Part 2 of a Review of a book by Stephen Zarlenga, American Monetary Institute, NY
The Lost
Science of Money — The Mythology of Money — The Story of Power
by
William
Krehm
First published in German translation as Der Mythos von Geld – die Geschichte der Macht, this first English edition is updated and expanded.
In the first installment of this review, I left the reader at the plunder of Constantinople by the Fourth Crusade. That unleashed the gold and silver stocks uselessly hoarded over the centuries in that great quasi-heir to the Roman Empire. I rounded out the piece by noting Zarlenga’s masterly summation of both the losses to humanity of the classical treasures accumulated there, and the enormous impetus that the restoration to circulation of so much precious metal was to give to Europe’s Renaissance. In a sense it was a dress rehearsal for the conquest of America by the Spaniards that added up to an even vastly greater, more destructive pillage that cleared the way for capitalism and the industrial revolution.
In his Chapter 6 on “Renaissance Struggles for Monetary Supremacy: Zarlenga takes up the threads of his great tale with a closer look at the developing relationship between cities and countryside. This adds depth to his monetary analysis, even though he has not by any means exhausted this neglected historical vein. But let us glimpse at the significant use he does make of the researches of economic historians, especially the Belgian Henri Pirenne. In the later stages of the Roman Empire, the great manors generally owned by the Church and managed by their condottieri became self-sufficient. A crucial factor in this was the conquest of the Mediterranean lines of communication with the Near East and North Africa by Islam. The Church held the monopoly on literacy, accounting, capital, and management techniques, on which Princes depended.
“Around 1200 the local customs of the towns that sprang up at the centers of these estates became institutionalized by law. One law – ‘Stadtluft macht frei’ (city air liberates) – gave freedom to escapee slaves from the manors after their having lived in a 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. Pirenne writes, ‘For burghers the country population existed only for exploitation.’” What a cluster of astoundingly transforming institutions for economists to ignore!
“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 town land 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 residences nearby.”
In short we are brought into the great revolution of urbanization which goes on crescendoing to this day. The ignored implications of this urbanization on price theory – and hence on monetary theory – are vast. As urbanization continues on a mounting scale, it brings a second factor into the price level – life in a great city is more costly in part because of the immensely costlier infrastructures required. On the other hand only in large towns is it possible for liberating ideas and practices to be nurtured. But the price of such urbanization has been almost wholly ignored by economists. The resulting upward price gradient favored the entrepreneur and hence sped the wheels of development. Zarlenga grasps some of these factors. Almost 40 years ago I developed the notion of the social lien – a growing stratum of the price level that cannot be attributed to a growing surplus of aggregate supply over aggregate demand, or to the greater direct costs of production by the private sector. Rather it is the result of the indirect costs of the human and material investment of a government sector necessarily expanding within the economy and filtering into the price level through taxation on both consumers and producers.1 Ignoring that and persisting in the search for equilibrium points – identified with a flat price level – as the one concern of official monetary theory has thrown up a wall of obtuseness that favours interests of those who stand to profit from such a dogma. That has been so powerful a distorting factor in official economic thought that it can qualify as a twin to the “lost science” that Zarlenga has concentrated on. They intermingle to support a costly monetarist tyranny.
“The principal method of promoting trade were the great trade fairs sponsored by the territorial princes from the 11th century on. These were held at particular places annually or quarterly. The importance of the fair did not 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 arising outside the fair were set aside, regulations on trading were lifted and merchants were attracted from afar with their gold and silver coins.
“The main monetary feature of these events were a payment-clearing mechanisms where merchants’ purchases and sales were matched and accounts settled at the end of the fair. If a merchant sold more than he bought, he would receive the difference in coinage. If he purchased more than he sold, vice versa. If his credit were good, he could extend the debt to the next fair.
“At later fairs the clearance mechanism often had reciprocating arrangements with those of other fairs. Bills of exchange and finance bills were payable at fair times. 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.
“In this period military service became a profession and in the 1400s it required skilful direction and large capital. It was carried on mainly by Swiss, German and Spanish mercenaries. When not at war, soldiers often turned to banditry. The growth of firearms and cannon forced the cities to build defenses, and that usually required getting into debt. A city’s credit rating became its most powerful weapon. This gave the cities an advantage over princes, for until the 16th century a prince’s debts were not binding on his successors. Cities, with their perpetual existence, were considered safer to lend to.” This was another instance of institutions making up for the insufficiency of commodity money.
The institutions of England, developed from the Norman Conquest through the Magna Charta and the Wars of the Roses, served her well. “In England only the King had the power of minting money. In France 300 vassals appropriated the right of coinage; under the Capetians the Crown was constantly trying to recover it.
“The Princes needed revenue mainly for military expenses. Most of the wealth was in the hands of the clergy and the nobles, who were difficult to tax. The result was that the mint became the main source of revenue. From roughly the mid 1300s to the mid-1400s was 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 ‘debasement.’ For even when they regained their monopoly over coinage, monarchs continued debasing their coinage. By studying coin debasement as a taxation substitute, Peter Spufford has shown that such debasement could be an effective tax, equitable, unavoidable; and relatively easy to administer. He also noted the necessity of reducing the metal weight of new coinage from time to time to reflect the wear-and-tear loss on already circulating coinage. Otherwise Gresham’s law would assert itself. 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.”2
“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 Knights 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 12th 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.3
“‘Compared with the efflorescence and ubiquity of Italian credit, that of the Jews appears a very small affair. In actual fact the more economically advanced a country was, the fewer Jewish money-lenders were to be found. The revival of Mediterranean commerce in the 11th century made it possible to dispense with them as intermediaries with the Levant. ‘The Jews of the West were reduced to mere pawnbroking,’ wrote Pirenne.”
“Deposit banking arose in the Catalonian region of Spain in the early 1200s at about the same time as the Bank of St. George started in Genoa. Deposit banking was generally intended to perform safekeeping and transfer services, not to make loans. 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 Court. In 1360 Fracesh Castello was beheaded in front of his bank.’
“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 who wanted to lend, they found semantic ways around the prohibition. One way 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 calling 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 post-dated bill. Finally, the bill may never have been sent for collection. The borrower would pay the money in the local currency. This became known as ‘dry exchange.’
“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 greatly overextended 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 over, 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 – just in case. But eventually the rebels were dead and Edward was broke. The London branch went broke. The obvious lesson: [still being learned in every boom] 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 moderate, kept good relations and neutrality, and outlived the Florentines in both Antwerp and France.
“The Lombards were essentially pawnbrokers making loans on pledges of personal property. They were found throughout Europe but 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 pawnbroking, often going bankrupt to the ruin of their small depositors. Like the Jews, they usually charged 43.5% a 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.’”
“In 1400 Barcelona organized a city-owned deposit bank as a department of the municipal government, which guaranteed its liabilities. It was to allow overdrafts only to the city but in fact allowed substantial overdrafts to the city commissioners. In 1468, during the great silver famine, 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.” That lesson, too, is still being relearned today.
“It must have soon become apparent to the Templars, the Italian merchant 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 (cash post-dated checks) at a discount. However, the loans would not have to be made in coinage, but could be in credits to the borrower’s account in the bank – in bookkeeping entries. The borrower would have the ability to write checks on that account. Such checks might not actually be cashed, but be credited to another account on the books of the same bank.” That is the big unmentioned bonus to the banks in bank mergers today, alongside the other unmentioned bonus – the already “too big to be allowed to fail” become even more so by the very merger. And on top of that the increasing power and increasing secrecy of deregulation expose them to taking risks in ever more dimensions.
“In many ways this was a monetary power greater than the King’s over the mint. This bank money was a more truly fiat money form and further removed from true barter than the ‘precious metal ‘coins. But the bankers were usurping a power that derives from and belongs to society and using it for personal benefit.
“The whole process was inflationary, but because it fraudulently pretended that the bankers’ paper was redeemable in metal, the system would collapse when too many bills had been written and finally their coinage reserves would be drained away.”
There was no lack of resistance to this aspect of banking. But because it threw out the baby with the bath, the positive side of token money along with its exploitative abuses, it was doomed to defeat.
At its height some 180 mostly North German towns headed by Luebeck, Cologne, Bremen, Brunswick, Danzig joined together in a sort of commercial union, and in association with the House of Burgundy and the Teutonic Knights they opposed the incursion of bankers in general and Italian bankers in particular. “Characteristic of the conservatism of the Hanseatic League was that it had no monetary powers whatever, a fact that argues against the assumption that money was originated by merchants.
The Hansa was unable to envisage the unification of the various money systems within her domain, even though the various currencies were a serious obstacle to Hanseatic commerce. The Hanseatic League called itself ‘the merchants of the Holy Roman Empire’ and the closely allied 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 trading in futures. They forbade selling herring before it was caught and grain before it was grown and cloth before it was woven. The attitude against futures markets was so strong that aspects of it survived until the early 1990s when most futures contracts in Germany were not legally binding upon the speculator.
“Until 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. One of the oldest features of Hansa policy was its campaign against credit on the grounds that it caused instability of prices which would upset business. Credit was also accused of increasing the temptation to take risks and, even worse, of favoring the dishonest schemes of unscrupulous merchants.” They were alarmed by the Italians’ command of credit techniques, and the fact that these were catching on among the South Germans.
“The 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. 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 be paid in coinage and not by crediting an account in a bank. Further it was decreed that all foreign exchange bills were to be paid in gold; silver was phased out in three steps over about a year. The demonetization of silver quickly became unworkable, and was repealed in September, 1401.
“Then the Hansa joined the battle, demanding and obtaining an abolition of all credit transactions in Flanders in 1401. By 1541 some variant of this process was repeated five times.”
“An ordinance of 1450 gave the reasons: The banks have wrought utter ruin among all classes of people, but especially among merchants and persons of note. The banks were accused 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 bringing the underweight monies of these mints into (domestic) circulation. The Brugge events had catastrophic results for the Medici banking family in Florence. In 1478 they sold out their Brugge branch to their local partners, and in 1488 the branch was catastrophically liquidated. In 1494 a mob invaded their Palace in Florence and burned the records. Their business tactics, which generally worked in an inflationary environment, had no chance in a deflationary one.”
1494 was two years after Columbus set sail westward. The shot in the arm that the sack of Constantinople by the Fourth Crusade had given the European monetary system had worn off. It was high time that the gold accumulation of the advanced Indian civilizations in the New World were sacked to keep the monetary system of the Old World ballooning.
“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 (‘An Essay on the Economic Effects of the Reformation,’ London, Burnes, Oates & Washbourne, 1923, p. 126). O’Brian noted that during the Middle Ages, the ‘blanks’ in the Gospel were filled by Aristotle’s work and by natural reason.
“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 trade. The 16th 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 the Knighthood, which advanced the art of navigation and map-making. Columbus’s voyage to America in 1492 and Gasco de Gama’s completion of the route to India around the African Cape of Good Hope became of overriding geopolitical importance. Both discoveries resulted from attempts to engage in the gold/silver 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 power to the North Sea area.”
“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. The instruments of the genocide were the conquistadores sent by the Spanish Crown to loot gold from them.
“Columbus’s discovery of America was not only based on bad geography, but on equally defective monetary theory. He was searching for a Western route for Spain to engage in the gold-silver trade with China and Japan. His contract with the Spanish Crown gave him one-eighth of the spoils of the voyage, and one of his first suggestions to Spain was to enslave the Indians. While the monarchy was truly concerned with the religious conversion of native souls, it was brutal in its quest for gold. The Indians were butchered, raped, hanged, and burned, usually on the initiative of the local conquistador operating within contracts structured by the Church’s legal talent.
“Sir Arthur Helps in The Spanish Conquest of America, estimated that the original population under Spanish control at 32 million and that within less than 40 years the Spanish conquistadores destroyed 15 million of them by working them to death in silver and gold mines.”
“The conquerors were legally required to recite the ‘Requerimiento’ to any Indians they were about to slaughter. It affirmed that God gave the charge to one man...Peter...that he should be head of the human race. We ask and require that you take time to deliberate upon it, and that you acknowledge the Church as the Mistress of the whole World. If you do so, you will do well.… But if you do not we shall make war against you and shall take you and your wives and children and shall make slaves of them.” The Requerimiento had been framed by the famous jurist Palacios Rubios and was normally read in Spanish to the trees, or mumbled by the attacking army. In one case it was actually translated to an Indian ruler Atahualpa of Peru in 1532. After hearing the Requerimiento, Atahualpa said: “Your pope must be a most extraordinary man to give so liberally of what does not belong to him.” The conquistador Pizarro murdered Atahualpa as soon as the Inca leader had a room filled with gold for his agreed-upon ransom, totalling 185,000 ounces.
“While Spain did the ‘dirty work’ on the ground, England and Holland adopted a simpler strategy – they highjacked 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 intercepted. The British Crown gave charters, calling them privateers. The Dutch West India Company was established in 1623 specifically to rob the Spaniards. 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. Of great interest to Amsterdam was the contract for supplying Negro slaves to the Spanish colonies of America. From 7 to 18 million slaves were brought to South America from Africa; about 400-500,000 were brought to North America.
“While the effect of the precious metals created a ‘renaissance of the north,’ the effect on Spain was negative. Spain plundered the Americas and mainly enriched her ‘Nobles.’ [The conquistadores were actually recruited disproportionately from amongst the pig-herders of the impoverished Western province of Extramadura.] Spain produced little of anything after the conquest, and the ill-gotten, blood-stained gain, which flowed to her shores from America served only to feed impractical vanity. Finding she could purchase anything and everything with gold and silver, she threw herself into her work of conquest and let commerce go” (W.A. Shaw). [It gave rise to the literary genre of the ‘picaresque novels,’ where a stock character, too impecunious to sup, nevertheless picks his teeth ostentatiously on the town square to prove to his peers how well he has dined.]
“This Spanish evidence provides additional support for the viewpoint that money is not productive capital. We noted that Naples and Venice had begun using milled copper coinage for smaller transactions in 1472 and 1473. However, the plunder of the precious metals from America retarded the development of money systems and though away from Nomisma and back to commodity money, which is essentially just an advanced [three-way] form of barter.”
“In 1902, Alexander Del Mar, in The History of Precious Metals, 1902, estimated: ‘About half the existing stock of precious metals was obtained through conquest and slavery. The value at which this crime-stained metals 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.
“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. 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 15 to 1 at that time. The Portuguese channeled the pepper trade though the city of Antwerp, which quickly became Europe’s greatest trading port. The Cape Route also reduced Moslem economic power as a go-between for Venice and India.”
End of Installment Two of the review of Zarlenga book. Further installments to come.
1. Krehm, William (May, 1970). La Revue Économique, “Le Secteur Public et la Stabilité des Prix.”
2. Krehm, William (1975). Price in a Mixed Economy – Our Record of Disaster, Toronto. Significantly, when COMER finally dug up and put together the details of the surreptitious bailout of the Canadian banks from their immense losses in financing major speculations in gas and oil, real estate, and an Ottawa builder’s sudden fantasy to start collecting US department store chains, the bank spokesmen cried that the statutory reserves, the core of the bank bailout, had been an unjust tax levied on the banks. In fact the statutory reserves had been a modest quid per quo for the government assigning to the banks a major part of its powers of money creation, while remaining responsible through the central bank as their lender of the last resort, The statutory reserves varying from 8 to 10% for some years were the portions of deposits received by the banks from the public in chequing and other short term accounts that had to be redeposited with the Bank of Canada on an interest free-basis. They provided an alternative to influencing the volume of lending by raising interest rates. The same illusions and misconceptions crop up concerning money over the centuries and millennia.
3. Distinguishing as it does between capital investment which is depreciated over its useful life and current spending, it is basic to double-entry bookkeeping. When they apply a bit of it here and there to produce a better statistic for impressing the bond-rating agencies, governments in our day hide what they are doing. With a total write-off of bridges buildings, and human investment in a single year governments are driven to raise more taxation in that year than is strictly necessary, and when the excess taxation shows up in a higher price level, they now proceed to pushup interest rates “to lick inflation.” What they need to lick is their stubbornness in resisting their auditors and refusing to adopt accrual accountancy, On the other hand excluding the depreciated value of their capital investments from their assets but including the debt incurred by financing them through the private banking system, leads to an exaggerated net deficit (i.e., the excess of debt over assets). This serves as a pretext for selling private assets that appear on their books at a token value at a small fraction of their real worth, to well-connected investors, who apply accrual accountancy to their acquisition, list it on the stock market, and by driving up user fees for what the taxpayers have already paid for in taxes, now pay for them a second time in users’ fees.