Review of the Book:

The Lost Science of Money
by Stephen Zarlenga

Edward J. Dodson

[Written for publication on the website of the Banneker Center for Economic Justice, 2003]

I cannot remember with any certainty when I first encountered Stephen Zarlenga's perspectives on the global monetary system. At some point in my own internet-based research on the subject I came across the website for his American Monetary Institute. Mr. Zarlenga and I differ significantly in our views of what constitutes a just - and sound - monetary system. As conveyed in a May 2000 interview by a reporter with the Gold Newsletter, his explains that the most important issue to be resolved is "whether money is a power, embodied in a commodity like gold; or a creation of the law. That is does its value come from its 'intrinsic' (commodity) value or from sponsorship or legal requirements of government? Or a combination?" To answer this question to his own satisfaction, Stephen Zarlenga embarked on a long journal of research and analysis. He argues:

"History shows money is an abstract institution of society and government. As far back as 340 BC Aristotle wrote: 'Money exists not by nature but by law.' He's saying true money is a fiat (decree) of the law."

"Panics are caused by fractional reserve banking, where banks create money in the form of bank credits. But these credits aren't the same as money because they depend on the bank's staying liquid. Paper money in hand is more secure. In a crisis this leads to cash runs on banks. [The solution was proposed during] the 1930's when Henry Simon created the 100% Reserve Solution. It avoids collapse by changing outstanding bank credit into actual cash. First, banks (including the Federal Reserve Banks) are required to establish 100% reserve backing for all deposits. To do this, the US Treasury loans them (at interest) freshly printed US currency to bring their cash reserves up to 100 %. Treasury paper held by banks, gets credited against these borrowings; canceling an equal amount. Banks are then confined to lending existing funds."

"This elegant reform transforms the private bank credit money created out of thin air for decades, into US legal tender -- real money. All US debt held by the banking system is canceled out by the banks borrowings from the Treasury. Banks become panic proof, with cash to pay all claims."

"This reform wouldn't be inflationary or deflationary - it simply makes tangible what had been thought to be the existing money supply. This reform removes the money issuing power from private banks and places it in the US Treasury. Its not paper money that's immoral; its the private issuing of it."

Mr. Zarlenga brings together the results of his penetrating research in a new book, The Lost Science of Money[1]. He provides evidence to show that even the most common items exchanged in barter did not evolve into money. Rather, "the original development of money may have arisen out of the need for uniform sacrifices or dues to the gods, and fees to the priests." My own investigation of the organization of the priestcraft confirms that those who served as the knowledge-keepers and seemed to have the means of communicating with the gods were increasingly able to accumulate wealth without having to produce it themselves. Priests could not survive by accumulating precious metals, but the problems of storing grains and other commodities were greatly reduced by introducing symbolic items to represent a future claim on production. The widespread discoveries of large gold deposits resulted in a steady accumulation of gold by the priestcraft, who, as observed by Zarlenga, began to accept gold for their priestly services. By the time of Alexander the Great (and surely long before) the priests effectively controlled the supply of gold taken from the land. They determined how much was held in storage and how much was put into circulation. By keeping the amount of gold in circulation stable, they were able to effect a relative stability of the price of goods and services in terms of gold.

Metal coins were in general circulation in various parts of the Old World somewhere between 1200 and 700 BC - minted by those who held power, with a fixed exchange value in terms of goods and services. This, Stephen Zarlenga looks upon as not only desirable but the highest level of practical application of monetary theory. "Coinage was a big improvement over the ancient Oriental money systems because it was legally valued and its quantity could be controlled by law," he writes. "But it was still vulnerable to manipulation and other defects mainly because its metallic content could interfere with its monetary function, since the metal was considered valuable apart form the coin form."[2] The next advance was to issue coins minted out of the increasingly more available silver metal, then the circulation of silver coins small enough for everyday commerce. Fixed prices in terms of gold or silver coins also slowed the loss of farms to creditors, who during the era of floating monetary values loaned the farmers money when commodity prices in terms of money were high but more often than not had to repay the loan when commodity prices in terms of money had fallen.

The story told by Stephen Zarlenga is one of ongoing monetary chicanery interrupted by a precious few periods of honest attempts by those governing to establish fiat currency on a stable basis. So long as gold and silver coins were relied upon to serve this purpose, money changers engaged in hoarding, smuggling and speculation. Rome temporarily evaded these problems by minting and declaring coins made of bronze as the republic's legal tender.

"Under this bronze [coinage], republican Rome grew powerful, staying independent from Eastern power and blocking the easy establishment of Eastern financial beachheads on Roman soil. Under this bronze money, Rome developed and gave the world a system of law that is still consulted after 2300 years - a legal system separated from religion to a higher degree than seen before in antiquity."[3]

Roman monetary independence did not last, however. The conquests by its legions brought enormous quantities of silver and gold into the empire. Gradually, many Roman citizens became propertyless as control over land became increasingly concentrated. As would occur later in northern Europe, peasant farmers were displaced by sheep and cattle. The production of foodcrops for the general population was supplanted by cash crops for export and consumption by the wealthy. Zarlenga makes a convincing case that the move away from fiat (bronze) to commodity (gold and silver) coinage was a primary cause for the gradual decline of the Roman republic. The lesson is clear:

"If the cause of Rome's decline has remained mysterious, perhaps it's not so much from a lack of knowledge of what took place, but to shield from closer scrutiny similarly destructive attitudes and institutions operating on present day Western society."[4]

The eventual re-emergence of Mediterranean societies as centers of commerce and culture and military power is taught as the Renaissance of Western civilization. Zarlenga adds his voice to historians who point to the Crusades as an important series of trigger events in the rise of the European - and Christian -- nation-states. Zarlenga points to the organization of the Knights Templar early in the 12th century as a major institutional change that had an enormous effect on the future of northern Europe, accumulated landed wealth and gaining power. Constantinople - the center of Christendom in the East - fell to Europe's armies in 1204. Silver and gold in undreamed of quantities was carried off. Armed with this enormous infusion of (largely) silver coinage the Renaissance began. The returning Knights Templar became the continent's bankers until their network was broken up early in the 14th century by the French monarch. Zarlenga repeats what several historians surmise - that their treasure was moved to Scotland under the protection of Robert the Bruce. The Knights continued, as proponents of freemasonry, to have a continuing influence over world events. Once again, the priestcraft took over as the principal monetary authority. Merchant bankers also began to appear across Europe.

What Zarlenga next tells the reader is that the absence of a truly fiat coinage set the stage for another series era of economic upheavals. The exchange value of silver in terms of gold was much greater in the Middle East and Asia than in Europe. The result was the gradual transfer eastward of most of the silver confiscated from Constantinople - as well as Europe's production - and the accumulation of gold by the merchants of Europe. European princes tapped this commodity money to finance their expansionist ambitions. At the same time, the merchant bankers began to extend credit well beyond the value of commodity coinage held. Catholicism's moral leaders fought against the charging of interest but lost. Discovery of the ocean route to Asia around the African continent, followed by the discovery and exploitation of the New World then combined to dramatically alter the balance of power between core and periphery powers. Spanish treasure ships (those that escaped English privateers) were making their way back from the New World, funding the empire-building and luxury-consumption of a Spanish aristocracy as well as new manufacturing enterprises in the north. Added to all of these dynamics came the quasi-religious wars that were to initiate great migrations of people to unsettled lands in the New World. Noble factions aligned with the new Protestant sects engaged in open warfare against their Catholic-aligned nobles, Europe's huge landed estates the main prize. After two centuries of these civil wars, the modern nation-states of Europe were largely formed, along with the pattern of shifting alliances in pursuit of temporary advantage over one another. While Spain emerged as the first global empire, "the democratization and wider distribution of wealth in the north led to increased industry and prosperity, while the increased concentration of wealth in Spain lead to stagnation and relative decline,"[5] observes Zarlenga. The dynamic role of gold and silver commodity coins certainly played a role far more significant than most historians have recognized. However, the other extremely important ingredient for the rise of the northern nation-states (and of England, most particularly) was the migration of people forced off the land by enclosures to the coastal cities and then to the growing list of colonial possessions. The effectiveness of this pattern of empire-building is evidenced today by the widespread use of the English language around the globe.[6]

In reading this book, I was eager to reach the point where Mr. Zarlenga discussed the creation of the Bank of Amsterdam and the impact this unique "deposit bank" had on the global economy during its relatively brief period of operation as a bank of deposit. Our author quotes Jonathan Israel's assertion that the "Bank's most vital feature was that it was a civic and not a privately owned or managed institution"[7] rather than the manner in which the bank operated. As a bank of deposit, the Bank of Amsterdam "made profits on money changing and gold and silver purchases, charging up to 2.5%," writes Zarlenga, as well as "supplying the city mint with gold and silver bullion."[8] The fact that the City of Amsterdam owned the bank and employed its managers is not, in my view, its essential advantage. The key issue is whether monetary systems are inherently monopolistic and, therefore, best operated under the auspices of government. Zarlenga then notes that the Bank's appointed managers allowed the City of Amsterdam and the Dutch East India Company (a government-chartered monopoly) to withdraw money left on deposit by others, but states the "overdrafts … caused no difficulty for over a century."[9] Clearly, the story of the Bank of Amsterdam is one more piece of evidence that the short-run interests of political decision-makers have a tendency to result in corruption of sound economic institutions. Stephen Zarlenga's conclusions are rather different:

"The overall record of the Bank of Amsterdam stands out as one of the best run banking institutions in history. It became a mythical model for how a banking system should function. Those who held it up as the ideal gold and silver banking system were generally unaware that the Bank had issued new money in the form of overdrafts to the City and the Dutch East India Company."

If ever there was a time when a real gold and silver system might have worked, it was then, with the vast metallic plunder coming from America. Yet the Bank considered it necessary to begin issuing abstract money within six years of starting operations. That it felt compelled to keep it a secret indicates the retardation of monetary thought in the merchant's mindset."

Its great success was that it was a public institution owned and run by the City for the benefit of the country and its merchants, and not run by private parties for special interests. This enabled it to raise the credit to make good on all of its deposits when it got into trouble. …"[10]

Dishonesty is dishonesty. The managers of the Bank were guilty of fraud - by their self-creation of credit - and should have been prosecuted and removed from their positions. Of course, they were essentially ordered to commit this fraud by their employer, the officials governing the City of Amsterdam. Where, I might ask, was the City Controller when all this was happening? Well, of course, the City Controller (if there was one) was either in on the fraud or was prohibited from auditing the Bank's activities. I am not foolish enough to argue to private sector fraud is any less frequent. I do argue that one important lesson of history is that the potential for despotism increases the broader is the scope of governmental functions.

One of the most dangerous powers government can be allowed to possess is the self-creation of credit. By this power, governments issue promises to pay (i.e., government bonds) to investors or the central bank the legal tender the government printing presses issue upon request of the central bank in order to "purchase" government bonds.

Perhaps if we (and other societies) lived under systems of real participatory democracy not controlled by powerful vested interests I would be more trusting in societal institutions. As things stand, I believe the practical answer is to enact legislation permitting investors to create a private sector network of deposit banks, the operations of which would be regularly audited (the auditing firm selected based on very stringent criteria that prevents the kind of collusion between auditors and corporate management that has come to the surface recently). Criminal penalties, vigorously enforced by government regulatory agencies, need to be adopted. An additional market response comes from insurance companies, which are in business to protect investors from losses associated with these and other types of risk. The enabling legislation should require that deposit banks maintain adequate insurance to protect investors and the public from losses associated with criminal wrongdoing on the part of bank management. I am reminded of the wise advise of Max Hirsch, writing at the turn of the last century in Democracy versus Socialism:

"Democracies have produced men of great ability and of conspicuous honour to deal with great questions of State. But where democratic governments have undertaken the conduct of industrial functions, the task has generally fallen into unreliable and incompetent hands. Universal experience proves that the more detailed governmental functions become, the more they deal with industrial matters, the less lofty is the type of politician. Abuse of power, neglect of duty, favouritism and jobbery have been the almost universal accompaniment of industrial politics."[11]

One can argue, I am sure Stephen Zarlenga would, that government today - at least in the world's more responsible social-democracies - has many more safeguards in place to prevent the kinds of systemic corruptions identified by Marx Hirsch and others who wrote during the era of the robber barons. Ironically, protecting citizens from monetary inflation is one of the areas where governments have demonstrated the least self-control. The culmination of Mr. Zarlenga's historical analysis arrives at the beginning of the sixteenth chapter:

"Our review of Greek, Roman, Byzantine, Venetian, Dutch, and English money, until the formation of the Bank of England, showed that monetary control was generally either in government or religious hands and was inseparable from ultimate sovereignty in the society. Yet in America today, the idea that government should control the issuance of money is guaranteed to arouse ridicule among most economists. The government's monetary role is under attack by diverse elements from the paid apologists for privately controlled central banks, to free banking advocates, to gold standard enthusiasts."[12]

He then asks, "are their views well grounds in historical or modern experience, or merely a bias they picked up in economics class or from re-reading Ayn Rand novels once too often?"[13] This last comment may be directed toward Alan Greenspan, I suspect, who is known to have been a strong admirer of Ayn Rand as a young man. However, I do agree with him that insufficient skepticism toward modern monetary theory (or, perhaps more accurately, monetary conventional wisdom) has been exhibited among economics professors. Mr. Zarlenga attempts to make the case that by comparison, government issuance of currency throughout the history of the United States was done with greater care and responsibility than by private banks. Insofar as the comparison goes, I agree with his conclusion. However, after the brief period during which the Bank of Amsterdam operated consistently as a bank of deposit there is nowhere in history to turn for guidance. John Wood, writing for the American Institute for Economic Research, also reminds us that "[g]overnments have imposed severe penalties - the cutting-off of hands is a favorite - for using foreign currencies in attempts to compel their citizens to hold their own depreciating currencies."[14] These are worst cases, of course, and not the practice (nor within the current legal authority) of market-oriented social-democracies. What keeps governments and their central banker partners from an unrestricted expansion of paper currency is the political and economic risk of what one might call a run to quality (i.e., a large-scale sale of the nation's currency in the international currency markets). This, more than anything else, is what today prevents governments from balancing budgets on the backs of those who hold liquid assets denominated in the nation's paper currency.

Stephen Zarlenga's means of protecting the general public from potential corrupting actions of government officials charged with managing the monetary system is to, first, provide a clear legal definition of money; and, second, clearly delineate how "new money" is to be added to the money supply. "The attempt to disconnect the money system from politics reflects a distrust to the citizenry in such matters," he writes, continuing: "Of course it should have independence, like the Judiciary. But it must be accountable, and it is through politics that the citizens express (indirectly) whether the money system is functioning well or not. …The raison d'etre of the money system is to serve the community, and history gives us little reason to place more trust in money systems controlled by elites, rather than by the citizens."[15] Looking at history and our ongoing everyday experience with as objective eye as I can muster, I remain a skeptic. If what Henry George meant when he wrote "it is the business of government to issue money"[16] was that commodity money coinage of a consistent and known gold/silver content, the U.S. Mint is already entrusted with this task in a limited sense - by the issuance of gold and silver coins to be held for investment purposes rather than circulation in exchange for goods or services. The U.S. Mint also possesses the capabilities and controls to issue paper currency that cannot be easily counterfeited. What is at issue is the method of putting paper currency into circulation. The bottom line for Stephen Zarlinga is ending privilege, an objective with which I am in full agreement:

"A society such as the U.S., depending on private bank credits in place of government-created money, is operating in moral quicksand. It has established a special privilege of power for those private parties issuing the credit - the bankers. …"[17]

The problem is that the commercial banks are not beneficiaries of the current system. Even the Federal Reserve Banks have restrictions imposed by law of their distribution of profits to member bank shareholders. The primary beneficiary is the United State government, which, as I have explained earlier, along enjoys the power to self-create credit. Neither government nor privately-owned banks ought to have this destructive power. Purchases up to some relatively low value level can be adequately handled by fiat coins of nominal intrinsic value without risking the integrity of the system. However, paper currency must be denominated in quantities of specific goods and services over which the issuing deposit bank has control (and its delivery thereof upon demand is appropriately guaranteed by governmental regulation, independent auditing and required insurance coverage).

This debate is far from over, of course. Although Stephen Zarlenga is more comfortable with government in full control of money issuance and circulation than I am, the introduction of a long list of other reforms might persuade me that government had reached a point of sufficient public trust to trust government to introduce and maintain sound money.

Edward J. Dodson / January 6, 2003


1. Stephen A. Zarlenga. The Lost Science of Money (Valatie, NY: American Monetary Institute, 2002), p. 11.
2. Ibid., p.26.
3. Ibid., pp. 53-54.
4. Ibid., p. 92.
5. Ibid., p.217
6. From the 17th century on, English became the language of commerce. Even today, when the number of Spanish-speakers in the American hemisphere exceeds English-speakers, English predominates in the commercial sphere and is the second language of individuals who aspire to participate in the global economic, academic and political arenas.
7. Ibid., p. 229. Quoted from Jonathan Israel, Dutch Primacy In World Trade (NY: Oxford Univ. Press, 1989), p. 77.
8. Ibid.
9. Ibid., p.231.
10. Ibid ., p.232.
11. Max Hirsch. Democracy versus Socialism (NY: Robert Schalkenbach Foundation edition, 1966. Originally published 1901), p.287.
12. Stephen Zarlenga, The Lost Science of Money, p. 433.
13. Ibid., p. 434.
14. John H. Wood. Money, Its Origins, Development, Debasement, and Prospects (Great Barrington, MA: American Institute for Economic Research, and Economic Education Bulletin, Vol. XXXIX, No.8, August 1999), p 59.
15. Ibid., p. 645.
16. Henry George. Social Problems (NY: Robert Schalkenbach Foundation edition, 1966. Originally published 1883), p. 178.
17. Stephen Zarlenga. The Lost Science of Money, p. 661.