Cold Comfort: No Double Dip Recession

Yesterday's 260 plus point plunge in the Dow was (according to news reports) caused by the fear that economic growth is slowing and that there will be a "double dip" recession. If the recent past is any indication, today's reports will be made with one eye on the stock market, one on the Federal Reserve and the financial system, and one on the politicians and academic economists frantically trying to come up with some rationale to justify more deficit spending.

Yes, we are fully aware that adds up to three eyes. It should, however, be completely obvious by now that those claiming to be in charge of things have got to be from another planet. Their actions and alleged reasons for those actions have little or nothing in common with reality as experienced on the third rock from the Sun.

Fortunately, we can assuage the fears that there will be a "double dip" recession. First, of course, we are not in a recession. This is a depression.

Second, there cannot be a double dip when we haven't gotten out of the single dip. As we saw in today's feature presentation on this blog relating the "South Sea Bubble," people have succumbed to the weird, probably extraterrestrial idea that you can get something for nothing. They have mistaken the partial recovery of the price level in the stock market not as evidence that Ming the Merciless is controlling people by means of a mysterious device emanating from the planet Mongo, but as an actual economic recovery.

Usually we attribute the belief that you can get something for nothing to the socialist doctrine that declares each should contribute according to his ability, and receive according to his needs. Not surprisingly under such an arrangement, no one seems to have the ability to contribute, but all have apparently endless and insatiable needs. Our friend, the inaptly named Little Red Hen (to say nothing of St. Paul), had a few pithy comments about people who think they should get all they need or want without bothering to produce anything.

Like all the other characteristics of its bastard stepchild socialism, however, the idea that you can — and should — get something for nothing is inherited from capitalism, and inscribed in the genetic code of both systems. As Robert Walpole pointed out in the early 18th century (see what you miss when you don't read the feature article?), "stock market jobbing" diverts people away from productive activity, focusing their efforts on gambling and speculation in the hope of getting something for nothing. The financial elite becomes the real and unaccountable ruler of the country.

Third and finally, just as Dr. Harold Moulton pointed out in his 1936 study, The Recovery Problem in the United States (Washington, DC: The Brookings Institution), basic systemic problems are not being addressed. There has been no real recovery, because the only changes introduced into the system (e.g., the full repeal of the Banking Act of 1933 — "Glass-Steagall") have only made matters worse. Semi-effective internal controls in the form of separation of function have been replaced by completely ineffective external controls in the form of increased government regulations and direct State control of money and credit.

What can be done about this surreal situation?

First, immediately rush out and purchase a tin pie plate to tie on your head to counter the effects of Ming's control ray. Send Flash Gordon to shut down the machine or destroy it . . . after arming Our Hero with a quick review of the Evil Overlord of the Universe List so he will know what to expect. After all, had the world's leaders taken Mein Kampf seriously in the 1920s, Hitler might never have come to power.

Second, see what can be done to convince the hordes of brainwashed policymakers, politicians, and academic economists (a.k.a., "The Legions of Terror") that, no, money is not "peculiarly a creation of the State." Rather, money is a private property-based symbol of the present value of existing and future marketable goods and services functioning as the medium of exchange. Money is illegitimate (i.e., "theft") without that essential private property link.

Third and finally, immediately set in motion the steps necessary to implement Capital Homesteading so that ordinary people can,

a) Gain democratic access to the means of acquiring and possessing private property in the means of production,

b) Enjoy the benefits of producing marketable goods and services as the primary source of consumption income instead of relying on increasing unserviceable consumer and government debt to generate effective demand with pointless gambling and speculation seen as the only way out, and

c) Have a basic security that the money supply is both stable and sufficient for the role that money is designed to play without manipulation by the State or any other division of the Legions of Terror.

Or, we can all just sit back and hope somebody else does something — who knows who or what — to straighten things out and bring the system back into closer conformity with reality.

I think I hear the echo of a Supervillain's maniacal laughter.

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Common Cause, Part IX: The South Sea Bubble

Not long after the Bank of England managed to weather its first storm, it was faced with a far more serious problem. The nation became embroiled in what became known as "the South Sea Bubble." The illusion that a bank can create money out of nothing for the State is a powerful inducement to the private sector to try the same thing. The end result, of course, is similar, as the world has discovered to its great cost during the recent global financial crisis.

Misunderstanding Money, Credit, and Banking

Just as John Law's "Mississippi Scheme" in early 18th century France gave a bad name to money creation for productive purposes, the South Sea Bubble subverted popular understanding of corporate finance and investment. This was a blow that crippled economic development in a way that virtually ensured that only those people with existing accumulations of savings — the already wealthy — would be able to participate in economic growth in any meaningful fashion.

There may have been some excuse for this. Commercial banking was, all things considered, still in its infancy, and was not well understood. As today, of course, the obsession with existing accumulations of savings had (and still has) the potential to ruin otherwise sound financial techniques and force concentration of ownership of the means of production on an economy. This "slavery of past savings" also inevitably requires ever-increasing State control of money and credit in an effort to maintain some kind of equilibrium, even if it is completely artificial and always undertaken for political motives instead of economic. As Conant described the situation,

It is not surprising that the bank was unable to cope with its difficulties and that many impracticable and speculative schemes were set on foot, for the time was essentially a period of transition. The industrial and commercial world had barely set foot upon the threshold of the wonderful development of the eighteenth and nineteenth centuries. Great Britain until the time of Elizabeth had been only a second or, third rate power in Europe, overshadowed by the great Kingdoms of France and Spain, by the ancient prestige of the German Emperor, and by the power of the Pope. Her influence was raised by the defeat of the Spanish Armada, but the population of England and Wales at the Revolution of 1688 was only five and a half millions, and the supremacy in the money markets and trade of the world still belonged to the bankers and merchants of Holland and Italy. The use of bank-notes, except as mere certificates against which coin and bullion was held to the full amount, had begun only thirty years before the Revolution, and the proper management of a banking currency was almost purely a problem of abstract theory rather than of practical experience. If merchant princes and the kings of finance stood upon the threshold of an unknown world, the mass of the community but dimly viewed it from afar. They were easily deluded by extravagant hopes and easily misled by the fairy tales of the splendid riches and possibilities of the Western Continent. (Conant, op. cit., 86-87.)

It does not take too long an examination of the current wild fluctuations in the stock market and the antics of the world's central banks to conclude that the situation has not changed for the better in the past three hundred years.

A Reasonable Proposal

It started innocently enough, or at least with no discernible evil intent. In 1711 the earl of Oxford came up with a plan to retire the national debt, at the time amounting to almost £10 million in 6% government bonds. A company of merchants was organized and assumed the debt. At first nameless, this association became the "South Sea Company." So that the State could meet the interest payments, duties on a large number of imported products, at first supposed to be temporary, were made permanent. To provide for payment of principal, an act of parliament gave the merchants a monopoly on trade with the Spanish colonies in South America.

This was a trifle optimistic. Spain had no intention of allowing England, with its growing manufacturing power, to cut the Spanish government out of its primary source of income. Spain may not have invested its vast influx of wealth from the mines of the New World wisely, but that didn't mean that the Spanish were stupid. The only trading concession that Spain made was to grant permission to English merchants to import African slaves for thirty years, and to send a single ship once a year to trade with New Spain (Mexico), Chile, or (not and) Peru. Further, the vessel was to be strictly regulated as to tonnage and value of the cargo.

Nevertheless, the earl of Oxford declared that Spain had granted permission for two additional ships the first year, and gave the impression that this was just the beginning of massive expansion in trade. Spain, of course, had no such intention. The best interpretation that can be put on Oxford's statement is that he believed he could persuade the Spanish to expand the scope of the agreement, and was just being a little premature in his announcement.

Or, possibly, more than a little premature. The first voyage — of a single ship — was made in 1717. The year after, war broke out with Spain, and the agreement was canceled.

Redefining Interest and Investment

We can only understand the earl of Oxford's optimism by examining the predominant economic philosophy of the day: mercantilism. For more than a century the idea had grown that true wealth did not consist of marketable goods and services and the means of producing them, but of accumulations of the medium of exchange, notably gold and silver. This was the logical outcome of the great usury debate of the late 16th and early 17th centuries.

The classic — and correct — understanding of usury is taking a profit from something that, in and of itself, does not generate a profit. This comes from Aristotle, who examined the nature of money and credit in the Politics (I.x). Perhaps oversimplified, usury is not simply high interest, or all interest, but any interest above and beyond what is due to an owner of savings as a just share of profits from a productive project.

"Interest" comes from ownership interest. Someone who supplies a store of accumulated savings to finance a project that results in the production of marketable goods and services is due a share of the profits that result. The amount is based on some reasonable calculation as to the value of having contributed the financing. There are many ways to determine what constitutes a fair share. It would be a needless digression to go into the ins and outs of the matter in this discussion. The bottom line is that not to give a just share of profits to those who supply the savings required for capital investment (whether the savings are past or future) is a violation of the rights of private property.

Judaism, Christianity, and Islam maintained this Aristotelian understanding of usury until the 16th century. By and large, Judaism and Islam retain the classic understanding, but, just as Christianity fragmented on theological issues with the Reformation, it divided on the issue of usury. The Catholic Church retained the ancient understanding, although enforcing it with indifferent success as the social and political influence of organized religion waned. The Protestant churches (this is a generalization) abandoned the classic understanding, and redefined usury to mean high interest.

The redefinition of usury meant that it was now considered legitimate to charge for the use of money as money — whether or not the money was used for anything that generated a profit, and as long as the charge wasn't too high. With money as money now considered valuable in and of itself, even as a commodity, there now occurred a sea change in national policy in every country that adopted this new — and very profitable — understanding of money and credit.

The goal of national monetary and fiscal policy was not to see that the country had sufficient supplies of the medium of exchange to facilitate trade and finance economic growth and new capital formation. Instead, accumulations of gold and silver were seen as valuable in and of themselves. In order to accumulate as much of this sterile wealth as possible, a country had to export as much as possible in the form of marketable goods and services, and import as much gold and silver as it could. National wealth was not measured in terms of how well the country was able to provide for its citizens by giving them the opportunity to provide adequately for their domestic needs. Instead, wealth became measured in terms of how much gold and silver could be accumulated. This has been replaced in our day by all forms of the media of exchange, preferably claims issued by other countries with a more or less sound credit rating.

Within this paradigm, production of marketable goods and services became secondary to the manipulation of the media of exchange. Just as "interest" became redefined in order to permit owners of existing accumulations of savings to take a profit without sharing in a profitable enterprise, "investment" became redefined as speculating and gambling in equity and debt without producing any marketable good or service.

The Frenzy Begins

When George I opened parliament in 1717 he expressed concern over the state of the national credit. He recommended that steps be taken to reduce the national debt. Good Queen Anne had died three years previously, leaving the country heavily in debt. The South Sea Company and the Bank of England almost immediately put forward proposals intended to deal with the situation — in ways, naturally enough, calculated to be to the financial advantage of the respective projectors. Even a brief account of the bargaining makes for fascinating reading:

The South Sea Company was essentially a Tory institution and they proposed as early as 1717 to increase their capital from £10,000,000 to £12,000,000 for the purpose of wiping out the debt due the Bank of England and several minor obligations. The bank made counter propositions, but the real contest occurred in 1719 and 1720 over the proposition of the South Sea directors to assume the entire national debt. It was estimated at £30,981,712 and was to be consolidated into one fund, to be added to the capital of the company at five per cent. interest annually. The company proposed to pay a bonus of £3,500,000 to the government in four installments, beginning in 1721. The bank met this remarkable proposition by an offer of its own to assume the entire debt on terms which were calculated to be about £2,000,000 more advantageous than those of their rivals. The South Sea Company obtained three days to amend their offer and increased the bonus to £7,567,500. The bank rejoined with another offer of £1,700 in bank stock for every annuity of £100 for ninety-six and ninety-nine years and the reduction of the interest on the consolidated debt after June 24, 1727, to four per cent. (Conant, op. cit., 90.)

After lengthy debate, parliament passed the South Sea Act, the Bank Act, and the General Fund Act. Robert Walpole was almost the only member of the House to speak against the measures. Although he put the force of his considerable eloquence behind his efforts, they were in vain. Presciently, the "fat old Squire of Norfolk" declared that speculation in stocks would divert the country from genuinely productive activity, to gambling in the hope of getting something for nothing. The directors of the Company would become the real rulers, exercising absolute power over the country without any accountability.

Despite the fact that virtually everything that Walpole predicted came to pass and has persisted, in one form or another, down to the present day, he was ignored. As described by Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds,

The proposals of the South Sea Company were accepted, and that body held itself ready to advance the sum of two millions towards discharging the principal and interest of the debt due by the state for the four lottery funds of the ninth and tenth years of Queen Anne. By the second act, the Bank received a lower rate of interest for the sum of 1,775,027 pounds 15 shillings due to it by the state, and agreed to deliver up to be cancelled as many Exchequer bills as amounted to two millions sterling, and to accept of an annuity of one hundred thousand pounds, being after the rate of five per cent, the whole redeemable at one year's notice. They were further required to be ready to advance, in case of need, a sum not exceeding 2,500,000 pounds upon the same terms of five per cent interest, redeemable by Parliament. The General Fund Act recited the various deficiencies, which were to be made good by the aids derived from the foregoing sources. (Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds. New York: Farrar, Straus and Giroux, 1932, 48.)

The South Sea Company had been transformed from a trading company into a financial institution — and, apparently, a very profitable one. Like today's bailed out gigantic financial consortia, the South Sea Company didn't actually have to produce anything. It just had to make a profit out of speculation, manipulation of the national debt, and mismanagement of the currency.

The bill took two months to work its way through parliament. As predicted, the directors of the Company took every opportunity to puff up the value of the shares. In January of 1720, the value per share was £128. After some fluctuations, the value per share stood at £330 when the House of Commons passed the bill. The bill was then rushed through the House of Lords at high speed. Several peers spoke against it, but to no avail. The bill had its first reading on April 4, 1720. On the fifth it had its second reading, on the sixth it was committed, and on the seventh it was read a third time and passed. George I signed the bill the same day, and it became law.

The country went into a speculative frenzy. "Exchange Alley" was wall-to-wall people every day, while the financial district as a whole was virtually impassable due to the carriages filling the streets. Nor was the insanity any respecter of rank. Rich and poor, low and high, all were caught up in the desire to speculate in shares of the South Sea Company and make enormous gains with no labor and without producing anything in the way of marketable goods and services. Many of the deals involved what would later be termed "derivatives." Politicians, for example, were bribed by "purchasing" shares on credit, with payment due only after the shares were sold.

The Frenzy Spreads

The gambling fever was not restricted to shares in the South Sea Company. Multitudes of new corporations sprang up seemingly from out of nowhere. As Mackay related,

There were nearly a hundred different projects, each more extravagant and deceptive than the other. To use the words of the "Political State," they were "set on foot and promoted by crafty knaves, then pursued by multitudes of covetous fools, and at last appeared to be, in effect, what their vulgar appellation denoted them to be — bubbles and mere cheats." It was computed that near one million and a half sterling was won and lost by these unwarrantable practices, to the impoverishment of many a fool, and the enriching of many a rogue.

Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market. The projectors took the first opportunity of a rise to sell out, and next morning the scheme was at an end. (Mackay, op. cit., 54-55)

As for the South Sea Company itself, the shares rose to £890 by June 3, 1720. Many people then decided it was time to sell, and the shares fell to £640. The Directors and the government began to panic, and immediate steps were taken to bolster the value per share. By the beginning of August the shares had recovered and even gained to the extent of £1,000. This triggered a massive sell off.

A number of shareholders and would-be investors complained that they were being discriminated against in the allocation of shares. The value per share began to drop. By September, it had fallen to £700. The Directors called a special shareholders' meeting, but it had the opposite effect of what was intended. By the middle of September the shares had fallen to £400. Messages were sent to the king in Germany (George I was also the Elector of Hanover) and to Walpole at his country estate to come to London immediately. The hope was that Walpole and the king would persuade the Directors of the Bank of England to float a new bond issue of the South Sea Company in order to keep up the price — an early version of a toxic asset purchase.

Being somewhat wiser than today's Federal Reserve authorities and still preserving some measure of independence (besides wanting to eliminate a rival), the Bank was reluctant to get involved any further than it already was. The Bank finally agreed to circulate the bonds, but refused to commit itself to purchase any set amount. The bonds would be offered for sale to the public, but the Bank itself would not guarantee to purchase any.

At first it seemed as if the ploy might succeed. On the morning that the subscription list opened, throngs of people descended and put their names down. The flood soon abated, however. A run began on the Bank, the goldsmiths, and other financial institutions that had gone heavily into the shares of the South Sea Company. The Bank of England was only able to stave off the worst of the run by hiring people to withdraw low denomination coins and be seen redepositing the money.

The Bank was closed on September 29, a traditional "Bank Holiday," and the panic subsided somewhat. The shares of the South Sea Company continued to drop, however, and soon reached £135. The Bank of England refused to continue trying to float the Company's bonds. The agreement, after all, was still only in draft form, with a number of important particulars left blank — including any penalties for non-performance. As Mackay related the end of the affair,

"And thus," to use the words of the Parliamentary History, "were seen, in the space of eight months, the rise, progress, and fall of that mighty fabric, which, being wound up by mysterious springs to a wonderful height, had fixed the eyes and expectations of all Europe, but whose foundation, being fraud, illusion, credulity, and infatuation, fell to the ground as soon as the artful management of its directors was discovered."

In the hey-day of its blood, during the progress of this dangerous delusion, the manners of the nation became sensibly corrupted. The Parliamentary inquiry, set on foot to discover the delinquents, disclosed scenes of infamy, disgraceful alike to the morals of the offenders and the intellects of the people among whom they had arisen. It is a deeply interesting study to investigate all the evils that were the result. Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later. (Mackay, op. cit., 70.)

The Growth of Banking

Torn between its contradictory character as a commercial bank issuing asset-backed promissory notes to facilitate trade, and the creator of debt-backed promissory notes to finance State expenditures, the Bank of England weathered a number of other storms throughout the 18th century. Banking theory continued to develop, however, as the mercantile classes learned to use the new financial instruments to advantage. They had to proceed cautiously, however, for the failure of the Mississippi Scheme in France and the South Sea Bubble caused the public to look on money, credit, and banking as something mysterious and beyond the ken of mere mortals.

In 1759, however, Adam Smith published The Theory of Moral Sentiments, a production setting out what Smith believed were the principles of human interaction. In 1776 Smith published The Wealth of Nations, which was an application of the principles he had worked out in The Theory of Moral Sentiments to the field of political economy. The Wealth of Nations contains two very important sections for the understanding of money, credit and banking. Volume II dissects mercantilism, disabusing people of the notion that accumulating gold and silver or other media of exchange means that real wealth of the country is increasing.

In Volume I, however, is the explanation of "the Nature, accumulation, and Employment of Stock," that is, approximately a hundred-page treatise on the formation of capital. While not perfect, Smith presented the essence of the real bills doctrine and what would become known as Say's Law of Markets, both of which we have previously discussed.

The fact that Adam Smith worked out the basic principles is of great importance for, while he made a few errors (corrected by later authorities such as Henry Thornton, Harold Moulton, and Louis Kelso), Smith's enormous prestige is critical today in the effort to restore some sanity to the theory and practice of money, credit, and banking. People these days have, by and large, forgotten how to think for themselves. Consequently, the imprimatur of someone like Adam Smith is essential to convince people of the validity of binary economics and the soundness of widespread ownership through a program such as Capital Homesteading.

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Friedrich von Hayek . . . Collectivist?

The Austrian School economist Friedrich von Hayek a collectivist? What next? Pope Benedict XVI a Satanist? The Dalai Lama the secret leader of the local Hell's Angels? Come on!

No, really. Today we received our copy of Contra Keynes and Cambridge: Essays, Correspondence in "The Collected Works of F. A. Hayek." We purchased it from the used book exchange, abebooks.com, because we couldn't find a copy of von Hayek's 1930 critique of John Maynard Keynes's A Treatise on Money on the internet, and the critique is included in this book.

We were already aware that von Hayek believed Keynes to be too collectivist. This, of course, begs the question — how much collectivism is acceptable? How about individualism? Why not act in accordance with humanity's unique political nature and act in a manner consistent with humanity's individual and social nature?

It came as something of a surprise, then, to discover that von Hayek missed the most collectivist statement in the entire Keynesian Kanon. It occurs at the very beginning of the first volume of A Treatise on Money, on page 4 of the edition in our library:

It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

How could von Hayek miss the implications of this breathtaking declaration of State absolutism? State absolutism? Absolutely! What else would you call the alleged power to change reality by "re-editing the dictionary"?

Instead, von Hayek stated, "Book I gives a description and classification of the different kinds of money which in many respects is excellent. Where it gives rise to doubts or objections, the points of difference are not of sufficient consequence to make it necessary to give them space which will be much more urgently needed later on." (Friedrich von Hayek, "Reflections on the Pure Theory of Money of Mr. J. M. Keynes," Contra Keynes and Cambridge. Indianapolis, Indiana: Liberty Fund, Inc., 1995, 123.)

Von Hayek's clear statement that he sees no real problem with Keynes's stunningly collectivist definition of money reveals where the essential problem lies. By mis- or redefining money from "anything that serves as the medium of exchange and can be used in settlement of a debt," to "peculiarly a creation of the State," both Keynes and von Hayek accept the effective abolition of private property. This is accomplished by separating money — whether current money ("currency") or any other form, including barter — from the present value of existing and future marketable goods and services. By abolishing private property, the groundwork is laid for the creation and maintenance of the most perfect totalitarian collectivist State ever imagined.

Say . . . who was that guy in the yellow bed sheet with the embroidered skull and crossbones who just zipped by on that Harley?

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Common Cause, Part VIII: The Revolt of the Goldsmiths

While it was clearly not the intent of the founders, the establishment of the Bank of England created an effective monopoly over money and credit in what was soon to become the United Kingdom. Worse, this monopoly was concentrated in the worst possible hands — the State, the one institution that, due to its monopoly over the instruments of coercion, should never enjoy, establish, or maintain any other monopoly.

Naturally the establishment of a State-supported monopoly created serious problems. Concentration of power, especially financial power, is rarely (if ever) a good thing for anyone, especially for ordinary people who thereby are cut off from the means of acquiring and possessing private property in the means of production.

The first reaction against the Bank of England did not, however, come from the common people. Relatively few of them had sufficient existing ownership to worry about such things. Those that did have a modicum of wealth tended to avoid banks, even to finance capital acquisitions or improvements. True, the Bank of England was the first major establishment intended to function in accordance with the real bills doctrine and create money as necessary backed by the present value of existing and future marketable goods and services. Popular understanding of money and credit, however, was still linked seemingly irrevocably to existing accumulations of savings. Existing savings are, by definition, a monopoly of the currently wealthy. Consequently, banks, capital finance, lending, money creation — these were esoteric matters, best left to the financial and political elite.

The Business of Lending

Lending for both consumption and productive purposes had, for centuries, been in the hands of the goldsmiths. It was common throughout the Middle Ages for people with savings to deposit their coin or valuable objects with the local goldsmith for safekeeping. This was logical, for the goldsmiths had the best security around. Their business success depended on their ability to safeguard small items of high value.

This made the goldsmiths the obvious people to resort to when a loan was needed. During the Middle Ages, of course, most loans were not made for productive purposes, but for consumption. Charging interest on these loans was (and remains) a serious sin under the name "usury" in the three major religions and most of the others. This is because the money is not used for a productive purpose, and, consequently, there is no profit to share — the original meaning of "interest," derived from "ownership interest."

Nevertheless, lending for consumption at interest was tolerated, though not considered moral. We don't need to go into the complex rationale here, other than to say that usury is wrong not because taking a profit is wrong, but because taking a profit when no profit is generated is wrong. Taking a profit is therefore not "objectively evil," and can be tolerated at times when there are no actual profits if the good that results outweighs the unintended evil of making an unjust profit.

There was, however, a growing incidence of lending for productive purposes as England changed from producing marketable goods and services for domestic use, to producing goods for export. This had begun on a large scale in the reign of Henry VII Tudor, when the "staple," that is, the annual production of wool, became an important export. Consequently, the rising "New Men" were those who dealt primarily in wool and related areas of commerce. Large tracts of land were cleared of the subsistence farmers and herders who had lived there for centuries, sometimes millennia, and used for sheepherding. As St. Thomas More later quipped in Utopia, England thereby became the only country on earth where sheep ate men.

Developing the staple, building the financial and commercial infrastructure — all of this took money. While the practice of discounting and rediscounting bills of exchange drawn on the present value of the annual staple to be realized in the future had been growing rapidly, a great deal of lending was still out of existing accumulations of savings. Loans made out of existing accumulations of savings remained largely the business of the goldsmiths until the establishment of the Bank of England.

The Reaction of the Goldsmiths

Not surprisingly, in view of the special privileges granted to the Bank of England, the goldsmiths quickly became desperate. Because of the money creation powers and economies of scale of the new Bank, the only business that would be left open to them was high-risk loans made to borrowers who did not qualify for a loan from the Bank of England or one of the affiliated "country banks." They therefore gave their support to a proposal that, even had it succeeded, would have been disastrous.

This was the proposal for a "land bank" brought before parliament by Hugh Chamberlain the year after the founding of the Bank of England. The idea was to establish a bank that would issue notes backed by the value of land, up to one hundred times the annual rental of the land, and "in some unexplained way" provide the State with funds. (Conant, op. cit., 85.)

Except for the odd provision that the State would somehow receive funds (probably a subtle way of offering a bribe), the theory of a land bank is relatively sound. The currency is backed with something with a defined present value. It has the disadvantage, however, of tying the amount of circulating media to an asset that does not increase and decrease in tandem with the marketable goods and services available for purchase in the economy. This means automatic deflation if the economy grows at all, and inflation if the economy contracts. Tying the money supply to a commodity in fixed supply is thus a recipe for economic stagnation. This, of course, is simply the ultimate outcome of tying money to something other than the present value of existing and future marketable goods and services. The same thing happens with gold, silver, or any other commodity.

The other problem with the land bank scheme was that the proposed issue of notes was grossly in excess of the present value of the land. Typically, even the best land at that time sold for twenty times the annual rental at most, and frequently less. That is, the present value of the land was calculated by multiplying the annual anticipated rent revenue by some factor reflecting the true value of the land. In essence, the proposal was to inflate the currency, giving a bribe to the State for the privilege of robbing the people through the transference of purchasing power that necessarily results from inflation. The first bribe was to guarantee the State an advance of more than £2.5 million at 7% interest, to be secured by a special tax on salt.

Those who opposed the monopoly established for the advantage of the Bank of England were quick to offer their support to the land bank. Unfortunately (or, actually, fortunately) they were not quite so ready to offer financial support. As Conant related,

The King was authorized to appoint a body of commissioners to receive subscriptions, half of which were required to be subscribed before August 1, 1696, and the whole before January 1, 1697. Subscriptions did not materialize, however, with such rapidity as expressions of sympathy for the enterprise. The Lords of the Treasury subscribed £5000 on behalf of the King, but the other subscriptions never exceeded £2100, and it is recorded about three years later that Dr. Chamberlain, "sole contriver and manager of the Land Bank, is retired to Holland, on suspicion of debt." (Conant, op. cit., 85.)

Before that, however, people began worrying about the rise of a potential rival to the Bank. The value of Bank shares fell. This resulted in a demand that the Bank of England be granted a monopoly not just on government business, but on all commercial banking. The shares recovered after the land bank proposal came to nothing, but other problems were in store.

Dangers of State Control of Money and Credit

The Bank's association with the State was the chief problem it faced. Being forced to implement government monetary and fiscal policy had a definite down side. Decisions tended to be made on political, rather than economic or financial grounds. One of the first instances of this was a "recoinage" ordered for 1696, to be completed by February 1697. This was to replace the "hammered" coinage that still made up the bulk of the currency. Much of this was badly worn, clipped (pieces of metal shaved off), and underweight. New coins of full weight made by machine were to take the place of the worn-out pieces.

As the government's chief financial agent, the Bank found itself presented with vast quantities of inferior coin with a legal tender value sometimes far in excess of the value of the metal, for which it had to pay out full value in good coin. The government sold the new coin to the Bank at face value, but only purchased the old coin from the Bank as bullion. This caused the Bank to suffer a serious financial loss.

Adding to the problem was the fact that the new coins could not be manufactured fast enough to meet demand. Since the lowest denomination note issued by the Bank of England was £20 — an enormous sum of money at the end of the 17th century — most people had to be paid out in new coins when they brought their old coins in for redemption. The goldsmiths, still smarting from their defeat caused by the failure of the land bank scheme, took the opportunity to try a trick that became common later, and eventually led to the formation of clearinghouses as well as stricter government regulation.

A Trick with Fractional Reserves

The goldsmiths attempted something that came straight out of the "dirty tricks" department of classical capitalism. While relatively simple, it requires some explanation and a little background information. The trick relies on the essential difference between a bank of deposit and a commercial bank of issue — and the insistence that banknotes be redeemable on demand in gold and silver, not in the assets that actually back the banknotes.

As we have seen, a bank of deposit is pretty much what it sounds like, and what most people tend to think of as a bank . . . whether or not they are looking at an actual bank of deposit. A bank of deposit takes deposits (obviously), then lends out the deposits to borrowers. The bank charges interest on such loans, some of which is passed through to the depositors. The bank of deposit retains the rest of the interest as its revenue, from which it meets its costs and generates profit for the owners. (George Tucker, The Theory of Money and Banks Investigated. Boston, Massachusetts: Charles C. Little and James Brown, 1839, 160-172.)

Assuming that a country is on the gold standard, the bank of deposit can either lend out the gold that was deposited, or it can keep the gold safe in its vaults and issue a banknote to substitute for the gold. These banknotes circulate as currency, or "current money." If a customer presents a banknote to the bank, the bank will either use the banknote to cancel a debt owed by the customer, or exchange the note for gold out of the bank's reserves.

As noted, the bank of issue is a different creature altogether. The most common type of bank of issue is the commercial bank, that is, a bank intended to facilitate commerce. (Ibid.) A bank of issue converts non-monetary wealth into money. If something has a present value, it can (in theory, anyway) be converted into money. (Ibid.)

A bank of issue (again, in theory) does not need a customer to make a deposit before making a loan. Instead, a borrower comes to the bank and pledges something of value in exchange for a loan. Technically, if the pledge involves real property (i.e., land), the pledge is called a "mortgage." ("Mortgage," Black's Law Dictionary, op. cit.) If the pledge involves anything other than land, it is called a "pawn." ("Pawn," Oxford English Dictionary.) The latter term is nowadays restricted to small loans made on "portable security," that is, items of relatively high value that can be transported easily and used to secure the loan.

The bank of issue creates the money, either in the form of a banknote that circulates as currency, or in the form of a demand deposit on which the borrower issues checks. A check does not usually circulate as currency, but is returned immediately (more or less) to the bank of issue for redemption after a single transaction. Usually the recipient of a check does not take it to the bank on which it was drawn and demand cash, but deposits it in his or her own bank, taking the banknotes issued by that bank or issuing checks.

The recipient's bank presents the check to the bank on which it was drawn in order to settle the account and complete the transaction. Since the original bank and the receiving bank often have thousands, if not millions of such transactions back and forth, very little cash changes hands — or needs to, as the accounts eventually "zero out" (again, in theory). This "zeroing out" is usually done through a clearinghouse, a financial institution designed to facilitate transactions between banks and minimize the movement of actual cash, which can be both unwieldy and unsafe.

The Reserve Requirement

In practice, however, there is a role for reserves of currency even with a "pure" bank of issue. Assuming a gold standard, a bank of issue may need gold on hand to reassure the public as to the value of its banknotes and demand deposits. A bank of issue does this by converting its banknotes and demand deposits into gold coin on demand (or into banknotes of the central bank that can be converted into gold) instead of using the banknotes to settle outstanding liabilities of the bank. (Thornton, op. cit., 90-102.)

A bank of issue thereby assumes the character of a bank of deposit, at least in part. The bank has to maintain deposits — reserves — of whatever serves as the legal tender currency in order to self-insure its banknotes and demand deposits. It thereby backs its banknotes and demand deposits both with the loans it made to create the money (which might go bad), and a percentage of its total loans in gold, which is presumed always to be good, despite what history has shown. (Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650, Harvard Economic Studies, 43. Cambridge, Massachusetts: Harvard University Press, 1934.)

In Great Britain at the close of the 17th century, there were both banks of issue and banks of deposit. To confuse matters, however, not only did most people then tend to think of all banks as banks of deposit, today's economists and other experts also have a strong tendency to make the same assumption. People thought — and still think — that banknotes were backed 100% by gold. If not, there was some kind of fraud involved.

What really backed the banknotes, of course, were the loans made by the bank that represented actual assets with a defined value in terms of gold. That is, a bank of issue might make a loan for £1,000, and take a lien on a factory, mine, or a farm worth £2,000. This would give the bank's notes or demand deposits "double" security. It wasn't too unusual for a banknote with a face value of, say, £1, to pass for more than £1 in gold if the public was aware that the bank that issued the note had a reputation for taking only good security for the loans it made. Of course, if a bank had a bad reputation, the banknotes it issued might be worth much less than the face value of the note in gold.

Typically, however, banks of issue would not stop at backing their banknotes and demand deposits with liens on items of present value, but also back a portion of each banknote or demand deposit with gold as well as other assets. Thus, a conservative bank of issue's banknotes and demand deposits might be backed 200% with assets other than gold, plus 25% in gold, making each £1 it issued "worth" £2, 5s (a "shilling" was 1/20 of a pound, so 5 shillings or 5s was 25% of £1), with the note passing at a premium over the face value to reflect the greater confidence in the issuing bank.

Most checks and banknotes emitted by a bank of issue, however, were not redeemed in gold, but by settling the debt by means of which the money was created in the first place. Before the first clearinghouse was established in England in 1773, this was done through direct inter-bank transfers, large banks, or a consortium of banks filling the same function that clearinghouses later filled. In the 17th and 18th centuries, this was primarily banknotes as well as the checks that today constitute the bulk of the business of clearinghouses.

The "Bullying Tactic"

Unfortunately, in the laissez faire atmosphere of the 17th and 18th century (that is, laissez faire when it suited the plutocracy to be left alone, i.e., until they needed the State to enforce some demand or other), there was an underhanded financial trick that large banks used to play on smaller, independent banks. If we correctly understand Adam Smith's analysis in The Wealth of Nations, larger banks or financial consortiums would sometimes take or create the opportunity to destroy a smaller rival. (Adam Smith, The Wealth of Nations, 294.) Large banks would hold back banknotes issued by an independent small bank until they had accumulated more than the independent bank was believed to have in gold reserves.

These banknotes would be presented all at one time and, instead of being used to settle or purchase the independent bank's outstanding loans (the basis on which the banknotes had been issued), would be used to demand gold. The independent bank would thereby be forced into bankruptcy, and the larger bank(s) would pick up the independent bank's outstanding loans and other assets for a fraction of their true value. This sort of thing also happened in Europe and, later, in the United States under the state banking system that was in place prior to the National Bank Act of 1864. Even as late as the early 20th century J. P. Morgan used a variation of this "liquidity duel" (Michael Crook, "A Brief History and Analysis of Scottish Free Banking, 1716-1845") or "bullying trick" ("The Bullionist Controversy," The History of Economic Thought Website.) to cause a run on the Knickerbocker Trust by suspending the Knickerbocker's clearinghouse privileges, thereby precipitating the "Panic of 1907."

In Scotland, banks were allowed to suspend convertibility of their banknotes into gold on a temporary basis, in part to prevent this from happening. (Conant, op. cit., 145.) As described by Smith,

Some years ago the different banking companies of Scotland were in the practice of inserting into their bank notes, what they called an Optional Clause, by which they promised payment to the bearer, either as soon as the note should be presented, or, in the option of the directors, six months after such presentment, together with the legal interest for the said six months. The directors of some of those banks sometimes took advantage of this optional clause, and sometimes threatened those who demanded gold and silver in exchange for a considerable number of their notes, that they would take advantage of it, unless such demanders would content themselves with a part of what they demanded. (Smith, loc. cit.)

Naturally, this did not sit well with the financial powers-that-were in London who did not like such interference in "free trade." Therefore, even a temporary suspension of convertibility of banknotes into gold was outlawed in 1765 (Conant, op. cit., 146.) . . . unless you were the Bank of England and had a special relationship with the government. Consequently, the goldsmiths began collecting Bank of England notes that bore the promise of redemption in gold.

The War on the Bank of England

Eventually the goldsmith's accumulated approximately £30,000 in banknotes. These were presented for redemption during the week beginning May 4, 1696. As anticipated, this caused a "run" on the Bank — customers demanding to withdraw their accounts in full, in gold and silver, not paper.

The banknotes, however, were not backed by gold and silver, but by government debt. The Bank typically had only sufficient gold and silver on hand to meet the ordinary demand for convertibility into specie. In effect, by presenting the banknotes backed by government debt for conversion into coin, people were demanding that the State make immediate repayment of that portion of the national debt held by the Bank. Nowhere is the essential illogic of backing the currency with government debt more evident, for making good on the banknotes would have required a huge tax increase, payable only in gold and silver . . . which would immediately have set off inflation, possibly even hyperinflation as gold and silver were taken out of circulation and replaced by banknotes.

One of the advantages of being so closely tied to the government now became evident. The directors simply refused to honor the promise given on the face of the banknotes and convert them into specie. An ordinary bank doing the same thing would have been forced into bankruptcy, as became not uncommon during the 18th century. The Bank of England did, however, promise to continue to make redemptions for their current customers . . . as soon as the government made its scheduled £80,000 interest payment on the State debt held by the Bank.

Now one of the disadvantages of being so closely tied to the government became evident. The government failed to make the scheduled payment. The Lords of the Treasury, however, did issue an order that no public notary could "enter a protest" on any bill issued by the Bank for a period of two weeks.

"Entering a protest" is a formal statement by a notary made at the request of the holder of a bill or note that the instrument was presented for payment on the specified day and was refused. The "protest" gives the reasons for refusing to redeem the bill or note and protests against all parties to the instrument (in this case the Bank of England and the government), holding them responsible for all damages resulting from the refusal to honor the bill.

The government, by disallowing all such protest effectively destroyed the private property interest in the bill on the part of the holder in due course. It was also an effective suspension of specie payments that lasted for over a year before the Bank resumed redemption of its notes in gold and silver. The Bank was granted new privileges and its charter extended.

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Von Hayek's Comeback

In the face of what can only be described as "blatant Keynesianism" (i.e., socialism) now pervasive throughout the world, there may be some glimmerings of hope coming from the Wall Street Journal. At the very least, the venerable financial newspaper is avoiding (too much) name calling . . . unlike a deservedly nameless "economist" who recently published an article in an equally deservedly anonymous journal on "oinkonomics," predictably a rant against all those dirty, greedy, filthy, sinful capitalist pigs who refuse to come around and be good socialists and follow the orders of the author of the article, whether or not the royal commands make any sense. (The author once published an article on all the things he'd do if he were king: raise wages, abolish taxes, make everything cheap, command the tide to stop coming in . . .)

In any event, an article appeared today in the Wall Street Journal written by an economics professor at George Mason University. The article was refreshing if only because it did not seem to take the usual academic acceptance of socialism for granted. There are, of course, things wrong with the economics of Friedrich von Hayek — but you can see the main issue in the following copy of the letter we sent:

Dear Sir:

Thank you for your excellent article in today's Wall Street Journal ("Why Friedrich Hayek Is Making a Comeback," 06/28/10, A21). It highlighted a number of critical points to which we here at the Center for Economic and Social Justice ("CESJ") in Arlington, Virginia, have been trying to draw the attention of policymakers and the Federal Reserve authorities for years. If you are not familiar with CESJ, you may be acquainted with Dr. Norman Bailey, who serves on our Board of Counselors, or with his work as former Chief Economic Advisor for the National Security Council under President Reagan.

We agree completely that it is not simply a question of printing money and throwing it at the problem as Keynes — and even, to a limited extent, Milton Friedman — asserted. We believe, however, that the article did not present a viable solution. To address that, at the suggestion of Dr. Norman Kurland, president of CESJ, I am sending you a link to Dr. Kurland's paper, "A New Look at Prices and Money," published in The Journal of Socio-Economics, Vol. 30, pp. 495-515. Dr. Kurland would welcome your comments on his paper.

First, of course, we agree that neither the State nor the central bank has any business setting interest rates. Only the market can set the interest rate on existing accumulations of savings if a market is to be considered in any way "free." The rate of interest should not be manipulated to achieve political goals or as a result of collusion among private enterprises. These efforts merely raise or maintain barriers against free and full participation in the economy by everyone according to his or her abilities.

There is also the issue of State interference with individual freedom. "Power," as Daniel Webster observed, "naturally and necessarily follows property." By interfering with access to the means of acquiring and possessing private property in the means of production and subordinating economic growth and financing of new capital to political motives, the State effectively determines who can own and on what terms. This is tantamount to the abolition of private property.

Not surprisingly, attempts at State control of the economy, in whole or in part, corroborate the effective abolition of private property under Keynesian assumptions. "Property," as the late lawyer-economist Louis Kelso (best known as the "inventor" of the ESOP) pointed out, "in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," American Bar Association Journal, March 1957.)

The problem with von Hayek's solution of just letting the free market operate, however, is that he mis-defined money. Somewhat ironically, he used the same Currency School understanding of money as Keynes. This effectively limits "money" to coin, currency, and (except for some monetary puritans) demand deposits.

Von Hayek correctly diagnosed Keynes's collectivism in his deservedly renowned critique of Keynes's A Treatise on Money (1930). Nevertheless, he failed to take into account the fact that "money" as the medium of exchange is anything that can be used in settlement of a debt. Von Hayek thereby missed the most collectivist and thus the most damning of the Keynesian claims. Consistent with Georg Friedrich Knapp's "chartalism," Keynes declared that "money" is a special creation of the State, and the State has the power (in Keynes's words) to "re-edit the dictionary" and unilaterally change the terms of any contract. Keynesianism thereby makes private property a meaningless concept.

Consistent with the findings of Dr. Harold G. Moulton, first president of the Brookings Institution, CESJ advocates a much more limited role for the State, particularly in the economy. Dr. Moulton presented a counter to the New Deal in 1935 with the publication of The Formation of Capital, the third in a four-volume series setting forth principles of economics and finance that would bring about a sound recovery in place of artificial stimulation by the State.

To Moulton's work we add that of Louis Kelso and Mortimer Adler as found in the two books they co-authored, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter work is significant: "A Proposal to Free Economic Growth from the Slavery of Savings." Finally, we integrate the "act of social justice," not as a euphemism for the State making up for the failure of individual justice, but as a means of restructuring our institutions to provide a level playing field so that individual virtue will become possible once again — equality of opportunity, not results.

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Common Cause, Part VII: The Old Lady of Threadneedle Street

The Bank of England, chartered in 1694, is generally considered the first modern bank of issue, as well as the first true central bank. Known today as "the Old Lady of Threadneedle Street (although it didn't move there until 1732), the Bank was instrumental in directing the course of British economic and social development for the next three centuries. It laid the foundation of the economic strength of the British Empire — and the fatal weaknesses that surfaced with the development and general acceptance of the principles of the British Currency School. We find this embedded in the origins of the bank itself.

Different Types of Banks

Before we can begin, however, we must briefly define our terms. This is necessary due to the fact that the terms, while in common use, have very fluid meanings. How these terms are understood often depends more on political needs than financial or economic factors. Consequently there are no standard definitions, and the terms "national bank" and "central bank" are often used interchangeably. For convenience, we will use the following definitions.

A "band of deposit" or deposit bank is what most people think of as a bank. A bank of deposit is defined as a financial institution that takes deposits and makes loans. It functions as an intermediary between savers and borrowers, facilitating the process and, in general, making the market work more efficiently by putting "idle" funds to work.

In contrast, a "commercial bank" is a financial institution that takes deposits, makes loans, and issues promissory notes. As a type of bank of issue or bank of circulation (the terms are usually considered interchangeable), a commercial bank can create money. When done correctly, the money created by a commercial bank, whether in the form of banknotes, demand deposits, or bills of exchange, is backed by the present value of existing or future marketable goods and services.

A "national bank" is a financial institution that, in its purest form, serves as a bank of deposit for the State. In this capacity it regulates the national currency and sets the standard of value. A national bank may also function as a commercial bank with the power to create money for private sector industry, commerce, and agriculture, but should be prohibited from creating money for the State. Allowing the State to create money, either directly by issuing treasury bills and notes, or indirectly, by selling its debt paper to a commercial, national, or central bank circumvents the controls imposed on the State by direct taxation and the required consent of the governed, substituting the "hidden tax" of inflation.

A "central bank" is a "bank for banks." A "true" central bank functions as a national bank with respect to the regulation of the national currency and the standard of value, and as a bank of issue for commercial banks. A central bank differs from a national bank in that a central bank has the power to create money specifically for other banks. A central bank may also function as a commercial bank and serve private sector businesses directly, but this tends to obscure its special character as a bank for banks, and inserts a conflict of interest. In common with a national bank, a central bank should be prohibited from creating money for the State, although serving as a depository for State funds is a legitimate and necessary function of a central bank.

The Founding of the Bank

The ostensible reason for the establishment of the Bank of England, as with previous banks with a national character, was to facilitate trading in bills of exchange. The difference was that the Bank of England was established as a bank for bankers — the essence of a central bank.

The Bank of England was capitalized in the usual way. It was organized as a joint-stock company with the subscribers paying in accumulated savings in the form of specie, that is, gold and silver coin and bullion. With its power to discount and rediscount bills of exchange, however, the Bank — if successful — would make the mercantile classes almost completely independent of the executive ("the Crown") and thus put that wealthy financial elite in total control of the country. The problem, however, was that in order to obtain a royal charter, the organizers had to placate the new king, William of Orange.

William had come to the throne as the result of the "Glorious Revolution" of 1688. He was still widely regarded by many of his new subjects as a usurper. Further, William was fully aware that he was king only at the sufferance of the increasingly powerful commercial classes who controlled the House of Commons. These, by and large, had gained their fortunes in the new society created out of the wreckage of Henry VIII Tudor's break with the Catholic Church.

Consequently, the State in the person of William was, as had become usual in England and throughout the rest of the world, in continual need of money. With the Stuarts, the parliament had learned the tremendous power associated with controlling the purse strings. The House of Commons meant to keep the king on a short rein — with the threat of a short reign, if necessary.

The Slavery of Savings

Before the Bank of England was founded, virtually all new capital formation had to be financed out of existing accumulations of savings. This is a slow and laborious process, requiring cutting consumption. This, paradoxically, slows the process of capital formation even further by reducing effective demand in the economy, and is believed (erroneously) to require concentrated ownership of the means of production in order to finance new capital. (Vide Moulton, The Formation of Capital, loc cit.)

Further, savings were inevitably in the form of gold and silver coin. The mint right was a long-established monopoly of the Crown. It was, however, a monopoly exercised under the watchful eye of a parliament that feared — rightly — even this truncated power to create money in the hands of the executive. Charles I Stuart had, after all, managed to carry on a long and devastating war half a century before by being able to coin money. Henry VIII Tudor had almost ruined the country by using his royal prerogative of striking coins and his near-legendary debasement of the currency to control England and Ireland politically and economically.

In consequence, ownership of the means of production was highly concentrated in England, even at the dawn of the 18th century. The common people had largely been stripped of ownership of land as a result of the Reformation, and ownership concentrated in the hands of the aristocracy. The rising commercial classes, which had gained great economic as well as political power during the Civil War, already controlled most of the non-agricultural trade in the country. An institution like the Bank of England, with its discount power and thus control over the means of acquiring and possessing private property in the means of production, would concentrate ownership of the growing commercial interests even further in fewer and fewer hands. This would mean the virtual negation of the power of the Crown.

Reasserting Royal Power

As noted, however, William had one arrow in his otherwise empty quiver. Organizing as a corporation could only be carried out with explicit royal approval. It was, after all, the creation of an "artificial person," and thus required what amounts to a grant of citizenship — personality — in order to have a social and legal identity. In order to obtain its charter, the bank had to agree to lend the full amount of its capitalization immediately to the Crown. In exchange, the bank received "government stock," as the floating debt of the State was then termed.

There were not a few advantages to this arrangement. Bank of England notes were thereby backed not primarily by the value of the commercial paper that private merchants and bankers brought to the bank for discounting, or even gold and silver coin and bullion, but by the full faith and credit of the English Crown. The Bank of England thereby acquired the character of a national bank, rather than remaining a purely private venture. The Bank of England would henceforth be the chief agent for handling the financial business of the English (to be known about a decade later as the British) government.

Plus, by backing the note issues of the Bank of England with government debt and making it the chief agent of the government, the notes of all other commercial banks that rediscounted their bills at the Bank of England would pass at par with those of the Bank of England. This, in effect, established a common paper currency throughout England. Parity with the gold and silver coinage was to be maintained by requiring that the banknotes be convertible on demand into gold.

How to Debauch a Currency and Destroy Liberty

Unfortunately, the disadvantages of this arrangement were even greater. It is a fundamental principle of internal control in a business that functions must be separated, e.g., those who authorize the disbursement of funds must not be the ones who actually have custody of the funds and make disbursements. Backing the note issues of the Bank of England with government debt tied private and public interests together in a sort of proto military-industrial complex. This eventually led to the elitist anti-democratic ideas expressed by Walter Bagehot in The English Constitution (1867).

In addition, giving a commercial bank the power to create money for non-productive purposes — especially for the State, which has a monopoly on the instruments of coercion — is the same as permitting the State to raise money at will, bypassing the taxation and appropriations process. This is extremely dangerous, for it gives the State enormous power by avoiding the normal checks and balances built into the system. As Henry C. Adams observed,

As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

Allowing the State to finance its operations without being directly accountable to the citizens through taxation is one of the surest ways to establish and maintain tyranny — to say nothing of effectively abolishing private property. Money and credit are the primary means to acquire and possess private property in the means of production. Money is also a claim on the present value of all existing and future marketable goods and services in the economy — which ordinarily must back all money and be directly linked to it through the institution of private property in the means of production that generate marketable goods and services. Ownership of the means of production is, in turn, the chief protection for life, liberty, and all other fundamental human rights.

Formerly, the only thing holding back the power of the State to inflate the currency was access to the supply of precious metal and how fast the government dared to decrease the amount of gold and silver in the coinage. With the addition of paper money, the inflation rate could proceed at a much faster rate. Now that money can be created electronically, of course, there is no effective limit to the rate at which the currency can be inflated. One witness to this is the increasingly wild swings in the stock market in recent years as money is created virtually at will for speculation and gambling on the secondary markets and to finance massive government spending.

Of course, neither paper money nor electronic money is inherently any more inflationary than gold, silver, or any other medium. The key to a stable currency or money supply that is neither inflationary nor deflationary — an "elastic currency" — is to tie all money creation to the present value of existing and future marketable goods and services with private property.

The problem is when the State — or anyone or anything else — gains control over or access to money and credit in any way that allows money creation without a preexisting private property right in something that has a definable and secure present value. When the State gains access to the money creation powers of the banking system, accountability to the citizens diminishes and sometimes disappears altogether. This lays the groundwork for tyranny as well as effective socialism. It is, to all intents and purposes, taxation without representation.

The Privileges of the Bank of England

On the strength of its massive loan to the State, the Bank of England not only had the benefit of certain inherent advantages, but comparative advantages over the goldsmiths. The goldsmiths had previously enjoyed a virtual monopoly on lending. They were, however, deposit bankers, meaning that they could not lend out more than they took in. They were also forced by economies of scale and the scarcity of existing accumulations of savings to charge high interest on loans.

It didn't help that many of the goldsmiths were Jewish. Jews had been expelled from England in 1295. They had, however, been permitted back into the country a generation or so before the founding of the Bank of England. This was after the Jews of Amsterdam, anxious to participate in the economic growth and development of England, managed to scrape together a bribe large enough to satisfy Oliver Cromwell, then Lord Protector of the Commonwealth.

In contrast, the Bank of England was an enterprise initiated by the "best" men in England. These were descendants (culturally and mentally, if not physically) of the class that had controlled England since the Tudors had tossed out the Plantagenents late in the 15th century. Walter Bagehot was later to assert in his classic The English Constitution (1867) that the mercantile classes were the real rulers of England — an assertion borne out by the rapid rise of the Bank of England.

Nevertheless, the Bank of England could not have attained its eminence without the protection of the State. Because of its special position, the Bank had three privileges denied to other financial institutions. These privileges allowed the Bank to reduce its charges far below those of its competition, the London goldsmiths, and virtually eliminate all rivals. The Bank,

• Received all government balances (i.e., was the official agent for the State's financial business),

• Had limited liability, and (most important)

• Had the power to issue banknotes against the government debt, thereby permitting the Bank to make loans in excess of its deposits.

Discounting bills of exchange was by this time a common practice, and these circulated as a form of currency, albeit frequently only from business to business. Bills of exchange did not provide a common circulating medium for the country, especially as they were inevitably in large denominations. The Bank of England was, in fact, established in order to facilitate the rediscounting of bills of exchange.

Commercial Banking with a Difference

The issue of banknotes made the Bank of England something more than an ordinary commercial bank. By providing a common circulating medium for the country in the form of banknotes backed by the State debt, the Bank of England became the first true bank of issue or circulation. (Charles Conant, A History of Modern Banks of Issue. New York: The Adelphi Company, 1927, 84.)

This was a problem on two counts. One, the soundness of the banknotes was based (as today) on the credit-worthiness of the government instead of the productive capacity of private sector assets. As we have seen in recent years, as well as many times throughout history, basing a currency on the faith and credit of the government whose debt stands behind the currency destabilizes the currency whenever the government gets into trouble, whether politically or economically.

Two, backing the currency with government debt essentially gives the State the key to the money machine. Consistent with the disproved principles of the British Currency School, this also convinces many people that government debt is the only proper backing for the currency. This, of course, makes no sense, given the definition of money as the medium of exchange: anything that can be used in settlement of a debt. A private property right is essential if money is to have a stable and secure value, or even if it is to serve its proper function.

Using government debt to back the currency or any other part of the money supply effectively abolishes private property to that extent. It also gives the State virtually complete control over the economy — at least that part of it involving consumers and day-to-day transactions in the public market, as opposed to what is today known as "B2B" — "Business to Business." In general, at least until the State takes over control of business, the private sector can continue to create its own money. This is in the form of bills of exchange that circulate within the business community, usually without ever seeing the inside of a bank.

All of these dangers are avoided, or at least minimized if the State is forbidden to create money, or have the commercial, national, or central banking system create money on its behalf. Had the Bank of England backed its banknotes with properly vetted and collateralized private sector bills of exchange, the circulating medium would have been backed not by the vagaries of State monetary and fiscal policy — always at the mercy of political interests instead of the needs of commerce — but would have had existing productive private sector assets behind them instead of the State's ability to collect taxes at some unspecified date in the future.

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News from the Network, Vol. 3, No. 25

This week seems to be pretty much a replay of many of the previous weeks. Problems keep cropping up that could be solved with the application of Just Third Way programs and principles (chiefly Capital Homesteading), but no one seems to be paying any attention. The media and economic mavens keep announcing that the recession is over without even convincing themselves, and the oil aneurism seems to have assumed the status of business-as-usual. Ho, hum.

One serious danger sign popped up today in the Wall Street Journal for anyone fortunate enough to have read Dr. Harold G. Moulton's 1935 classic The Formation of Capital. There were at least two articles complaining about the imposition of regulations that will make it harder for consumers to borrow beyond their means and so "stimulate" the economy. There was also a laudatory article reporting that some manufacturing companies and service industries were adding new capital in anticipation of an upswing in consumer demand. Two problems are immediately evident

One, of course, lending consumers even more money that they can't repay will do nothing to get us out of the hole we're in. Two, Moulton clearly proved that consumer demand does not increase in response to capital formation, but that capital formation increases in response to consumer demand. There must be a concurrent increase in both consumption and investment in order for economic growth to occur and be in any way sustainable. As it is, additional new capital formation at this time, without broadening the ownership of it to increase effective demand, is simply wasting precious resources to create excess capacity.

Surprisingly, America's latest economic bogeyman, China, seems to be doing more in that area than the United States — and people wonder at the trillions of dollars we owe to China:

• Corey Rosen of the National Center for Employee Ownership reports that Huawei, a global provider of telecommunications networks in China, with 95,000 workers, is now the second largest worker-owned company in the world. Ownership is restricted to the 61,000 Chinese employees, as the company says that legal issues make it difficult to allow ownership by non-Chinese. Corey states that worker ownership is quite common in China, although exact statistics are difficult to obtain.

• We recently received some unsolicited comments regarding the basis of the natural moral law used by the Just Third Way. Inevitably, questioners seem to reject the basis used by Aristotle, Aquinas, Maimonides, and Ibn Khaldûn (and Kelso and Adler), and — in consequence — fail to realize the significance of Aquinas' correction of Aristotle, and thus Pius XI's breakthrough in moral philosophy as analyzed by William Ferree. For the record, then, we use the "Intellect" (Nature) as the basis of the natural law, not "Will" (Revelation or personal opinion). It is possible to understand the economic justice principles of Binary Economics without the Thomist refinements of Aristotelian philosophy and natural law theory. We cannot, however, understand the social justice principles of the Just Third Way without Aquinas and Pius XI — or Ferree. Before offering a critique of either one, then, it would be well for prospective critics to read Chapter 5 of The Capitalist Manifesto and Introduction to Social Justice. For those interested in the basic principles of the natural moral law, a good place to start is Dr. Heinrich Rommen's book on the subject, The Natural Law, and from there explore the resources offered by the Center for the Study of the Great Ideas. All but Dr. Rommen's book are free, and even that should be available in many libraries.

• Speaking of the Center for the Study of the Great Ideas, we received an e-mail from Dr. Max Weismann, president of the CSGI, with some very positive comments responding to a statement by Norman Kurland that the war in Afghanistan — or anywhere else — is, at heart, a "war of ideas," and the best "weapons" to use are good ideas strong enough to force out and "conquer" the bad ideas.

• This past week Norman Kurland attended a seminar at the Atlas Foundation. Also in attendance was Dr. Norman Bailey, friend of CESJ and former chief economic advisor to the National Security Council under President Reagan. Norm (K) made a number of good contacts, and reinforced the addition of lowering barriers to expanded capital ownership to the traditional "Libertarian Triad" of a limited economic role for the State, free and open markets as the best determinant of just wages, just prices, and just profits, and restoration of the rights of private property.

• Norm's attendance at the Atlas function was arranged by Joe Recinos, who has returned briefly to this area following an extended business trip in Central America. Joe plans on another trip south very soon, and has committed himself to reconnecting with the family of the late Señor Alberto Martén Chavarría, renowned as the founder of Solidarism in Costa Rica, and who expressed support for Binary Economics and the principles of the Just Third Way.

• Norm also had a meeting this week with State Representative Anastasia Pittman of Oklahoma City, who brought Norm together with leaders from Native American and African American groups for a lively discussion on general Just Third Way principles and applications.

• Michael D. Greaney attended a function at his church, and took along some flyers publicizing current and future CESJ books. While the announcer forgot to mention the fact that the material was available, a number of people picked up the flyers, and two copies of Michael's book, In Defense of Human Dignity (2008) were sold. Please let us know if you would like to receive the flyers in .pdf to print out and distribute, and we can send them to you by e-mail.

• As of this morning, we have had visitors from 47 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Brazil, Poland and Australia. People in Egypt, Argentina, Venezuela, the United States, and Poland spent the most average time on the blog. The most popular posting is still the piece on "Le Armée Catholique et Royale" from the "Out of the Depths" series on French financial experiments. This is followed by the weekly "News from the Network," the "Prologue" from the "Out of the Depths" series, the "McChrystal Mania" piece, and the "Production is the Key" posting from the "Out of the Depths" series.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Have Mercy, I Say, Mr. Obama!

In the 1947 film Life With Father, Clarence Day, Sr. remonstrates with God over his wife's illness. "Have mercy, Sir, I say, have mercy!" he thunders. We are tempted to implore President Obama in the same words, although, perhaps, with less vehemence and more bewilderment. After all, Mr. Day, as played by the inimitable William Powell, was clearly certain that God would hear him. We cannot say the same for Mr. Obama, who is much less accessible than the Deity portrayed in Clarence Day, Jr.'s God and My Father (New York: Alfred A. Knopf, 1932), on which parts of the film were based. Still, we have to keep trying to reach him. There are just too many problems cropping up, the majority of which could be solved by the application of Just Third Way principles. To take a few examples,

The Economy

According to today's Wall Street Journal ("Fed Grows More Wary on Economy," A2), the nation's central bank "offered a subdued assessment of the U.S. economy." This is due in large measure to "developments abroad" and "signs that the U.S. economy hasn't built much momentum after turning around in mid-2009" — a "turnaround" that most of us seem to have missed. That is, countries and consumers aren't going into debt fast enough to generate the effective demand necessary to inflate the earnings of companies that want to use cuts in consumption to finance new capital formation, rather than Kelsonian pure credit and expanded capital ownership to do the same thing on a more financially sound, rational, and sustainable basis.

European Debt Crisis

Europe wants to get out of the current debt crisis by cutting costs. Obama wants them to get out of it by increasing debt. ("Merkel Rejects Obama's Call to Spend," Wall Street Journal, 06/24/10, A10.) While we've more sympathy with spending less rather than spending more, neither does anything to restructure the system so that productive activity takes the place of redistribution through inflation and the tax system. The underlying problem remains unresolved: speculation, gambling, and government spending are preferred over productive activity in which people can participate as direct owners of both labor and capital.

Confidence in the Executive

"Americans are more pessimistic about the state of the country and less confident in President Barack Obama's leadership than at any point since Mr. Obama entered the White House." ("Confidence Waning in Obama, U.S. Outlook," Wall Street Journal, 06/24/10, A4.) The Oil Aneurism — for which BP is now blaming the U.S. government! — that the pundits are now claiming is much worse than Katrina, with less response and effectiveness than Bush, the economy (vide, supra), immigration, the upcoming election, manipulation of unemployment figures, the escalating housing crisis, etc., etc., etc. People are still waiting for the change for the better Mr. Obama promised, not this constant stream of change for the worse.

Derivatives

In 1907, the president of the Knickerbocker Bank and Trust in New York City used the bank's assets to speculate in copper shares. The result was the "Panic of 1907" that almost destroyed the world's financial system. Consequently, commercial banks were prohibited from owning anything other than their own shares or government securities. In the 1920s, massive money creation by commercial banks to finance speculation by their investment banking divisions led to inflation of the value of shares on Wall Street and the Crash of 1929. Consequently, the Banking Act of 1933 — "Glass-Steagall" — separated commercial banking from investment banking. The partial repeal of Glass-Steagall in the 1980s gave us the Savings and Loan debacle. The full repeal in the 1990s gave us the current "economic downturn."

Congress is now valiantly trying to retain the ability of commercial banks and other financial institutions to "invest" in speculative instruments and promote consumer debt ("Negotiators Ease Finance Rules," Wall Street Journal, 06/24/10, A8), evidently to make certain that the gamblers and speculators continue to make huge profits from the increasingly wild swings in the stock market and promote the ephemeral "Jobless Recovery." ("Volcker and Derivatives," Wall Street Journal, 06/24/10, A20.)

Why not implement Capital Homesteading so that all new money created is linked directly to the present value of existing and future marketable goods and services through widespread direct ownership of the means of production? Let those with existing accumulations gamble and spend to their heart's content, increasing effective demand without redistribution by using savings — unconsumed production — to consume unconsumed production.

Please, Mr. Obama, have mercy, I say!

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Common Cause, Part VI: The Holy Roman Empire

"Neither Holy, Roman, nor an Empire." So goes Voltaire's glib epigram describing Charlemagne's revived Roman Empire. This is often attributed to the English historian, Edward Gibbon, particularly as it reflects his general attitude. Although subsequently chiseled into stone by many who were otherwise serious historians, the truth of the matter is that Gibbon (who had a higher opinion of himself than did many of his contemporaries), didn't understand Empire or "Romaness," any more than did Voltaire — or Alexander the Great. According to Samuel Johnson, the "ugly fellow" didn't understand holiness, either: ". . . now that he [Gibbon] has published his infidelity [his Decline and Fall], he will probably persist in it." (James Boswell, Life of Samuel Johnson, March 20, 1776.)

The Fall of Rome?

From one point of view, the Roman Empire never "fell." (Hilaire Belloc, "What Was the Roman Empire?" Europe and the Faith, Rockford, Illinois: Tan Books and Publishers, Inc., 1992, 18.) True, the "last" emperor, Romulus Augustus, abdicated in 476, but he was instantly replaced by a more effective ruler who called himself a king instead of an emperor. There was a change in terminology, not function. Odoacer was a Roman general, holding a regular Roman commission and proclaimed Imperator by his troops — worthy to lead Romans in battle. The word itself, from which we derive "Emperor," signifies "Commander in Chief." Odoacer was thus an Imperator, but not the Imperator. Odoacer had no thought of putting an end to the Empire. Like many other Roman military leaders, he was taking a time-honored approach to power. This had happened before, and, as far as the principals were concerned, would happen again.

What, then, was the Roman Empire? One historian defines it very simply and clearly: "The Roman Empire was a united civilization, the prime characteristic of which was the acceptation, absolute and unconditional, of one common mode of life by all those who dwelt within its boundaries." (Ibid., 22.) That is, the Roman Empire was a specific set of institutions adapted by the wants and needs of the people living there. As long as those institutions remained responsive to those needs and wants and in general conformity with the precepts of the natural law, the civilization endured. It was not perfect, but then, few human artifacts are. Unlike Alexander's construct, which failed to adapt at all, the Roman Empire exhibited a high degree of adaptability, lasting in one form or another for more than 2,500 years. Perhaps not surprisingly, one of the most enduring institutions of the Romans (next to law, language, and the written word) was the monetary system.

The Empire didn't fall. It faded, but never completely disappeared. In regions where direct Imperial power waned, the local military administration took over the reins of government, but always in the name of the Empire. Gradually the chief administrator and wielder of supreme local civil and military power came to be known as a rex, a recognized administrative function in Republican and Imperial times. There were religious varieties of rex as well as civil. Sometimes the offices were combined for ritual purposes, as in Athens, but that is another issue. This word, rex, which is usually translated into English as "king," did not, at first, have the status or mythology that we now associate with monarchy. A king in Greek, Roman Republican and, later, Roman Imperial times was not a monarch, a sole-ruler. He was an elected or appointed head of a people or political subdivision, often for life, but not infrequently for a limited term.

The idea of Empire remained. Local rulers, whether calling themselves Rex, Duces Bellorum ("Duke"), or any of a multitude of ranks and titles, invariably claimed to be a part of an Empire that many modern historians assert did not even exist. (Ibid., 77-79.) One of the premier classical historians at the turn of the last century, J. B. Bury, supports the view that the Empire didn't fall. Some modern historians, however, still have the habit of accepting Gibbon uncritically, even though many have accepted the thesis that the empire was transformed, not conquered. The administrative center had shifted to Byzantium following the centuries when Constantine had moved the imperial capital from Rome to the Golden Horn, but that single society remained.

Roman Coinage

There had never been an official uniform coinage adopted for the entire Roman Empire. Many places used the imperial Denarii, but frequently this was alongside of, and not a replacement for, the local coinage. Most client nations and a great number of subject peoples in the eastern part of the Empire were granted the mint right under the Romans. They, of course, retained their local standards.

This was reflective of the great plurality that overlay the unity of the World-State that was Rome. There were innumerable local customs and liberties — coinage being one — philosophic opinions, religious practices and dialects. There was not even one official language, but two — Greek and Latin, side by side. Still, however, there was that basic unity of system, even when four or more men held power at the same time. (Ibid., 24-25.)

As the power and cohesiveness of the Western Empire waned, whatever remained of a need for coinage was filled locally, either through domestic issues of usually degenerate products, or importation of foreign coin. By the time the Domus Regiæ Maior (the "Mayor of the Palace"), Pepin the Short, seized the Frankish throne in 754 from Childeric III, the last of the Merovingians, coinage and the monetary system in the German states and everywhere else in the West was in a truly deplorable state.

The monetary system had broken down as the imperial administration of the Roman Empire in the West fell apart. By the fourth century, coinage had, "fallen to the degraded position of ponderata (i.e., miscellaneous pieces of metal of no standard weight or fineness), when it was customary to assay and weigh each piece. Before the seventh century the weights themselves had been so frequently degraded that it was no longer possible to make a specific bargain for money." (Alexander Del Mar, Money and Civilization, London, 1886, 5.) The Lex Salica, the law code of the Merovingians, however, continued to denominate fines in terms of Solidi and Denarii. (Vide Katherine Fischer Drew, The Laws of the Salian Franks. Philadelphia, Pennsylvania: University of Pennsylvania Press, 1991.)

Barter and payment in kind were the order of the day. Tenants and Knights' fees were, of course, paid in military service. Rents of common people, such as socmen and tenants of demesnes lands, were usually paid with labor or foodstuffs. Every commodity imaginable was used in trade, and often specified in contracts instead of coin or money of account. It was all, however, money, as it was all used as the medium of exchange in settlement of a debt.

There was also the prevalence of what people in the Middle Ages called, "living money." This consisted of cattle of all kinds (draft animals of whatever species were referred to, until recently, generically as "cattle") and slaves. All of these had a value set upon them by law. An adult male slave and a hawk, for instance, had the same value in certain areas. Whether this was a compliment to the man or the bird is uncertain. When a debtor could not make up a necessary sum in coin, he frequently supplied the deficiency by providing a certain number of slaves, horses, cows, or sheep. All private and public debts, as well as fines and imposts by the State and penances imposed by the Church were payable in "dead" or "living" money, with the exception that the Church, attempting to discourage slavery, refused to accept slaves in settlement of a debt or penance. (Robert Henry, History of Great Britain, 1848, Vol. IV, 243.)

Pepin's Reform

Pepin took characteristically vigorous action, and in 755 introduced a reformed coinage of good quality "Deniers" (from the Latin). This Novus ("new penny") was of sterling (.925) silver, and had a precious metal weight of 21.818 grains. The planchet was much broader and thinner than the old Sceat, making for a much more attractive coin. The standard was 264 Deniers to the twelve-ounce Roman pound of silver (5760 grains). Hence the pound (Librum, Livre, Lira, etc.) quickly became a unit of account throughout Europe. This was the reformed coinage introduced into England, probably by Offa of Mercia around 775, at a slightly reduced weight of 20 grains (although later increased to the standard pennyweight of 24 grains), and was tenacious enough to survive, at least vestigially, until 1970.

The new coinage, however, was initially restricted to the kingdom of the Franks. It was through the efforts of one of Pepin's sons and co-heirs, Charles, known to history as Charlemagne, that the Frankish Denier and coins minted to its standard became the common currency of Europe. Pepin originally split the kingdom between Charles and Carloman, his elder son (Einhard, Vita Caroli, Two Lives of Charlemagne, London: Penguin Books, 1969, § 3). Charlemagne subdivided the Roman pound of silver into twenty Sols (Solidi) of twelve Deniers each. The Denier was further divided into two Oboles, each weighing 12 grains of silver. The Denier quickly became the standard coin of Western Europe, as well as the Empire, with, naturally enough, many variations of type and legend. Until the middle of the thirteenth century it was the only coin issued in Europe in any quantity. (C. C. Chamberlain and Fred Reinfeld, "Denier," Coin Dictionary and Guide, New York: Bonanza Books, 1960.)

Pepin had originally set the standard at 264 Deniers to the pound. Charlemagne, in an effort to stabilize the gold to silver ratio, increased the silver content to 240 to the pound, or 24 grains (one Pennyweight) to the Denier. (Carlile, op. cit., 87-88.) Even though gold did not generally circulate, it was still considered an important national asset, and one that should not flow out of the country. Edicts by Charlemagne's successors make it clear that this was, indeed, an object of national policy. (Ibid., 88-90.) The entire monetary system was ultimately based on the Solidus, (A. R. Burns, Money and Monetary Policy in Early Times, New York: Augustus M. Kelley, Publishers, 1965, 243.) and it was an important sign of continuation with the old Empire and a symbol of the underlying social unity.

Charlemagne issued a very limited number of gold Solidi at his mint at Uzés in Provence. His successor, Louis le Debonnaire, also struck Solidi at the imperial capital at Aachen. These were to be the last gold coins struck in continental Europe until Friedrich II (1197-1250) issued his gold Augustale in 1230, four centuries later. Carolingian gold coins are thus extremely rare and out of the reach of most collectors.

Except for the limited issues of gold Solidi, probably issued for symbolic purposes to show continuity with the classical standard, silver Deniers and Oboles were virtually the only coins struck by the Carolingians. The designs are extremely simple. The obverse is usually devoted to a single central cross, surrounded with the king's name. The reverse is almost exactly the same, except that, instead of the king's name, the cross is surrounded by the name of the mint town, e.g., METALLVM (Melle). (Laurence Brown, Coins through the Ages, New York: Bonanza Books, 1961, 42.)

Spread of Reform

Charlemagne's coinage reform did not reach to all parts of his Empire. Outlying areas often retained vestiges of the ancient Roman or Merovingian system, or adapted one derived from whichever major economic power within whose sphere they operated. In most of Spain, for example, no one reckoned in Libræ, Solidi and Denarii, even as money of account. Other parts of Spain did adopt the standard, referring to it as "Denor," from which the modern Spanish dinero, "money," is derived. Some of the Spanish recalcitrance was due to the fact that the Spanish largely refused to acknowledge that they were even in the Frankish sphere of influence, much less part of the revived Empire. As far as the Spanish were concerned, they were still in the old Empire, even if there wasn't an emperor. In Castile, the gold Solidus or Bezant of Constantine, the standard coin of the East, was current money until 1487. Other areas used Moorish standards.

Charlemagne's sole excursion into the Iberian peninsula accomplished little apart from providing the material for the epic Chanson Rolande, based on the destruction of the army's baggage train by Basque tribesmen as Charlemagne was withdrawing back into France. There are two contemporary reminders of this battle. One is Einhard's account in his Life of Charlemagne, where he says, "In this battle Egginhard the Royal Seneschal, Anselm the Count of the Palace, and Hruodland ("Roland"), the Warden of the Breton Marches, were killed, along with many others." (Einhard, op. cit., § 9.) The other is a unique Denier of the reformed coinage, well worn, but with the obverse clearly stamped, "CARLVS," and the reverse, "RODLAN." (W. S. Merwin, "Introduction," The Song of Roland; Medieval Epics, New York: Modern Library, 1963, 90.)

Giving support to the theory that inventions and new institutions come along as needed, and not before, the demand for coinage in the Europe before Charlemagne's renaissance was limited. Trade was not very extensive, and the majority of transactions were carried out on the barter basis. Accounts in the various chronicles that mention coins limit their use to awards of honor given out by local chieftains and kings, usually by the bag or handful. By far the greater use of coinage seemed to be as hoard material, such as comprised at least some part of the great legendary treasure accumulated by the Nibelungs and sunk in the Rhine (a primary inspiration for Wagner's operatic "Ring Cycle"). (Der Nibelungenlied, verse XIX in, e.g., Medieval Epics, op. cit., 320-324.)

This changed as Charlemagne's reforms took hold. As trade became more than a local matter, the need arose for a uniform unit of exchange and a standard of value recognized throughout the Empire. This created the need for a widespread coinage in silver. The change from gold to silver in this instance argues in favor of a developing money economy. Noting the place that coinage held in the typical pre-Carolingian economy and the prevalence of barter for day-to-day transactions, providing small denomination currency would, as Alexander Hamilton maintained later for the United States, spur economic development and provide ordinary people with the means of participating in the economic life of the nation. The theory behind the presumption that economic advances result in a bronze-to-silver-to-gold-to-paper shift assumes an adequate existing supply of the "lower" currency to supplement the "higher" for day-to-day transactions.

This was not the case in Charlemagne's reborn Empire. The need was to rebuild institutions, rather than to elaborate an existing system. It is also important to recall that a Denier was not a particularly small denomination. It was for many centuries a standard day's wage for a laborer, and a generous one, at that. Before the silver strikes in the Tyrol in the late 15th century and the flood of gold and silver from the New World in the sixteenth, both silver and gold were far more highly valued than in later centuries. Charlemagne's reforms simply made it possible for ordinary people to gain access to the institution of coinage for everyday, or at least not extraordinary, use.

Money in All Its Forms

Even with the reform of the coinage, however, an air of barter and the tendency to value items in terms of commodities persisted. For example, Charlemagne, in his dealings with the Saxon tribes, defined the value of his Solidus as the value of an ox of a year old of either sex in the autumn season, just as it is sent to the stall. (Burns, op. cit., 12n.) This was yet one more example of the prevalence of the idea of valuing things in terms of cattle in pastoral economies, from ancient Rome and medieval Ireland, to modern Maasailand.

Charlemagne's reforms were not limited to economics. The illiterate emperor's love of learning is legendary. His untiring efforts to learn to read and write could serve as an inspiration to many. He even slept with his writing-tablets and notebooks under his pillow in order to practice at odd hours. (Einhard, op. cit., § 25.) He imported scholars from Ireland, (Notker the Stammerer, De Carolo Magno (in Two Lives of Charlemagne, London: Penguin Books, 1969), § 1.) then the center of learning for the known world, (Vide, e.g., Thomas Cahill, How the Irish Saved Civilization, New York: Doubleday, 1995.) One contemporary source reports seeing more than twenty ships loaded with students from all over Europe sailing up the Shannon on a single day to study at the great monastic centers of Ireland.) and gathered books and manuscripts wherever he could find them. These were re-copied in the new "Carolingian Hand," heavily influenced by the insular Irish semi-uncial script then prevalent throughout Ireland, Britain behind the Saxon Shore, and Scotland. This was a vast improvement over the older crabbed and crowded style that is nearly illegible.

Being human, Charlemagne made errors, but, for a ruler, remarkably few, even considering the society and culture within which he was raised. The already-noted fiasco in Spain was one of the more obvious, consisting of an attempt to help people who didn't particularly want his help, and extend his rule even further. The other blot on his record, barely excused even by his otherwise adulatory chronicler Einhard, (Einhard, op. cit., §§ 7-8.) was the thirty-three year war and forced conversion of the Saxon tribes. From the point of view of modern-day realpolitik, the Emperor had no choice about leaving an immense hostile force on his borders, but it contrasted sharply with his otherwise exemplary treatment of foreign nationals and peoples.

Charlemagne established and maintained relations with the Caliph of Baghdad, Haroun al Raschid of Arabian Nights fame. The Caliph sent Charlemagne the first elephant seen north of the Pyrenees since Hannibal's invasion (and probably the first Indian elephant in Europe) as a gift to show his esteem for this great restorer of empire and stability, and also support Charlemagne against the Byzantine Emperor. Relations with Constantinople were strained, especially since Charlemagne laid claim to an imperium that the Eastern Emperors naturally thought of as belonging to Byzantium (although unable to exercise it).

Modern historians commonly deride Charlemagne's efforts to breath life into the Empire and reestablish and reform the institutions of society. They claim that the effort failed within a few generations of his death. This ignores the fact that the socio-political entity known as the Holy Roman Empire persisted, in name at least, until abolished by Napoleon in 1804. The last remnant fell in 1918 when the Allies, contrary to the spirit and implications of the Armistice, dismembered what remained of the Austro-Hungarian Empire.

That, however, still falls into the trap that so many do, defining Charlemagne's achievements in modern terms. Did Charlemagne accomplish what he set out to do? That is, did he revive a united civilization, the prime characteristic of which was the acceptance of a common mode of life by all who dwelt within its boundaries — and did he achieve a common currency?

Yes. Charlemagne's effort lasted until the rise of nationalism, and in a modified form thereafter. The reformed currency he established lasted with modifications until 1792 in Western Europe, 1871 in Middle Europe, and 1970 in Britain. When we consider the push that led to the European Union, the idea of an empire in the sense that Charlemagne understood still animates people today. You can't call the European Union Roman (although most of the countries are firmly established on Roman institutions and language), it certainly isn't holy, but it does meet the definition of what Charlemagne would have called an empire. By that measure, the Roman Empire was restored by Charlemagne and has lasted to the present day.

The Carolingian experience illustrates how far a civilization can advance when limiting itself to existing accumulations of savings as the sole source of financing for new capital — and for circulating media, whether in the form of coin, cattle, commodities, or anything else. This severely restricted the rate at which new capital could be formed. Clearly, as long as the financial system remained primitive, so did the economy. As Harold Moulton explained:

The creation of capital in a primitive society was a very direct process. A fisherman in off hours contrived a rude net of grass or reeds, thereby increasing his future capacity to catch fish. Or a farmer used a sharp stone to convert a branch of a tree into a rude spade or a plow with which to loosen the soil. Capital formation, under such circumstances, was a purely individual matter, dependent solely upon devoting a portion of one's energies to producing capital goods. For the moment there may have been a decrease in the amount of consumption goods that might have been produced during the hours devoted to the creation of capital; but as a result of the temporary sacrifice an expansion of consumptive satisfactions was realized in the future. (Moulton, The Formation of Capital, op. cit., 11)

It would not be until the "invention" of "issue banking" (as opposed to "deposit banking") that the present value of future marketable goods and services could be monetized and used to finance the formation of the very capital that produced those same goods and services. It was not until the development of a type of financial institution that could not only lend out what it took in as deposits (deposit banking), but also issue promissory notes against the present value of future marketable goods and services (issue banking), that it would finally become possible to take advantage of the full productive capacity inherent in an economy.

This is a lesson that today's policymakers, trapped in the Keynesian assumption that only existing accumulations of savings can be used to finance capital formation, have yet to learn. Consequently, instead of using the financial system and the money creation powers of the commercial banking system backed up by the central bank to provide liquidity for private sector growth, they use these extremely powerful tools to redistribute existing wealth, concentrating not on increasing production, but on dividing up an ever-shrinking pie.

In the next posting in this series, we will see how the invention of issue banking increased the rate of capital formation but how, despite the promise inherent in the advance in financial technology to spread ownership broadly, it was almost immediately hijacked for political purposes and used to increase State power at the expense of individual human dignity and personal sovereignty.

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