Review of a book by Stephen Zarlenga, American Monetary Institute, NY9: The Lost Science of Money
This is a remarkable book on two counts: the author has staked out a subject in so all-embracing a way that, to my best knowledge, has no precedent. The "hidden science of money," in its misty origins and seductive ambiguities, has always been a happy hunting ground for the devil’s minions. Zarlenga draws a bead on the entire process from its sacral beginnings to the latest financial scandals. With careful documentation he explodes the myth of the founding fathers of economic theory, who, peeping beneath Adam and Eve’s fig-leaves, saw in them destined traders frustrated by barter.
That is to misread what money is about. Considered just as another commodity – gold, silver, or whatever – has little to do with what it is or how it is measured, once it is enlisted as a monetary device. The Greeks called its latter role "nomisma." Its value as such is set not by its worth as a commodity but by the fiat of a political or quasi-political authority that launched its circulation. Thus the value of a paper dollar bill may be five cents if we consider the costs of its physical production. However, as a token claim (or ticket) for the purchase of any commodity backed by the credit of the government, it is worth a whole dollar. And note well, this is not a debt of the government to be paid, but a medium to facilitate the exchange of commodities or other values. Obviously this gap between the "commodity value" of the material substance of the monetary unit and its token worth is a bottomless well of temptation, and must be protected by a strict limit on its issue. Exceed the social need of it and the value of the nomisma will shrivel. "Nomisma" comes from the Greek Nomos meaning law. An earlier meaning of the root is pastureland (the Greeks were originally a pastoral people) with strong hints of a shepherd guiding his flock, but not necessarily to the slaughterhouse.
In that derivation is embedded the forbidden secret of money. Mistake the two valuations of the nomisma with the value of its material content and you have 95 cents of play room for scams. As little-known chapters of history, it has accounted for the purloining of the wealth of empires. Unless a public body retains the power of creating money and keeps alive the distinction between the legal tender that can take the form of paper bills and the worth of the material, inked paper or whatever, society is flying blind, and inviting robbery.
Money was not Just the Result of the Inconvenience of Barter
No single work on so vast a theme can cover all bases. I missed reference to the Homeric poems that bear witness to gifting rather than individual barter as the remote source from which the money concept developed. This aspect was explored by M. Maus and others of the French Durkheim school of sociology. Or the use of cattle as a measure of the piety of religious sacrifice, and then shifting to the bronze, iron or whatever the material of the tools of the sacrificial rites to the nomisma role for the metal itself. There seems to be a greater variety of evidence of the origin of proto-money in religion rather than in trade. While economists sucked out of their thumbs the frustration of barter as the source of the money concept, more serious investigators tested that view and found it wanting. What led them to this conclusion were ancient poems like those of Homer and the customs of primitive peoples today. They concluded that barter when it occurred was rarely between individuals but between tribes or their leaders, and was largely ceremonial. Particularly in ancient Greece, the cow was a measure of value, obviously stemming from its role in ritual sacrifice. The precious metals, rather than a means of circulation of goods and services, were originally accumulated for burial in the foundations of temples and shrines. Temple prostitutes were a common means of attracting precious metals for such pious hoarding, rather than trade. Money arose, then, as a much broader social phenomenon than merely man’s alleged instincts as an irrepressible trader. The sacred roots of money, moreover, have a way of resurfacing even today in darker, demanding ways.
The take-over of the economy by bankers has thus required the suppression of much of our history and literature, beginning with Aristotle and Plato who were explicit on the distinction between the two aspects of money. There were always two distinct and incompatible ways of appraising the precious metals – as plain commodities, and as money or proto-money where the value was what the monarch stamped on a sample of the metal. Treating money as a simple commodity thus requires a high degree of obfuscation.
The introduction of smaller silver coins into ancient Greece introduced money to the small farmers. Previously if they borrowed commodities such as grain before harvest was in, they repaid it in kind. But with the introduction of small silver coins they might borrow the grain when its market value was high and then by the time repayment was due, find the value of the currency in terms of grain had risen ruinously. Or they may have received the loan in money at the Athens rate but were required to pay interest at the Corinthian or Aeginaian rate which could be 50% higher. Where you have several different coining authorities – there were three in ancient Greece – the repertory of possible tricks multiplies. That is why in Sparta Lycurgus outlawed the use of gold and silver as money and introduced iron "cakes," whose usefulness as a commodity was deliberately destroyed by being dipped in vinegar while still hot. Thereby it became unambiguously a nomisma, worthless except as a medium for trading.
When Copper and Bronze were more Useful than Gold
The Romans made a point of keeping the commonly used money strictly nomismata – coins of bronze – a mixture of copper, tin, with a little lead. This was introduced by Rome’s second king, suggestively called Numa (718-672 BC). In this way they were insulated from the influence of the Middle Eastern powers who coined gold and silver as their money.... Gold and silver could be traded in Rome as merchandise, but the ability of the eastern temples or merchants to control and disrupt Rome’s money was greatly reduced by the Numa innovation. The fate of Greece was partly determined by the orientation of its money. Greece faced east; Rome faced West.
It was only during the Punic Wars that the powerful defence thrown up by its bronze currency against foreign monetary intervention was sapped.
J.W. 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: ‘The foreign invader would be driven from Italy if the Oriental Goddess, the Phrygian "Mother of the Gods" were brought to Rome. The small black stone which embodied that mighty divinity (Kybele) was conveyed to Rome. In the very next year Hannibal embarked for Africa. The Phrygian Goddess’ sanctuary was established on Palatine Hill. Some have argued that the cultic success in ridding Italy of Hannibal threw open the gates of Rome to a variety of Eastern cults. But the warfare had already helped bring down the money system and Roman justice with it.
"The ‘commodization’ of Rome’s money system dramatically accelerated the emergence of a plutocracy – a ruling order based on wealth. ‘By the time of the 2nd Punic War there were already significant accumulations of capital in the hands not only of the Roman Establishment, but of a non-Senatorial business class. This capital may have been the fruits of the profits made during the 1st Punic War. Contractors commanded sufficient reserves to make deliveries to the Government on credit from 215 BC onwards.
"Our hypothesis that silver was provided to the mint at a six-fold overvaluation can help explain where the money came from. And the timing also works. (p. 65).
"For 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 warfare didn’t want any interruption to their profiteering."
This eventually brought on a revolt on behalf of the small farmers led in turn by two aristocratic brothers, the Gracchi, inspired by Stoic philosophy. Both were martyred, and the era of Julius Caesar and his dictatorial successors took over. Each of these, while still striving for power, minted his own gold coins. This had a double purpose – financing their attempt to seize supreme power and advertising the extent of power already attained. Under Augustus the ratio of gold to silver was raised to 12:1, and an end was put to coining by patrician families. Julius Caesar had directed his conquest to gold sources, that amongst much else would allow him to handle his huge personal debt. With every new colony founded, a new coining was launched under the Roman stamp to take care of its monetary needs. Despite Rome’s Eastern conquests gold and silver drained off to the east, largely because of the luxury imports by the high-living new rich of Rome. Slaves replaced free labourers on the vast latifundia that took over as usury ruined the small farmers.
All this echoes strangely familiar in the claim of central banks to be independent of their government, no matter what their charters may say. That is notably the case even in Canada and the United Kingdom, where the central governments are in fact the sole shareholder of its central bank with the explicit ultimate responsibility for its basic policy. Moreover, the official goal of "zero inflation" is unrealizable in a pluralistic urbanized high-tech society, in which ever more indispensable infrastructures are provided by the state. The coining of gold was considered the ultimate sign of sovereignty. Strip government of that prerogative, and what is left is no longer a truly sovereign power.
For a later period, after the Roman Empire had declined, it worked like this: The gold/silver ratio in the West was kept high, ranging over millennia, between 9 and 16 to 1. However, the ratio in India and Asia was kept low – usually around 6 or 7 to 1. This meant that silver taken from Europe to India was exchanged for nearly twice as much gold in India as in Europe. The nexus of this 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, giving each establishment a profit on exchange.
"The existence of this dichotomy and its significance is almost unknown (Jacobs, William, The Precious Metals, 1831, reprinted NY, A.M. Kelley, 1968). Alexander Del Mar also discovered it. While the mechanism is still [generally] unrecognized, we can identify its traces in the work of modern historians such as M. Rostovtzef’s Social and Economic History of the Hellenistic World: ‘The Ptolemies [Macedonian successors to Alexander the Great in Egypt] ‘for reasons unknown to us but probably dictated by economics...separated themselves and their Kingdom from the rest of the Hellenized world. It seems to have been an accepted fact that they derived an enormous reserve of gold from the Arabian caravan trade.
"Pliny [the Elder] 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."
It should be made clear that what Zarlenga has to say about the handling of money creation in the contemporary world in no way stands or falls with his espousal of the price ratio of gold and silver in remote and more recent times.
This is how Zarlenga sums up his views on the reasons for the decline of the Roman Empire. "The combined evidence on wealth concentration, the absence of mining, the normal erosion of the coinage through usage and the tendency of the precious metals – especially silver – to flow eastwards, present 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 theory 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."
On the High Social Cost of Commodity Money
Then in his Chapter 4, "Re-Instituting Money in the West," Zarlenga takes an entirely different approach to the question of fiat money – money whose worth does not depend on the intrinsic value of the material enlisted for the money role, but on the credit (a.k.a. these days as the "productivity") of the nation.
"‘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 negatively, 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 money, which in many respects are more of an advanced form of barter than a true money system." For if you consider money just another commodity, three not just two commodities are involved in any exchange.
"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 economic 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 continued well into the 17th, 18th, and 19th centuries. Modern 19th and 20th century money systems, which claimed to be precious metals systems, generally depended on an element of fraud rather than force, as we shall see.
"Thus the advantage to society of having enough rule of law to create that money system is enormous. It is just not 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.
"An early attempt to rebuild the money system was made by Charlemagne (742-814), 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. 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. The alternative would have been an expensive re-minting and the loss to the melting pot of the numerous historical commemorations in the old coins.
"The basis of Charlemagne’s Empire was military conquest and the enslavement of subjugated people, mostly Saxons. Using this extensive slave labor he re-started or intensified precious metal mining at Chemnitz, Kremnitz, and Rauthenberg, mostly of silver, working the slaves to death in the mines. Those slaves not needed for mining were sold to the Moslems through Jewish and Venetian intermediaries. To mint Charlemagne’s silver into pennies, many new mints were opened at Dorestad, Aachen, Bonn, Cologne, Maastricht and Namur. At one point he considered producing all the coinages at his Palace mint at Aachen." That, of course, indicates how much wealth and effort was dedicated to provide the semblance of a commodity currency.
"However, the coinage was still scarce as indicated by taxes being collected mainly in services and produce, rather than coinage." And in the well-known fact that for centuries later, royal courts moved around from royal domain to domain as they consumed the resources grown locally. All this indicated the crushing cost of trying to maintain a commodity money system when there were neither the precious metals nor skills and institutions available for that or the alternate fiat currency."
Zarlenga traces the different ways in which successive regimes exploited the discrepancy between the gold-silver ratio in India and Europe. The Venetians learned to live with the Muslim conquest of the Eastern Mediterranean, by adapting their trading to the Muslim injunctions against the taking of interest. The Venetians replaced it with profits by the Venetian financiers who shared with the active entrepreneurs the actual risks. But those profits included the huge discrepancy in the gold-silver ratio between Europe and Asia. The basis for this collaboration was in Egypt which was kept isolated from the rest of the Muslim world, undoubtedly for this purpose. The Portuguese by discovering the route around the Cape of Good Hope cut into Venice’s monopoly which had brought Italy the Renaissance, and the European basis for the collection of the ratio bonus shifted from Pavia to Antwerp. The Jews came to play an increasing part in communications across the ratio frontier. From Portugal it shifted to Holland, largely because of its prowess in shipbuilding. And from there to England. Then with the discovery of America, far cheaper sources of gold became available.
Zarlenga aims some well-directed irony at Marx’s labour theory of value that joins with an equality signs the value of gold to the hours of average labour needed for its production. The average hours of labour needed for the production of gold might seem irrelevant, given the fact that the gold that flooded Europe after the Spanish conquest of America was not mined by the Spaniards but stolen – once by the Spaniards from the Amerindian civilizations that they destroyed for the purpose, and then much of it by English pirates from the Spaniards. Two radically different social systems reigned on either side of the equality symbols. Moreover the same scenario had been reenacted three hundred years earlier fuelled by the same famine for an exchange medium in Europe that had been bleeding its scant silver into Asia.
"In 1095 Pope Urban II passionately called for an expedition to take Jerusalem from the Muslims. ‘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.
"But after all Moslems had ruled Palestine for over 400 years. The Emperor asked for help in retrieving the holy lands to remove the military pressure the Seljuk Turks placed on Byzantium. At the time the larger part of the Jewish population had moved from Asia to Europe. The occupation of Spain by Islam had brought a wave of Jews with it. Much of the East-West trade was in their hands through Spain. The massacre of Jews in Europe by Crusaders as they left on the first Crusade may indicate that constricting the Jews was a motivation on more than one level.
"But the Papacy also wanted to end the dominance of the Basileus in Constantinople which was apparently still recognized as the supreme religious authority by most of the Western leadership. 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."
The Hidden Monetary Drive behind the Crusades
"All these high level objectives 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 reopened to general Christian traffic. 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 with India. Many poor Crusaders were responsible for the massacres of the Jews. The attacks were said to be religiously motivated in that anyone who accepted baptism was not harmed – for example all the Jews of Trier. However, many massacres occurred elsewhere: in the Church at Rouen; at Speyer 800 Jews killed each other to avoid baptism In Mainz, 1014 Jews similarly died together, and massacres occurred at Altenauhr, Xanten, Mors, Kerpen, Gelden and Cologne (James Parkes, The Jew in the Medieval Community, Hermon Press, New York, 1976). ‘Unless the reader can seize some of the horror of those fatal weeks it is not possible to understand the hatred of Jews of the Middle Ages for Christianity and for those Jews who accepted it.’
"When the Crusaders reached Constantinople they were awe-struck by the sight of the great walled city. Nothing like it existed in the West. The various leaders took oaths of loyalty to the Emperor and agreed to give him all conquered territories. The Army went on to Jerusalem, remaining orderly in spite of poorly planned logistics. 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 to Constantinople. Somehow on July 15, 1099, they took Jerusalem, and an ecclesiastical Kingdom was set up there with Godfred de Bouillon as king. They then took one city after another, perpetrating many horrors in the name of Christianity.
"Christian behaviour contrasted poorly with that of the Muslims, especially Saladin the Great. A Kurd born at Takrit, Saladin had united the Muslims to fight the Crusaders. In 1183 he retook Jerusalem, granting merciful terms. Saladin’s guards kept such order that no Christian suffered any ill usage.
"Over time the Crusaders, always a small minority in the cities they conquered, became orientalized. They inter-married with the ‘infidels,’ and didn’t think much of home. Both Christian crusaders and Moslem defenders eventually sought alliances in battles against co-religionists. Christians came to boast of Moslem descent. The Moslems had preserved elements of Greek learning and Roman law in a better form than the West. Despite the Clergy’s falsified reports on conditions in the Holy Land, the fame of Saladin the Great spread throughout 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 reason to question their faith. This led to a new freedom of mind in some individuals. One important result of the 1st Crusade was the formation of the Knights Templar, originally called the Poor Knights of the Temple of Solomon. They were formed in 1114-18 to protect pilgrims in the Holy Land. Questions have arisen as to their humble origin and goal.
"‘The evidence suggests that this avowed goal was a facade and that the Knights were engaged in a much more ambitious, grandiose geopolitical enterprise (The Temple and the Lodge, Arcade, Little Brown, 1989). 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 4th Crusade. The nine Knight members in 1128 included Fulk, Comte d’Anjou (father of Geoffrey Plantagenet and grandfather of Henry II, King of England), Comte de Champagne; and Hughes de Payens, who became the order’s first Grand Master. Within one year they owned lands in France, England, Scotland, Spain and Portugal. Within a decade their possessions would extend to Italy, Austria, Germany, Hungary and Constantinople. By 1150 the Temple had begun to establish itself as the single most wealthy and powerful institution in Christendom, with the sole exception of the Papacy (Dana Carlton Monroe, The Kingdom of the Crusades, Port Washington, Kennikat, 1966).
The Father of a Thousand Forgotten Novels
And here the plot thickens to father a thousand forgotten novels. "Byzantium had obstructed the 3rd Crusade and formed an alliance with Saladin, who held Jerusalem. Elements in the West, including the leadership of Cluny, France’s greatest religious house, and especially members of the Cistercian Order, plotted Byzantium’s downfall. The plan was to divert the 4th Crusade into an attack on Constantinople under the pretext of re-instating Emperor Isaac and his son Alexis, who had been deposed in a palace coup. Venice’s fleet would be crucial. 95-year-old Enrico Dandolo readily agreed to lead the expedition. He had been partly blinded by Byzantine officials, a favorite method of torture. The appearance of the Venetian fleet in the harbour of Constantinople was enough to make the acting emperor flee and have the deposed Emperor Isaac reinstated, but when his son told him of the agreement made to cede religious sovereignty to Rome, he objected. When the Byzantines learned of the agreement in January 1204, they murdered both father and son and installed Canabus as Emperor." With sovereignty Rome and countless principalities in Europe would revert to do their own coining of gold and silver.
"On April 9th, the Crusaders attacked and defeated the Byzantines. From April 13 to 15 the Christian invaders were turned loose on the greatest Christian city in the world. They went wild. 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 by Constantinople over nine centuries from the ancient temples. All were melted down into bullion or coin. Thousands of manuscripts and parchments from many personal libraries were now burned and from that time on the works of many ancient authors disappeared altogether.
"Baldwin of Flanders was elected Emperor and Venice took control of the Patriarchy and Churches. The loot was gathered up and divided. The Pope ratified these decisions. The schisms between the Latin and Orthodox churches became irrevocable. Michael 8th recovered Constantinople from the Latins in 1261. It fell to the Ottoman Turks in 1453.
"The fall of Constantinople in 1204 formally ended the Empire’s monetary powers, which had held sway in Europe from the time of the Caesars.
"The ‘secret’ dynamic behind this ‘sacred’ monetary system 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, control of money slipped from 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. Frederick 2nd assumed the sacred prerogative of the Basileus and minted gold coins at Naples in 1225. Local rulers all over Europe began minting gold coinage.
"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 their loot into the official pool, which totaled about 400,000 marks weight worth of 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 (William Jacobs, The Precious Metals). The return of this metallic plunder to Europe gave a crucial monetary 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 system could function. Nomisma could be introduced. The hoarded coinage and bullion had been less than useless in Constantinople, where it required heavy storage expenses and served as a magnet attracting conquest. 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 individual crusaders and by the Knights Templar in their growing financial activities."
-- from Economic Reform, January 2005