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Thursday, July 23, 2009

The New Civic Revolution

Review of Stephen Zarlenga's The Lost Science of Money (2002)

by Richard C Cook

Stephen Zarlenga, the director of the American Monetary Institute, has written a book entitled The Lost Science of Money, which is one of the most important books published in the world in the past 200 years. Someday it will be recognized for the classic that it is. The fact that many of the ideas seem unfamiliar only shows how lost the science of money really has become. This review will demonstrate that monetary reform along the lines Zarlenga recommends could transform the economy of the world into a system that would benefit everyone, not just the monetary plutocrats who preside over the globalistic cannibalism that runs amok today.

During the 18th and 19th centuries, Americans had a much better grasp than we do of the importance of monetary policy and its political significance. Virtually no one knows anything about the battles over the British Currency Act of 1764, or over the First Bank of the United States in the 1790s and the Second Bank in the 1820s, or over the Greenbacks issued by the Lincoln administration during the Civil War, or the battles waged by the Greenback Party and the silver crusaders of the late 1800s. Those of us who so readily comment on every kind of economic issue would benefit vastly from the knowledge of past generations, for people once knew that WHO issues and controls a nation's money is more critical and decisive than any other economic matter. In fact, our more progressive ancestors would consider it both comical and tragic if they beheld our incredible ignorance and passivity with regard to monetary issues.

Today everyone in public life or academia takes it for granted that the monetary system nominally presided over by the Federal Reserve is the only one ever conceived by the mind of man that is safe, functional, worth having, or even possible. I suppose we assume that the near-panic that grips the minds of millions of people every time the Federal Reserve contemplates an interest rate hike is the way Almighty God intended human beings to live on this good earth. But then again, maybe not. In his book, The Lost Science of Money, Stephen Zarlenga has proven once and for all how wrong these assumptions are, how rotten and ill-conceived this system really is, and how a few basic reforms could make an enormous difference in the life of the people of our nation and the world.

Zarlenga's ideas of monetary reform are part of a longstanding underground intellectual current that has surfaced from time to time even within the federal government. Twenty years ago, a study group on alternative monetary policy was starting to be set up within the White House just before President Carter was voted out of office in favor of the most fiscally-irresponsible president in US history, Ronald Reagan. Attention had been attracted by the Social Credit theories which originated with Major Douglas in Great Britain during the 1920s and which were promoted by A R Orage, publisher of the progressive periodical the New Age.

Douglas's ideas were an important pioneering effort to create the theoretical foundations of a genuinely scientific and democratic currency suited to modern industrial conditions. He had a really revolutionary idea: that the money in circulation should be directly issued by the government and should be sufficient for the people of the nation to purchase what they were able to produce at full employment levels. This would mean that rational people in the government would be able to calculate how much money was needed and assure that it was entered into circulation. Douglas's ideas were partially but successfully implemented in some of the Canadian provinces several decades ago before the financiers put an end to the experiment.

The reason we cannot accomplish this seemingly simple task of balancing currency with production is that our government does not exercise its sovereign prerogative of controlling the money supply. You weren't taught this in school, but by an act of Congress in 1913, that prerogative was ceded to the private banking industry. The aim of that industry - surprise - is to maximize its profits by earning interest on money it does not possess but which it creates out of thin air under a monopolistic government charter called the Federal Reserve System. Unfortunately, the people who sit in Congress and make our laws seem to have forgotten this ever happened, which is why Mr Zarlenga's book and the work of the American Monetary Institute and related organizations are so important.

Let's be clear. The Federal Reserve System is not a public institution, although it serves certain well-defined but very limited public purposes as the Treasury Department's fiscal agent and as a national clearinghouse of monetary transactions. But the fact that the chairman of the Federal Reserve is appointed by the president is mainly for show, which would become clear if the president tried to appoint a true monetary reformer to the position. Rather the Federal Reserve is the instrument of the private banking interests which own its stock, and it is those interests which issue and control our currency.

Stephen Zarlenga has enunciated the most important principle of all by defining money (through logic and case studies) in its rightful sense as an "instrument of law" which should be created and controlled by the central government to facilitate the legitimate commerce and investment of the nation. He traces this principle through world history, but the key event for us in America was the issuance of paper money by the colonial governments in the English colonies through the simple expedient of spending it into existence in payment for public expenses. This is the real meaning of fiat money, and our ancestors understood it.

By contrast, the money issued by the Federal Reserve is often called fiat money but it really isn't. Rather it is a degraded debt-based currency issued by the banks through loans. It's pseudo-money. Open your wallet and look at a Federal Reserve note. It's really a kind of play money, because it is encumbered by the requirement to repay the loans which produced it and to repay them with interest. The Bureau of Engraving and Printing is constantly looking for better ways to print money to prevent counterfeiting, not realizing that the Federal Reserve notes they already print are made with a kind of disappearing ink. This ink strangely causes the value of the notes to vanish into the vaults of the banks.

Much of the reserve base for bank loans is federal government debt instruments - Treasury notes, T-bills, and the like - meaning that the larger the national debt, the better for the banks, because they are then authorized by reserve policy to lend more money to you, to me, and to Argentina. Now you know why Republican presidents like Reagan or George W Bush couldn't care less about running up more government debt. Nothing more effectively lines the pockets of their foremost patrons, the financiers.

By contrast, true fiat money, which is the money most suited to the democratic form of government, would be paper, or, today, electronic money spent into existence for legitimate public purposes. This money would then circulate throughout the national economy, fueling every kind of economic endeavor imaginable, but with no debt burden and no overwhelming carrying charges by the banks.

This type of true fiat money was used extensively in colonial times until further production was outlawed by the British Parliament, in league with American colonial hard-money merchants, through the Currency Act of 1764. The result was a deepening economic depression that was a primary cause of the American Revolution. Once the Continental Congress declared independence in 1776, it authorized fiat currency through the famous Continental currency. While popular textbooks speak derisively of the inflation of this currency, they fail to note two crucial facts. One is that the Continentals were a great success in financing the early war effort before the later infusion of French gold, and the other is that the inflation was caused to a considerable extent by massive British counterfeiting of the Continental currency in the British-held city of New York. Stephen Zarlenga covers this aspect of our monetary history in detail.

With the establishment of the First Bank of the United States under Secretary of the Treasury Alexander Hamilton during the first of President George Washington's two administrations, the concept of government-issued fiat money was replaced by that of debt-laden bank notes issued by a central bank whose stock was subscribed by speculators and private financiers. In fact, having won our independence from Great Britain, through Hamilton's bank we promptly turned over our monetary system to stockholders, a majority of whom were British and continental European!

The First Bank of the United States was the Bank of England imitated on American soil, a bank which during the 18th century saddled the British government and people with an astronomical national debt. Hamilton was strenuously opposed by Thomas Jefferson, James Madison, and their followers, who realized that control of the monetary supply by private interests was disastrous to democracy. In fact, monetary policy was the number one political issue of the 1790s, and it was the split between Hamilton and his beloved First Bank and Jefferson who opposed it that created a permanent two-party system for the United States.

Hamilton became the leader of the Federalists, who were the forerunners of today's Republican Party, which is above all the party of the private financiers. Jefferson led the party that eventually became the Democratic Party, though its leaders today have forgotten that their party's founder viewed control of the monetary system by bankers as the death-knell of government by and for the people. Maybe the present-day Democrats, who proved in the 2004 presidential election what many suspected, which is that they truly have nothing to say, should read the history of their origins. They could start with one of the most important books on politics ever written in America, which Stephen Zarlenga cites extensively, Martin Van Buren's once-famous tome published just before the Civil War entitled, Inquiry Into the Origin and Course of Political Parties in the United States (1867).

Jefferson was the great apostle of human freedom. His words in the Declaration of Independence that "all men are created equal", have changed the history of the world and are the foundation of every democratic constitution in existence. Jefferson was elected president in 1800 and repudiated debt-based financing of the federal government. This election was known at the time as the "Civic Revolution of 1800", because of the overthrow of power of the financiers who controlled the government through the First Bank. Jefferson and his Secretary of the Treasury Albert Gallatin slashed expenditures and balanced the federal budget for eight consecutive years, a feat which was never again accomplished.

In fact, the best way to assure a massive public debt and the accompanying erosion of monetary values through uncontrollable inflation is to charter and rely on a privately-owned and controlled central bank of issue like the Bank of England, the First and Second Banks of the United States, or the Federal Reserve of today. Once such a system is in place, the central government is so hamstrung by debt that is it unable to direct public expenditures into desirable socioeconomic channels and has surrendered its economic sovereignty to the financiers, which is precisely where we now stand.

The most notable success of government-issued fiat money was the famous Greenbacks, authorized by Congress in 1861 and utilized by the Lincoln administration to pay wartime expenditures. Of course Lincoln was a Republican, and so pro-bank, but the government was facing an emergency, and Lincoln had the ability to rise above party-line thinking to do what had to be done. Actually, the impetus for the Greenback legislation came out of the US House of Representatives, which as a body had been the most progressive and knowledgeable institution within the government since our Constitution was enacted, and the ordinary people of the time, with their measure of natural common sense, recognized that it was the Greenbacks which saved the union.

It was because the Greenbacks eliminated the need for the federal government to borrow from the New York and British bankers at the extortionist rates of interest they were demanding that Lincoln was called by the London Times "the most dangerous man on earth". Soon afterwards, however, the bankers were able to secure passage by Congress of the National Banking Acts of 1863-64, legislation which Lincoln approved. This eventually led to the centralization of banking power, the formation of the New York Money Trust under the Morgan and Rockefeller interests, and the complete takeover of money creation by the US and European bankers through the Federal Reserve Act of 1913.

Nevertheless, during the Civil War and for the half-century which followed, the Greenbacks were an essential component of the US money supply. As late as 1900, Greenbacks still formed about one-third of the money in circulation. Another third consisted of metallic-based currency - gold and silver coins, along with Treasury-issued silver certificates - while the final third consisted of debt-based paper notes issued by national banks. The value of the Greenbacks was destroyed by inflation during and after World War One, when the sovereign power to create money was abdicated by Congress and President Woodrow Wilson and ceded to the private bankers through the Federal Reserve Act.

Congressman Charles A Lindberg, Senior, Republican of Minnesota and father of the future aviator, said on December 23 1913, the day President Woodrow Wilson signed the Federal Reserve Act: "This Act establishes the most gigantic trust on Earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed. The trusts will soon realize that they have gone too far even for their own good. The people must make a declaration of independence to relieve themselves from the Monetary Power. This they will be able to do by taking control of Congress. Wall Streeters could not cheat us if you Senators and Representatives did not make a humbug of Congress ... If we had a people's Congress, there would be stability. The greatest crime of Congress is its currency system. The worst legislative crime of the ages is perpetrated by this banking bill. The caucus and the party bosses have again operated and prevented the people from getting the benefit of their own government."

Hmm, "the worst legislative crime of the ages …" Unfortunately, Lindberg never got his people's Congress. But other intelligent people in the United States knew what had happened. Among them were America's greatest inventor and its greatest industrial genius, Thomas Edison and Henry Ford, who were cited in articles in the New York Times on December 4 and 6 1921, as favoring direct government funding of the Muscle Shoals nitrate and water power projects near Florence, Alabama. Edison said, "… under the old way [that is, funding government projects through borrowing via bond issues from the public and banks as through the national banking and Federal Reserve System], any time we wish to add to the national wealth, we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30 million of their own money the people of the United States should be compelled to pay $66 million. That is what it amounts to, with interest … In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 percent to the stated cost."

Edison contrasted debt financing to a system like the Greenbacks, where the government simply spends currency into circulation. He said, "… if the government issues currency, it provides itself with enough money to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increases income without adding a penny to its debt. It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurer and the other helps the people. If the currency issued by the government is no good, then the bonds issued would be no good either. It is a terrible situation when the government, to increase the national wealth, must go into debt and submit to ruinous interest charges …"

Hmm, "a terrible situation …" The Federal Reserve with its system of debt financing has ruled the monetary and thereby the economic life of the United States for the last 91 years. Because of it, every man, woman, and child owes tens of thousands of dollars to a bank, either from mortgages or household debt, or from borrowing by local, state, or national governments. The Romans had a word for it which we translate as "debt slavery". Interestingly, a seeming majority of our two hundred million or so debt slaves are vehement supporters of those politicians who are bought and sold on a daily basis by the financiers who rule the economy which has subjected us to ever-declining real wealth. I guess it's because the financiers have such strong family values.

Speaking of family values, how about what is going on today with the cost of purchasing a family home? Middle-class wealth has been shattered by this seemingly uncontrollable inflation that no one subjected to it can explain. Instead, people are reduced to trying to make their own little killing by buying today with plans to sell in a year or two at a profit. So the family home, the hearth of domestic tranquility, has become a gambling chip. Will any politician stand up and say this is just a trick of the banks, in cahoots with government, to pump cash into an economy which is grossly undermonetized and where our physical infrastructure has been so stripped down that it can no longer provide our population with a decent living? All this is covered up by a monopolistic press that the financiers own lock, stock, and barrel.

So let's now shift gears and speak as impartial professional analysts. A good analyst knows that the first thing to do when conducting an analysis is to identify and describe the problem you want to solve. In the realm of monetary policy, what is the real nature of the problem we are facing financially that can lead us to search for the source of the toxins that are infecting the world today? Isn't the problem, or paradox, that while science and engineering have the ability to produce everything really necessary to support the world's population in a reasonable degree of health, safety, and comfort, we see instead a world in the throes of war, strife, poverty, debt, struggle over resources, disease, and ignorance everywhere except in the most prosperous parts of those few nations that control the world's money supply?

Think about it. The era of scarcity of resources should be over. It is, or should be, crystal clear to any impartial observer that science has the ability to solve mankind's material problems once and for all. If you doubt it, go talk to any bright engineering student about the miracles science is working in every field. We know how to provide food, water, shelter, transportation, and clothing to everyone in the world. We have the technological capability to replace cars that run on fossil fuels with those that run on fuel produced by farm products. We know that the oceans contain an unlimited supply of water, and we have the knowledge to remove the salt and other minerals to make it drinkable. We know that the Sun is an endless powerhouse of energy, and we possess the technology to harness it. And even if minerals near the surface of the Earth are limited in their extractability, we know that the ocean bottom or even the asteroids and the Moon, if mined, could meet our needs indefinitely.

What is it that prevents us from being able to take advantage of Nature's abundance? When faced with a problem like this what do we do? Do we try to find an answer or do we just blow it off? Well, if we are thinking like scientists, we examine the data and form a hypothesis. In this case, what is limited seems to be not resources, not organizational ability, not technological know-how, but CAPITAL. Observation shows that time after time the biggest lack in any new industry which has the capacity to relieve man's material burdens is that there is not sufficient readily-available money to make it happen. This is an economic fact. And why is it not available? Is money scarce? Or is it kept scarce because those who control it want to make it scarce to enhance their own economic and political power?

The scarcity of money is artificial. It is a function of the monetary system that controls the currency. This scarcity is made much worse by the fact that our concept of money is so poor. We view money as a commodity that is and should be privately owned, and that if it is needed for great public purposes it can only be accumulated by robbing citizens through taxes or by robbing future generations of their birthright through borrowing and adding to the national debt. Any major project that must be financed through borrowing from financial institutions, whether a local elementary school or a national health care system, is immediately hamstrung by interest debt. Ask any local budget officer. As Thomas Edison indicated when talking about the Muscle Shoals project, this debt can double or even triple the lifetime cost of a project.

What are the broad economic and social results of the system of private control of money creation? Here are just a few:

Increased concentration of wealth in the hands of those who already have it and the progressive impoverishment of everyone else;

Gradual destruction of the middle class and reduction of the majority of humanity to consumers, service workers, and debt slaves;

Control of government and the press by the financiers;

Erosion of the ability of government to invest in education, health care, and physical infrastructure;

Crushing burdens of taxation on all classes of society except the most wealthy;

Inflation of the costs of housing and real estate due to the utilization of mortgage lending by the financial industry as the best way to maximize their profits while pumping liquidity into the world economy;

Speculative investment of huge amounts of money in derivatives and other non-productive financial instruments as opposed to investment in processes that enhance real physical wealth;

Distortion of the physical landscape through creation of vast tracts of suburban wilderness, because the hideous concentration of expensive single family homes, shopping malls, and freeways is the most profitable scenario for lenders;

Reduction of entire regions of the world to poverty and dependence on the movement of private capital, combined with loss of national economic sovereignty by any nation where outside private financiers are in control of investment and resources;

A deepening worldwide crime wave resulting from the fact that private finance simply cannot engender sufficient paid employment for the people of the world;

A ceaseless state of war and civil strife resulting from entirely unnecessary national and international financial crises.

Not only is the monetary system that causes all this shortsighted and even criminal, but it is also just plain stupid. Money as a resource is not or should not be defined as a commodity like any other. It is, as both Aristotle and Stephen Zarlenga have said, and as Thomas Edison and Henry Ford well knew, an "instrument of law" that should and must be controlled by government acting as the legitimate agent for the needs, hopes, dreams, and aspirations of all the people. To repeat, money should not be treated as a commodity. It should be an instrument of law that commands commodities for the public and private good. To do this, money should be created as, when, where, and how it is needed based on analysis by public agencies, including our own Congress, accountable only to the people.

Faced with the need, for example, of a network of large desalination plants to augment the nation's water supply, the government should pass legislation to authorize the creation of the required amount of money and spend it into circulation on facilities that will meet the goal of an abundant water supply. This could be done through outright grants or the capital could be injected by very low-interest loans from a government reconstruction authority, as was done by the Roosevelt administration under the New Deal. Direct spending of the people's money for great public projects is what Edison and Ford proposed in 1921 for Muscle Shoals.

The system I am talking about (described in detail in Zarlenga's The Lost Science of Money book) would be the modern version of the Greenbacks, a system which can be easily implemented with sufficient political will. Unfortunately, the will is lacking, and the current generation of politicians knows nothing about monetary issues. Free and open debate of these issues is a distant memory, even though two twentieth century chairmen of the House Banking Committee, Wright Patman and Henry Gonzales, introduced legislation to abolish the Federal Reserve.

Spending of the new Greenback currency that now should be authorized by Congress could be done for a host of worthwhile infrastructure needs, including education, where a free college education could be offered to everyone, transportation, including both local and national mass transit systems, as well as health care and sanitation systems and financing of Social Security. In time, much government funding at all levels could be accomplished through this system, thereby reducing or even eliminating the need for income taxes. Takeover of the power of currency creation used responsibly by our democratically-elected government is the single measure with the power to make the abundance of science available to all our citizens and to reduce or eliminate the totally-useless competition and struggle for economic domination that is the cause of so much trouble in the world today.

In fact, it is not an exaggeration to say that today there is only one truly overriding economic, financial, and political issue that holds the key to everything else, and this is whether the creation of money is controlled by democratically-elected governments or by the private financial industry. The world we truly value and wish for ourselves and our children and grandchildren will live or die based on how that question is answered. The epic nature of this struggle can be clearly understood by reference to one of the great movies of our time, Star Wars. If you want to know what it takes to sustain a real Republic, like that envisioned by Luke Skywalker, Princess Leia, and the Jedi, it is one where the people create and control the currency. If you want to enthrone over all of us an evil Empire like that of Darth Vader and the Emperor, then turn over the money supply to the bankers. That is in fact what has been done and is why we are already so far down the dark road of economic globalization based on financial tyranny.

The giant sucking sound you hear around the globe today comes from the international financial community sucking the life, the resources, and the assets out of the pockets of all the people of the world. The primary exception is China, which has maintained its financial independence through monetary policy resembling that which is described in this paper. This is why China may become the world's leading economic power within one or two more generations, with political and eventually military hegemony soon to follow. If that isn't enough to frighten us into action, then the case is truly hopeless.

So think about these things as you study Stephen Zarlenga's work … This study will lead you to a vision of the future which is breathtaking and which sooner or later must be realized. This is the progressive wave of the future which cannot be denied. The day is coming when the earth will truly be equally free for all by the discovery that we already possess the keys to our future material happiness. The great changes needed to bring this vision into realization begin with monetary reform. That is how important the work is of Stephen Zarlenga and the American Monetary Institute and others thinking along the same lines.

Real and lasting change can only be made by those with the ideas to replace what we have now with something meaningful. You can start by realizing how much you and everyone you know has been duped by the existing monetary system then move on to a serious study of Stephen Zarlenga's book, The Lost Science of Money. Implementation of monetary reform will be the foundation of a new "civic revolution", even more far-reaching than the one Thomas Jefferson and his colleagues brought about in America over two centuries ago.


Richard Cook, formerly with the US Treasury and Nasa, is a monetary writer and historian, and author of Challenger Revealed: How the Reagan Administration Caused the Greatest Tragedy of the Space Age (2007).

(c) 2004 American Monetary Institute

Stephen Zarlenga, Director

Dedicated to the independent study of monetary history, theory, and reform

Bill Totten


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