should be clearly identified and thereby 
destroyed. Some economists will scoff at being characterized as evil for 
merely making deductions from their beloved theoretical premises that 
they place their faith in, for merely acting as good priests of their hal- 
lowed market god. 

But they truly serve an evil deity and the fruits of their theories grow 
monotonously bitter. The hallmark of those intent on doing harm is their 
ever readiness to take current benefits fi:om the common man, promising 
him instead some imaginary heaven in the long term, to be made possi- 
ble by the intercessions of their god, Hand, the Invisible. 

Somehow their theories always manage to reserve the current bene- 
fits for wealthy predators, parasites really, who in the main part fund 
their salaries. At present, society is in trouble to the extent that these 
"econo-myths" dogmas are being followed. Their prescription? - yet 
more "free market discipline"- their brand of free trade theories dictate that 
American workers must compete with underpaid workers in countries 
where labor has minimal rights and where environmental concerns are 
ignored; with what is in effect a form of slave labor. This props up foreign 



24 PROPOSALS FOR U.S. MONETARY REFORM 669 



tyrannies and supports the investments of the economists' patrons. 

Of course not all economists are evil. Many moral economists are 
just afraid of losing their jobs, or have fallen into a rut of mental obedi- 
ence. But it's long overdue for those able to think clearly to become 
much more vocal, and not just between themselves but with the public 
in clearly understandable language. Galileo had to be severely threatened 
- he was led through the Vatican's torture rooms and shown some of their 
devices - before he mouthed the "party line." But economists appear 
almost anxious to kneel and serve corrupt power. Time to stand up, boys! 

REFORM # 2: ENDING FRACTIONAL RESERVE BANKING 
AND INSTITUTING THE 100% RESERVE SOLUTION 

The reform process will soon arrive at requiring banks to hold 100% 
reserves for money that they lend. To phrase this more universally, banks 
can lend what has been deposited with them, but would not be allowed 
to create money, beyond some minor specified amounts. Private money 
creation has been the source of the bankers' power. It has also been the 
source of the periodic crashes of the system. 

Most economists, even good ones, will panic at this proposal 
because their mindset can't conceive of the banks as servants rather than 
masters. But far better methods can quickly be found to introduce 
new money into the system and properly direct it toward real pro- 
duction and improvement of values for living, methods far more 
effective than private banking has been. 

Banking panics occur because banks have the privilege to create 
money in the form of bank credits on their books. The banking system's 
reserves of actual money are often only one tenth (or less) of these bank 
credits. They used to do this in the 19th century by printing about ten 
times the number of banknotes as the coinage they held. Now since the 
Federal Reserve notes are money the way the coinage used to be, they 
do it, system wide, by creating new credits on their books to a multiple 
of the amount of paper money and old credits they have received. 

The banking system pretends that these bank credits are equivalent 
to money, but they are not. For they depend on the Bank's image and 
ability to stay liquid and pay its depositors; whereas paper money in 
hand is more secure. In the words of Robert de Fremery: 

"This essentially fraudulent practice multiplies bank deposits that 
exist only as book entries... but making this unsound practice legal does- 
n't prevent the public from periodically losing confidence and asking for 

its money. The resuh is panic and depression."^ 



670 TOWARD A FOURTH BRANCH OF GOVERNMENT 



AVOIDING BANKING SYSTEM PANICS AND COLLAPSES 

But how can we restructure our present unstable banking system in 
which banks do create money? The Austrian School of Economics for 
decades has been mis-educating Americans that any credit expansion 
must be followed by a crash, and many American conservatives and 
Libertarians now believe this. For example, Ludwig Von Mises writes: 
"There is no means of avoiding the final collapse of a boom brought 
about by credit expansion. The alternative is only whether the crisis 
should come sooner as the result of a voluntary abandonment of further 
credit expansion, or later as a final and total catastrophe of the currency 

system involved." ^^ 

This fatalist doctrine is being spread in America, setting people on 
the wrong course regarding how to react in their personal investments 
and in the determination of banking policy. It's based on what we may 
justly refer to, after 23 chapters of demonstration, as the "childish" view 
that money is a commodity or "economic good." If the Austrian School 
understood the nature of money as a social/legal invention of mankind, 
they'd have to abandon their conclusion that catastrophe is inevitable. 

De Fremery points out that: 

"A more plausible theory is that all economic activity is continually 
reaching a new equilibrium between the total circulating medium of 
exchange and the goods and services offered for it. In other words, an 
expansion of bank credit leads to a collapse not [only] because of mis- 
directions in production but rather because of the operation of 
Gresham's law. The use of bank credit as a medium of exchange gives 
us what Bishop Berkeley called a 'double money.'..." 

The reason for the collapse then is the preference for the cash money 
as opposed to the bankers' credit money, resulting in runs on the banking 
establishment to draw out cash. 

^^According to this theory, it is possible to avoid a collapse follow- 
ing a period of credit expansion simply by converting the existing 
volume of bank credit into actual money having an existence inde- 
pendent of the debt, and at the same time take away the banking sys- 
tem's privilege of creating any more credit, ue., force banks to confine 

their lending operations to the lending of existing funds. "^^ 

Those who hold a commodity view of money can't accept this possi- 
bility because neither gold nor economic goods can be brought into exis- 
tence out of thin air, to change the bank credit into their idea of real money. 

When one understands the nature of money as an abstract legal 



24 PROPOSALS FOR U.S. MONETARY REFORM 671 



power, it clearly becomes possible for the government to create and sub- 
stitute such trusted real money for the already existing, suspect bank 
credit. Thus we are not held hostage to preserving the existing flawed 
banking system, or to risk bringing down the whole structure. 

WOULD IT HAVE WORKED IN 1929-32? 

Could this "100% Reserve Solution" have prevented the Great 
Depression? Could the situation be rescued even after years of misman- 
agement by the bankers, and after the panic set in? The answer to these 
questions is "yes." The "100% Reserve Solution" has some marvelous, 
almost magical effects. It is a way to get to 100%* reserves without dis- 
rupting the banking system, or calling in loans and creating a financial 
disaster. It is done by increasing the reserves held by banks. 

SODDY AND SIMONS DEVELOP THE 100% RESERVE SOLUTION 
Under this plan the banks are required to establish 100% reserve 
backing for their deposits, in this unique way: 

The U.S. Treasury would loan freshly created U.S. paper currency to 
banks to bring their cash reserves up to 100%. The banks would pay inter- 
est to the U.S. on these loans. If the Fed had not yet been nationalized, 
then Federal Reserve Banks would also borrow from the treasury suffi- 
cient new currency to bring their cash reserves up to 100% of their 



24c. Frederick Soddy 
was Lee Professor of 
Chemistry at Oxford. In 
1921 he received the 
Nobel Prize in chemistry 
and laid the groundwork 
for the "big bang" theo- 
ry in cosmology. He also 
brought great clarity of 
thought to the problem 
of banking panics and 
invented the "100% 
Reserve Solution." This 
is emphatically not the 
same as merely requiring 
100% reserves, presently 
being advocated by some 
misguided monetary 
reformers. 




672 TOWARD A FOURTH BRANCH OF GOVERNMENT 



demand deposits (funds deposited by their member banks for safekeep- 
ing plus all government funds against which checks are being drawn by 
the government). The amount of U.S. securities (T bills and T bonds) held 
by the Federal Reserve and other banks would be credited against these 
borrowings, canceling an equal amount. 

Thus the 100% Reserve Solution is totally different from just requir- 
ing banks to keep 100% reserves, which would cause a disastrous defla- 
tion, and a repudiation of all monetary and banking reform. 

But with this elegant plan, all the bank credit money the banks have 
created out of thin air, through fractional reserve banking, would be 
transformed into U.S. government legal tender - real, honest money. All 
of the prior U.S. debt extended in the old bank created money (banking 
credits) would be canceled out by the banks' new borrowings from the 
U.S. The approximately $600 bilHon of U.S. bonds held by the banking 
system (in 1999) would go out of existence, lowering the U.S. national 
debt by that amount. 

The banks would be panic proof, having by definition enough cash 
to pay all claims, without requiring a financial calamity through repudi- 
ation and contraction. The reform would not fix cases where banks and 
borrowers engaged in extraordinarily foolish loans, but the resulting 
bankruptcies from them need not destroy the whole system. 

The concept behind the 1 00% Reserve Solution was discovered by 
Nobel Laureate in Chemistry Frederick Soddy in 1926. During the Great 
Depression, Henry C. Simons was a professor at the University of 
Chicago, my alma mater. Simons independently rediscovered the 100% 
principle in 1933, and proposed it as the way to end the depression and 

prevent future banking panics. ^^ 

In July 1939, the plan was endorsed and put forward in a pamphlet 
by Paul H. Douglas (University of Chicago), Irving Fisher (Yale), Frank 
D. Graham (Princeton), Earl J. Hamilton (Duke), Wilford I. King 
(NYU), and Charles R. Whittlesey (Princeton). It was circulated to most 
members of the American Economic Association involved in monetary 
or banking matters. Hundreds of economists, mostly professors, signed 
on to the plan. Robert De Fremery gave the AMI a rare copy of the pro- 
posal, including a list of those good economists. The Federal Reserve 
System was aware of the plan but did not even acknowledge it! 

100% RESERVE SOLUTION NEED NOT BE DEFLATIONARY 

This reform would be neither inflationary nor deflationary, because it 
would simply make real what had been thought to be the existing monetary 



24 PROPOSALS FOR U.S. MONETARY REFORM 673 



levels. From that point, it is crucial that alternatives to bank created cred- 
it be used to make necessary increases in the money supply. 

For example, newly created money could be spent into circulation 
by government paying for social security and universal medical cover- 
age for the nation. Or it could be loaned into circulation in interest free 
loans from the federal government to local governmental bodies (from 
school boards to states) to be used only for infrastructure construction and 
repair. This would cut the cost of all such infrastructure in half. 

These and other sound alternatives are available now. More can be 
developed through careful thought, and even more careful trial and error. 
For banking institutions to continue making new loans they simply 
would have to attract such new money from depositors or investors. 

CONGRESSMAN VOOPIHIS PROMOTED THE 100% RESERVE PLAN 
Into the 1940s, California Congressman Jerry Voorhis advocated the 
100% Reserve Plan. Then the bankers' lobby financed Richard Nixon's 
first congressional campaign against him. Nixon ran a dirty campaign, 
smearing Voorhis as a communist, and got elected. Voorhis learned from 
one of his neighbors, who was Nixon's campaign manager, that the 
American Bankers Association had financed Nixon. 

"IKE" WAYLAYS THE PATMAN PROBE 

Voorhis then worked with House Banking Committee Chairman 
Wright Patman in 1956 on the "Patman Probe," which was to formally 
examine the results of the Federal Reserve System, on a scale like 
Aldrich's Monetary Commission of 1908-12. As the bill to create the 
Patman Probe was being passed in the House of Representatives, the 
bankers' lobby pulled 31 congressmen from the floor of the House and 
told them to change their votes or face defeat in the next election. The 
lobbyists later went to President Eisenhower to head off the probe. "Ike" 
told them not to worry - he'd set up a "blue ribbon" group of bankers to 
"study" it. Thus meaningful monetary reform has not been on the polit- 
ical horizon for over a generation in America. ^^ 

DE FREMERY KEPT THE 100% RESERVE SOLUTION ALIVE 

The work of Robert de Fremery (1916-2000) has kept the concept of 
the 100% Reserve Solution alive today. For decades he wrote articles 
and corresponded with economists on the necessity of banks to maintain 
100% reserves. His two books, Money and Freedom (1955) and Rights 
vs. Privileges (1992) have clearly explained why: 

"Is it not obvious that there are serious defects in our banking sys- 



674 TOWARD A FOURTH BRANCH OF GOVERNMENT 



tern and our tax system that deprive most of us of fundamental rights and 
bestow enormous privileges on others?... How many riots must we 
endure? How many prisons must we build? How many of our rights 
must we lose? How many of our young people must be sent away to 

fight in foreign wars before we decide that enough is enough?" ^^ 

DeFremery believed that monetary reform had to be combined with 
changes in the taxation system along the lines proposed by the 19th cen- 
tury land reformer Henry George, and known as the "single tax," in 
which the full rental value of unimproved land goes directly to society 
as taxation. It's a concept originated by the French Physiocrats (they 
called it the "impot unique") and the idea deserves more attention than 
it is presently given. Father of the Revolution Thomas Paine held a 
similar viewpoint toward land. See de Fremery's Rights vs Privileges. 

De Fremery thought that unless land reform accompanied monetary 
reform, the concentration of wealth and power spawned in either area 
would soon re-establish a system of corrupt privilege in the other area. In 
the author's view, implementing our three major reform points will create 
a climate of reform where other matters can be scrutinized and acted on. 

REFORM #3: INSTITUTE ANTI - DEFLATION PROGRAMS 
AND BEWARE OF DEFLATION 

To proceed merely on the basis of restricting the bankers' creation of 
money is to invite deflation, depression and repudiation of the reforms. 
This is a real danger since financial elements that would benefit ft'om 
deflation would promote refi)rms with such ''unintended'' consequences. 
For three decades the fear of inflation has been drilled into the American 
mind and the political climate is still vulnerable to an over reaction to 
inflation phobia. Thus Fed Chairman Greenspan was praised for raising 
interest rates 11 times in the late 1990s in fear of an imaginary inflation! 

Therefore limitations on the bankers' power to create money 
must not only be accompanied by clearly defined powers for the 
government to take their place, but also specific programs requiring 
money creation, for example to re-build infrastructure throughout 
the land in a major way. Paying for Social Security and a national 
health care system through government money creation would also 
serve to avert a deflation. 

Are we advocating inflation? Certainly not. We like Henry George's 
answer on whether he'd support the government issuing money toofi^eely: 

"('ecclesiastical expletive!') I am a Greenbacker, but I am not a fool.''^^ 



24 PROPOSALS FOR U.S. MONETARY REFORM 675 



24d 

Robert de Fremery 
(1916 - 2,000) kept the 
concept of the "100% 
Reserve Solution" alive 
to the present day, 
through his books and 
articles and personal 
correspondence with 
prominent economists. 
He was also an impor- 
tant supporter of the 
Henry George school of 
land taxation. 




THE USURY PROBLEM REMAINS 

Chapters 7 and 13 showed the problems of usury and interest are far 
from settled, Whipple's calculation (see p. 346) demonstrated the impos- 
sibility of long term interest, even at moderate rates, even where the 
lender did not create the money, but loaned money he already owned. 

While it's outside the scope of this book to resolve all elements of 
this complex question, nationalizing the money creation process is a pre- 
condition to solving the usury problem and its wealth concentration 
effect. Continuing historical research and logical documentation would be 
helpful. For example applying serious computer models to this question 
could provide valuable information on how quickly usury concentrates 
wealth to insupportable, society busting levels. 

Some steps could be taken immediately: nationalize money creation 
in government hands, where it can be created debt free, or at least inter- 
est free as described above. There should be an immediate national legal 
limit of 8% annual interest, including credit cards, with no offshore 
loopholes. No interest should be paid on checking accounts. Cumulative 
interest should never be allowed to exceed the amount loaned. Some of 



676 TOWARD A FOURTH BRANCH OF GOVERNMENT 



these restrictions were in effect in the early 1980s, before the mad paper 
chase took over our economy in its present form. 

Regarding the international debt problem, Pope John Paul II, is 
the best economist. His call for a "Jubilee" to forgive much of the 
debt - to write it off- makes much more sense than most of them do. 

FINANCIERS WILL TRY TO SABOTAGE REFORM 

Once meaningful monetary reforms are underway in America, we 
shouldn't be surprised if bankers and financiers attempt to derail the 
reforms through economic disruptions, including bringing the economy 
to a hah. They might spark foreign and domestic crises and violence. 
Therefore the reforms must make substantial provision for this by cre- 
atively giving such types enough other things to worry about so that they 
have little time to attack the reforms. This shouldn't be too difficult, con- 
sidering that reform would most likely proceed after another orgy of 
banking induced disasters, rife with felonious acfivity. 

Readers who feel the author has been too harsh on the bankers 
should remember that even Jesus Christ felt compelled to use violence 
against them, and them alone. 

DON'T ALLOW ECONOMISTS TO DIRECT MONETARY REFORM 

Monetary reform must not be left in the hands of economists. Such 
reform is a legal, moral and political matter more than an economic one. 
Economists have no training in those areas and generally disdain such 
matters. Their indoctrination leads them to erroneously assume that the 
market process best resolves such questions. 

In Chapter 12 we likened the polifical economists to a Temple priest- 
hood, trained to uphold the Temple ways. They have endured so much 
mental pressure in their formative years in order to obtain their PHD seal 
of approval from their predecessors that it's not realistic to expect or 
count on them to break free of such thought patterns. 

What role should economists play? Where exceptional individuals 
have achieved an independence of mind, they can best contribute to the 
reform process by evaluating technical matters connected with reform, 
not the legal, moral or political questions regarding the main structures 
reform should take. They can thus neutralize the destructive economists. 

OBSTACLES TO MONETARY REFORM 

The four main obstacles we must overcome are: 

1. The banking and media establishments 

The financial power of the bankers, related financiers, and their 



24 PROPOSALS FOR U.S. MONETARY REFORM 677 



lobbying power in the U.S. Congress is a formidable obstacle. The 
dependence and interlocking of the banks with the major media and uni- 
versities means that except for accidents, the message for meaningful 
monetary reform will not likely reach the citizenry through major tele- 
vision and radio stations, major newspapers and magazines, or 
Hollywood films. Thus this book was first printed in German, by a Swiss 
publisher. 

Enacting meaningful reform in America will require using alternative 
methods of communication. It's critical to develop strong person-to-per- 
son relations on a grass roots level, that can be expanded to larger and 
larger groups. Another key will be to educate and gain the support of 
existing groups - to interest them in monetary reform. Documentary film 
makers able to work closely with monetary researchers also need to be 
attracted to the cause of monetary reform. 

2. Poor monetary and economic thought 

Much inane monetary thinking arises from the Austrian School of 
Economics, which has more influence in America than in Europe, thanks 
to its hold on American Libertarians. The monetary positions of this 
school are weak right from its founder Carl Menger's theory of the ori- 
gin of money. Their main monetary tract was written in 1912 by Ludwig 
Von Mises at only age 31. Yet re-printings have almost no changes, 
despite the momentous monetary events that occurred since then! This 
reveals a kind of arrogance to beware of Von Mises' rarely read book 
has many contradictions and bold unsupported assertions on its key 
monetary positions, for example his assertion that: 

"The concept of money as a creature of law and the State is clearly 

untenable. It is not justified by a single phenomenon of the market."^^ 

Why? No answer. That single statement brands him as either dis- 
honest or foolish. It is clear from history that money is a creature of the 
law and the state. We have documented case histories that prove him 
wrong, in many of our chapters. 

The Austrian School - "A leap backward" 

The method of Von Mises and the Austrians is either a form of 
shouting as in the above example, or it is theoretical, a'priori reasoning. 
This use of deduction rather than observation, and their tendency to 
ignore the scientific method, caused the Austrian School to be labeled "a 
leap backwards" in economic thought by Edward C. Harwood, founder 
of the American Institute for Economic Research (AIER) in Great 
Barrington, Massachusetts: 



678 TOWARD A FOURTH BRANCH OF GOVERNMENT 



"Dr, Von Mises denies not once but several times that his theories can 
ever be disproved by facts. This point of view represents a leap backward 

to Platonic Idealism or one of its offspring in various disguises."^^ 

The ongoing work of the AIER should not discard Harwood's acute 
observations on this matter.^ 

It should be mentioned that among the Austrian economists, the 
author truly admires Professor Murray Rothbard's clear and unequivocal 
condemnation of fractional reserve banking as a "Ponzi scheme." Von 
Mises criticized it less forcefully; but most Austrians support it in the 
name of free markets. Rothbard understood that free markets stop where 
fraud and privilege begin. 

We don't mean to only single out the Austrians. Similar charges 
apply to other "schools" as well. As a "science," economics is very ill. 

3. Ayn Rand and the Libertarian free market theology 

The anti-governmental aspect of most economists is the problem, 
and ultimately their main thrust. For decades in America, as part of a free 
market theology, they have attacked the one organizational form with the 
potential to stand up against the Plutocracy on behalf of the people - our 
government. The Libertarians didn't invent this idea. Adam Smith orig- 
inated its present form, largely for the purpose of keeping the money power 
in private hands, as seen in Chapter 12. The Libertarians are merely the 
latest group to be captured by this ideology and to be convinced that they 
represent something new, rather than an old plutocratic viewpoint. 

Their idol, Ayn Rand, the 20th Century's greatest proponent of cap- 
italism, was actually bom in Russia as Alissa Rosenbaum, She renamed 
herself after the brand name of her typewriter. Rand was so partial to 
deductive reasoning as to be easily taken in by the conservative economic 
line. Her monetary error of regarding money as a commodity, particu- 
larly gold, is evident in the cocktail party speech by the colorful (and 
your author's favorite of her characters) Francisco D'Anconia in her 

novel Atlas Shrugged}^ 

While it's only a novel, many of her followers treat it more like a 
textbook or the "Gospel" and distribute an excerpt of that speech on 
money. Her works transmitted this falsehood to the Libertarian political 
party, which formed among her readers (without her blessing). But nov- 
els are a medium that neither demands proof nor exposes the author to 

^ The author served as a Tmstee and Executive Committee member of the American 
Institute for Economic Research (AIER) in 1976, in a successful effort to help the 
Institute resolve its problems with the Securities & Exchange Commission.) 



24 PROPOSALS FOR U.S. MONETARY REFORM 679 



serious scrutiny or dispute by those with real knowledge in the field. 

Answering critics who said people like Ayn Rand's heroic characters 
don't really exist, she rephed that the proof of their existence was her 
novels. That answer raised the initial red warning flag regarding method- 
ological problems in her thinking. 

One problem with merely applying reason and logic to complex life 
situations is that no matter how precise one's logic is, if it is applied to 
poorly defined concepts, the result will be tenuous at best. For example, 
applying good logic, while utihzing a faulty definition of money will 
produce a confused result where the outcome will be determined by the 
dominant media of the dominant financial group: i.e. by power. That out- 
come will support the existing financial order. That has unfortunately 
been Ayn Rand's legacy. Her protege, Alan Greenspan, has been chair- 
man of the Federal Reserve since 1987. 
Nietzsche provided Rand's power 

Your author had read all of Ayn Rand before reading Nietzsche; but 
after reading him, it was clear that what was powerful and of value in 
Rand had its source in Nietzsche. Her mentioning him only once (and in 
a somewhat negative way) was not a sufficient acknowledgment of the 
great debt that she owed him. Ayn Rand took the powerful ybr/w provid- 
ed by Nietzsche, and filled it with the inane content of Adam Smith. In 
part she turned Nietzsche's idea of the Superman (mans potential for 
continuing heroic development) into a type of shopkeeper's mentality. 

But contrary to Rand, Friedrich Nietzsche's advice to his better 
people was to: ^*Get thee from the marketplace!^^ 

The anti-social nature of current thinl^ing 

Rand's very strength of mind and egoism also led to errors in her 
view of society. It is wonderful to have a confidence and certainty of 
mind. The problem arises when the personality insists it can exhibit this 
certainty in areas about which it is not sufficiently informed. This type of 
personality is highly vulnerable to flattery and often demands adulation 
or obedience, well known features of her personal makeup. 

By over-accentuating man's faculty of deductive reasoning, she 
consequently devalued the importance of his experience and of society. 
For reason is normally an individual process and experience almost 
always takes place within a social context. In her refreshing glorification 
of the individual. Rand unnecessarily stretched it too far and down- 
played that even reason takes place within the concepts and ideas of our 
predecessors, relayed to us through society. For example, Newton said 



680 TOWARD A FOURTH BRANCH OF GOVERNMENT 



that he saw so far because he was "standing on the shoulders of giants." 
That process only occurs in a social context, where knowledge can 
be recorded and passed down. In any case, mankind only exists within 
societies. Nowhere does man exist just as an individual. Ayn Rand did- 
n't deny this, but the Libertarians are still struggling with the real-world 
implications of that fact. 

The facts call for an attitude adjustment 

To effect meaningful reform, a change in attitude is needed, to rec- 
ognize the proper relation of the individual to society. No doubt some 
readers wince at the thought of instituting the monetary power in our 
government. The reason is thai for over two centuries, a poisoning of our 
attitude toward government has been underway. The stealthy promo- 
tion of this self-destructive childishness must stop. 

Significantly, such anti-government propaganda was intimately con- 
nected with monetary proposals. As described in earlier chapters, your 
author found it first in Adam Smith's 1776 book and later in cruder 
attempts like Walter Bagehot's 1869 proposal for a union of American 
and British currencies. Even crackpots like Oxford's Bonamy Price were 
sent on tour to attack our government and befuddle American minds. 

The great social/govemmental/political task of our time is to define 
the proper evolving relationship of man to society as a whole, and the 
responsibilities and rights that individuals must have to live as men and 
function optimally. This moral system needs to be specified optimally, 
not just in terms of society, but ulfimately in terms of humanity. 

The jealous and vengeful thunder God of the Old Testament is not 
capable of supplying any such morality for the modem world, and the 
gentle teachings of Jesus have proved much too easy to corrupt by those 
only seeking advantage. One approach would be to isolate the best ele- 
ments of various traditions and leave behind the trash, to separate the 
wheat from the chaff. 

But instead of helping to shape and define that relationship, Ayn 
Rand's delinquent children - the Libertarians - are acting like spoiled 
brats, with some of their leaders going so far as to assert there's no need 

for any government. ^^ The kind of personal freedom being advocated 
has a hollowness to it reminiscent of the "freedoms" that the oriental 
cults promoted as they swept into Rome from the 3rd century BC, dis- 
cussed in Chapter 2. It appears to be having a similar effect to that 
described by James Frazer in The Golden Bough: 

"The (result) was to withdraw the devotee more and more from the 



24 PROPOSALS FOR U.S. MONETARY REFORM 681 



public service, . .displacing the old ideal of the patriot and the hero who, 
forgetful of self, lives and is ready to die for the good of his country. . .A 
general disintegration of the body politic set in. . .the structure of society 
tended to resolve itself into its individual elements and thereby to relapse 
into barbarism, for civilization is only possible through the active co- 
operation of the citizens and their v^illingness to subordinate their pri- 
vate interests to the common good."^^ 

Similarly, while the Libertarian ideology gets people focused on the 
individual, then certain already existing financial and religious organi- 
zational structures can dominate by default. 

The Libertarians cast off the jealous thunder God of the Old 
Testament, and ignored Jesus and Mohammed. But they got suckered 
into accepting the existence of ghosts created by those whose purpose it 
was to monetarily rule societies. Their ghosts go under the name of 
"invisible hands" supposedly exerted by the market. 

As described by his High Priest Adam Smith, ''Hand the Invisible '' 
promises that so long as society bows to neo-feudal elements in control 
of the money system, Hand v^'iW appropriately distribute the economy's 
rewards and punishments. To Adam Smith and the modem laissez-faire 
advocates, the "Market" thus displays omniscience, omnipotence, and 

benign goodness, the three essential attributes of a Deity.^^ 

They pretend the "market" offers a valid, workable "morality" for 
the guidance of society. But only people who have not seen the inner work- 
ings of markets would entertain such a foolish idea. In effect they have sim- 
ply done away with morality and consciously substituted "the bottom line." 
This is much more than an accounting problem. It is deeply embedded in 
the so-called science of economics. 

For in reality the only invisible hand is the one picking everyone's 
pocket and transferring the contents to those abusing the monetary and 
economic system! It's long past time to reform them out of existence, but 
it's not too late. 

4. Dangers to civil liberty from the "War on terrorism" 

A precondition for monetary reform is that we keep our political 
freedoms intact. Unfortunately, the destruction of the World Trade 
Center in a context of Christian, Jewish and Moslem "fundamentalism" 
has placed our Constitutional Republic and Bill of Rights in more 
jeopardy than at any time since WWII. 

Watching what we venerated as a magnificent permanence in New 
York's skyline collapse into rubble was a traumatic experience. In the 



682 TOWARD A FOURTH BRANCH OF GOVERNMENT 



aftermath, necessity called upon us to vigorously defend ourselves and 
to honestly examine, and correct where possible, the root causes of the 
trouble. Understandably the defense came first. Now it is time to do the 
evaluations and to rationalize our Middle Eastern policy. 

Fundamentalist elements in Israel, America and the Moslem world 
want this crisis to degenerate into a war of the West vs. Islam. Thanks to 
our nuclear arsenal, the West would "win" such a war. Hundreds of mil- 
lions of Moslems would die. But America would also be destroyed in the 
process, and not just from the millions dying in unstoppable biological 
attacks, and the occasional nuclear briefcase, yrom whatever source, that 
slipped through. 

Consider how quickly our Constitutional Republic would perma- 
nently be changed into a type of police state in futile attempts to stop 
"terrorism." We'd still have Mickey Mouse and Donald Duck, and 
President Whomever, but our cherished rights, for which our forefathers 
fought and died, would be gone forever. The protection of those rights for 
ourselves and our posterity, not Middle-Eastern land politics, must be our 
paramount concern. 

Even as they took military steps to eradicate organized fundamental- 
ist networks committed to terroristic activity against the U.S., President 
Bush and Secretary of State Powell also announced their intent to support 
formation of a Palestinian state, and to end the decades of occupation of 
Palestine by Israel. These were courageous moves in the right direction. 

Then the Enron Corporation collapsed in scandal, with the potential 
(depending on media coverage) to destroy the present Administration. 
Bush and Powell's initiative quickly faded with the next reprisal attack on 
Israel, in its back and forth dance of death with the Palestinians. 

Since it is generally "forbidden" in the American media for non-Jews to 
criticize Israel, history and events have thus combined to place a special 
responsibility upon Jewish Americans to promote a reasonable American 
policy in the Middle East. While that requires much courage, we hope sig- 
nificant numbers can rise to the challenge, as did soldiers in Israel's army who 
refused to serve in the occupied territories. Like it or not, American Jews may 
have been dealt a difficult but conspicuous and decisive hand to play. 
However, rime grows short, and if Jewish Americans don't move deci- 
sively on this question, then reasonable people will have to demand it. 

WHAT CAN BE DONE NOW? 

Assuming that we are not sliding down a slippery slope into despotism, 
if we are to succeed with monetary reform it will require that a lot more 



24 PROPOSALS FOR U.S. MONETARY REFORM 683 



Americans understand both the historical background and the essentials 
needed for a just money system. Only in that way will political action be 
directed toward intelligent goals. That's the purpose of this book and 
hopefully you are motivated to act and to learn more. Please read it again, 
and encourage others to obtain a copy, as that will help support AMI's con- 
tinuing research. If you have questions, email us at: ami@taconic.net or 
write us at P.O. Box 601, Valatie, NY, 12184, and the American Monetary 
Institute will address the questions. 

The measures needed for reform must be accurately and simply dis- 
tilled into the form of proposed non-partisan legislation as a focal point 
for political action. This will require the assistance of trained legal and 
political minds, and as progress is made it will be posted at AMI's web 
site (http://www.monetary.org). 

Democratic, Republican and Independent sponsors must be found 
and motivated to introduce such legislation. Widespread political sup- 
port is possible because of the highly positive effects a just money sys- 
tem would have on almost everyone - what could become "The Next Big 
Thing." The millions of Americans presently working for social justice 
and environmental concerns are natural supporters of such legislation, as 
well as researchers and teachers. Americans concerned with our eroding 
rights and freedoms at the hands of growing plutocracy are also natural 
supporters; for we would reinstate one function to government - the 
money power - and be able to start removing hundreds of functions, 
made unnecessary by this reform. 

We have no illusions about the difficulty involved in wresting away a 
power that special interests have held entrenched for more than a century. 
But neither are we pessimistic. The reform becomes politically achievable 
each time the financiers run the world's economies into the wall. If at 
such a time, the legislation is among the bills introduced in Congress, 
and solid, thoughtful public support exists for it, it has a chance. 

This underlines the importance of not compromising the legislation 
in order to make it palatable to special interests. Their view won't matter, 
at its most likely time for passage. No one will care what the Fed or the 
economists who supported their system have to say at that point. 

THE NEXT BIG THING? 

The exciting advances in Internet technologies and in the biomedical 
fields (and soon in nano-technology), have spurred the question, 
"What's the next big thing"? Usually the motive of the question is to 
identify some investment opportunity. But what might be the next big 



684 TOWARD A FOURTH BRANCH OF GOVERNMENT 



thing transcends such personal considerations. The reader will see that, by 
using the monetary concepts presented here, society has far more power to 
solve its long and short range problems than the prevailing attitudes 
toward government would indicate. In fact it's now possible to go beyond 
mere problem solving and into the beginnings of "utopia" creation. 

As long as there are unused resources available, such as unemployed 
and under-employed people, or unused plant and equipment and natural 
resources, and there are needs to be filled, society has the monetary 
power to employ those factors without resorting to taxation or borrow- 
ing. Since we have seen that private banks can't or won't do it, the 
money to finance such development can be carefully created by govern- 
ment within specific constitutional guidelines. The availability of the 
new goods and services produced means that inflation need not result. 
The new wealth and economic activity and connected taxes generated 
are great bonuses from such productive efforts. 

Some short-sighted economists will crow that "there is no fi*ee 
lunch," and think they have knocked down these concepts (but if there's 
no free lunch, then why haven't these fellows starved to death long ago?) 
What they really seem to hate is watching society accomplish good 
things and solve problems. They want to limit such decisions and activ- 
ity only to corporations, and the elites that rule them. That means the 
kind of problems that only society can solve will grow until they lead to 
warfare. 

The real sources of the productivity are the work and thought and 
tools and natural resources, and our inherited knowledge and experi- 
ence, all existing within a supportive social and legal framework Money 
is just the indispensable lubricant that facilitates their employment. If 
there are not sufficient numbers of skilled people, society can direct its 
monetary power to improving our educational system and fiinding new 
schools of all types. People might also better understand the negative 
role the media has been exercising in generally glorifying or playing to 
ignorance and promoting drug use. They might question whether that is 
accidental, really just for the sake of profit, or much worse. 

Other purposes to which the monetary power can lend a hand are 
obvious: medical research to remove the scourge of cancer and other dis- 
eases; automotive research to double or quadruple the efficiency of auto- 
mobiles; or develop better, pollution free technologies. Energy and 
waste management research will allow us to stop fouling our planet. And 
yes, a missile defense shield, and other programs that keep our defenses 



24 PROPOSALS FOR U.S. MONETARY REFORM 685 



strong in the present dangerous world. To reduce those dangers, it 
wouldn't hurt if we would increase our efforts to help and teach other 
peoples how to raise themselves out of poverty. 

Readers now know that ^'we can H afford i7" is just an excuse. 
We already have the knowledge and productive capability to at least 
begin the creation of a near Utopian existence on earth. What stands in 
the way are mainly pernicious monetary, banking, and some "religious" 
attitudes. Hopefully this book has provided enough of the monetary 
background and solutions to help start us moving toward a brighter 
future, 

Stephen A. Zarlenga 
Oak Street Beach, Chicago, 
Labor Day, 2002. 



Epilogue 

If you are interested in these monetary themes on either a theoreti- 
cal or practical level, you are invited to keep in touch with the Institute, 
and if possible to become a sustaining member (see overleaf). We'll 
keep all informed of developments with regular updates through e mail, 
and regular mail for those not online. 

No one knows just how the future will unfold, but we know that 
monetary reform is crucially needed in America, and as long as we are 
able to take meaningful steps to that end, we will. Our primary contri- 
bution will continue to be in the area of monetary research and educa- 
tion. We also have a responsibility to help implement the ideas discov- 
ered there. That is fully consistent with our charter, and with the politi- 
cal action limitations that 501(c)3 rules place on charitable trusts. Our 
stated mission is '7o advance the independent study of monetary histo- 
ry, theory and reform, and to present the results in a way that s under- 
standable by the average citizen, so that it can lead to monetary reforms 
that assure a greater level of economic justice in society and a more effi- 
cient and equitable functioning of government, " 



686 



Notes to Chapter 24 

^ Alexander Del Mar, History of Monetary Systems, (repr., New York: A.M. 

Kelley, 1969), p. 467. 

^ Natl. Conf. of Catholic Bishop's Pastoral Letter, Economic Justice for All, 1995. 

^ A year 2,000 estimate by a Chicago Federal Reserve Bank economist. Earlier 

figures of a $300 billion loss were reduced as many properties became salable. 

^ Alexander Del Mar, Money in Ancient Countries, (London: Bell, 1885), p. 2 

^ Max Weber, The Protestant Ethic and the Spirit of Capitalism, transl. Parsons, 

(New York: Scribners, 1958), p. 182. 

^See Stephen Zarlenga, Henry Georges Concept of Money, Schalkenbach 

Foundation, quoting Henry George's Social Problems, p. 168. 

^ Robert de Fremery, Rights vs Privileges, (Provocative Press, 1992), pp. 54-5. 

^ Frederick Soddy, Money Versus Man, (New York: Dutton, 1933, pp. 32, 45-6. 

^ de Fremery, cited above, p. 76. 

^ Ludwig Von Mises, Human Action, (Yale Univ. Press, 1949), pp. 560-80. 
de Fremery, cited above, p. 50. 

Henry C. Simon, Economic Policy for a Free Society, (Univ. of Chicago Press, 1 948). 
Oral history, drawn from conversations with Robert de Fremery. 

^ de Fremery, cited above, p. 125. 

^Louis F. Post; The Prophet of San Francisco; (New York: Vanguard, 1930), p. 
128. Post does not tell us what the "expletive" was! 

^ Ludwig Von Mises, Theory of Money and Credit, (Capetown: J. Cape, 1 934), p. 69. 

^ B.C. Harwood, Useful Principles of Inquiry, (Great Barrington, Mass., 
Behavioural Research Council, 1973), p. 211 
Ayn Rand, Atlas Shrugged, (New York; New American Library, 1957), pp. 387-9 1 . 
My old friend Doug Casey, Co-Chairman of the Libertarian Party's 1996 Presiden- 
tial race, said this in a speech posted on the Internet at that time. C'mon Doug! 
^^ James G. Fraser, The Golden Bough, (Macmillan, 1952), pp. 414-5. 
^^ Gemot Kohler pointed this out on the William Vickrey Memorial Website at: 
http://pw2.netcom.eom/-masonc/vickrey.html#KOHLERT 

Publications and cassette recordings available to AMI Sustaining Members 

The Lost Science of Money, by Stephen Zarlenga donation: $60 

Der Mythos Vom Geld - Die Geschichte der Macht, by S. Zarlenga . " $48 

History of Money in America, (audio cassettes - 4 hours of 

S. Zarlenga interviewed on Tom Valentine's Radio Free America) ... " $27 

Henry George s Concept of Money, (audio cassettes - 2 hour 

address to Chicago's Henry George School of Social Science) " $15 

Refutation ofMengers Theory of the Origin of Money, 

by S. Zarlenga (a 21 page research paper) " $15 

Robert De Fremery's Rights vs Privileges (paperback, 125 pp.) " $15 



24 PROPOSALS FOR U.S. MONETARY REFORM 687 



AMERICAN MONETARY INSTITUTE 

PO BOX 601, VALATIE, NY 12184 

Tel. 518-392-5387, email aini@taconic.net 

http : //www. monetary, org 

The American Monetary Institute ("AMI") is a publicly supported 
charitable trust dedicated to the independent study of monetary history, 
theory, and reform. To maintain that independence our funding must 
come from a number of diverse sources and our research has to be avail- 
able to a wide audience. This book has presented the results of that 
research to date. 

AMI SUSTAINING MEMBERSHIPS 

Readers who find the themes of The Lost Science of Money to be 
valuable and want to support our continuing research are encouraged to 
become Sustaining Members by pledging to donate either $48 or $75 per 
year, or whatever is a comfortable and sustainable amount for them. As 
a 501c3 organization, donations to AMI are fully tax deductible. All 
Sustaining Members receive a quarterly bulletin from the Institute high- 
lighting current monetary developments. They also receive an equivelant 
value of their donations in the form of our publications and tapes. 

For AMI to be successful, its work must be understood by people in 
many walks of life. This is a two-way process - feedback from readers 
will tell whether we are truly communicating, or if more clarification is 
necessary. AMI therefore encourages Sustaining Members to relay their 
reactions as well as questions and proposals for further study. 

We invite you to join and become more personally acquainted with 
the AMI and these important monetary concepts. We also welcome your 
participation in the coming efforts to achieve monetary reform. If that 
can be accomplished in America, then it will become much easier to 
begin resolving international monetary problems as well. 

Please make your check payable to the American Monetary Institute, 
PO Box 601, Valafie, NY 12184, and either photocopy this page or send 
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D My check is enclosed for ^$48 n$75 DOther: $ 

Enroll me as a sustaining member of the American Monetary Institute. 
Name email 



Address 



City/State/Zip Phone_ 



688 



List of Illustrations 



Abbreviations used: Nyplpc. - New York Public Library Photo Collection; 
art. - artist; phot. - photographer; n.n. - not named; unk. - unknown. 

la) Hook tool money, Ridgeway's Origin of Metallic Weights and Standards. 

lb) Aristotle and Alexander, art. n.n., Nyplpc. 

Ic) Map of Greece and Turkey. 

Id) Ionian stater, Smithsonian Institution, phot. Douglas Mudd. 

le) Croiseus stater, Smithsonian Institution, phot. Douglas Mudd. 

If thru li) 130 grain coins, Smithsonian Institution, phot. Douglas Mudd, & 

American Numismatic Society, phot. Sebastian Heath. 

Ij) Athens owl, Smithsonian Institution, phot, Douglas Mudd. 

Ik) Solon, Casper Roig Editores, Madrid, Nyplpc. 

2 a) Map of Italy. 

2b) Aes signatum, Smithsonian Institution, phot. Douglas Mudd. 

2c) Animal signatus, Smithsonian Institution, phot. Douglas Mudd. 

2d) Heavy aes grave, Smithsonian Institution, phot. Douglas Mudd. 

2e) Lighter aes grave, Smithsonian Institution, phot. Douglas Mudd. 

2f) Romano coins, Smithsonian Institution, phot. Douglas Mudd. 

2g) Roma coins, Smithsonian Institution, phot. Douglas Mudd. 

2h) Roma quadrigatus, Smithsonian Institution, phot. Douglas Mudd. 

2i) Denarius, Smithsonian Institution, Douglas Mudd. 

2j) Roma victoriate, Smithsonian Institution, phot. Douglas Mudd. 

2k) Oath scene gold/Mars eagle gold, Smithsonian Institution, Douglas Mudd. 

21) Augustus bronze dupondus, Smithsonian Institution, phot. Douglas Mudd. 

2m) Brutus' "Bid Mart" daggers, Smithsonian Institution, Douglas Mudd. 

2n) Constantine the Great, art. Jos. Buelow, 1860; Nyplpc. 

3a) Abd El Malik coin, Smithsonian Institution, phot. Douglas Mudd. 

3b) Map of middle-east land bridge. 

3c) Early and late bezant, Smithsonian Institution, phot. Douglas Mudd. 

3d) Walls of Constantinople, phot. E. Widmer, Nyplpc. 

4a) Carolingian penny, Smithsonian Institution, phot. Douglas Mudd. 

4b) Charlemagne, art. Meissonier; Nyplpc. 

4c)St. Mark's Cathedral, phot. H. Simeone Huber, Nyplpc. 

4d) Doge's secret chancellery room, phot. Tore Gill, Nyplpc. 

4e) Venetian toumesello & star grosso, Lane's Money & Banking in ... Venice. 

5a) Pope Urban calling for the crusade, art. n.n., Nyplpc. 

5b) Siege of Jerusalem, art. Dore\ Nyplpc. 

5c) Crusader coin, Smithsonian Institution, phot. Douglas Mudd. 

5d) St. Peters castle at Bodrum, Internet source, phot. n.n. 

5e) Map of 4th Crusade route. 

6a) Champagne coin, Smithsonian Institution, phot. Douglas Mudd. 

6b) Jacob Fugger, art. Hans Burgkmair, Nyplpc. 



24 ILLUSTRATIONS 689 



6c) Charles V* at Fugger's castle, art. Becker, Nyplpc. 

6d) Brussels bourse, De Roover's Money, Banking and Credit in Medieval Brugge. 

7a) St. Thomas Acquinas, art. n.n., Nyplpc. 

7b) Aristotle, Internet source, art. n.n. 

7c) Martin Luther, art. n.n., Nyplpc. 

7d) John Calvin, art. Barbant, Nyplpc. 

8a) Prince Henry the Navigator, art. Gustave Alaux; Nyplpc. 

8b) Ferdinand & Isabella, art. unk., Prado Museum, Nyplpc. 

8c) Potosi coin, Smithsonian Institution, phot. Douglas Mudd. 

8d) Antwerp bourse, art. L. Legros, Nyplpc. 

9a) Bank of Amsterdam, art. P. Saenredan, Rijksmuseum, Nyplpc. 

9b) Amsterdam synagogue, Bloom's Economic Activities of the Jews of Amsterdam, 

9c) Frederick Henry, sculptor n.n., Nyplpc. 

9d) Amsterdam Exchange, art. Von Hiob Berkheyde, Boymans Museum, Nyplpc. 

I Oa) old English penny, Smithsonian Institution, phot. Douglas Mudd. 
10b) clipped coinage, photo missing. 

10c) Talley sticks, courtesy Bank of England. 

lOd) William 3rd in candlelight, art. n.n., Nyplpc. 

lOe) John Locke, art. G. Knodler, Engr. S. Freeman, Nyplpc. 

11a) William Paterson, art. n.n., Nyplpc. 

lib) Charles Montagu, art. n.n., courtesy Bank of England. 

I I c) Bank of England, courtesy Bank of England. 

lid) John Law, J.W.H. Allen, French Natl. Portrait Gallery, London. 

lie) Rue Quincampoix, art. n.n., Nyplpc. 

12a) Adam Smith, art. n.n,, Nyplpc. 

12b) Bishop George Berkely, art. John Smibert, Nyplpc. 

12c) Charles Montesquieu, art. Legeant, lith. Fonrouge, Nyplpc. 

13a) Thorold Rogers, photo missing. 

13b) Michael Sadler, art. n.n., Nyplpc. 

13c) Jeremy Bentham, art. J. Watts, Nyplpc. 

13d) Karl Marx, Internet source, phot. n.n. 

13e) Stanley Jevons, Internet source, phot, n.n. 

14a) Wampum, Smithsonian Institution, phot. Douglas Mudd. 

14b) Pine tree coins, Smithsonian Institution, phot. Douglas Mudd. 

14c) Massachusetts bill, Smithsonian Institution, phot. Douglas Mudd, 

14d) NJ paper money, Smithsonian Institution, phot. Douglas Mudd, 

14e) Ben Franklin, art. Cochin, 1777, engr. H.W. Smith, Nyplpc. 

14f &g) Continental Currency, Smithsonian Institution, Douglas Mudd. 

14h) Tom Paine, art. n.n., Nyplpc. 

15a) Robert Morris, art. C.W.Peale, 1782, Independence National Park Coll. 

15b) John Witherspoon, art. n.n., Nyplpc. 

15c) Alexander Hamilton, art. L.W. Gilbs, Nyplpc. 

15d) Note of First Bank of U.S., American Numismatic Association. 



690 ILLUSTRATIONS 



15e) Thomas Jefferson, art. n.n., Library of Congress. 

15f) James Madison, art. n.n., Nyplpc. 

15g) U.S. Treasury note, March, 1815, American Numismatic Association. 

15h) 2nd Bank of the U.S., Philadelphia, American Numismatic Association. 

15i) President Jackson, art. J. Van der Lyn, 1819, Nyplpc. 

15j) Jackson assassination attempt, art. n.n., Library of Congress. 

15k) Daniel Webster, art. & engr. J.B. Longacre, 1833, Nyplpc. 

151) Martin Van Buren, art. n.n., Nyplpc. 

1 6a) French assignat, courtesy Cornell University. 

17a) Greenback, Museum of Financial History, NY. 

17b) Greenback vs Gold, Dewey's Financial History Of The US. 

17c) Gettysburg scene, Library of Congress. 

17d) Confederate money, Smithsonian Institution, phot. Douglas Mudd. 

17e) Benjamin Butler, phot, n.n., Nyplpc. 

18a) Alexander Del Mar, from The Science of Money, 

18b) Henri Cemushi, Cemushi Museum, Paris. 

18c) August Belmont, phot, n.n., Nyplpc. 

18d) 1865-75 Appreciating dollar. Hicks' The Populist Revolt, 

19a) W.J. Bryan, phot, n.n., Nyplpc. 

19b) J.P. Morgan, phot, n.n., Nyplpc. 

19c) Del Mar's table, Del Mar's History of the Precious Metals. 

19d) Ezra Pound, Internet source, phot. n.n. 

20a) Wall Street bomb, phot, n.n., Nyplpc. 

20b) DJIA 1900 - 1933, AMI collection. 

20c) Bonus veterans, phot. Joe Costa, Daily News, Nyplpc. 

20d) Mariner Eccles, phot, n.n., Nyplpc. 

20e) Depression soup line, Phot, n.n., Nyplpc. 

20f) Franklin Roosevelt, Phot, n.n., Nyplpc. 

20g) Pope Pius XI, Internet source, phot. n.n. 

20h) Archbishop Of Canterbury, A.P., Nyplpc. 

21a) German hyper- inflation currency, AMI collection. 

21b) Hjalmar Schacht, Internet source, phot. n.n. 

21c) Gottfried Feder, phot. Heinrich Hoffman, 1933. 

22a) Keynes And White, phot, n.n., IMF. 

22b) US Gold Holdings Chart, AMI collection. 

22c) Imf Building, IMF. 

23 a) D Mark run up chart, AMI collection. 

23b) Euro chart, AMI Collection. 

23 c) Euro coin and currency, ECB. 

24a) Henry Gonzales, phot, n.n., Library of Congress. 

24b) Wright Patman, phot. Harris & Ewing, 1936, Nyplpc. 

24c) Frederick Soddy, Scribner's Mag., Sept. 1905, phot, n.n., Nyplpc. 

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691 



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702 The Lost Science Of Money 



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708 



INDEX 



Abd El Melik, 83-84, 100 
Aboriginal American money, 214-15; 

mound cultures, 362 
Ace, 42-43, 50 
Adams, Brooks, 78 
Addison, C.G., 146-47 
Aeginatic money standard, 33 
Aes, (Roman) 44-45 
Aes grave, 49, 51, 52, 55 
Aes rude, 44 
Aes signatum, 46, 48, 51 
Agio (at Bank of Amsterdam), 230 
Agrarian Justice (Paine), 410 
Agricultural commodities as money, 12, 

15,51; colonial America, 364-65 
AlDjawhri, 102 
Al-Jahri, Mabid, Ali, 626 
Aldrich, Nelson, 519, 523, 525; National 

Monetary Commission, 533, 535 
Aldrich Plan, 503, 524, 525, 527 
Aldrich- Vreeland Act, 518-19, 521, 526 
Alexander the Great, 17, 18, 21, 78, 87, 95 
Alison, Archibald, 173 
Ambrose, St. (on usury), 182 
America: aboriginal American money, 

114-15; plunder of precious metals 

from, 125; see also United States 
American Bankers Association, 525 
American Inst, for Econ. Res. (AIER), 677 
American Monetary Institute, 6, 128, 445- 

46, 664, 665-66, 681-83; mission and pur 

pose, 683; sustaining memberships, 686 
American Revolution, 376-86 
American Society of Civil Engineers, 

infrastructure report, 654-55 
Amsterdam, 223-49 
Amsterdam Stock Exchange, 238-45, 277; 

Ducatoon index future; manipulations, 

242-43; structural flaws, 243. 
Ancient Coins and Medals (Humphreys), 41 
Ancient Economic History (Heichelheim), 13 
Ancient Oriental System, 12, 13, 33 
Ancus Marcius, King, 45 
Anderson, Benjamin, 503 



Andreades, Andreas, 5, 267, 347; Adam 
Smith undistinguished, 310; Bank of 
England, 278, 279, 308; EngHsh nat- 
ional debt, 290, 350; Solon's reforms, 
29-31; temples as banks, 15, 24 

Animals, as money, 5 1 

Anti-Federalists, 393 

Antwerp, 121-23, 127 

Aquinas, Thomas, St. 178-79, 184-85, 194 

Aristotelian Analysis of Usury, The 
(Langholm), 178 

Aristotle, 95, 103, 180, 592, 629; nature 
of money, 35-36, 56, 656; nomisma, 
34-35; Solon's reforms, 29-31; usury, 
30, 184-85, 188,341,343-45 

Arrian Heresy, 93 

Articles of Confederation, 389 

AS, (Roman), 44-45, 52, 55-56 

Asian Trade in Antiquity (Jones), 88 

Ass, (Roman), 44-45, 73 

Assignats, (French) 446, 447-50 

Astor, John Jacob, 417 

Athelstan's Law, 253 

Attic money standard, 26, 30 

Aufricht, Hans, 610 

Augsburg, 185 

Augustus, 68, 70, 72-73, 75, 88, 89 

"Aurea mediocrites," 3 1 

Aurelean, Emperor, 91 

Aureus (gold coin), 71-72, 75, 88 

Austrian School of Economics, 4, 676- 
77; free banking, 444-45; mistaken 
market origin of money, 28; paper 
money, 372; usury, 342 

B 

Bacon, Francis (on usury), 34 1 -42 
Bagehot, Walter, 490-01, 679 
Baggatini (Venetian coin), 125, 218 
Baigent, Michael: freemasonry, 149; 

Knights Templar, 141, 146, 148 
Balfour, Arthur (and WWI), 576-77 
Bank for International Settlements, 606-09,619 
Bank holidays (1930's), 556 
Bank of Amsterdam, 228-33, 277-83; 



INDEX 709 



owned by city, 228-33 

Bank of England, 93, 277-88, 305-06, 479, 
605, 633; American monetary policy 
and, 539-40, 543; charter, 283-84; 
Church of England leads to its national- 
ization, 571-72; promotes commodity 
theory of money, 278; contraction of 
money supply, 330-31; limited convert- 
ibility of notes, 320; Federal Reserve 
System compared, 525-26, 527, 528, 
533; failure, 285; goldsmiths' attack on, 
286; and Irish potato famine, 301-02; 
Marx on the Bank, 351-52; monetary 
reforms, 346-47; held the money power, 
282, 287-88, 311, 313, 315, 327-28, 391; 
nationalization of, 571-72; opposition 
to, 283, 284-85, 286, 287-88, 340; 
Paine's attacks on, 410; causes Panic of 
1907, 517; privatizes the money power, 
277-88; Smith supports it, 320, 324, 
327-28, 297, 407, 410; and usury, 278, 
336, 340; and war, 290-91 

Bank of North America, 390-91, 403 

Bank of Sweden, 277 

Bank of the United States (1st, 1791-1881), 
403-09, 434, 435-36; Bank of the United 
States (2nd, 1816-1836), 416-19, 434, 
437-38, 454 

Bank reserves: minimum reserves, 636; 
100% reserve solution, 671-74; see also 
Fractional reserve banking 

Bank Von Leening (Amsterdam), 23 1 

Bankhead- Jones Farm Tenant Act, 559 

Banking, 504; closing of banks, 556; and 
competition, 514; Greece, 29; money 
power, 161-63, 320, 403-05; money 
changers, 158, 167, 168-69; Safety 
Fund System, 442; "Suffolk system," 
441; state-owned banks, 161; suppres- 
sion by Byzantium, 146; temples as, 
14, 15, 24, 70, 79; Venice , 127-28; see 
also specific headings, e.g.: Bank of 
England; Deposit banks; Free banking; 
Private banks 

Banking panics, 669-70 

Bannister, Saxe, 280, 290 

Barbour, Violet, 236-37, 246, 267 



Baring Brothers, 408, 422, 501-02 

Baring, Francis, 284, 288 

Barter, 9, 10-11, 79; in colonial America, 

364; England, 252 
Bartolus, 178 

Barton, William (bank proposal), 397, 423 
Baruch, Bernard, 539, 541 
Basileus (controlled money), 78, 83, 112, 

114, 132, 177; banking, 127; gold 

coinage, 84, 120, 145; gold/silver ratio, 

100, 101, 144 
Beach, W.E. (on gold standard), 605 
Beecher, Henry Ward, 473 
Behemoth (Hobbes), 256-57 
Belloc, Hilaire, 92, 194, 197, 252 
Belmont, August, 487, 489, 498, 508 
Bentham, Jeremy, supports usury, attacks 

Aristotle, 342-46, 359 
Bentinct, George, 302 
Bentsen, Lloyd, 469 
Berkeley, George, 317, 316-18, 358; 

"double money," 670; accurate on the 

nature of money, 657 
Bemardine, St. (on usury) , 1 83 
Bezant, 78, 96-97, 137, 144, constant 

weight caused deflation, 96-98 
Bible, 198-203, 286-87, 679-80 
Bibliolatry, 198-99, 203, 679-80; destroys 

civilization 286-87; destroys the mind 

198-99 
Biddle, Nicholas, 419, 423, 424, 425, 467 
"Billon" (medieval coins), 157 
Bills of credit, 367-69, 370, 373, 378, 415 
Bills of exchange, 158-59, 162 
Bimetallism, 482, 498, 503; see also 

Currency Act of March 14, 1900; Pre- 
cious metals; Gold standard; Silver 

question 
Bismarck, Otto, 483 
Black Friday (May 11, 1866), 486 
Black money (medeival), 157 
Black, Eugene, 622 
Blackwell, John, 366 
BlandAllisonAct, 500, 501 
Block, Raymond (on Rome), 42 
Blondeau, Pierre, coin machine, 266 
Bloom, Herbert, 215-16, 229, 234, 235, 



710 Index 



237, 245 
Blunt, John (South Sea Co.), 299 
Boeckh, Augustus, 17-18, 33 
Bohm-Bawerk, Eugen von, 1 89 
Bond, Nicolas, 231 
Book of the Prefekt (Byzantine), 96 
Bordo, Michael, 614 
Bourse (Brugge), 1 67 
Boxer, C.R., 221,223 
Bradley, Justice, (money decision), 471 
Breck, Samuel, 385, 386 
Breckenridge, Sarah, 254 
Bretton Woods Conference, 609, 614, 620 
British East India Company, 269, 271-73, 299 
British Monetary Experiments 

(Horsefield), 279 
Brock, Leslie, 369-70 
Bronze money, 41; AS, 44, 52, 55; bars, 

46, 48; coins, 54, 55, 73; Nomisma, 

39, 40; see also Copper money 
Brugge, 167-69, 172-74 
Brutus, 69 

Bryan, William Jennings, 510, 524, 528, 537 
Bucer, Martin, 191 
Buchanan, James, President, 454 
Buckle, T.H. 329 
Buddhism, 214 
Bullion. See Precious metals 
Bullock, Charles J. 377; Coinage Act of 

1873, 497; commodity view of 

money, 374, 459; free banking, 438; 

on the Greenbacks, 459-60, 486 
Bundesbank, 597-98, 638 
Burnett, Andrew, 52, 60, 62, 73; Aes 

grave, 50; Roman demonetization, 56; 

Romano coins, 54; silver drain, 88-89 
Burudian, 184 
Bush, Neil, 470 
Butler, Andrew Pickens, 399 
Butler, Benjamin Franklin, 402, 475, 509 
Byzantium. 141-45, 151. Also see Basileus 

c 

Caesar, Julius, 67-68, 69, 71-72, 73, 76, 

102; prohibition on hoarding, 89 
Calhoun, George M., 32-33 
Calhoun, J.C., 416 
California gold rush, 119, 347 



Calvin, John, 192-99, 203, 473; bibliola- 
try, 199; usury, 188, 191, 196, 203, 
340, 344 

Calvinism, 93, 398, 472 

Camera De' 1 Imprestidi, 127, 128 

Campbell, Alexander, 475 

Cantillon, Philip, 289, 485 

Capital, (Marx), 349-55, 358 

Capitalism, 201-02; Jewish capitalism, 
201; pariah capitalism, 201, 202; 
Puritan capitalism, 201; Thesis of, 336, 
341-45,347-48 

Carey, Henry, 460 

Carlisle, John G., 485 

Carthage, 55-56, 63-64 

Catterall, Ralph, 417, 437 

Cattle, as money, 10, 11, 16-17, 19, 20 

Cavalli (Venetian coin), 125, 218 

Cellorigo, Gonzalez de, 2 1 7 

"Census," (medieval loan form), 1 8 1 

Central Bank of Japan, 484 

Central banks, 415-17, 523, 599, 604; 
international central bank, 609; moneti 
zation of debt, 635; private banks, 518- 
19; see also specific headings, e.g.: 
Federal Reserve System; International 
Monetary Fund 

Cemushi, Henri, 482, 498, 500 

Chamberlain, Houston Stuart, 591-92 

Chamberlain's Land Bank, 284-85 

Champagne trade fair and fiat coin, 152 

Charlemagne (revives coinage), 110-14, 
129, 134; and papacy, 112 

Charles II, King of England, 266-67 

Charles-Picard, Colette, and Gilbert, 55 

Chase, Salmon R, 455, 457, 464, 469, 471 

Checks, 158-59, 162 

Chevelier, Michel, 481 

Childs, Francis, 286 

Chopra, M.U., 624-25, 626 

Chrematism, 186 

Christianity, 78; Crusades, 118-20, 131- 
49; and Moslems, 137-38; see also 
Religion; Scholastics 

Church of England, 251, and nationaliza- 
tion of Bank of England, 571-72 

Cicero, 31,69, 70 



INDEX 711 



Civil War, 455, 464, 486; see also 
Confederate money; Greenbacks 

Clark, John, 437 

"Classical economics", 33, 43, 102; mis- 
named, 102-03 

Clay, Henry, 416,467 

Clay, Lucius, 597 

Clay money, 45 

Clearance mechanism (Fairs), 1 52 

Cobbett, William, 336-37 

Coin clipping, 120-21, 260-62, 266, 278- 
79,481,482 

Coinage, 153, 514-15; "debasement," 156- 
57; colonial America, 364, 374; deriva 
tion of word, 22; free coinage law, 233; 
Greece, 16, 21-24; "intrinsically valable 
coinage," 28-29; overvaluation, 51-52, 
62, 65, 126, 127; private issue, 61-62; 
recoinage, 285; "tree coinage," 366; 
United States, 409; see also specific 
headings, e.g: Denarius; Gold coins; 
Roman monetary system 

Coins, Bodies, Games and Gold (Kurke), 34 

Coin's Financial School (Harvey), 498-99 

Coke, Lord, 343 

Collegenza (partnerships), 116, 181 

Columbus, Christopher, 210-11 

Commodity money, 14, 109, 188, 395, 
599, 670-7 1 ; Bank of England pro- 
motes , 278; Charlemagne, 129; colo- 
nial America, 364-65; Jevons, 356, 
357; Marx, 349, 355; private banking 
and, 335; redeemability into commodi- 
ty, 157; Roman money mistaken as, 51- 
52, 56, 57-59, 60, 62, 63, 65, 100, 105; 
Smith, 335, 349, 357, 404, 530; Smith 
promotes commodity money, 313; 
United States, 400, 402, 404, 409-10, 
411,426 

Commodity price indexes, 462-63 

Conant, Charles, 437, 468, 502 

Conditionality(IMF), 617 

Confederate money, 447, 465-66 

Confusion de Confusiones (De La Vega), 
242 

Consecration process (coinage), 18-19 

Considerations on the Currency and 



Banking System of the United States 

(Gallatin), 421. 
Constantine the Great, 78 
Constantinople, 141-45, 151 
Constitutional Convention, 393-402; 

avoids money question, 396; inade- 
quately defines money power, 394 
Continental currcncy, 40, 96, 377-86, 434, 447; 

British counterfeiting, 380-81, 382, 460 
Convergence (European monetary), 633-34 
Cook, Jay, 492 
Cooper, Peter, 509, 512 
Cope, H.L., 78 
Copper, 17; see also Bronze 
Copper money, 33, 40, 41, 51, 218; 

Brugge, 168; Indian money, 113; 

Italy, 125, 218; Mexico, 214; see also 

Bronze money 
Cosmas (medieval monk), 97-98 
Cost-of-living index, 463 
Counterfeiting: Assignats, 449; colonial 

money, 372-73; Continental Currency, 

380-81, 382, 460; Greenbacks, 454, 

460; punishment for, 96, 373 
Country pay period, 364-65 
Coxey, Jacob, 509-10 
Craggs, James, 300-01 
Craig, John, 252 

Crawford, Michael, 56, 60, 62-63, 69-70, 73 
"Crime of 73", 495 

Cromwell, Oliver (as Messiah), 263-64 
"Cross of gold" speech, 510-12 
Crusades, 118-20, 131-49 
Currency. See Money 
Currency Act (1764), 375 
Currency Act of March 14, 1900, 515-16 
Currency of the American Colonies, 

1700-1764, The (Brock), 369-70 
Currency question. See Bimetallism; 

Deflation; Gold standard; Inflation; 

Legal tender; Paper money; Precious 

metals; Silver question 
Cyprus, slaughter of the Greeks, 89 
Cyrene, slaughter of the Greeks, 89 

D 

Dandolo, Andrea, 124, 125 
Dandolo, Enrico, 120, 122, 142, 144 



712 Index 



Dante (Inferno & usurers), 1 84 

Dawes, Charles Gates, 579, 589 

Dawes Plan, 579-80, 589 

De Brunhoff, Suzanne, 352 

De Fremery, Robert, 672; credit is not 
money, 663, 670; demonetization of 
gold, 595-96; gold standard, 659; 
money supply, 549; 100% reserves, 674 

De Gaulle, Charles, 612, 648 

De Koopman, 246 

De La Vega, Joseph, 235, 240, 242, 244 

De Lugo, John, 1 80 

De Mai, Louis, 155 

De Molay, Jacques, 148 

De Moneta (Oresme), 308-09 

De Roover, Raymond, 153, 157, 161, 
162, 173 

De Vries, Margaret G., 613-14, 616 

Debt. See Interest; Loans 

Decker, Matthew, 228, 300 

Decline and Fall of the English System of 
Finance, The (Paine), 292, 470 

Decline and Fall of the Roman Empire, 
r;?e(Gibbon), 89, 91-92, 93 

Deflation, 479-80, 659, 673; Brugge, 172- 
73; England, 347; Japan, 484-85; and 
100% reserves, 672-73; Rome, 105; 
United States 484-85, 495-97, 502-03, 556 

Defoe, Daniel, 294 

Del Mar, Alexander, 59, 177, 218, 522; 
aboriginal money, 114-15, 362-64; Aes 
grave, 50; Charlemagne, 114; Civil War 
bonds, 486; coinage issued by Hadrian, 
112; colonial money, 367-68, 369, 374, 
377; continental currency, 378; debase 
ment of coinage, 155-56; demonetize 
tion of silver, 495-96, 497-98; defmtion 
of money, 661; ecclesiastics, 112; fall 
of Rome, 93-94; Free Coinage Act, 
269, 270; gold and silver coinage, 515; 
gold coinage prerogative, 83; gold 
coins issued with Byzantine markings, 
114; gold/silver ratio, 85, 86-87, 90; 
"intrinsically" valuable coinage, 28; 
limitation of issue, 62; Mixt Moneys of 
Ireland case, 155; monetary result of 
Constitutional Convention, 400-02; 
money as legal institution, 43; Moslem 



monetary system, 100-02; National 
Monetary Commission, 519; national 
ization of money, 604; nature of money, 
657; "nummulary system," 31-33; 
nomisma, 61; precious metals, 219; re- 
monetization of silver, 500; Roman 
monetary system, 51, 52, 54, 59, 79, 
91; silver demonetization, 485; Smith, 
315; study of monetary history, 4; 
Sumner's influence on, 459; trade of 
Venice, 118; The World, 487, 488, 489 

Dempsey, Bernard, 1 78 

Denarius, 56-59, 61-62, 88, 89; Venice, 
120-21 

Denationalisation of Money (Hayek), 
443,445-46,568,641 

Deposit banking, 128; Barcelona, 161; 
Catalonia, 158; see also Amsterdam 
Bank 

Depression (1929). 548-52 

Desha, , 413 

Deutsche Bank, 576 

Deutsche Bundesbank, 597-98, 638 

Deutsche Mark, 597 

Dewey, Davis Rich, 464, 479-70 

Dewey, Thomas E., 527 

Dewolf, Lyman E., 474 

Dickens, Charles, 339 

Dickeson, M.W., 362, 363, 376 

Dillaye, Stephen (refutes White's Fiat 
Money Inflation in France), 448-50 

Dinar (Moslem coin), 100, 101, 102, 137 

Diocletian, Emperor, 76-77, 96;Price 
Edicts (Cope), 78 

Dionysius, 50 

Dionysius of Halicamassus, 48 

Dirhem (Moslem coin), 100, 101, 102 

Discourse upon Usury, A (Wilson), 196 

Disraeli, Benjamin, 251, 338, 339 

Division of labor, 3 1 1 

Dobbs, Arthur, 376 

Dollar, 647, 648; foreign exchange, 646; 
dominates IMF, 611-12 

Dollinger, Philip, 171, 172, 173 

Double entry bookkeeping, 157 

Douglas, Paul (on bank reform), 560, 672 

Douglas, William, 369 

"Dry exchange bills," 159, 187 



INDEX 713 



Dual trading problem, 241-42 

Duane, William, 425 

Ducat (Venetian), 122, 123, 171 

Ducatoon (Dutch), 239, 240, 243-45 

Duisenberg, Willem R, 649-50 

Dury, John, on Jewish question, 263-64 

Dutch East India Company, 223, 231, 

232, 238, 239, 248, 277 
Dutch West India Company, 215, 234 -35 

E 

Eagle, Joe H., 524 

Early Roman Coinage (Thomsen), 48, 60-61 

Eastman, E.P., 454 

Eccles, Marriner, 527, 554 

Eck, John, on usury, 188 

Economic Activities of the Jews of 

Amsterdam (Bloom), 215-16 
Economic History of Rome (Frank), 40 
"Economic man," really a monster, 329-30 
Economics, destroys mental processes, 318; 

removes moral considerations, 177-78, 

195-97, 307 
Ehrenberg Richard, 154, 160, 166, 221 
Einzig, Paul, 11,540,608 
Eisenhower, Dwight, (blocks reform) 674 
Electrum coinage, 24, 27, 28 
Ellsworth, Oliver, 399 
England, 251-74, 336-40; see also Bank 

of England; Great Britain 
English National Bank (Proposed), 287 
Enron Corporation, collapse of, 681 
Equestrian Order (Rome), 65 
Ernst, Joseph Albert, 370, 377 
Essays on Money (Law), 397 
Euobic money standard, 26 
Euro, 637, 641, 646-50 
European Central Bank (ECB), 630-39 

632; Federal Reserve compared, 644 
European Community, 630 
European Monetary Institute (EMT), 631, 639 
European Monetary Union, 400, 598-99, 

630-50; fractional reserves, 637-38 
European System of Central Banks 

(ESCB), 630-35, 642-43, 638, 639 

F 

Faridi, 625 

Feaveryear, A.E., 266, 331 



Feder, Gottfried, 590-91, 592-96, 599 

Federal Deposit Insurance Corporation 
(FDIC),531,561 

Federal Reserve Act, 519, 524, 525, 536; 
attempt to repeal, 664-65 

Federal Reserve Conspiracy, The 
(Mullins), 522-23 

Federal Reserve System, 508, 519-33, 
535-50, 559, 560-61, 567, 572, 661, 
669; not audited, 633; Bank of England 
compared, 525-28, 533; European 
Central Bank compared, 644; fractional 
reserve banking system, 530-31, 536, 
552; gold standard, 538; money cre- 
ation, 288; proposed nationalization of, 
664-65; reform of, 663-64; regional 
banks, 536 

Federal budget (myth), 654 

Federalist Papers, 402 

Federalists, 393 

Fenton, Roger (on usury), 1 96 

Ferguson, William S., 6^ 

Fiat Money Inflation In France (White), 
446, 447 

Fiat money, 20, 22, 32, 33, 447; 
Aristotle's support of, 34; bank money 
as, 162; favored by Plato, 35\ Greece, 
25, 26, 31-33; Jevons, 357; limitation 
of issue necessary, 62; Paine, 410; 
Rome, 51, 56; and rule of law, 110; 
United States, 362; Venice, 116, 127, 
129; see also Currency question; Legal 
tender; Nomisma; Numerary system; 
Paper money 

Financial History of the United States 
(Studenski and Kroos), 465 

Fisher, Irving, 672; usury, 189 

Fisher, Sydney George, 460 

5% Contract (usury avoidance), 188 

Floating exchange rates, 612 

Florence, 159-60, 188 

Florin (coin), 122 

Forbannais, M., 218 

Forgery. See Counterfeiting 

Foundations of the Nineteenth Century, 
The (Chamberlain), 591-92 

Foxwell, H,S. (on suppressing history), 308 



714 Index 



Fractional reserve banking: European 
Monetary Union, 637-38; Federal 
Reserve System, 530-31, 536, 552; 
loan creation through, 636 

Frank, Tenney, 41, 94-95; debasement of 
currency not cause of Roman fall, 91; 
Julius Caesar, 6S 

Tiberius Gracchus, 68; Roman mone 
tary system, 54, 59, 75-76 

Franklin, Benjamin, 149; counterfeiting of 
Continental money, 380; labor theory of 
value, 350; money supply, 660; nature of 
money, 315, 396, 657; paper money 
necessary, 4, 371-72, 375, 377, 385-86 

Frazer, James George, 64, 71, 92-93, 358, 
359, 680 

Free banking, 659-60; United States, 438-45 

Free Coinage Act (1666), 269-71, 277, 352 

Free coinage law {16th century), 233 

Free trade, 328-29; and monetary policy, 
311; trade fairs, 1 52 

Freeman, Kathleen, 5 

Freemasonry, 148-49 

Friedman, Milton, 200, 523, 549; Federal 
Reserve System, 524, 526, 538; free 
banking. 660; money supply, 503; 
Panic of 1907, 518, 519; Stock Market 
Crash, 550; Treasury, 517 

Fryer, Lee, 559 

Fugger, Hans Jakob, 165, 177 

Fugger, Jakob, II, 163, 167 

Fuggers, 163-66, 188,576 

G 

Galbraith, John Kenneth, 464 
Gallatin, Albert, 410, 411, 412, 414 
Gallatin, Robert, 421-22 
Gallienius, Gratian, Emperor, 98 
Garrison, Ely, 523, 525, 527 
George, Henry, 318; "economic man" a 
monster, 329-30; study of economics 
destroys the mind, 318; metallic money 
unnecessary, 659; money power, 504, 
512, 673; Smith's selfishness error, 329- 
30; single tax, 674 
Gerboux, M., 218 

German Contract (usury avoidance), 188 
Germany, 575-600 



Gesell, Silvio, 279 

GI Bill, 566 

Gibbon, Edward, 89, 93; coinage crisis, 
91-92; Jewish revolt, 89, 103-04 

Girard, Stephen (slave trader finances 2nd 
Bank ofthe United States) 413,417 

Giro banks, 128 

Glass, Carter, 523-24 

Glass-Steagall Act, 562 

Godfrey, John, 142 

Godfrey, Michael, 279, 283 

Godolphin, Sidney, 293 

Gold, 494; as flat money, 20; commodity 
value, 20; demonetization, 40, 41, 480- 
81; Greenbacks and, 460, 462; inflation, 
538; monetization of, 17-22; 130 grain 
standard, 25, 27; valuation, 19, 20, 60 

Gold coinage, 114; Charlemagne, 114; 
consecration process, 19-20; England, 
253-54; Greece, 26-29; Moslems, 83- 
84; Rome, 59-60, 69-70; sacred prerog- 
ative, 83-85, 90-91; Venice, 122 

Gold inflations, 102-03, 216-17, 351, 538 

Gold Reserve Act (1934), 561 

Gold/silver ratio, 20, 208, 248; 
Byzantium, 114, 121-22; Charlemagne, 
115; collapse of, 563; east/west 
dichotomy, 82-83, 85-88, 105, 147, 
157, 218, 220, 223, 271, 482-83; 
England, 253-54; France, 155; Holland, 
248, 265; India, 116, 218; Moslem 
monetary system, 101-02; refutes polit- 
ical economy, 102, 498-500, 563; 
Rome, 72, 83, 85, 89, 105; Venice, 121- 
22, 123-24 

Gold standard: not automatic, 544; Cross 
of gold speech, 510-12; causes defla- 
tion, 480, 484-85; England, 542-48; 
international standard, 605-09 Rome, 
71, 74, 76; United States, 515-16, 518, 
538,554,561,604,658-59 

Gold Trap and the Dollar, The (Zolotas), 
612-13 

Golden Bough, The (Frazer) 64, 71, 92- 
93, 358, 680 

Goldsmiths, 267-69, 286 

Gonzales, Henry, 567; proposed repeal of 



INDEX 715 



Federal Reserve Act, 664-65 

Gordon, Patrick, 373 

Gorham, _, 400 

Gospels — Their Origin and Their 
Growth, The (Grant), 198 

Gouge, William, 438-40, 441, 442, 444 

Graham, Frank D., 672 

Grant, Frederick, C, 64, 198 

Grant, Michael, 73-74, 88 

Grant, Ulysses, 489, 492-93 

Great Britain, 640-41; see also England 

Great Depression, 548-52 

Greece, 16-48 

Greek Coins (Kraay), 24 

Greenback Era, The (Unger), 472 

Greenbacks, 40, 450, 453-67, 476-77, 
492, 507, 512, 595; as permanent sys 
tem, 475, 489, 509; and gold, 460, 462; 
and creditors, 466-67; counterfeiting, 
454, 460; limitation of issue, 456-57, 
462; removal, 489-90; opposition to, 
470-74, 489-92, 504; and war, 455; 
White's attack on, 447-48, 

Greenspan, Alan, 504, 567-68, 673, 678 

Grenville, , 375 

Gresham, Thomas, Sir, 212 

Gresham's "law," 41, 120, 121, 309 

Grierson, Philip, 60, 97, 101, 102 

Groat (Brugge coin), 168 

Groseclose, Elgin, 545 

Grosso (Venetian), 120-21, 123-34, 126 

Guillebaud, C.W, 597 

Gulliver, David, 423 

H 

Hadrian, Pope, 112 

Hale, Horatio, 364 

Hallam, , 154 

Hamilton, Alexander, 393, 413, 421; 
Bank of United States, 407, 408; gov 
emment bonds, 405; money power, 
399, 402-03; proposes national bank, 
390, 467, 403, 406; promotes national 
debt, 408,411 

Hamilton, Earl J., 672 

Haney, Charles, 345 

Hanseatic League (Hansa), 169-74 

Hardy, C.C, 550-51 



Harley, James, 293, 294 

Harris, Joseph, 374 

Harvey, W.H., 498-99 

Harwood, Edward C., 677 

Harwood, William R., 93, 259 

Hasebroek, Johannes, 24-25 

Hayek, Friedrich von, 443, 445, 446, 568, 641 

economists as propagandists, 445 
Hayes, Rutherford, 494, 500 
Hazlitt, Henry, 446, 447 
Heathcote, Gilbert, 293-94 
Heichelheim, Fritz, 12, 13, 14, 16, 29 
Heiden, Conrad, 593, 595 
Heileges Geld (Laum), 1 1 
Helfferich, Karl, 584, 585, 587 
Helps, Arthur, Sir, 210, 211-12 
Henderson, M.I., 65 
Henry of Ghent, 185 
Henry, Frederick (Amsterdam), 240 
Henry, Robert L., 524 
Hepburn vs, Gmwo/c/ (Greenbacks), 471 
Herodotus, 16, 19, 21-22, 34 
Hicks, John D., 510 
Hirobumi, Ito, 484 
Historical Inquiry into the Production 

and Consumption of Precious Metals, 

r/?e(Jacob), 97, 350-51 
History of the Jews of England (Roth), 259 
History of Currency 1251-1896, The 

(Shaw), 271 ,482 
History of Economic Thought (Haney) 345 
History of Europe (Alison), 273 
History of Japanese Paper Currency, The 

(Takaki), 484 
History of Rome (Mommsen), 84 
History of the Bank of England, The 

(Andreades), 278, 308 
History of the Jews Of Babylon 

(Neusner), 90 
History of the Precious Metals, A (Del 

Mar), 219 
History of the Principle Public Banks 

(Van Dillen), 228 
Hitler, Adolf, 597 
Hobbes, Thomas, 198-99, 256-57 
Hochstetters of Augsburg, 166-67 
Holdsworth, John Thom: Bank of the 



716 Index 



United States, 405-06, 408, 413; 

Morris, 391 
Hollis, Christopher, 266-68, 274, 337-38, 

340; Irish potato famine, 302; pro 

gressive theory of history, 310; 
Walpole, 309 
Holzer, Henry, 196-97 
Hoover, Herbert, 553, 554 
Horsefield, J. Keith, 279, 286 

Howe, , 456 

Hudson, Michael, 13-14 

Hull, Cordell, 536 

Hull, John, 366 

Hume, David, 326-27, 413, 421 

Humphreys, Henry Noel, 41 

Hurgronge, C.S., 624 

Hutchinson, Governor, 374-75 

Hyperinflation (German, under a private 

central bank) 579-83 

I 

Imperial Constantinople (Miller), 85 
Importance of Usury Laws, The 

(Whipple), 345 
*'Impot unique," (Physiocrats) 674 
Imprestidi loans, (Venice) 127, 128 
In Defence of Usury (Bentham), 342, 346 
Income tax, 532 

Independent Treasury System, 426 
Indian wampum, 363-64 
Inflation, 480; Civil War, 464-65; 

Germany, 575, 579-89; and gold, 538 
Innes, A, Mitchell, 530 
Innocent IV, Pope, 137, 183 
Inquiry into the Origin and Course of 

Political Parties in the United States 

(Van Buren), 392-93 
Interest, 158-59; Adam Smith and, 323-24; 

agricultural loans, 12, 13, 14, 29-31; 

impossibility of long term compound 

interest, 346; Lombard pawnbrokers, 

161; and risk, 158, 181; see also Usury 
Interest rates, 12; negative interest rate, 279 
International Bank for Reconstruction 

and Development, IBRD, 620 
International Development Association, 

IDA, 621-22 
International Finance Corporation, IFC, 



621-22 
International Monetary Fund, 609-19; 

Special Drawing Rights (SDR), 604, 

616,618 
Irish potato famine, 288, 301-02 
Iron money, 31-33; Byzantium, 33; 

Sparta, 31-33, 39, 41,357 
Islam. See Moslems 
Israel, Jonathan, 229 

J 

Jackson, Andrew, 394, 454; Bank of the 
United States, 421, 422-25, 426 

Jacob, William, 86, 97, 145, 216-17, 218, 
350-51 

James, Marquis, 425 

Janus/oath scene Roman coin, 59 

Japan, 484-85 

Jefferson, Thomas, 382, 383, 403-04, 
408, 410-13, 434, 435; Bank of the 
United States, 408, 436; money power, 
394; comes to understand money 410-12 

Jenkins, , 60 

Jerome, St., 182 

Jevons, Stanley, 355-58 

Jew in the Medieval Community, The 
(Parkes), 134,257-59 

Jews and Modern Capitalism, The 
(Sombart), 220 

Jews, 146, 158, 349; in Amsterdam, 234; 
accounts at Bank of Amsterdam, 229; 
and Amsterdam Stock Exchange, 238; 
Amsterdam's Ashkenazi/Sephardic pop- 
ulation, 229; and Calvinism, 93, 195-96; 
coin clipping, 261-62; Cromwell as 
Messiah, 263; and drain of precious 
metals eastward, 75; expulsion from 
England, 262; Medieval Jewish Char- 
ters, 258-62; financing William IIF^ of 
Orange's revolution, 272; forbidden 
from engaging in banking, 229; arrive 
in New York, 235; and pirate booty, 
235; responsibility to develop rational 
U.S. mideast poUcy, 681; revoh against 
Rome and massacre of the Greeks, 89, 
103-04; short selling and Ducatoon 
trading, 240; slave trade, 134-35; 
Spinoza ostracized, 238; trading, 132, 



INDEX 717 



134; usury, 181-82, 196,258- 

62; war profiteering, 236 
Jones, A.H.M., 88 
Jones, William, 417 

Juillard vs, Greenman (Greenbacks), 490 
Julius Caesar. See Caesar, Julius 
Just Price, 177-79 
Justinian, Emperor, 83-84 

K 

Kahn, R.F., 185-86 

Keith, _, 370-71 

Kemerer, Edwin M., 536-37 

Kerr, Michael, 493 

Kettle, T.P., 455 

Keynes, John Maynard, 554-55, 559-60, 

596; international central bank, 609; 

International Monetary Fund, 616 
King, Wilford L, 672 
Knapp, George Friedrich, 4, 482, 590-91; 

nature and definition of money, 657, 661 
Knights of Christ, 207 
Knights Templar, 134, 141, 145-49, 157, 

162, 207, 605; suppression of, 124, 147-48 
Knights Templar, The (Addison), \A6A1 
Knox, John Jay, 392, 416, 437, 450 
Knox vs. Lee (Greenbacks), 47 1 , 490 
Kolko, Gabriel, 512-14, 519, 521, 524 
Kraay, Kolin, 24, 60 
Kroos, H., see Studenski 
Kurke, Leslie, 34 

L 

Labor theory of value, 350, Franklin and 

Locke, 350, 396; Marx, 350; Smith, 313- 

315,350 
Land banks, 366, Chamberlains, 284-85 
Lane, Frederick Chapin, 115, 121, 122, 

123, 124, 127 
Langholm, Odd, 178 
Lansing, Robert, 578 
Latham, Alfred, 499 
Latiflindia (Roman), 66, 92 
Latin Federation (Rome's), 46, 54 
Latin Monetary Union, 473, 479 
Laughlin, J, Laurence, 356, 415, 437, 

521,524 
Laum, Bernard, 1 1 , 24 
Law and Principle of Money, The 



(Raithby), 319 

Law, John, 10 ftnote, 294-98, 312, 313, 
446, 662; quantity of money, 325-25 

Le Bel, Philip, 177 

Leather money, 45, 125 

Leffmgwell, 540 

Legal tender, 288, 456; animals as, 51; 
colonial America, 366; see also Fiat 
money 

Leigh, Richard: freemasonry, 149; 
Knights Templar, 141, 146, 148 

Lenormant, Francois, 33, 50, 84 

Leo the Great, Pope, 1 82 

Leo XIII, Pope, 569 

Lemer, Eugene M., 465, 466 

Lessius, Leonard, 178 

LETS (Local Exchange Trading System), 660 

Levantine Trading Company, 234 

Lex Atemia Tarpeia, 50, 51, 60 

Libertarians, 10 ftnote, 676, 677-78, 680; 
see also Austrian School of Economics 

Lincoln, Abraham, 457-58 

List, Friedrich, 320, 328-29 

Liverpool, Lord, 482 

Livy, 19,41,42,51,61 

Loans: Ancient Oriental System, 12, 13; 
through fractional reserve banking, 
636; pawnbrokers, 161, 167; see also 
Interest; Usury 

Local Exchange Trading System (LETS), 660 

Locke, John, 228, 273, 324-25; gold/sil- 
ver ratio, 90, 219-19, 271; labor theory 
of value, 315, 350; money as pledge for 
wealth, 396; nature of money, 657 

Lombard, Alexander, 185 

Lombards, 161 

Longworth, Phillip, 1 1 5 

Lords of Trade and Plantations, 373-74, 
375-76 

Louis the Pious, 114 

Lowndes, William, 283 

Lus, Simon, (banker) 229 

Luther, Martin, 189-92, 193, 203 

Lycurgus (of Sparta), 31-33, 39, 357 

Lyons, Adelaide, 472 

M 

Maclay, William, 409 
Macleod, Henry Dunning, 288 



718 Index 



Madison, James, 391, 394, 402, 437; cen 
tral bank, 416 

Magic of Money, The (Schacht), 583 

Maitland, John, 328 

Malthus, Thomas, 315-17, 325 

Manasseh Ben Israel, 237, 238, 262-264 

Mandeville, Bernard, 325 

Marathon, 90 

Marble, Manton, 487, 489, 493, 498 

Mark, 171,581-89 

Mars/Eagle (Roman coin series), 59 

Marx, Karl, 348-55; Bank of England, 
351; commodity money, 349, 355; 
industry versus labor, 352-54; labor 
theory of value, 350-51; money supply, 
351; paper money, 350; private money, 
352; publicdebt, 351-52; Smith and, 
349-51, 355, 359; socialism, 354-55 

Marshall Plan, 566 

Mason, , 399 

Massachusetts, 367-69 

Mattingly, Harold, 60, 61, 73, 84 

Mayhew, N.S., 156 

McCarthy, Terence, 349 

McCulloch, J.R. 489-90 

McFadden, Louis T., 543-44, 560 

Mcleneghan, Blair, 384-85 

McLane, Louis, 425 

McNeal, John T, 398 

Measure of Value, The (Malthus), 315-17 

Medicis, 159-60 

Medieval Cities {?\XQrmQ), 183 

MEFO transactions, 596-97 

Meir, Robert, 617-18 

Melanchton, Philipp, 191 

Mellon, Andrew, 546 

Melville, Lewis, 298 

Memminger, Christopher, 465 

Menasseh Ben Israel, 262, 263, 264 

Menger, Carl, 26-27, 28, 567, 676; refuta- 
tion of Menger's Theory of the Origin 
of Money, 36, endnote 6 

Merchant banks, 167 

Merchant of Venice (Shakespeare), 341, 651 

Metallism. See Commodity money 

Mexican monetary system, 214 

Meyer, Eugene, Jr., 539, 550 



Mezzodenaro, 120 

Michieli, Doge, 125, 127 

Midas legend, 22-23, 87 

Mill, John Stuart, 327 

Miller, Adolph, 543-44 

Miller, Dean, 85 

Milne, J.G., 33, 45, 60 

Mints, 154-56, 252-53; Athens, 25; deri- 
vation of word, 22; Hull's mint in 
Massachusetts, 366; Smith, 311-12; 
Venice, 121; see also Coinage 

Mintumo coin hoard, 61 

Mississippi Company, 295-97 

Mitchell, Charles E., 549 

Mitchell, Wesley, 462-64 

Mite (Brugge coin), 168 

Mitsui group, 484 

Mixt Moneys of Ireland Case, 255, 311, 350 

Mohammed, 103, 197, 623-24 

Mohammett and Charlemagne (Pirenne), 94 

Molesworth, Lord, 300-01 

Mommsen, Theodore, 51, 84 

"Moneta,"313 

Monetary Crimes, 487 

Monetary History of the United States, A 
(Friedman and Schwartz), 523 

Monetary policy, 2-3; reform, 656, 658- 
84; see also Money supply 

Monetary Research Institute, 545 

Money: as accounting tool, 13-14; 
ancient oriental system, 12-15; as 
assignable debt, 661; credit as, 661; 
definition, 313, 395, 656-57; derivation 
of word, 56-57; differs from credit, 322; 
institutional origin of, 26, 84, 395; 
intrinsic value unnecessary, 28, 319, 
356, 397; nationalization of, 604 ; of 
account, 110, 122, 123; origins of, 9-12, 
16, 20-21; see also specific headings, 
e.g.: Commodity money; Paper money 

Money and Politics in America, 1 755-1 775 
(Ernst), 370 

Money in Ancient Countries (Del Mar), 59 

Money in Ancient Rome (Peruzzi), 43, 44 

Money power, 2-3, 9, 288; and banks, 161- 
63, 518; WJ. Bryan, 510; R Cooper, 
509; European Community, 630, 634-37; 



INDEX 719 



Henry George, 504; Greece, 24-25; 
personalized by Morris, 385-91; Smith, 
320-21, 419; United States, 389-429, 
Van Buren, 392; 518, 538; Wilson, 528 

Money supply, 98, 357-58, 410; Locke, 
324-25; Rome, 62-63; Smith, 313-14; 
United States, 536, 538, 564 

Moneychangers, 158, 167, 168-69 

Moneylenders, 122, 157-68, 161; see also 
Fuggers; Loans 

Monnaes de Antiquita (Lenormant), 84 

Monnaes noire, 157 

Montagu, Charies, 279-81 

"Monte Nuevo" bonds (Venice), 127 

"Monte Vecchio" bonds (Venice), 127 

Montesquieu, Charles De, 321-22 

Montezuma's treasure, 214 

Morality, and economics, 177-78, 195-97, 307 

Morgan, George, 490 

Morgan,J.R, 512-13, 523 

Morgantina coin hoard, 6 1 

Morgenthau-Tannenbaum plan, 597 

Morris, Robert, personalizes the money 
power, 385, 389-91,399 

Moslems, 95-96, 111-12, 114, 116, 197; 
and Christians, 138; and Crusades, 118, 
132-34, 137-40; monetary system, 100- 
01, 103, 623-27; trade with Venice, 
116; views on usury, 122, 623-25 

Muhammad, 197, 623-24 

Mullins, Eustace: Aldrich Plan, 524, 525; 
Federal Reserve System, 522-23, 526, 
537, 539, 560 

Munro, Dana Carlton, 137, 139 

Murphy, Archibald, 437 

Muslims. See Moslems 

Muys Van Holz, Nicholas, 239-40 

N 

National Bank of Philadelphia, 468 
National Banking Act, 1863-64, 467-58, 

467-70, 493 
National Banking Association, 467-68 
National banks, 322, 390, 662 
National Monetary Commission, 518-19 
National System of Political Economy 

(List), 328-29 
Nature and Necessity of a Paper 



Currency, The (Franklin), 372 
Neilson, Francis, 576, 577 
Nettleton,A.B., 473 
Neusner, Jacob, 90 
New London Society for Trade and 

Commerce, 366 
New York Board of Trade, 490 
New York Stock Exchange, 439-40, 492; 

closing, 538-39 

Newell, , 61 

Newton, Isaac, 298 

Nietzsche, Friedrich, 678 

Niles, Hezekia, 438 

Nisab (Islamic), 625 

Nitti, Francisco, 578 

Nixon, Richard, 612 

Noble, 253-54 

Nomisma, 34-35, 145, 357; Byzantium, 

78-79; England, 278; limitation of 

issue, 62; Rome, 105; Sparta, 39, 45; 

Venice, 125 
Noonan, John, 180, 181, 183, 187 
Norman, Montagu, 540, 54 1 
Northcote, Strafford, 486 
Northern Securities, 523 
Noumismata, 50 
Numa Pompilious, King of Rome, 40, 41, 

43, 44-46 
Numerary system, 31-33, 51, 54, 357; 

limitation of issue, 62; see also Fiat 

money 
Nummi, (Roman) 39 
Nummulary system, 50 
"Nummus Spartaeus," 33 
Nussbaum, Arthur, 436 

o 

O'Brien, George, 191 

Olivi, Peter, 179 

Open market operations, 636 

Oresme, Nicolas, 156, 308-09 

Orichalcum, 69 

Origin of Central Banking in the United 

States, The (Timberlake,), 407 
Origin of Metallic Weights and 

Standards, The (Ridgeway), 16-17,26 
Origin of Money, The (Menger), 26 
Origin of Political Parties in the United 



720 Index 



States (Van Buren), 392-93 
Origin of Rome, The (Block), 42 
Overmann Act, p. 532 
Owen, Robert. 660 
Owen-Glass bill, 523-24 
"Owl," (Athenian coin) 28 

P 

Page, Walther Hines, 537 

Paine, Thomas, 383-84, 435, 674; contra 
Bank of England, 292; continental 
currency, 386, 434; social security plan, 
562-63; view of money, 409-10 

Pakistan, 625, 627 

Palestinian State, President supports, 681 

Panic of 1857,454 

Panicof 1907, 517-18 

Paper money: colonial America, 367-69; 
Confederate money, 465-66; England, 
268-69, 287; gold/silver backing a ruse, 
347, 529-30; Marx, 350; United States, 
362, 404, 414-15, 392, 396, 397, 434, 
529-30; see also specific headings, e.g.: 
Fiat money; Greenbacks 

Parallel Lives (Plutarch), 21, 31-32, 40 

Parish, David, 417 

Parkes, James, 134, 135, 257-59, 260 

Paterson, William, 228, 279, 280, 285, 

290, 526, 527 

Patman, Wright, 532, 664, 674 

Paulus, Julius, 79; nature of money, 656 

Pausanius, 21 

Pawnbrokers, 161, 167 

Payer, Cheryl, 620-21 

Peel, Robert, 332 

Peisistratos, 28 

Pelanor, (Spartan money) 32, 45 

Pennsylvania, 370-71 

Pennsylvania Bank, 385, 390 

Penny: Anglo-Saxon penny, 254; silver 

penny, 110-11 

Persian money standard, 26 

Peruzzi, Emilio, 43, 44-45, 48 

Pesoa, Francesco, 222 

Petty, William, 228, 325, 341-42 

Piccoli (Venetian coin), 124 

Piracy, 215 

Pirenne, Henri, 98, 100, 103, 152, 154, 



155, 158. 183; fall of Rome, 94, 95-96; 
medieval moneylenders, 158; scarcity 
of precious metals, 98 

Pius XI, Pope, (on the money power) 
568-71 

"Placcats," (Dutch), 233 

Plato, 54; nature of money, 35-36, 656 

Pliny, 41, 59, 61, 88, 92 

Plutarch, 21, 31-32, 40, 67 

Plutocracy, 666 

Political economists, 307-10; Currency 
school versus Banking school, 331-32 
priesthood for banker*s theology, 305 

Polybius, 32 

"Ponderata,"313 

Pontiac (Indian chief), 364 

Pontifex Maximus, 68, 78, 83, 91, 212; 
control over Rome's money, 68, 78 

Populism, 508, 510, 512, 532 

Populist Revolt, The (Hicks), 510 

Portugal, (and the Cape Route), 220 

Postal Savings System, 517 

Pound, Ezra, 522, 533 

Precious metals: drain to east, 7, 64-76; 
plunder, 109, 145, 217, 232; scarcity, 
98; unnecessary for money, throughout; 
see also specific metals, e.g.: Gold; Silver 

Precious Metals, The (Jacob). 97, 350-51 

Price, 178 

Price, Bonamy, 491-92 

Price indexes, 462-63 

Price, J. L., 238, 247 

Primitive Money (Einzig), 1 1 

Private banks, 158-61, 355-56; 
Barcelona, 161; central banks, 518; 
land banks, 366; merchant banks, 159- 
60; Smith, 319-20, 359, 421; state- 
chartered banks, 436-37; United States, 
436-37, 450 

Private money, 162, 335; compared to 
government money, Chapter 16; forbid 
den in colonies, 375-76; immorality of, 
661-63; Marx, 352 

Protestant Ethics and the Spirit of 
Capitalism (Weber), 201, 202 

Ptolemies, 87-88 

Public Economy of Athens, The (Boeckh), 



INDEX 721 



17-18 
Punic Wars (destroy Roman money), 63-66 
Puritanism, 198,201 

Q 

Quadragesima Anno (Pius XI), 568-71 
"Quadrigatus" (Roman coin series), 54 
Quantity of money. See Money supply 
Querest (Berkeley), 317, 358 
Quiggin, A,H., 10, 16, 17 
Quigley, Carroll, 520, 577, 578, 641 

R 

Rae, John, 329 

Raguet, Condy, 418-19, 421, 437-38 

Raithby, John, 319 

Ramo secco design (Aes Signatum), 45, 46 

Ramsay, , 148-49 

Rand, Ayn, 180, 567, 568, 677; method- 
ological error, obstacle to reform, and 
poor economic thought, 677-79; 
Russian bom as Anna Rosenberg, 678 

Randall, J.G., 455, 464, 485 

Ranney, Rufus P, 470 

Raymond, Daniel, 420, 426 

Real bills doctrine, 516, 524, 529, 535, 542 

Reconstruction Finance Corporation , 558 

Reformation, 192-203, 207, 209 

Refutation ofMenger's Theory of the 
Origin of Money (Zarlenga), 36, endnote 6 

Reichsbank, 579, 581, 583, 584-90, 592, 
594, 597 

Reichsmark, 579, 588-89 

Reinhardt Program (Hitler's), 594 

Religion: and Greenbacks, 471-72; and 
origins of money, 9, 11-12; sacred gold 
coinage prerogative, 83-84, 90; usury, 
340; see also specific topics, 
e.g.: Christianity; Temples 

Rentenbank, 585, 588 

Rentenmark, 584-86, 588-89 

"Requiremento," 212-13 

Rerum Novarum (Pope Leo XIII), 569 

Reserves. See Bank reserves 

Resumption Act, 493-95 

Revolutionary War, 376-86 

Riba (Islamic) 625 

Ricardo, David, 287-92, 323, 330, 419, 
462; attacks private money creation, 



287, 291, 324; Bank of England, 291- 
92, 347; national banks, 421; attacks 
national debt, 290-91 

Ridgeway, William, 5, 16, 20, 26, 50-51 

Ridley, 48 

Rizeamon, Minomura (the "Man from 

Nowhere"), 484 
Roberts, Stephen N., 595 
Robinson, E.S.G., 61 
Rogers, J.E. Thorold, 337-38, 358, 359, 

491; charges a conspiracy, 337 
"Roma," (coinage) 54 
Roman Coins (Mattingly), 60 
Roman monetary system, 31, 34, 39-79, 

83-105; drain of money supply to 

east, 75-76, 88-89; a fiat money, 51-54; 

private money, 61-62; "Romano,'' 54; 

war and, 65-66, 73; see also Pontifex 

Maximus 
Roosevelt, Franklin, 554, 610; closing of 

banks, 556 
Rostovtzef, M., 87 
Roth, Cecil, 122, 134-35, 238, 259, 260, 

262, 273 
Rothbard, Murray, 677 
Rothschild, Alfred de, 501 
Rothschild, James, 487, 498 
Rubios, Palacias, 213 
Rueff, Jacques, 629 

s 

Sabath,A.J., 549-50 

Sadler, Thomas Michael, 338-39 

Saladin, 138-39, 141 

Saracenate, 137 

Scarabs, as money, 1 5 

Schacht, Hjalmar Horace Greeley, 585- 
90; Baghdad railroad, 576; Feder, 
592-97, 599; international currency, 
604; just price, 177-79; Reichsbank, 
580, 583; reveals cause of German 
hyperinflation, 586-88; Treaty of 
Versailles, 579 

Schiff, Jakob, 517 

SchliefFen Plan, 577 

Schliemann, Heinrich, 20, 42 

Scholasticism, 177-89, 203, 307; usury, 
122, 181-89 



722 Index 



Schuckers, IW., 380, 381 

Schumpeter, Joseph, 189 

Schwartz, Anna, see Friedman, M. 

Schweitzer, Pierre Paul, 616 

Scott, Kenneth, 380, 381 

Scott, William A., 524, 527 

Securities regulation, 562 

Seitman, Charles, 33, 61 

Servius Tullius, King of Rome, 46, 48, 65 

Sesterce,(money unit) 50, 56, 62, 88 

Seyd, Ernest, 499-500 

Seymour, Horatio, 487-88 

Shaftesbury, Anthony Ashley, Earl of, 338-39 

Shakespeare, William, 341, 651 

Shaw, Leslie M., 516-17, 533 

Shaw, W.A., 217, 254-55, 265-66, 271, 482 

Sherman Act, 501 

Sherman, John, 493-94 

Short History of Paper Money and 
Banking, A (Gouge), 439 

Short selling, 239-40; 

"Sidareos," (iron money) 33 

Silver, 17, 19, 54; demonetization, 40, 41, 
331, 481-82, 483-84, 492, 495-98; 
"Crime of 73'\ 495; exported from 
west to east, 85-90, 100, 116, 124; 
monetization, 13, 14, 17, 22-34; remon 
etization, 500-01; Rome, 40, 41; United 
States, 563-64; valuation, 33; see also 
Gold/silver ratio 

Silver coins, 110-11, 123, 124; Brugge, 
168; Carthage, 114; Greece, 28- 
29, 33; Rome, 54, 56, 75, 91, 100; 
Venice, 122, 124; see also specific 
coins, e.g. Grosso 

Silver Purchase Act (1934), 563-64 

Silver question, 510-12; see also 
Bimetallism; Coinage; Currency Act 
of March 14, 1900; Gold 

Simons, Henry C, 672 

Slave trade, 94, 294; and debt, 33; and 
Jews, 134-35; United States, 471-72 

Smallwood, E. Mary, 89-90 

Smith, Adam, 5, 43, 105, 289, 310-17, 
336, 369, 552-53, 554, 679; Bank of 
England, 284, 327-28, 397, 407; central 
bank, 407-08; classical monetary 



views, 101; misnamed classical school, 
102-03; colonial money, 374; commod 
ity money, 335, 349, 357, 404, 419, 
530; national bank, 404; free market 
ideology, 552-53, 554, 614, 677, 680; 
interest, 323-24; labor theory of value, 
350; Marx and, 349-51, 355, 359; 
money supply, 351; national banks, 
406; private banks, 319-20, 359, 421; 
Scottish banking, 148; selfishness error, 
312,329; usury, 342; value of gold 
and silver, 102,219; warfare, 291, 
293; see also Classical economics 

Social Security Act (1935), 562-63 

"Societas,'* (type of medieval loan) 181 

Sociological Theory of Capital (Rae), 329 

Soddy, Frederick, 564; against free 
banking, 660; devises 1 00% reserve 
solution, 672 

Solon, 5,26, 29, 30, 31,50 

Sombart, Werner, 192, 200 

Soud'Or, 114 

South Sea Bubble, 292- 

South Sea Company, 292-93, 296, 297- 
99,301,309 

Spain, (effect of American plunder), 217 

Spartan numerary system, 31-33, 357 

Spaulding, E.G., 455-56 

Special Drawing Rights (SDR), 604, 616, 618 

Spinoza, Baruch, (ostracized), 238 

Sprague, Oliver M., 518 

Spufford, Peter: Anglo-Saxon penny, 253; 
German capital towns, 575-76; gold, 
114, 124; mints, 155, 156; Oresme, 
309; silver, 97, 154 

Stabilization of the Mark, The (Schacht), 587 

Stahl,AlanM., 121 

Stanhope, Charles, 301 

State Theory of Money, The (Knapp), 4, 
482, 590-91 

Statutum Judaico, (England), 261 

Stock Market Crash, (1929), 548-52 

"Stoppage of the Exchecquer," 269 

Strabo, 19 

Strauss, Robert, (family bank fraud), 470 

Strong, Benjamin, 526-27, 529, 536, 540, 
541,546-47 



INDEX 723 



Studenski, P., and Kroos, H, 408, 454, 525, 
542, 551, 565; Bank of the United States, 
417; central banking, 523; Greenbacks, 
465; Panic of 1907, 517; private banks, 
436, Kuhn Loeb & Co., 517, 524, 526. 

Suasso, Isaac Lopez, 272, 273 

Suetonius, 44 

"Suffolk system," 441 

Sulla, 67 

Summenhart, Conrad, 188 

Sumner, William Graham, 366, 377, 406, 
438, 458-59, 497 

Supply and demand, 17, 18, 19, 20, 102, 105 

Survey of Primitive Money, A (Quiggen), 1 1 

Sutherland, C.H.V. 60 

Symon, Thomas, 266 

T 

Tacitus, 19 

Taine, Hippolyte, 273 

Takaki, Masayoshi, 484 

Takatoshi, Sokubei, 484 

Talanton, (Homer's), 26 

TaUies, (English), 264-65 

Taney, Roger, 425 

Tariff, 88 

Tawney, 576 

Tawney, R.H., 197; Baghdad railway, 

576; Puritanism, 198,200 
Taxation, 254, 564 
Tcherikover, Victor, 75 
Temple and the Lodge, The (Baigent and 

Leigh), 141 
Temple cults, 16-21 
Temple, William, Archbishop, 571 
Temples; as banks, 24-26, 70, 79; conse 

cration process, 18-19, and prostitution, 19 
"Ten-hours bill," 338-39 
Terrorism, war on, 680-81 
Tewksbury, D.S.,471 
Theodosian code, 89 
Theory of Money and Credit^ The (Von 
Mises), 4 
Thermopylae, 90 

Theory of Moral Sentiments (Smith), 329 
Theseus, 21, 25 

Thomas Aquinas, St., 178-79, 184, 185, 194 
Thomsen, Rudi, 48, 50, 51-52, 59, 60-61 
Tiberius, Emperor, 75 



Tiberius Gracchus, 66-67 

Tiepoio Querini Conspiracy, 123 

Timberlake, Richard, 407 

Timotheus, 33 

Tin money, 33 

Tobacco, as money, 2 1 5 

Tool money, 15-16, 32; Mexico, 214 

Tomesello, Venetian 125-26 

Tovey, D'Blossiers, 237, 261-62, 253, 254 

Toward a Just Monetary System 

(Chopra), 625 
Townsend, E.D., 219 
Townshend, Charles, 299, 309-10 
Toynbee, Arnold, 55, 63-64, 65 
Trade fairs, 152, 605 
Trade and Politics in Ancient Greece 

(Hasebroek), 23-24 
Tragedy and Hope (Quigley), 520, 541 
"Treasurers of the Gods," 25 
Treatise on Money (Keynes), 559-60 
Triens, 111 

Triple Contract (usury avoidance), 188 
Triumph of Conservatism, The (Kolko), 512 
Troelstch, Ernst, 149, 192, 197, 198 
Tuchers of Nurenberg, 167 
"2 Vi unit," of Rome, 45-46, 49, 50 
Two Nations, The (HoUis), 266-68 

u 

Unger, Irwin, 464, 472, 473, 489, 492-93 

Unholy Crusade, The (Godfrey), 142 

United States: banking fraud, 653; 
coinage, 409; colonial money, 361-86, 
434; Country Pay period, 364-65; fed 
eral budget, 653-54; monetary policy, 
433-51; monetary power, 389-429; 
monetary reform. 656, 658-84; paper 
money, 434-35; private banks, 436-45; 
reform of monetary system, 658-94; see 
also specific headings, e.g.: Constitu- 
tional Convention, Federal Reserve 
System, Great Depression, Greenbacks 

United States Monetary Commission, 498 

Urban III, Pope, 183 

Usher, A., 175 

Usury, 122, 177-203, 336-59, 674-75; 
agricultural loans, 13-14, 29; Aristotle, 35, 
184-85, 188, 341, 343-44; Bank of 
England's manipulation of money as. 



724 Index 



278, 336, 340; Calvinism and, 196; def 
inition, 340, 342; England, 259-61; 
Islam, 625; "macro usury," 340-41 
mathematical impossibility of long- 
term usury, 346; Pennsylvania, 370- 
71; riskless usury, 346; scholastic 
view, 178-81, 189; Triple Contract, 188 

V 

Van Buren, Martin, 392, 426-28, 435; 

Bank of the United States, 422, 424-25, 

454;Hamilton, 399, 402-03; 

Independent Treasury System, 426; 
Van Dillen, J.G-, 228, 232, 233, 237-38, 247 
VanderLip, Frank, 523, 525 
Vaughan, Rice, 351 
Venice, 96, 103, 115-29, 142, 220 
Ver Steeg, Clarence L., 391 
Victoriate, (Roman), 59, 62 
Viner, Jacob, 550-51 
Von Humboldt, 218 
Von Mises, Ludwig, 4, 568, 670, 676-77; 

wrongfully attacks Franklin, 4; paper 

money, 372; usury, 189 
Voorhis, Jerry, 673-74 
Vreeland, Edward B. See Aldrich- 

Vreeland Act 

w 

Wade, John, 340 

Walker, Francis Amassa, 18 

Walpole, Robert, 309 

Wampum, 363-364 

War, and money, 160, 236-37; Bank of 
England and, 290; Civil War, 455, 464, 
486; Flanders, 155; Revolution, 376- 
86; Roman monetary system and, 65- 
66, 73; World War I, 536-39, 542, 545, 
579; WWII, 565 

Warburg, Paul M., 523, 526, 530, 536, 
539, 547 

Warren, Josiah, 660 

Washington, George, 405 

Wealth of Nations, The (Smith), 148, 
311, 332, 284, 300, 389, 336, 407 

Weaver, James B., 509 

Weber, Max, 192,201-02 

Webster, Daniel, 424, 425 

Welsers of Augsburg, 166 



Westerman, William Linn, 1 6 

Western, Charles, on deflation effects, 331 

Weston, George, 495 

Whipple, John, impossibility of long term 
usury, legal concept of money, refutes 
Bentham 345-46, 674-75 

White, Andrew Dickson, 446, 447-50 

White, Henry, 576-77 

White, Henry Dexter, 609-10 

Whittlesey, Charles R., 672 

Wicksell, Knut, 185-86; usury, 189 

Wilbur, E.J., 454 

Will, Moses, 263 

William III, King of England, 272-73 

William of Auxerre, 183 

Willing, Thomas, 389, 391, 403 

Willis, H. Parker, 484, 543, 521, 523-24, 
528, 546 

Wilson, Charles, 243, 247-48, 249, 273, 274 

Wilson, Thomas, 1 96 

Wilson, Woodrow, 521, 528, 537, 539 

Wissell bank, 228 

Witherspoon, John, 473; Bank of North 
America, 391; promotes commodity the- 
ory of money, 404; paper money, 397-98 

Wooden money, 45 

World, The, 487, 488, 489 

World Bank, 620-21 

World Bank Group, 620-22 

World History of the Jewish People - The 
Dark Ages, 711-1096, f/^e (Roth), 134 

World War I, 536-39, 542, 545, 579 

World War II, and money creation, 565 

X 

Xenophon, on the "division of labor," 311 

Y 

Young, Roy A., 546 

z 

Zakaa (Islamic), 625 
Zarlenga, Stephen, 36, endnote 6 
Zarqa, Anas, 626 
Zianni, Doge, 120, 127 
Zimmem, Alfred E., 577-78 
Zolotas, Xenophon, 612-13 
Zulm (Islamic), 625