The lost history of money, an antidote to the myths

Summary:  With monetary policy at center stage of economic policy, we’re manipulated by myths about the history of money.  The truth is out there, for those that seek it. As in this excerpt from a recent IMF report.

Symbol of America's true religion!
The symbol of America’s true religion!


  1. Introduction
  2. History of money
  3. United Kingdom
  4. United States
  5. Summary
  6. About the Authors
  7. For More Information

Excerpt from “The Chicago Plan Revisited
by Jaromir Benes and Michael Kumhof
IMF Working Paper, August 2012
Red emphasis added. References & footnotes omitted.


There is another issue that tends to get confused with the much more fundamental debate concerning the control over the issuance of money, namely the debate over “real” precious-metals-backed money versus fiat money. As documented in Zarlenga (2002), this debate is mostly a diversion, because even during historical regimes based on precious metals the main reason for the high relative value of precious metals was precisely their role as money, which derives from government fiat and not from the intrinsic qualities of the metals.

These matters are especially confused in Adam Smith (Wealth of Nations, 1776), who takes a primitive commodity view of money despite the fact that at his time the then private Bank of England had long since started to issue a fiat currency whose value was essentially unrelated to the production cost of precious metals. Furthermore, as Smith certainly knew, both the Bank of England and private banks were creating checkable book credits in accounts for borrowing customers who had not made any deposits of coin (or even of bank notes).

History of money

The historical debate concerning the nature and control of money is the subject of Zarlenga (2002), a masterful work that traces this debate back to ancient Mesopotamia, Greece and Rome. Like Graeber (2011), he shows that private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts.


Virtual Gold Coin
A virtual Gold Coin as money

Zarlenga does not adopt the common but simplistic definition of usury as the charging of “excessive interest”, but rather as “taking something for nothing” through the calculated misuse of a nation’s money system for private gain. Historically this has taken two forms.

The first form of usury is the private appropriation of the convenience yield of a society’s money. Private money has to be borrowed into existence at a positive interest rate, while the holders of that money, due to the non-pecuniary benefits of its liquidity, are content to receive no or very low interest. Therefore, while part of the interest difference between lending rates and rates on money is due to a lending risk premium, another large part is due to the benefits of the liquidity services of money.

This difference is privately appropriated by the small group that owns the privilege to privately create money. This is a privilege that, due to its enormous benefits, is often originally acquired as a result of intense rent-seeking behavior. Zarlenga (2002) documents this for multiple historical episodes.

We will return to the issue of the interest difference between lending and deposit rates in calibrating our theoretical model.

The second form of usury is the ability of private creators of money to manipulate the money supply to their benefit, by creating an abundance of credit and thus money at times of economic expansion and thus high goods prices, followed by a contraction of credit and thus money at times of economic contraction and thus low goods prices. A typical example is the harvest cycle in ancient farming societies, but Zarlenga (2002), Del Mar (1895), and the works cited therein contain numerous other historical examples where this mechanism was at work. It repeatedly led to systemic borrower defaults, forfeiture of collateral, and therefore the concentration of wealth in the hands of lenders.

For the macroeconomic consequences it matters little whether this represents deliberate and malicious manipulation, or whether it is an inherent feature of a system based on private money creation. We will return to this in our theoretical model, too.

A discussion of the crises brought on by excessive debt in ancient Mesopotamia is contained in Hudson and van de Mierop (2002). It was this experience, acquired over millennia, that led to the prohibition of usury and/or to periodic debt forgiveness (“wiping the slate clean”) in the sacred texts of the main Middle Eastern religions.

The earliest known example of such debt crises in Greek history are the 599 BC reforms of Solon, which were a response to a severe debt crisis of small farmers, brought on by the charging of interest on coinage by a wealthy oligarchy. It is extremely illuminating to realize that Solon’s reforms, at this very early time, already contained many elements of what Henry Simons (1948), a principal proponent of the Chicago Plan, would later refer to as the “financial good society”.

  • There was widespread debt cancellation, and the restitution of lands that had been seized by creditors.
  • Agricultural commodities were monetized by setting official monetary floor prices for them. Because the source of loan repayments for agricultural debtors was their output of these commodities, this turned debt finance into something closer to equity finance.
  • Solon provided much more plentiful government-issued, debt-free coinage that reduced the need for private debts.

Solon’s reforms were so successful that, 150 years later, the early Roman republic sent a delegation to Greece to study them. They became the foundation of the Roman monetary system from 454 BC (Lex Aternia) until the time of the Punic wars.

It is also at this time that a link was established between these ancient understandings of money and more modern interpretations. This happened through the teachings of Aristotle that were to have such a crucial influence on early Western thought. In Ethics, Aristotle clearly states the state/institutional theory of money, and rejects any commodity-based or trading concept of money, by saying “Money exists not by nature but by law.” The Dialogues of Plato contain similar views.

This insight was reflected in many monetary systems of the time, which contrary to a popular prejudice among monetary historians were based on state-backed fiat currencies rather than commodity monies. Examples include the extremely successful Spartan system (approx. 750-415 BC), introduced by Lycurgus, which was based on iron disks of low intrinsic value, the 390-350 BC Athenian system, based on copper, and most importantly the early Roman system (approx. 700-150 BC), which was based on bronze tablets, and later coins, whose material value was far below their face value.

Many historians have partly attributed the eventual collapse of the Roman republic to the emergence of a plutocracy that accumulated immense private wealth at the expense of the general citizenry. Their ascendancy was facilitated by the introduction of privately controlled silver money, and later gold money, at prices that far exceeded their earlier commodity value prices, during the emergency period of the Punic wars.

With the collapse of Rome much of the ancient monetary knowledge and experience was lost in the West. But the teachings of Aristotle remained important through their influence on the scholastics, including St. Thomas Acquinas (1225-1274). This may be part of the reason why, until the Industrial Revolution, monetary control in the West remained generally either in government or religious hands, and was inseparable from ultimate sovereignty in society.

However, this was to change eventually, and the beginnings can be traced to the first emergence of private banking after the fall of Byzantium in 1204, with rulers increasingly relying on loans from private bankers to finance wars. But ultimate monetary control remained in sovereign hands for several more centuries.

  • The Bank of Amsterdam (1609-1820) in the Netherlands was still government-owned and maintained a 100% reserve backing for deposits.
  • The Mixt Moneys of Ireland (1601) legal case in England confirmed the right of the sovereign to issue intrinsically worthless base metal coinage as legal tender.
  • The English Free Coinage Act of 1666 placed control of the money supply into private hands, and with the founding of the privately controlled Bank of England in 1694, were the first time a major sovereign relinquished monetary control, not only to the central bank but also to the private banking interests behind it.

The following centuries would provide ample opportunities to compare the results of government and private control over money issuance.

The United Kingdom

The results for the United Kingdom are quite clear. Shaw (1896) examined the record of monarchs throughout English history, and found that, with one exception (Henry VIII), the king had used his monetary prerogative responsibly for the benefit of the nation, with no major financial crises. On the other hand, Del Mar (1895) finds that the Free Coinage Act inaugurated a series of commercial panics and disasters which to that time were completely unknown, and that between 1694 and 1890 twenty-five years never passed without a financial crisis in England.

The principal advocates of this system of private money issuance were Adam Smith (1776) and Jeremy Bentham (1818), whose arguments were based on a fallacious notion of commodity money. But a long line of distinguished thinkers argued in favor of a return to (or, depending on the country and the time, a maintenance of) a system of government money issuance, with the intrinsic value of the monetary metal (or material) being of no consequence. The list of their names, over the centuries, includes

  • John Locke (1692, 1718),
  • Benjamin Franklin (1729),
  • George Berkeley (1735),
  • Charles de Montesquieu, in Montague (1952),
  • Thomas Paine (1796),
  • Thomas Jefferson (1803),
  • David Ricardo (1824),
  • Benjamin Butler (1869),
  • Henry George (1884),
  • Georg Friedrich Knapp (1924),
  • Frederick Soddy (1926, 1933, 1943),
  • Pope Pius XI (1931) and,
  • the Archbishop of Canterbury (1942).

The United States

The United States monetary experience provides similar lessons to that of the United Kingdom.

Colonial paper monies issued by individual states were of the greatest economic advantage to the country (Franklin (1729)), and English suppression of such monies was one of the major reasons for the revolution (Del Mar (1895)).

  • The Continental Currency issued during the revolutionary war was crucial for allowing the Continental Congress to finance the war effort. There was no over-issuance by the colonies, and the only reason why inflation eventually took hold was massive British counterfeiting.
  • The government also managed the issuance of paper monies in the periods 1812-1817 and 1837-1857 conservatively and responsibly.
  • The Greenbacks issued by Lincoln during the Civil War were again a crucial tool for financing the war effort, and … their issuance was responsibly managed, resulting in comparatively less inflation than the financing of the war effort in World War I.
  • The Aldrich-Vreeland system of the 1907-1913 period, where money issuance was government controlled through the Comptroller of the Currency, was also very effectively administered.

The one blemish on the record of government money issuance was deflationary rather than inflationary in nature. The van Buren presidency triggered the 1837 depression by insisting that the government issuance of money had a 100% gold/silver backing. This completely unnecessary straitjacket meant that the money supply was inadequate for a growing economy.

As for the US experience with private money issuance, the record was much worse. Private banks and the privately-owned First and especially Second Bank of the United States repeatedly triggered disastrous business cycles due to initial monetary over-expansion accompanied by high debt levels, followed by monetary contraction and debt deflation, with bankers eventually collecting the collateral of defaulting debtors, thereby contributing to an increasing concentration of wealth.

Massive losses were also caused by spurious private bank note issuance in the 1810-1820 period, and similar experiences continued throughout the century. The large expansion of private credit in the period leading up to the Great Depression was another example of a bank-induced boom-bust cycle, although its severity was exacerbated by mistakes of the Federal Reserve.

Hyperinflation in Weimar and elsewhere

Finally, a brief word on a favorite example of advocates of private control over money issuance, the German hyperinflation of 1923, which was supposedly caused by excessive government money printing. The Reichsbank president at the time, Hjalmar Schacht, put the record straight on the real causes of that episode in Schacht (1967).

Specifically, in May 1922 the Allies insisted on granting total private control over the Reichsbank. This private institution then allowed private banks to issue massive amounts of currency, until half the money in circulation was private bank money that the Reichsbank readily exchanged for Reichsmarks on demand.

The private Reichsbank also enabled speculators to short-sell the currency, which was already under severe pressure due to the transfer problem of the reparations payments pointed out by Keynes (1929). It did so by granting lavish Reichsmark loans to speculators on demand, which they could exchange for foreign currency when forward sales of Reichsmarks matured.

When Schacht was appointed, in late 1923, he stopped converting private monies to Reichsmark on demand, he stopped granting Reichsmark loans on demand, and furthermore he made the new Rentenmark non-convertible against foreign currencies. The result was that speculators were crushed and the hyperinflation was stopped.

Further support for the currency came from the Dawes plan that significantly reduced unrealistically high reparations payments. This episode can therefore clearly not be blamed on excessive money printing by a government-run central bank, but rather on a combination of excessive reparations claims and of massive money creation by private speculators, aided and abetted by a private central bank.

It should be pointed out that many more recent hyperinflations in emerging markets also took place in the presence of large transfer problems and of intense private speculation against the currency. But a detailed evaluation of the historical experiences of emerging markets is beyond the scope of the present paper.

To be fair, there have of course been historical episodes where government-issued currencies collapsed amid high inflation. But the lessons from these episodes are so obvious, and so unrelated to the fact that monetary control was exercised by the government, that they need not concern us here. These lessons are:

  • {D}o not put a convicted murderer and gambler, or similar characters, in charge of your monetary system (the 1717-1720 John Law episode in France).
  • {D}o not start a war, and if you do, do not lose it (wars, especially lost ones, can destroy any currency, irrespective of whether monetary control is exercised by the government or by private parties).


To summarize, the Great Depression was just the latest historical episode to suggest that privately controlled money creation has much more problematic consequences than government money creation. Many leading economists of the time were aware of this historical fact. They also clearly understood the specific problems of bank-based money creation, including the fact that high and potentially destabilizing debt levels become necessary just to create a sufficient money supply, and the fact that banks and their fickle optimism about business conditions effectively control broad monetary aggregates.

Michael Kumhof
Michael Kumhof


(6)  About the Authors

Michael Kumhof is Deputy Division Chief, Modeling Division of the IMF Research Department. See his website here.

Jaromir Benes: IMF economist. See his professional history and publications here.

(7)  For More Information about gold

  1. Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation, 12 December 2011
  2. See a real speech at a political convention. Contrast it with the pablum we’re fed today., 5 September 2012 — The “cross of gold”.
  3. Why do so many Americans want a gold-based currency?, 6 September 2012
  4. What would a gold-backed currency do to America?, 7 September 2012





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