Given on Dec. 4, 2003.
THE LOST SCIENCE OF MONEY –
A SOLUTION TO THE STATES’ FISCAL CRISES
I thank the US Treasury for inviting me. It’s a great honor and opportunity to bring the research results of the American Monetary Institute to your attention, which are relevant to the developing fiscal crises faced by several states. Part of our 501(c)3 mission statement is to do just that.
The fiscal problem has its roots in the structure and control of our monetary system, and I intend to show how that structure has ultimately been based on a false or inadequate concept of the nature of money.
THE PROBLEM IS THAT MONEY HAS NOT BEEN ACCURATELY DEFINED
Perhaps the chief failure of economics is its inability, from Adam Smith to the present, to define or discover a concept of money consistent with logic and history. Economists rarely define money, assuming an understanding of it.
It’s still being argued whether the nature of money is a concrete power embodied in a commodity like gold, or whether it’s a credit/debit issued by private banks. Does its value come from the material of which it is made? Or is it, as we have concluded, an abstract social power – an institution of the law – having value because it is accepted in exchanges due to the sponsorship of government?
The correct answer leads to conclusions on the proper monetary role of government; whether the power to create and control money should be lodged, as at present in a somewhat ambiguous private issuer – the Federal Reserve System and its member banks – or should be wholly reconstituted within government. An accurate concept of money will light the way to solving the present fiscal crisis.
IN DEFINING MONEY, METHODOLOGY IS CRUCIAL
We have two basic approaches to understanding money: A theoretical method based on logic; and an empirical approach based on experience or history. Practitioners of the two methods arrive at very different conclusions. Theoreticians usually support private commodity money and private credit money. Historians normally want a much larger role for government.
Alexander Del Mar the great monetary historian 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 principles of this imaginary knowledge.”
Today we’ll examine some historical cases where important principles clearly stand out.
Lets start with Aristotle (384-322 BC), who gave the culmination of Greek thought and experiment on money around 330 BC:
“All goods must therefore be measured by some one thing…now this unit is in truth, demand, which holds all things together…but money has become by convention a sort of representative of demand; and this is why it has the name nomisma – because it exists not by nature, but by law (which in Greek was nomos) and it is in our power to change it and make it useless.” (See The Lost Science of Money, (LSM, Ch. 1) (ARISTOTLE SLIDE)
So Aristotle calls money a creature of the law. Not a commodity from nature but an abstract social institution. Its essence is not tangible wealth in itself, but a power to obtain wealth.
This is regarded as a supremely important distinction – between money and wealth. If you are always trading in “things” it’s just an advanced form of barter.
PLATO Agreed With Aristotle and advocated fiat money for his Republic:
“The law enjoins that no private individual shall possess or hoard gold or silver bullion, but have money only fit for domestic use. …wherefore our citizens should have a money current among themselves but not acceptable to the rest of mankind….”(Laws) “Then they will need a market place, and a money-token for purposes of exchange.”(Republic)
So both Aristotle and Plato noted the paramount principle – that the nature of money is a fiat of the law, an invention or creation of mankind. This principle, part of a lost science of money, must now be relearned in the 3rd Millennium in order to achieve the monetary reforms needed to move back from the brink of nuclear disaster, to move away from a future dominated by fraud and ugliness, toward a world of justice and beauty.
Significantly, the term “nomisma” is seldom found in early Greek texts. It’s in Herodotus in the 400s BC, but not again until Aristotle, over a hundred years later. This concept of money was probably suppressed in an ongoing struggle between oligarchic forces – a kind of “old Boy Network” relying on personal relations, arrayed against public money, and the developing, more democratic, public sphere of the Greek Polis, which introduced and controlled the nomisma payment mechanism. (LSM, Ch. 1)
This “private vs. public” battle for the control of the money power is part of a great ongoing social battle recurring throughout history to this day. This factor shapes the most important outcomes determining how well a money system works. A good system functions fairly; helping the society create values for living. A bad one obstructs the creation of values; places special privileges in the hands of some to the disadvantage of others, and promotes unfair concentrations of wealth and power, and disharmony and social strife.
PUBLIC (Government) MONEY HAS A SUPERIOR RECORD
Now it may be surprising, but the historical record actually shows that publicly controlled systems function much better than private ones. Furthermore, it shows that the concept of money – how money is defined – usually determines whether the system will be publicly or privately controlled. So there is a lot at stake in how a society defines money. (LSM, Ch. 16)
Here are two ancient cases from Greece and Rome based on Aristotle’s NOMISMA concept of money:
Lycurgus Spartan Pelanors
Plutarch describes an example of this nomisma in his discussion of Lycurgus of Sparta’s 8th century BC monetary reform, aimed at a society where wealth had become overly concentrated. Lycurgus banned using gold and silver and instituted iron slugs called Pelanors for Sparta’s money system. Furthermore those iron pieces were dipped in vinegar while hot, to render them brittle and to purposely destroy any commodity value that they had as iron! They received their value through legal sanction. This system of iron nomisma lasted about 350 years and Sparta became a premier power. Plato confirms that Sparta’s iron money was rendered useless with the vinegar treatment, and remarked that it was based on the “Dorian System” indicating the existence of an earlier tradition. (LSM, Ch. 1)
Republican Rome Used a Similar System
Rome isolated herself monetarily, basing her money on copper. This “disenfranchised” the gold/silver hoards and therefore much of the power of the East. While gold could still be traded in Rome as merchandise; without the monetary power, the ability of the East to control or disrupt Rome’s money would be reduced and she had a better chance to control her destiny.
Republican Rome used Aristotelian Nomisma, where bronze discs were valued far above their commodity values. Under this money, she grew powerful, staying independent from the East. (LSM, Ch. 2) (AES GRAVE SLIDE)
When the US rose to become the dominant world power, we didn’t have this advantage of monetary isolation. But during the two great crises of our nation – the Revolutionary War, and the Civil War – we erected money systems independent of Old World Power: the Continental Currency and the Greenbacks. And though both have been severely criticized, they served our nation well. (ROMA COIN, DENARIUS, OATH SCENE SLIDES)
Rome won the Punic wars, but her money system was destroyed in the process and she regressed to the metals systems of the East. First to silver, and then with the imposition of Empire, Julius Caesar established a gold standard based on the weight system of the ancient temples. The growth of plutocracy accelerated; wealth concentrated in its hands and the population degenerated into slavery. Adopting the East’s commodity money caused power and even the Empire’s headquarters to shift eastward to Byzantium.
[Today one often hears moralistic warnings about Roman inflation destroying the Empire, but on closer examination, it appears that deflation was a much greater problem. There were several great causes for this, which we can discuss in the question period if anyone asks. (Weight of Bezant was constant. 1. No mining; 2. Only Pontifex Maximus could mint gold coins; 3. Silver continually draining East; 4. False concept of money as commodity)] (LSM, Ch.2 & 3)
The breakdown of law and money continued to operate negatively, the one upon the other for centuries, in a slow downward spiral of societal decay, especially in the West, where the administration couldn’t stop the city of Rome from being temporarily overrun. In this context the concept of money regressed back to crude metallism. (CHARLEMAGNE slide)
CHARLEMAGNE attempted to re-institute money in the West around 800 AD. But minting his pennies depended on working slaves to the death in his silver mines. (LSM, Ch. 4) (PENNY slide)
When Charlemagne’s Empire ran out of conquests and slaves, the money system faltered. This plunder/conquest/slavery basis of precious metals systems continued well into the 19th century. Modern 19th and 20th century moneys claiming to be precious metals systems, depended on an element of fraud as we’ll see.
EUROPE’S MONEY SYSTEMS became more functional only after the plunder of the Americas. The total loot taken at gunpoint from the Indians from 1500 to 1700, was over 1200 tons of gold and 60,000 tons of silver! These amounts far overshadowed European supplies, and prices rose about 400 to 500% during that time.
The theft was their minor offense. Estimates place the Indian population under Spanish control at 32 million souls and in less than 40 years they killed about 15 million of them; working most to the death in silver and gold mines. For example, at a mine near Mexico City one report states:
“For half a league round the mine, and for a great part of the road to it, you could scarcely make a step except upon dead bodies or the bones of dead men. The birds of prey coming to feed on these corpses darkened the Sun.”
Spain did the dirty work on the ground, while England and Holland formed companies – privateers – to raid the Spanish fleets intercepting much of the loot. (LSM, Ch. 8, POTOSI COIN slide)
This was a very rare period where the supply of new gold actually kept pace with population growth. Historically it hasn’t done this, and so a gold money system has usually been a formula for deflation. As this “blood stained money” entered Europe it had profound effects, forcing great structural changes in economies, distributing wealth more broadly and creating a “Renaissance of the North.” The Reformation is usually given the credit for the dynamic developments this influx of new money helped produce in northern Europe.
THIS INFLOW OF METAL HELD BACK monetary thought in metallism. Even so, the principles of the science of money re-emerged from time to time as in England’s 1601 Mixt Moneys case, or the writings in Bishop George Berkeley’s Querest in 1735.
BUT THEN IN 1776, ADAM SMITH’S WEALTH OF NATIONS took a giant leap backward and formally obliterated any concept of money in the law, by defining money this way:
“By the money price of goods it is to be observed, I understand always, the quantity of pure gold or silver for which they are sold, without any regard to denomination of the coin.”
He thereby regressed the concept of money backwards from an advanced nomisma based in law, not just back to a “Moneta” level of unlimited coinage, but all the way back to “Ponderata,” pure metal by weight. This was where the concept of money had been before the Romans arrived in England – even more backward than the Ancient Oriental money systems which had at least monetized agricultural commodities.
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 to this day. (LSM, Ch. 12) Interestingly, Karl Marx followed Smith’s misdefinition of money.
The Bank of England Had Usurped England’s Money Power from the Crown in 1694, after Dutch William 3rd of Orange took over England. It signaled a recovery of the science of money, but it was organized privately for the power and profit of a small group instead of the whole nation.
Recounting the stealth with which this “revolution bank,” was formed, bank founder William Paterson remarked:
“The very name of a bank or corporation was avoided, though the notion of both was intended, the proposers thinking it prudent that a design of this nature should have as easy and insensible a beginning as possible…But it was found convenient to put it to hazard and expose so much of the nature of the thing…as was needful to have it espoused in Parliament.” (LSM, Ch. 11)
Until then England’s monetary power was in the Monarch’s hands. But from this point, bank of England credits – its notes and book credits – would be substituted in place of public money.
This has promoted a confusion between credit, and money, to this day. But they are different things. Credit depends on the creditor remaining solvent. REAL MONEY DOES NOT PROMISE TO PAY SOMETHING ELSE.
Credit can legally be improperly made into money, but it’s not itself money. Money is on a higher order than Credit. It is unconditionally accepted as payment. Monetizing bank credit places special privileges into the hands of bankers, to the detriment of the nation. Furthermore “Credit expands when there is a tendency to speculation, and sharply contracts just when most needed to assure confidence…,” wrote Henry George.
Those behind the Bank of England obscured the real source of the Bank’s power – ITS LEGAL PRIVILEGE – its notes were accepted as money by government.
Using the principles of money for such private purposes produced harmful results: 120 years of near continuous warfare, spawning an unpayable national debt, leading to excessive taxation which led directly to horrors such as the Irish Potato Famine.
[Before then, when a nation’s money system was used for taxation, the revenue generally aided the society at least in terms of what a Republic or King thought was needed.] But private moneys like the Bank of England’s concentrated society’s resources into a few hands, crippling the possibility for government to function properly, leading to a growing contempt of government.
OUR AMERICAN EXPERIENCE contains many of the best “case studies” for understanding money. We have been a great monetary laboratory – every conceivable solution was tried at some time, and we’ve been a paper money nation from Colonial days. Our development was inseparable from it – without it there’d be no United States.
English and Dutch laws forbade sending coinage to the colonies, placing them in continual distress. The intent was to extract raw materials, not for the colonists to trade with each other. An early form of globalization. The Colonies had to devise monetary innovations. (LSM, Ch. 14 & 15)
In the country pay period (1632 – 92) 17 different commodities were monetized by law at specified prices. It didn’t work – everyone wanted to pay with the least desirable commodity, in the worst condition.
1633 – Virginia and Maryland monetized tobacco, issuing warehouse receipts for it. A bumper crop in 1639. Half crop was burned; debts were reduced 60%
1652 – Hull’s mint in Massachusetts stamped the and silver “tree coinage.” But it quickly flowed to England and was melted down. (PINE TREE COINS slide)
Private land banks were set up but were shunned by the colonists, who considered money a prerogative of government, as it was in England until 1694.
Then in 1690, 4 years before the Bank of England, Massachusetts embarked on a radical course and issued paper bills of credit, spending them into circulation. Rather than a promise to pay anything, they were a promise to receive them back for all payments to the commonwealth. The colony thrived. Other colonies copied them and INFRASTRUCTURE arose. (Mass bill of Credit slide)
In 1723 Pennsylvania’s system loaned the bills into circulation, charging interest on them and using it to pay colonial expenses. Ben Franklin wrote:
“Experience, more prevalent than all the logic in the World, has fully convinced us all, that paper money has been, and is now of the greatest advantages to the country.”
In Franklins’s words, one detects atension even then, between theoretical argument and practical experience, a continuing battleground in economics today. (Franklin slide)
Some long lost principles of the Science of Money quickly resurfaced:
- Money need not have intrinsic value; its nature is more of an abstract legal power than a commodity.
- Accepting the government paper back in taxes was the key feature needed to give it circulating value.
- The quantity of money in circulation had to be regulated to maintain its value.
- They observed that paper money helped build real infrastructure.
- Most importantly, the colonies did not issue more money than their legislatures authorized. They have an outstanding record issuing currency. Of over a hundred colonial issues I found only one case of fraud. In Virginia, a Mr. Robertson who was supposed to be burning the old notes as new ones were printed, was giving them to friends instead.
BUT IN THE BATTLE FOR MONETARY DOMINANCE the colonial monetary experience has been miscast as irresponsible inflation money. This was the result of 18th century Boston’s medical Dr. William Douglas’ inaccurate writings. The error was corrected by Alexander Del Mar in 1900 in The History of Money in America, but was ignored. It was authoritatively cleared up again by Professor Leslie Brock in 1976 and again ignored. Many economists, and especially the libertarians still haven’t got the message that colonial government paper money was crucial in building the colonies.
In 1764, England’s Lords of Trade and Plantations prohibited all colonial legal tender issues, and that became the underlying cause of the American Revolution, not some tax on tea.
(Continental Currency slide)
THE CONTINENTAL CURRENCY became the lifeblood of the revolution. $200 million were authorized and $200 million issued. The Currency functioned well. In late 1776 the notes were only at a 5% discount against coinage, when General Howe took over New York City and made it a center for British counterfeiting. The Brits counterfeited billions; newspaper ads openly offered the forgeries; yet English General Clinton complained to Lord George Germaine:
“The experiments suggested by your Lordships have been tried, no assistance that could be drawn from the power of gold or the arts of counterfeiting have been left untried; but still the currency … has not failed.”
In March 1778 after 3 years of war, it was at $2.01 Continental for $1 of coinage.
The Continentals carried us over 5½ years of Revolution to within 6 months of its final victory. Thomas Paine wrote:
“Every stone in the Bridge, that has carried us over, seems to have a claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten.” (LSM, Ch. 14) (TOM PAINE slide)
OUR CONSTITUTIONAL CONVENTION considered two grand themes of humanity:
First whether mankind could be self-governing or had to be ruled by authority. Often referred to as the American experiment. We are still learning the outcome, and one of the reasons it’s still in doubt is because of the way the Convention mishandled the other grand theme – which was over the nature money.
By the time of the Convention, the great benefits of the Continentals was nearly ignored; along with much of the rest of our hard won monetary experiences. Some wanted to emphasize that the Continentals became worthless and rejected the idea of paper money altogether.
They ignored that paper money was crucial in giving us a nation; that abstract money requires an advanced legal system in place; that the normal method of assuring its acceptability is to allow the taxes to be paid in it. Then there was the matter of a WAR against the world’s strongest power.
Tom Paine said it best:
“…But to suppose as some did, that, at the end of the war, (Continental Currency) 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.”
The convention met from May to September 1787 but the money subject didn’t come up until August 16. Remember, Jefferson and Paine were not there. Franklin was too old to speak.
A curious book on money appeared just then, written anonymously by Calvinist Minister John Witherspoon, – the only clergyman signer of the declaration of Independence. The book attacked Government money and promoted Adam Smith’s view that only gold and silver are money. He stonewalled our hard won colonial monetary experience. (Witherspoon slide)
The power for government to properly create money, long considered as a necessary part of sovereignty, was contained in 5 magic words – to emit bills of credit. This provision was already in the articles of Confederation, but the Federalists – the merchant/commercial interest, largely responsible for calling the Constitutional Convention in order to strengthen the national government, fought to exclude this monetary power, from the new government, arguing that it could not be trusted with it! Some of them intended to get hold of the power privately as had been done in England.
THE SUPREME IMPORTANCE of the concept of money now becomes evident: For if money is primarily a commodity, convenient for making trades, which obtains its value out of “intrinsic” qualities, then it could be viewed more as a creature of merchants and bankers than of governments.
But if the true nature of money is an abstract social institution embodied in law – obtaining its value largely through legal sanctions, then its more a creature of governments, and the Constitution had better deal with it adequately. Describing how a uniform currency is to be provided, controlled and kept reasonably stable, in a just manner. It was on this crucial question that the Constitutional Convention faltered.
The delegates accepted Adam Smith’s primitive commodity definition of money as gold and silver and didn’t firmly place the monetary power into government, leaving it ambiguous. Later they’d argue over what they had done.
But the power would still exist, since it is as important as the legislative, judicial and executive powers.
I am suggesting that the nature of human affairs requires government to have four branches, not three; the fourth branch to embody and administer the monetary power.
The Constitution trusted the people with the political power; but didn’t firmly place the monetary power in their government. This (along with slavery) is the Original Sin of American Politics! As a result the power was left up for grabs. Alexander Hamilton wasted no time in “grabbing.”
My neighbor Martin Van Buren 8th US President wrote a great book on the Convention – The Origin of Political Parties in the US. He spent time with Jefferson in Virginia – discuss.
Hamilton And The Money Power Attack – First The Bond Theft
The Constitution went into effect in late 1789; Van Buren described Hamilton’s first move as Secretary of the Treasury, in 1790:
“Hamilton assumed some $15 million of the state debts…an act…neither asked nor desired by the states, unconstitutional and inexpedient…”
What was so bad about it?
“A large proport ion of the domestic debt (was held by) the soldiers who fought our battles, and the farmers, manufacturers and merchants who furnished supplies for their support….When it became known to members of Congress, which sat behind closed doors, that the bill would pass…every part of the country was overrun by speculators, by horse, and boat, buying up large portions of the certificates for (pennies on the dollar).” (LSM, Ch. 15)
Madison, attempted to have the law pay speculators less than the original holders, but was voted down.
NEXT HAMILTON AND ASSOCIATES, HAVING KEPT THE MONETARY POWER out of government hands, moved to assume it themselves. The Bank of North America was the only bank in the US, formed in Pennsylvania on Tom Paines initiative to assist the revolution. Arguing that it was only a state bank, Hamilton suggested it come forward if it wanted to alter itself for the national purpose. Curiously, the Bank took no steps toward this obvious increase in profit and power.
Hamilton’s Federalists quickly put through legislation to charter the First Bank of The United States, as a privately owned central bank on the Bank of England model. The Bank would be issuing paper notes not really backed by metal, but pretending to be redeemable in coinage, on the one condition that not a lot of people asked for redemption! They really did not have the coinage. The bank would do what they had blocked the government from doing! Print paper money.
Thus the real question in practice was whether it would be private banks or the government that would create paper money. Will the immense power and profit of issuing currency go to the benefit of the whole nation, or to the private bankers? That’s always been the real monetary question in this country. (BANK OF US NOTE slide)
While gold and silver served as a smoke-screen what the bankers really counted on, were the legal considerations of the money. They knew that all that was needed to give their paper notes value, was for the government to accept them in payment for taxes. That, and not issuing too excessive a quantity of them. Under those conditions, the paper notes they printed out of thin air, would be a claim on any wealth existing in the society.
And we see why the Bank of North America was not put forward for this purpose: the U.S. Government had owned 60% of it. Thomas Willing resigned the Presidency of the Bank of North America, to become President of the first Bank of The U.S. The government would only own 20% of the new bank.
Just where did the money for first Bank of the U.S. came from?
The $10 million share subscription for the banks shares, was oversubscribed within 2 hours. Less than 1/10 of it was ever paid in gold. The rest of the payment was accepted in the form of bonds – the very government bonds that Hamilton had turned from pennies on the dollar to full value. So you see where the money for the bank actually came from – from the American people!
THAT’S HOW PRIVATE CENTRAL BANKING STARTED IN AMERICA!
Even if the bank had “faithfully” stuck to gold and silver, the nation’s monetary power would still have been alienated to the east – to the European holders of those commodities. Same people we’d just fought the revolution against!
Thanks in large part to Jefferson’s efforts, the bank was liquidated in 1811. Three quarters of it was found to be owned by Europeans – English and Dutch. (LSM, Ch. 15)
THE 2ND BANK OF THE U.S. – THE BANK FROM HELL
operated illegally from inception, accepting IOU’s instead of the required gold in payment for its shares. So again the banker’s gold “requirement” turned out to be a masquerade.
This private central bank immediately embarked on a wild monetary expansion. Beginning operations in April 1817, by July it had 19 branch offices and had created $52 million in loans on its books and an additional 9 million in circulating currency, based on gold and silver coin reserves of only $2.5 million. This tremendous expansion caused a wild speculative boom.
Then in August 1818, the bank turned abruptly and began an insane contraction, causing the panic of 1819. It cut its outstanding loans and advances from a high of $52 million, down to $12 million in I819. Its circulating notes dropped from $10 million to $3.5 million in 1820. A massive wave of bankruptcies swept the nation.
The subsequent history of this bank and its fight to the death with President Jackson reads like a financial soap opera. The story of various state chartered banks is similar.
MEANWHILE THE US GOVERNMENT ACTED RESPONSIBLY
In the aftermath of liquidation of the first and second Banks, the US Treasury notes were responsibly substituted in place of banknotes. About $65 million were authorized and only $37 million actually issued. The U.S. Treasury spent them into circulation. Initially they were all large denomination, paid interest; were redeemable in gold and required formalities to transfer. By 1815 they became bearer certificates with no redemption date, paid no interest and were in smaller denominations. Thus they were nearly a true money form. The fact is that the US government has always acted responsibly in creating money. Not so the private banks! (LSM, Ch. 16)
THE GREENBACKS WERE ON BALANCE OUR BEST MONEY SYSTEM TO DATE
Thanks to 100 years of misreporting, the image of the Greenbacks coming down to us is inflated or worthless paper money. In fact, $450 million were authorized and $450 million were printed. Counterfeiters couldn’t duplicate the Greenbacks. Every Greenback was eventually exchangeable one for one with gold coin. (Greenback Photo)
But Greenbacks were not promises to pay money later – they were the money.
Since they were not borrowed, they did not give rise to interest payments and did not add to any national debt. The U.S. Treasury printed them and spent them into circulation.
Economists usually harp on the Greenbacks dropping to 36 cents in gold, and they leave it at that. While that happened, its highly misleading. Here’s the whole picture. Ultimately the greenbacks exchanged one for one with gold coinage. (Greenbacks Vs Gold CHART)
Some claim the Greenbacks kept value because later legislation called for redeeming them in gold. But that unnecessary Resumption Act couldn’t pass til 1874 for implementation in 1879. That couldn’t have caused the Greenbacks to start rising in July 1864. What did happen was that in June 1864, Congress limited the amount of Greenbacks to $450 million.
There was inflation but remember 13% of the population was fighting a terrible war. 625,000 died. Greenbacks performed well despite being spent on destruction as this horrific scene from Gettysburg shows. They were also being abused by the bankers. For every Greenback created by Congress, the banking system created $1.49 in Bank notes. (XXX GETTYSBURG slide)
WHAT IF instead of being spent on destruction, they went into building infrastructure, and canals and roads? Spending such money on infrastructure need not be inflationary. For example the Erie Canal lowered freight prices from $114 a ton down to $9 a ton.
THE GREAT LESSON OF THE GREENBACKS
Is That In Times Of Crisis – and other times too – our nation has Power to do what is financially necessary, through our government. We don’t have to beg or borrow money from the wealthy and, create an astronomical national debt. We don’t have to tax the middle class into oblivion, or cancel necessary programs. We can carefully use the nations’ sovereign money power far more than we presently have been allowed to realize. The Treasury – You Fellows – could have an indispensable Key role to Fulfill in this. Many of you already know this. (LSM, Ch. 17)
At the time of the greenbacks there were also those who fully understood. Senator Howe said:
“The Government may be able to borrow from the banks, but the Government cannot borrow coinage of the banks…but (only) their promises to pay money. …We must rely mainly upon a paper circulation; and … 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.”
To have done with shams and deal with realities – sometimes that requires a crisis, to activate us.
THE STRUGGLE between private versus public control of money continued throughout the 19th century. The Greenbacks continued to constitute about a third of our money supply. Generally the private money power dominated. But in periods when the government exercised control an excellent record was established– superior to that of private control.
The bankers continued their pretense that gold was the basis of the system, and even the Federal Reserve in 1913, appeared to be a gold-based system. But immediately upon inception, we were pushed into warfare. Within 20 years Americas farms, cities, exchanges and money system were all wrecked, ending in the great depression. It was again left to our government to rescue the nation. (LSM, Ch. 18 – 20)
It’s forgotten today, but the Thomas Amendment passed with legislation in 1933, gave the President the power to create $3 billion in Greenbacks, if the banking system didn’t co-operate.
APPLYING THESE CONCEPTS TO THE PRESENT SITUATION
OUTLINE FORM ONLY
see LSM chapter 24 for details:
Today gold is not much discussed and bank credits are openly substituted for money.
The definitional problem continues – they are now confusing credit with money. Economists are now calling money “high powered” money and they are calling credit “Lower powered” money. They should be more forcefully distinguishing between credit, and money. Blurring the difference empowers the bankers.
They should be examining the unfair privilege this system places in the bankers hands and They should be examining the results. For example:
The deteriorating infrastructure situation – see Engineers report in the Lost Science of Money, ch. 24
Another Danger: The De-funding of government at the local, state and federal levels, arises out of this disease of attacking government as the enemy.
This attack on government starts with Adam Smith. His purpose in smearing the English government was to keep the monetary power in the hands of the privately owned Bank of England.
WHAT TO DO NOW?
(schematic form; Spelled out in detail in LSM, Ch. 24)
In broad terms:
- Nationalize the Federal Reserve, place it within the Treasury and use the greenback mechanism to fund infrastructure improvement and repair. The American Society of Civil Engineers 1998 Report estimates that $2 trillion will be needed. Much more is required to assure water supplies.
- Remove the privilege banks have to create money. Only government should have this power. This means much more than requiring banks to have 100% reserves. A special 100% reserve solution elegantly transforms all previously bank created money into U.S. created money. This does not cause deflation or inflation.
- Institute anti-deflationary programs to assure that sufficient money is introduced by government into the system.
EXTRA FOR QUESTION PERIOD: THE 250 YEAR ATTACK ON GOVERNMENT
We found that the attack on government originated largely in Adam Smith – in his efforts to keep the monetary power within the Bank of England. Smith glorified the Bank and obscured its private ownership calling it as a great engine of state. He attacked government issued money.
“A revenue of this kind has even by some people been thought not below the attention of so great an Empire as that of Great Britain…But whether such a Government as that of England – which, whatever may be its virtues, has never been famous for good economy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into – could be safely trusted with the management of such a project, must at least be a good deal more doubtful.” (Adam Smith, Wealth of Nations; p.358 – in the Great Books collection, v. 39)
Smith’s insulting the English Government marks the modern beginning of a relentless attack on society – the belittling and smearing of its organizational form – government. Smith also inadvertently illuminates the major purpose of this attack: – to keep the money power in private hands.
WHAT WAS THE MORAL EFFECT OF BANKING ON THE EARLY US?
Here is what William Gouge, a banking expert wrote in 1833:
“Without clearly distinguishing the causes, men have come to see clearly the wealth passing continually out of the hands of those whose labor produced it, or whose economy saved it, into the hands of those who neither work nor save. They do not clearly see how the transfer takes place, but they are certain of the fact. In the general scramble they think themselves entitled to some portion of the spoil, and if they cannot obtain it by fair means, they take it by foul.” “The Banking system is the principal cause of social evil in the United States.” (It still is, in 2004!)
To summarize the argument: The nature of the money power is societally derived, not one originating in the activities of private corporations. Because of its great importance to all, control over the process belongs under public authority. Both logic and history show that its not safe to delegate this power, and certainly not acceptable to allow its usurpation.
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