The Lost Science of Money
by Stephen Zarlenga
2002, American Monetary Institute
Written by Darrell Anderson.
The Lost Science of Money, The Mythology of Money — the Story of Power is a fascinating book. Stephen Zarlenga is an expert on the history of monetary exchange systems and his book is evidence. If one decides to investigate this book, do so if for no other reason than the excellent one-stop reference to monetary history. Unfortunately, Zarlenga’s book is frustrating to read and potentially damaging to anyone unfamiliar with the topic of monetary theory.
There are several problems with Zarlenga’s 722 page tome. Obvious to people who have participated in publishing is that Zarlenga did not use a professional editor to help format his self-published book. There are several formatting and typographical inconsistencies, such as using hyphens instead of em and en dashes. Zarlenga also likes to use bolded text to emphasize particular statements, but the font size throughout the book using bold facing is inconsistent. This unprofessional formatting does not detract from the content, but does annoy the watchful eye.
Zarlenga also attacks other authors who reify (anthromorphisize) concepts. He attacks other people who have treated political systems as living entities that can “feel,” “breath,” and “think.” Yet, strangely, Zarlenga fails to realize that he is subject to the same criticism. Throughout his entire book he continually refers to countries and nation-states as “she.” Zarlenga is guilty of calling the kettle black.
The problems of Zarlenga’s book go deeper than these superficial observations, however. At the core of his book, Zarlenga is trying to convey a theory of money. He fails to convey his theory simply because he does not carefully and explicitly define many words and terms. He assumes that through his historical discussions that one will derive his theory by osmosis, but such is not the case. Oddly, he never provides a straightforward definition of money, although his definition of the concept is rooted in that of Aristotle’s nomisma.
Nomisma is Greek and derived from the root word nomos. Nomos means established by law. Thus, nomisma is a concept in which the concept of money is derived and defined by law.
Here is where Zarlenga’s theory collapses. Throughout the book a reader realizes that Zarlenga is hopelessly stuck inside the philosophy of statism. He seems unable to conceive of a world outside that philosophy. Thus, he does not define the concept of money outside those boundaries. Yet, a useful theory of money must exist outside statism. Such a theory would be applicable within statism but can survive and explain the concept of money outside that environment. Zarlenga should know better. He is well aware that in early human history cattle was the preferred common medium of exchange, and in that early history, human communities were little more than early agrarian settlements mixed with nomads and hunter-gatherers. There then was no environment known as statism. Yet, concepts of exchange and value were already entrenched in human thinking.
Thus, Zarlenga should know that the concept of money is not defined by statutory decree but by mere social custom. Although within the statist environment statutory law can amplify or affirm social custom, a dependable theory of money must stand alone in either environment.
Aristotle wrote that “Money exists not by nature but by law.” If, by law, Aristotle included social custom, then Aristotle’s and Zarlenga’s definition would hold. But many people today will confuse the word “law” with only that of statutory law, and not social custom, and that is why Zarlenga’s thesis is frustrating. A better definition of money:
Money: anything that is used as a medium of exchange.
This definition satisfies the way cattle was used by ancient ancestors, satisfies the way various precious commodity metals have been used in exchange, and satisfies the way the modern fiat paper currency and checkbook currency is used.
Zarlenga fails to explicitly define other important words that are needed to develop a useful theory of money. He failed to explicitly define concepts such as currency, debt, credit, or justice. Like many authors, Zarlenga assumes the meaning and definitions of these words are obvious when, as he aptly reminds his readers throughout the book, definitions are not obvious. Had Zarlenga defined such words, he likely would have removed several contradictions and confusing statements in his book and would have developed a sounder theory of money.
Currency: the physical thing that circulates commonly as a medium of exchange to represent the concept of money.
Debt: an unfinished exchange of wealth.
Credit: The willingness to forego an immediate consummation of an exchange of wealth and to accept debt.
Justice: a recognition of the concept of rights, a recognition of boundaries to specific actions and claims. Justice is a recognition of a right to self-defense, a right to seek remedy for trespass.
This lack of explicit definitions does not mean Zarlenga’s book is a wasted effort. He demonstrates several flaws of Adam Smith’s Wealth of Nations, flaws that contribute to much of the modern confusion about monetary theory. Readers are urged to read Zarlenga to appreciate those flaws. One example is the misconception that only precious metal commodities can serve as a medium of exchange, specifically gold and silver. Another flaw is that the exchange value of gold and silver is determined by the cost of production, when in fact, throughout much of human history, gold and silver was mined through physical slavery, which means the “cost” of mining essentially was zero (with respect to those people who benefited from the use of gold and silver). Another flaw is that the exchange value of gold and silver is regulated by supply and demand when historically, the exchange value almost always was regulated by political decree.
Perhaps one of the more interesting historical aspects of money discussed by Zarlenga is the difference in gold-silver exchange ratios that existed between Europe and Asia. Europeans valued gold more than silver and Asians the opposite. This created differing exchange ratios. Well into the 19th century the typical exchange ratio in Europe was about 12:1. In Asia that ratio was approximately 7:1. This created a huge imbalance that motivated European traders to take their gold to Asia to exchange for silver, and when returning home to exchange that silver for gold and other goods. This imbalance contributed greatly to the many wars and conflicts in the Old World because whoever controlled the trade routes controlled the monetary system. The result was immense profits and political power.
Zarlenga attacks the so-called Austrian School of Economics for the lack of a clear theory of money. Although proponents of this school lack a clear theory of money, some of Zarlenga’s attack on Austrians are outside the context of monetary theory. Austrian’s are well known for their anti-statist beliefs, and because Zarlenga is hopelessly entrenched in the philosophical mindset of statism, he incorrectly attacks libertarian thinking. He is stuck on the idea that an honest monetary system can exist only within the context of statutory law and dismisses other ideas about how to provide monetary reform. The Austrians do not have the answer to monetary reform, being hopelessly stuck in the idea that only precious metal commodities can serve as a medium of exchange, but Zarlenga is off target to attack so vehemently. Part of Zarlenga’s problem is that he has not defined the distinction between the concept of government and the philosophy of statism. The two are not the same.
The German sociologist Franz Oppenheimer called voluntary exchange the economic means of satisfying needs and wants, and forced exchange as the political means. The former method implies persuasion and cooperation to obtain title to resources, the latter implies force and coercion — and often violence or the threat of violence. The process of government is merely a human desire to encourage social order. The philosophy of statism is a philosophy of violence, a philosophy where people justify violence in order to satisfy their needs and wants.
Zarlenga confuses readers by not defining wealth and capital. He understands that money and wealth are not necessarily the same thing, but because he is entrapped into defining money through statutory law rather than as a concept, he often cannot distinguish when he is discussing money or currency, or wealth or money.
Capital: previously produced wealth devoted to producing more wealth. Capital is a feedback mechanism from the distribution of wealth back into the production of wealth. Capital is not to be confused with currency, which is only a potential claim on future capital.
Perhaps the most glaring hole in Zarlenga’s thesis is his lack of discussion about compound interest. He devotes much text to the concept of usury, but the concept of usury always has been a clouded topic because nobody can agree on the meaning of the word. The debate is more easily resolved by discussing compound interest rather than the gray topic of usury. Zarlenga is an admirer of 19th century social reformer Henry George, and George once provided one of the better definitions of the concept of interest.
Interest: with respect to the flow of wealth, the return from leasing capital.
Webster’s New Universal Unabridged Dictionary, second edition, 1983, provides a definition for compound interest:
If Zarlenga had carefully distinguished between wealth and capital, and had carefully distinguished that currency and capital are not the same thing, and then used George’s definition of interest, he would see that interest and compound interest are not the same.
Whereas by George’s definition interest is a linear fee, one that corresponds to the linear manner in which humans produce, compound interest is an exponential function. Compound interest is an effort to create debt from never-ending debt. Zarlenga is aware of the mathematical impossibility of compound interest and discusses the problem in his book. He is aware of the damage compound interest causes with respect to the monetary system, but does not seem aware that compound interest is a socially unacceptable concept in private loans as well. Although Zarlenga discusses Islamic concepts of interest, a reader is not convinced that Zarlenga understands the distinctions. Unfortunately, he missed an excellent opportunity to teach readers why the concept of compound interest is socially disruptive at all levels of humanity.
Zarlenga’s solution to the problem is to create a fourth branch of the political system devoted completely to providing monetary stability. Whereas Zarlenga sincerely wants to invoke meaningful reform, because he is entrenched in the concept of statism, he never will be able to produce true reform. As a philosophy of violence, statism encourages the idea of central banking and compound interest. Statism encourages the use of legal fictions to hide behind the color of law. Zarlenga recognizes that bankers try to entrench people into war, so that politicians are required to borrow from bankers and create never-ending debt and indenture all citizens. Once this debt perpetuates, the entire region is enslaved to bankers. Thus, Zarlenga should recognize that modern banking cannot exist without the political power and muscle of statism. Yet, he insists on a statist solution to the problem. He wants to remove control of the monetary system from bankers but wants to offer that control to politicians. Bankers and politicians are merely different classes of the same species: creatures who use the violently coercive political means of survival rather than the peacefully cooperative economic means. Without addressing these fundamentally disruptive aspects of statism, Zarlenga is unable to offer true monetary reform.
Zarlenga is not to be dismissed. With some adjustments, and by explicitly defining several words and terms, his book would be most noteworthy and he might be able to offer true monetary reform.