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The History And Evolution Of Money The Emergence Of Gold As Universal Money Supply

The attempts by governments to cheat their subjects by clipping or debasing gold coins; the reality that any quantity of gold will suffice for a monetary system and that "more money" does not require more gold.

There is a great mystique surrounding the nature of money. It is generally regarded as beyond the understanding of mere mortals. Questions of the origin of money or the mechanism of its creation are seldom matters of public debate. We accept them as facts of life which are beyond our sphere of control. Thus, in a nation which is founded on the principle of government by the people, and which assumes a high level of understanding among the electorate, the people themselves have blocked out one of the most important factors affecting, not only their government, but their personal lives as well.

This attitude is not accidental, nor was it always so. There was a time in the fairly recent past when the humble voter-even without formal education-was well informed on money matters and vitally concerned about their political implementation. In fact, as we shall see in a later chapter, major elections were won or lost depending on how candidates stood on the issue of a central bank. It has been in the interest of the money mandarins, however, to convince the public that, now, these issues are too complicated for novices. Through the use of technical jargon and by hiding simple reality inside a maze of bewildering procedures, they have caused an understanding of the nature of money to fade from the public consciousness.


The first step in this maneuver was to scramble the definition of money itself. For example, the July 20, 1975 issue of the Nw York Times in an article entitled "Money Supply: A Growing Muddle," begins with the question: "What is money nowadays?" The Wall Street Journal of August 29, 1975, comments: "The men and women involved in this arcane exercise [of watching the money supply] ... aren't exactly sure what the money supply consists of." And, in its September 24, 1971 issue, the same paper said: "A pro-International Monetary Fund Seminar of eminent economists couldn't agree on what money is or how banks create it."

Even the government cannot define money. Some years ago, a Mr. A.F. Davis mailed a ten-dollar Federal Reserve Note to the Treasury Department. In his letter of transmittal, he called attention to the inscription on the bill which said that it was redeemable in "lawful money," and then requested that such money be sent to him. In reply, the Treasury merely sent two five-dollar bills from a different printing series bearing a similar promise to pay. Mr. Davis responded:

Dear Sir:

Receipt is hereby acknowledged of two $5.00 United States notes, which we interpret from your letter are to be considered as lawful money. Are we to infer from this that the Federal Reserve notes are not lawful money?

I am enclosing one of the $5.00 notes which you sent to me. I note that it states on the face, "The United States of America will pay to the bearer on demand five dollars." I am hereby demanding five dollars.

One week later, Mr. Davis received the following reply from Acting Treasurer, M.E. Slindee:

Dear Mr. Davis:

Receipt is acknowledged of your letter of December 23rd, transmitting one $5. United States Note with a demand for payment of five dollars. You are advised that the term "lawful money" has not been defined in federal legislation.... The term "lawful currency" no longer has such special significance. The $5. United States Note received with your letter of December 23rd is returned herewith.

The phrases "...will pay to the bearer on demand" and "... is redeemable in lawful money" were deleted from our currency altogether in 1964.

1. As quoted by C.V. Myers, Money and Energy: Weathering the Storm (Darien, Connecticut: Soundview Books, 1980), pp. 161, 163. Also by Lawrence S. Ritter, ed., Money and Economic Activity (Boston: Houghton Mifflin, 1967), p. 33.

Is money really so mysterious that it cannot be defined? Is it the coin and currency we have in our pockets? Is it numbers in a checking account or electronic impulses in a computer? Does it include the balance in a savings account or the available credit on a charge card? Does it include the value of stocks and bonds, houses, land, or personal possessions? Or is money nothing more than purchasing power?

The main function of the Federal Reserve is to regulate the supply of money. Yet, if no one is able to define what money is, how can we have an opinion about how the System is performing? The answer, of course, is that we cannot, and that is exactly the way the cartel wants it.

The reason the Federal Reserve appears to be a complicated subject is because most discussions start somewhere in the middle. By the time we get into it, definitions have been scrambled and basic concepts have been assumed. Under such conditions, intellectual chaos is inevitable. If we start at the beginning, however, and deal with each concept in sequence from the general to the specific, and if we agree on definitions as we go, we shall find to our amazement that the issues are really quite simple. Furthermore, the process is not only painless, it is-believe it or not-intensely interesting.

The purpose of this and the next three chapters, therefore, is to provide what could be called a crash course on money. It will not be complicated. In fact, you already know much of what follows. All we shall attempt to do is tie it all together so that it will have continuity and relativity to our subject. When you are through with these next few pages, you will understand money. That's a promise.

So, let's get started with the basics. What is money?


The dictionary is of little help. If economists cannot agree on what money is, it is partly due to the fact that there are so many definitions available that it is difficult to insist that any of them is the obvious choice. For the purpose of our analysis, however, it will be necessary to establish one definition so we can at least know what is meant when the word is used within this text. To that end, we shall introduce our own definition which has been assembled from bits and dabs taken from numerous sources. The structure is designed, not to reflect what we think money ought to be or to support the view of any particular school of economics, but simply to reduce the concept to its most fundamental essence and to reflect the reality of today's world. It is not necessary to agree or disagree with this definition. It is introduced solely for the purpose of providing an understanding of the word as it is used within these pages. This, then, shall be our working definition:

Money is anything which is accepted as a medium of exchange and it may be classified into the following forms:

1.Commodity money 2.Receipt money

3.Fiat money

4.Fractional money

Understanding the difference between these forms of money is practically all we need to know to fully comprehend the Federal Reserve System and to come to a judgment regarding its value to our economy and to our nation. Let us, therefore, examine each of them in some detail.


Before there was any kind of money, however, there was barter, and it is important first to understand the link between the two. Barter is defined as that which is directly exchanged for something of like value. Mr. Jones swaps his restored Model-T Ford for a Steinway grand piano.1 This exchange is not monetary in nature because both items are valued for themselves rather than held as a medium of exchange to be used later for something else. Note, however, that both items have intrinsic value or they would not be accepted by the other parties. Labor also may be exchanged as barter when it, too, is perceived to have intrinsic value to the person for whom the labor is performed. The concept of intrinsic value is the key to an understanding of the various forms of money that evolved from the process of barter.


In the natural evolution of every society, there always have been one or two items which became more commonly used in

1. Strictly speaking, each party holds the value of what he is receiving to be more than what he is giving. Otherwise he would not make the trade. In the mind of the traders, therefore, the items have unequal value. That opinion is shared equally by them both. The shorter explanation, however, is less unwieldy barter than all others. This was because they had certain characteristics which made them useful or attractive to almost everyone. Eventually, they were traded, not for themselves, but because they represented a storehouse of value which could be exchanged at a later time for something else. At that point, they ceased being barter and became true money. They were, according to our working definition, a medium of exchange. And, since that medium was a commodity of intrinsic value, it may be described as commodity money.

Among primitive people, the most usual item to become commodity money was some form of food, either produce or livestock. Lingering testimony to this fact is our word pecuniary, which means pertaining to money. It is derived from the word pecunia, which is the Latin word for cow.

But, as society progressed beyond the level of bare existence, items other than food came into general demand. Ornaments were occasionally prized when the food supply was ample, and there is evidence of some societies using colored sea shells and unusual stones for this purpose. But these never seriously challenged the use of cattle, or sheep, or corn, or wheat, because these staples possessed greater intrinsic value for themselves even if they were not used as money.


Eventually, when man learned how to refine crude ores and to craft them into tools or weapons, the metals themselves became of value. This was the dawning of the Bronze Age in which iron, copper, tin, and bronze were traded between craftsmen and merchants along trade routes and at major sea ports.

The value of metal ingots was originally determined by weight. Then, as it became customary for the merchants who cast them to stamp the uniform weights on the top, they eventually were valued simply by counting their number. Although they were too large to carry in a pouch, they were still small enough to be transported easily and, in this form, they became, in effect, primitive but functional coins.

The primary reason metals became widely used as commodity money is that they meet all of the requirements for convenient trading. In addition to being of intrinsic value for uses other than money, they are not perishable, which is more than one can say for cows; by melting and reforming they can be divided into smaller units and conveniently used for purchases of minor items, which is not possible with diamonds, for example; and, because they are not in great abundance, small quantities carry high value, which means they are more portable than such items as timber, for example.

Perhaps the most important monetary attribute of metals, however, is their ability to be precisely measured. It is important to keep in mind that, in its fundamental form and function, money is both a storehouse and a measure of value. It is the reference by which all other things in the economy can be compared. It is essential, therefore, that the monetary unit itself be both measurable and constant. The ability to precisely assay metals in both purity and weight makes them ideally suited for this function. Experts may haggle over the precise quality of a gemstone, but an ingot of metal is either 99% pure or it isn't, and it either weighs 100 ounces or it doesn't. One's opinion has little to do with it. It is not without reason, therefore, that, on every continent and throughout history, man has chosen metals as the ideal storehouse and measure of value.


There is one metal, of course, that has been selected by centuries of trial and error above all others. Even today, in a world where money can no longer be defined, the common man instinctively knows that gold will do just fine until something better comes along. We shall leave it to the sociologists to debate why gold has been chosen as the universal money. For our purposes, it is only important to know that it has been. But we should not overlook the possibility that it was an excellent choice. As for quantity, there seems to be just the right amount to keep its value high enough for useful coinage. It is less plentiful than silver -which, incidentally, has run a dose second in the monetary contest-and more abundant than platinum. Either could have served the purpose quite well, but gold has provided what appears to be the perfect compromise. Furthermore, it is a commodity in great demand for purposes other than money. It is sought for both industry and ornament, thus assuring its intrinsic value under all conditions. And, of course, its purity and weight can be precisely measured.


It often is argued that gold is inappropriate as money because it is too limited in supply to satisfy the needs of modem commerce. On the surface, that may sound logical-after all, we do need a lot of money out there to keep the wheels of the economy turning- but, upon examination, this turns out to be one of the most childish ideas imaginable.

First of all, it is estimated that approximately 45% of all the gold mined throughout the world since the discovery of America is now in government or banking stockpiles.1 There undoubtedly is at least an additional 30% in jewelry, ornaments, and private hoards. Any commodity which exists to the extent of 75% of its total world production since Columbus discovered America can hardly be described as in short supply.

The deeper reality, however, is that the supply is not even important. Remember that the primary function of money is to measure the value of the items for which it is exchanged. In this sense, it serves as a yardstick or ruler of value. It really makes no difference if we measure the length of our rug in inches, feet, yards, or meters. We could even manage it quite well in miles if we used decimals and expressed the result in millimiles. We could even use multiple rulers, but no matter what measurement we use, the reality of what we are measuring does not change. Our rug does not become larger just because we have increased the quantity of measurement units by painting additional markers onto our rulers.

If the supply of gold in relation to the supply of available goods is so small that a one-ounce coin would be too valuable for minor transactions, people simply would use half-ounce coins or tenth-ounce coins. The amount of gold in the world does not affect its ability to serve as money, it only affects the quantity that will be used to measure any given transaction.

Let us illustrate the point by imagining that we are playing a game of Monopoly. Each person has been given a starting supply of play money with which to transact business. It doesn't take long before we all begin to feel the shortage of cash. If we just had more money, we could really wheel and deal. Let us suppose further that someone discovers another game-box of Monopoly sitting in the closet and proposes that the currency from that be added to the game under progress. By general agreement, the little bills are distributed equally among all players. What would happen?

The money supply has now been doubled. We all have twice as much money as we did a moment before. But would we be any better off? There is no corresponding increase in the quantity of property, so everyone would bid up the prices of existing pieces until they became twice as expensive. In other words, the law of supply and demand would rapidly seek exactly the same equilibrium as existed with the more limited money supply. When the quantity of money expands without a corresponding increase in goods, the effect is a reduction in the purchasing power of each monetary unit. In other words, nothing really changes except that the quoted price of everything goes up. But that is merely the quoted price, the price as expressed in terms of the monetary unit. In truth, the real price, in terms of its relationship to all other prices, remains the same. It's merely that the relative value of the money supply has gone down. This, of course, is the classic mechanism of inflation. Prices do not go up. The value of the money goes down.

If Santa Claus were to visit everyone on Earth next Christmas and leave in our stockings an amount of money exactly equal to the amount we already had, there is no doubt that many would rejoice over the sudden increase in wealth. By New Year's day, however, prices would have doubled for everything, and the net result on the world's standard of living would be exactly zero. 1

The reason so many people fall for the appealing argument that the economy needs a larger money supply is that they zero in only on the need to increase their supply. If they paused for a moment to reflect on the consequences of the total supply increasing, the nonsense of the proposal becomes immediately apparent.

Murray Rothbard, professor of economics at the University of Nevada at Las Vegas, says:

We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness, of its gold-unit. There is no need whatever for any planned increase in the money supply, for the supply to rise to offset any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit "economic growth."'


The Federal Reserve claims that one of its primary objectives is to stabilize prices. In this, of course, it has failed miserably. The irony, however, is that maintaining stable prices is the easiest thing in the world. All we have to do is stop tinkering with the money supply and let the free market do its job. Prices become automatically stable under a commodity money system, and this is particularly true under a gold standard

Economists like to illustrate the workings of the marketplace by creating hypothetical micro and macro economies in which everything is reduced to only a few factors and a few people. In that spirit, therefore, let us create a hypothetical economy consisting of only two classes of people: gold miners and tailors. Let us suppose that the law of supply and demand has settled on the value of one ounce of gold to be equal to a fine, custom-tailored suit of clothes. That means that the labor, tools, materials, and talent required to mine and refine one ounce of gold are equally traded for the labor, tools, and talent required to weave and tailor the suit. Up until now, the number of ounces of gold produced each year have been roughly equal to the number of fine suits made each year, so prices have remained stable. The price of a suit is one ounce of gold, and the value of one ounce of gold is equal to one finely-tailored suit.

Let us now suppose that the miners, in their quest for a better standard of living, work extra hours and produce more gold this year than previously-or that they discover a new lode of gold which greatly increases the available supply with little extra effort. Now things are no longer in balance. There are more ounces of gold than there are suits. The result of this expansion of the money supply over and above the supply of available goods is the same as in our game of Monopoly. The quoted prices of the suits go up because the relative value of the gold has gone down.

The process does not end there, however. When the miners see that they are no better off than before in spite of the extra work, and especially when they see the tailors making a greater profit for no increase in labor, some of them decide to put down their picks and turn to the trade of tailoring. In other words, they are responding to the law of supply and demand in labor. When this happens, the annual production of gold goes down while the production of suits goes up, and an equilibrium is reached once again in which suits and gold are traded as before. The free market, if unfettered by politicians and money mechanics, will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort. The human effort required to extract one ounce of gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged.


A perfect example of how commodities tend to self-regulate their value occurred in Germany at the end of World War II. The German mark had become useless, and barter was common. But one item of exchange, namely cigarettes, actually became a commodity money, and they served quite well. Some cigarettes were smuggled into the country, but most of them were brought in by U.S. servicemen. In either case, the quantity was limited and the demand was high. A single cigarette was considered small change. A package of twenty and a carton of two hundred served as larger units of currency. If the exchange rate began to fall too low-in other words, if the quantity of cigarettes tended to expand at a rate faster than the expansion of other goods-the holders of the currency, more than likely, would smoke some of it rather than spend it. The supply would diminish and the value would return to its previous equilibrium. That is not theory, it actually happened. 1

With gold as the monetary base, we would expect that improvements in manufacturing technology would gradually reduce the cost of production, causing, not stability, but a downward movement of all prices. That downward pressure, however, is partially offset by an increase in the cost of the more sophisticated tools that are required. Furthermore, similar technological efficiencies are being applied in the field of mining, so everything tends to balance out. History has shown that changes in this natural equilibrium are minimal and occur only gradually over a long period of time.

1. See Galbraith, p. 250.

For example, in 1913, the year the Federal Reserve was enacted into law, the average annual wage in America was $633. The exchange value of gold that year was $20.67. That means that the average worker earned the equivalent of 30.6 ounces of gold per year.

In 1990, the average annual wage had risen to $20,468. That is a whopping increase of 3,233 per cent, an average rise of 42 per cent each year for 77 years. But the exchange value of gold in 1990 had also risen. It was at $386.90 per ounce. The average worker, therefore, was earning the equivalent of 52.9 ounces of gold per year. That is an increase of only 73 per cent, a rise of less than 1 per cent per year over that same period. It is obvious that the dramatic increase in the size of the paycheck was meaningless to the average American. The reality has been a small but steady increase in purchasing power (about 1 per cent per year) that has resulted from the gradual improvement in technology. This and only this has improved the standard of living and brought down real prices-as revealed by the relative value of gold.

In areas where personal service is the primary factor and where technology is less important, the stability of gold as a measure of value is even more striking. At the Savoy Hotel in London, one gold sovereign will still buy dinner for three, exactly as it did in 1913. And, in ancient Rome, the cost of a finely made toga, belt, and pair of sandals was one ounce of gold. That is almost exactly the same cost today, two-thousand years later, for a hand-crafted suit, belt, and a pair of dress shoes. There are no central banks or other human institutions which could even come dose to providing that kind of price stability. And, yet, it is totally automatic under a gold standard.

In any event, before leaving the subject of gold, we should acknowledge that there is nothing mystical about it. It is merely a commodity which, because it has intrinsic value and possesses certain qualities, has become accepted throughout history as a medium of exchange. Hitler waged a campaign against gold as a tool of the Jewish bankers. But the Nazis traded heavily in gold and largely financed their war machine with it. Lenin claimed that gold was used only to keep the workers in bondage and that, after the revolution, it would be used to cover the floors of public lavatories. The Soviet Union under Communism became one of the world's biggest producers and users of gold. Economist John Maynard Keynes once dismissed gold as a "barbaric metal." Many followers of Keynes today are heavily invested in gold. It is entirely possible, of course, that something other than gold would be better as the basis for money. It's just that, in over two thousand years, no one has been able to find it.


The amazing stability of gold as a measure of value is simply the result of human nature reacting to the forces of supply and demand. The process, therefore, may be stated as a natural law of human behavior:

LESSON: When gold (or silver) is used as money and when the forces of supply and demand are not thwarted by government intervention, the amount of new metal added to the money supply will always be closely proportional to the expanding services and goods which can be purchased with it. Long-term stability of prices is the dependable result of these forces. This process is automatic and impartial. Any attempt by politicians to intervene will destroy the benefit for all. Therefore,

LAW: Long-term price stability is possible only when the money supply is based upon the gold (or silver) supply without government interference.

As the concept of money was slowly developing in the mind of ancient man, it became obvious that one of the advantages of using gold or silver as the medium of exchange was that, because of their rarity as compared to copper or iron, great value could be represented by small size. Tiny ingots could be carried in a pouch or fastened to a belt for ease of transportation. And, of course, they could be more readily hidden for safekeeping. Goldsmiths then began to fashion them into round discs and to put their stamps on them to attest to purity and weight. In this way, the world's first coins began to make their appearance.

It is believed that the first precious metal coins were minted by the Lydians in Asia Minor (now Northwest Turkey), in about 600 B.C. The Chinese used gold cubes as early as 2100 B.C. But it wasn't until the kings stepped into the picture that true coinage became a reality. It was only when the state certified the tiny discs that they became widely accepted, and it is to the Greeks more than anyone that we owe this development. Groseclose describes the result: These light, shining discs, adorned with curious new emblems and a variety of vigorous, striking images, made a deep impression on both Greek and barbarian. And to the more practical minded, the abundance of uniform pieces of metal, each of a standard weight, certified by the authority of the state, meant a release from the cumbersomeness of barter and new and dazzling opportunities in every direction....

All classes of men succumbed to money, and those who had formerly been content to produce only for their needs and the necessities of the household, found themselves going to the market place with their handicraft, or the fruits of their toil, to exchange them for the coins they might obtain. 1


From the very beginning, the desire for a larger money supply led to practices which were destructive to the economy. Unscrupulous merchants began to shave off a tiny portion of each coin they handled-a process known as coin clipping-and then having the shavings melted down into new coins. Before long, the king's treasury began to do the same thing to the coins it received in taxes. In this way, the money supply was increased, but the supply of gold was not. The result was exactly what we now know always happens when the money supply is artificially expanded. There was inflation. Whereas one coin previously would buy twelve sheep, now it would only be accepted for ten. The total amount of gold needed for twelve sheep never really changed. It's just that everyone knew that one coin no longer contained it.

As governments became more brazen in their debasement of the currency, even to the extent of diluting the gold or silver content, the population adapted quite well by simply "discounting" the new coins. That is to say, they accepted them at a realistic value, which was lower than what the government had intended. This was, as always, reflected in a general rise in prices quoted in terms of those coins. Real prices, in terms of labor or other goods or even of gold itself remained unchanged.

Governments do not like to be thwarted in their plans to exploit their subjects. So a way had to be found to force people to accept these slugs as real money. This led to the first legal-tender laws. By royal decree, the "coin of the realm," was declared legal for the settlement of all debts

1. Groseclose, Money and Man, p. 13.

Anyone who refused it at face value was subject to fine, imprisonment, or, in some cases, even death. The result was that the good coins disappeared from circulation and went into private hoards. After all, if the government forces you to accept junk at the same rate of exchange as gold, wouldn't you keep the gold and spend the junk? That is what happened in America in the '60s when the mint began to issue cheap metal tokens to replace the silver dimes, quarters, and half-dollars. Within a few months, the silver coins were in dresser drawers and safe-deposit boxes. The same thing has happened repeatedly throughout antiquity. In economics, that is called Gresham's Law: "Bad money drives out good."

The final move in this game of legal plunder was for the government to fix prices so that, even if everyone is using only junk as money, they can no longer compensate for the continually expanding supply of it. Now the people were caught. They had no escape except to become criminals, which most of them, incidentally, chose to do. The history of artificially expanding money is the history of great dissatisfaction with government, much lawlessness, and a massive underground economy.


In more modern times, rulers of nations have become more sophisticated in the methods by which they debase the currency. Instead of clipping coins, it is done through the banking system. The consequences of that process were summarized in 1966 by Alan Greenspan who, a few years later, would become Chairman of the Board of Governors of the Federal Reserve. Greenspan wrote:

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit....

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes....

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Unfortunately, when Greenspan was appointed as Chairman of the Federal Reserve System, he became silent on the issue of gold. Once he was seated at the control panel which holds the levers of power, he served the statists well as they continued to confiscate the people's wealth through the hidden tax of inflation. Even the wisest of men can be corrupted by power and wealth.


Returning to the topic of debasing the currency in ancient times, it must be stated that such practices were by no means universal. There are many examples throughout history of regents and kingdoms which used great restraint in money creation. Ancient Greece, where coinage was first developed, is one of them. The drachma became the defacto monetary unit of the civilized world because of the dependability of its gold content. Within its borders, cities flourished and trade abounded. Even after the fall of Athens in the Peloponnesian War, her coinage remained, for centuries, as the standard by which all others were measured. 2

Perhaps the greatest example of a nation with sound money, however, was the Byzantine Empire. Building on the sound monetary tradition of Greece, the emperor Constantine ordered the creation of a new gold piece called the solidus and a silver piece called the miliarense. The gold weight of the solidus soon became fixed at 65 grains and was minted at that standard for the next eight-hundred years. Its quality was so dependable that it was freely accepted, under the name bezant, from China to Brittany, from the Baltic Sea to Ethiopia.

Byzantine laws regarding money were strict. Before being admitted to the profession of banking, the candidate had to have sponsors who would attest to his character, that he would not file

  1. Alan Greenspan, "Gold and Economic Freedom," in Capitalism: The Unknown Ideal, ed. Ayn Rand (New York: Signet Books, 1967), p. 101.
  2. Even the Greeks, under Solon, had one, brief experience with a debased currency. But it was short lived, and never repeated. See Groseclose, Money and Man, pp. 14, 20-54.

or chip either the solidi or the miliarensia, and that he would not issue false coin. Violation of these rules called for cutting off a hand.1

It is an amazing fact of history that the Byzantine Empire flourished as the center of world commerce for eight-hundred years without falling into bankruptcy nor, for that matter, even into debt. Not once during this period did it devalue its money. "Neither the ancient nor the modern world," says Heinrich Gelzer, "can offer a complete parallel to this phenomenon. This prodigious stability...secured the bezant as universal currency. On account of its full weight, it passed with all the neighboring nations as a valid medium of exchange. By her money, Byzantium controlled both the civilized and the barbarian worlds."2


The experience of the Romans was quite different. Basically a militaristic people, they had little patience for the niceties of monetary restraint. Especially in the later Empire, debasement of the coinage became a deliberate state policy. Every imaginable means for plundering the people was devised. In addition to taxation, coins were clipped, reduced, diluted, and plated. Favored groups were given franchises for state-endorsed monopolies, the origin of our present-day corporation. And, amidst constantly rising prices in terms of constantly expanding money, speculation and dishonesty became rampant.

By the year 301 A.D., mutiny was developing in the army, remote regions were displaying disloyalty, the treasury was empty, agriculture depressed, and trade almost at a standstill. It was then that Diocletian issued his famous price-fixing proclamation as the last measure of a desperate emperor. We are struck by the similarity to such proclamations in our own time. Most of the chaos can be traced directly to government policy. Yet, the politicians point the accusing finger at everyone else for their "greed" and "disregard for the common good." Diocletian declared:

  1. Le livre du prefet ou l'empereur Leon le Sage sur les corporations de Constantinople, French translation from the Geneva text by Jules Nicole, p. 38. Cited by Groseclose, Money and Man, p. 52.

Byzantininsche Kulturgeschichte (Tubingen, 1909), p. 78. As quoted by Groseclose, Money and Man, p. 54.

Who is of so hardened a heart and so untouched by a feeling of humanity that he can be unaware, nay that he has not noticed, that in the sale of wares which are exchanged in the market, or dealt with in the daily business of the cities, an exorbitant tendency in prices has spread to such an extent that the unbridled desire of plundering is held in check neither by abundance nor by seasons of plenty.... Inasmuch as there is seen only a mad desire without control, to pay no heed to the needs of the many, seems good to us, as we look into the future, to us who are the fathers of the people, that justice intervene to settle matters impartially 1

What followed was an incredibly detailed list of mandated prices for everything from a serving of beer or a bunch of watercress to a lawyer's fee and a bar of gold. The result? Conditions became even worse, and the royal decree was rescinded five years later.

The Roman Empire never recovered from the crisis. By the fourth century, all coins were weighed, and the economy was slipping back into barter again. By the seventh century, the weights themselves had been so frequently changed that it was no longer possible to effect an exchange in money at all. For all practical purposes, money became extinct, and the Roman Empire was no more.


When new civilizations rose from the ruins of Rome, they reclaimed the lost discovery of money and used it to great advantage. The invention was truly a giant step forward for mankind, but there were many problems yet to be solved and much experimentation lay ahead. The development of paper money was a case in point. When a man accumulated more coins than he required for daily purchases, he needed a safe place to store them. The goldsmiths, who handled large amounts of precious metals in their trades, had already built sturdy vaults to protect their own inventory, so it was natural for them to offer vault space to their customers for a fee. The goldsmith could be trusted to guard the coins well because he also would be guarding his own wealth.

When the coins were placed into the vault, the warehouseman would give the owner a written receipt which entitled him to withdraw at any time.

1. As quoted by Groseclose, Money and Man, pp. 43-44.

At first, the only way the coins could be taken from the vault was for the owner to personally present the receipt. Eventually, however, it became customary for the owner to merely endorse his receipt to a third party who, upon presentation, could make the withdrawal. These endorsed receipts were the forerunners of today's checks.

The final stage in this development was the custom of issuing, not just one receipt for the entire deposit, but a series of smaller receipts, adding up to the same total, and each having printed across the top: PAY TO THE BEARER ON DEMAND. As the population learned from experience that these paper receipts were truly backed by good coin in the goldsmith's warehouse and that the coin really would be given out in exchange for the receipts, it became increasingly common to use the paper instead of the coin.

Thus, receipt money came into existence. The paper itself was useless, but what it represented was quite valuable. As long as the coin was held in safe keeping as promised, there was no difference in value between the receipt and the coin which backed it. And, as we shall see in the next chapter, there were notable examples of the honest use of receipt money at the very beginning of the development of banking. When the receipt was scrupulously honored, the economy moved forward. When it was used as a gimmick for the artificial expansion of the money supply, the economy convulsed and stagnated.


This is not a textbook on the history of money, so we cannot afford the luxury of lingering among the fascinating details. For our purposes, it is sufficient to recognize that human behavior in these matters is predictable and, because of that predictability, it is possible to formulate another principle that is so universal that it, too, may be considered a natural law. Drawing from the vast experience of this early period, it can be stated as follows:

LESSON: Whenever government sets out to manipulate the money supply, regardless of the intelligence or good intentions of those who attempt to direct the process, the result is inflation, economic chaos, and political upheaval. By contrast, whenever government is limited in its monetary power to only the maintenance of honest weights and measures of precious metals, the result is price stability, economic prosperity, and political tranquility. Therefore,

LAW: For a nation to enjoy economic prosperity and political tranquility, the monetary power of its politicians must be limited solely to the maintenance of honest weights and measures of precious metals.

As we shall see in the following chapters, the centuries of monetary upheaval that followed that early period contain no evidence that this law has been repealed by modern man.


Knowledge of the nature of money is essential to an understanding of the Federal Reserve. Contrary to common belief, the topic is neither mysterious nor complicated. For the purposes of this study, money is defined as anything which is accepted as a medium of exchange. Building on that, we find there are four kinds of money: commodity, receipt, fiat, and fractional. Precious metals were the first commodity money to appear in history and ever since have been proven by actual experience to be the only reliable base for an honest monetary system. Gold, as the basis of money, can take several forms: bullion, coins, and fully backed paper receipts. Man has been plagued throughout history with the false theory that the quantity of money is important, specifically that more money is better than less. This has led to perpetual manipulation and expansion of the money supply through such practices as coin clipping, debasement of the coin content, and, in later centuries, the issuance of more paper receipts than there was gold to back them. In every case, these practices have led to economic and political disaster. In those rare instances where man has refrained from manipulating the money supply and has allowed it to be determined by free-market production of the gold supply, the result has been prosperity and tranquility.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: this information is provided herein with the permission of G. Edward griffin