The Nature of Money in Modern Economy – Implications and Consequences

By Stephen Zarlenga and Robert Poteat


Perhaps no subject is as important to mankind as the nature of money, which has been so neglected and misunderstood in both the popular and professional mind, to the great detriment of the intelligent and just operation of societies. The authors’ intent is to discuss the great importance of the monetary question, briefly examine some of the dominant erroneous concepts of money and their effects upon societies, and point and link to the great progress currently being made by researchers in this field, so readers can examine them more fully.

While this paper can present only very brief summaries of what some of the important new papers do, we hope readers will find it useful in outlining a reading curriculum to assist in a long overdue understanding of the “money power.”

Finally, the authors will describe a money and banking system proposal they are very familiar with, which has evolved since the great depression of the 1930s, and is now ready for implementation and has even been introduced as potential legislation into the United States Congress. We need a money system which removes many of the problems and injustices that have afflicted societies, and thereby helps set the stage for justice, progress, and peace on Earth.

Some Background

Mankind has lived under various governmental systems from democracy to dictatorship, but the best will be those which are most in harmony with man’s nature. Likewise, many things can and have been used as money, from shells, products of agriculture and mining, tools, and fiat papers and coins, even debt – but the best is that which is in harmony with the nature of money. It is, therefore, important to understand the nature of money when reforming society’s monetary system. As a key building block and measurement tool of economics, understanding the nature of money is also an essential element to foster real progress in economics.

The monetary subject has a long history. Aristotle established what the authors consider the “science of money” in the 4th century BC, when he defined money as an abstract legal power, a fiat of the law, summed up in his phrase, “Money exists not by nature but by law”. Thus to Aristotle, the essence of money isn’t a commodity that comes from a mine or a farm. It is created by “nomos” – which was the law or binding custom; and the Greek name for money was “nomisma.” Aristotle made the supreme distinction between money, which is abstract, and wealth, which is tangible.

Aristotle was the first to state this formalized “science of money.” We have not found an earlier statement of it, though we read of a real world example in the Spartan Pelenors, which existed about four centuries before Aristotle. This was described by the Delphic priest Plutarch (about four centuries after Aristotle) in his work “Parallel Lives”, in the comparison of Lycurgus of Sparta, with Numa of Rome, both legendary monetary reformers.

According to Plutarch, Lycurgus, who was of the Spartan Royal household, had travelled widely, visiting India, Spain and Libya. On the Island of Crete, he knew the poet Thales “the lawgiver”. When Lycurgus took control of Sparta, he instituted land and monetary reforms.

Plutarch tells us that Lycurgus made it illegal to use gold and silver for money, and legislated that a number of elongated iron discs should be money instead. Furthermore, the iron discs were dipped in vinegar while still hot, which made them brittle and useless as iron. Each disc weighed just over ½ kilo (about a pound) and were called “pelanors” because they were shaped like small cakes (pelanoi). Thus, the Pelanors were a form of “nomisma” – not commodity money. They are referred to by Plato as the “Doric” system of money, about which we know little.

Plato agreed with Aristotle on the nature of money, writing how the citizens of his Republic would need “a money token for purposes of exchange”.

The history of money systems often shows a pattern of Aristotle’s science of money being discovered; used in building the society; corrupted and then lost; and again being rediscovered over time by another culture. Even when various specific commodities were used as money (or to represent money) it was the law that made them so. Yet it’s important to understand that it is not just the law which gives value to money. Money has value because of skilled people, resources, and infrastructure, working together in supportive enough social and legal frameworks, creating values for living. Money is the indispensable lubricant that lets things “run”. It is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law and is an unconditional means of payment.

It is the law that determines what will be money, by accepting that thing in payment for taxes. That makes the government the acceptor of “last resort” of that thing, if necessary, in payment of taxes. Since there is

always a demand for it to be used to pay taxes, it is more easily exchangeable between people in a society, who then don’t have to worry about it being accepted from them by someone else. This important monetary concept was clearly set forth in the 1905 publication of George Knapp’s State Theory of Money book, an important monetary work. On page one Knapp states “Money is a creature of the Law”. Later in the book he wrote “The most important achievement of economic civilization, the chartalism [using tokens for money]of the means of payment” (description added).

And “Our test, that the money is accepted in payments made to the States’ offices”. Knapp then categorized various types of money from commodities, and debt, and various abstract paper monies, in dizzying classification terminology.

Importance of the Concept of Money

How a society defines money is a main determinant of who then controls it. We define “control” as the power to issue and remove money from circulation and to determine who gets it first. If a society defines money as a commodity such as precious metals or other valuable commodities (i.e. as wealth) then the wealthy will control not only their own wealth but the monetary mechanism as well, since they can control that commodity. Such control over the money system can easily lead to amassing more wealth, with little or no productive work. If the society defines money as credit/debt, as is generally done today around the world, then the bankers will be in control, since they dominate credit. They will then be the ones with the ability to accumulate wealth and power without productive work.

Thus, both money defined as wealth and money defined as credit/debt, can lead to social injustice through the money system, where one element in the society is able to amass wealth and power by creating and controlling money, without productive work. But money has value due to society’s structure and therefore as Dr. Anas Zarqa has pointed out: Money creation is a social prerogative, and hence the benefits of money creation should accrue to the whole society.

When a society defines money as Aristotle did – as an abstract legal power – then government has a chance to objectively control it to promote the general welfare. There is a mythology – a “reigning error” – that government issued money has been irresponsible, and inflationary. But despite the prevailing prejudice against government, when one actually examines the monetary record, it becomes clear that government has a far superior record in issuing and controlling money than the banks have had. And that includes society’s experience with the Continental Currency, the Greenbacks and the German hyperinflation.

The Continental Currency of the American Revolution, for example, is attacked as becoming worthless, without discussion that while the government authorized $200 million and issued $200 million (plus replacement notes), the British counterfeited untold billions of them. The Brits also used counterfeiting against the French Assignats – the details became public when the counterfeiters sued each other in the English courts. The Continental Currency carried us over nearly six years of warfare to within six months of final victory. It gave Americans a nation. The American Greenbacks are smeared as worthless inflation money when in fact the U.S. government authorized $450 million and printed exactly $450 million; and every Greenback eventually was exchangeable one for one with gold coinage – but very few people bothered to exchange them. The Greenbacks allowed the U.S. to stay together as one nation.

The German hyperinflation is cited by the “banker apologists” without pointing out that the German Reichsbank was privately owned and controlled, or that the hyperinflation began the month (May 1923) that all German government influence over the Reichsbank was removed on the insistence of the allied occupiers; and the hyperinflation was not stopped until Hjalmar Schacht re-asserted German government control.

The Confusion of Money with Credit

In our present system, money and credit have been confused. All the systems we and fellow reformers are familiar with use bank debt, loaned into circulation at interest, for their nation’s money system. The main exception is the metal coinage issued by the nation, and sometimes also the nation’s paper money, for example as in Great Britain, where such cash is issued by the government owned and controlled Bank of England. In contrast, the U.S. Federal Reserve System is somewhat ambiguous – the President appoints its Chairman for four year terms and its directors for 14 year terms – but it is essentially a private entity and its 12 branch banks are capitalized by the various banks in their districts.

Because society defines money as credit/debt, as the present systems do, the bankers control the system and look at the results: obscene concentrations of wealth, injustice and continual warfare around the world. If we define money in the proper Aristotelian sense as an abstract legal power, then control over money and society can be under a legal/constitutional system with checks and balances. Clearly it should be the state which provides the nation’s money, not the banks. The U.S. Constitution does place that power into the Congress (Article 1, Section 8, par.5), but it was unadvisedly handed to the Federal Reserve in 1913. Around the world, this power has been inappropriately taken over by the banks, through legal maneuvering and through what’s known in the West as “fractional reserve accounting,” which is how banks create and circulate their debt in place of government-issued money.

The Neglect of Defining the Nature of Money Leads to Bubbles and Crashes

We can thus see the importance of understanding the concept of money, and yet the subject is neglected, where economic works too often assume an understanding and agreement on the nature of money, or ignore defining it altogether. We regard this as a huge oversight because the effect of what we use for money has major repercussions on society.

The authors maintain that this general “ignoring” was a pre-condition for the so called “Great Recession” and its widespread destruction to have occurred. Without what’s known as the fractional reserve accounting method, it would not have been possible for the banking system to create the expansionary euphoric phase which clearly led to an over-optimistic evaluation of future conditions, which in effect, created the real estate bubble, leading up to the crash and mortgage and banking crisis.

Without this money-creation power – this using bank-created debt as money, real estate prices would have remained grounded much closer to realistic valuations. Bankers’ fees would not have been so high, and customers would not have been so badly damaged by going into such unrealistic mortgage debt. Society’s bailing out of the bankers, transferring trillions of dollars to them, need not have occurred. Further, it is not the first time that this has happened and we do not think it is asking too much of economists, who generally live comfortably in society, to help assure that it doesn’t happen again. Did this “ignoring” occur due to error, neglect, and sloth in economic thought, or are there political reasons for it?

About the authors Stephen Zarlenga draws on 35 years of experience in the world of finance, securities, insurance, mutual funds, real estate, and futures trading. In 1996 he co-founded the American Monetary Institute (AMI) with Dr. Lucienne DeWulf. He is the author (2002) of The Lost Science of Money book. Earlier as a publisher he published 20 books on money, banking, politics, and philosophy (including The Anglo-American Establishment, by Prof. Carrol Quigley). From 1970 to 1975 he built the U.S. distribution network of the then leading American mutual fund concentrating in gold shares. Then as a member of the New York Futures Exchange (a subsidiary of the New York Stock Exchange) he specialized in trading the complex CRB futures index for several years. Thus he is familiar with both practical and theoretical sides of our market economy. Yet he calls into question and challenges the basis, and Achilles’ heel, of American Capitalism: the banker control and resulting misdirection of the nation’s monetary system. Zarlenga holds a degree in Psychology from the University of Chicago, where he was in the final graduating class under the revered Maynard Hutchins’ curriculum which focused on critical reading and thought. Hutchins had the “Chicago Plan” for monetary reform created at the University, formulated into legal language and introduced into the Congress in 1935. In May 2005, Zarlenga met U.S. Congressional Representative Dennis Kucinich (D, Ohio) and assisted with the creation of Kucinich’s monetary reform legislation, the N.E.E.D. Act (National Emergency Employment Defense Act), a masterful improvement over the Chicago Plan, which Kucinich introduced into the U.S. Congress in September 2010. The AMI holds Annual Monetary Reform Conferences featuring internationally important monetary reformers.

Robert Poteat is a United States Navy veteran of the Korean War serving as an electronic technician. He studied electrical engineering at the Illinois Institute of Technology in Chicago, worked in television and radio as an engineer, worked as an electrical engineer in manufacturing military telephone equipment, and installed, serviced, and managed installation and service of commercial elevators, electric stairs, and walks. In 1971 President Richard Nixon declared a wage and price freeze and closed the “gold window.” This arbitrary, seemingly unconstitutional, executive action began a continuing re-evaluation of free market ideology versus visible reality. In 1981, Poteat discovered a description of the current United States monetary system that evoked an “epiphany with cognitive dissonance.” The described debt system seemed to answer many questions, but how could such an unfair, ethically immoral system come to be in an ostensible democracy? Where is the Congress of the United States concerning Article I, Section 8, paragraph 5 of the United States Constitution, which they took an oath to protect and defend? Why is free market economic “theory” so inconsistent with the real world? Those questions began decades of continuing research.

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