Honest Money?

“Honest money” is a phrase bandied about as a self-evident truth. As the accompanying graph indicates, its incidence coincides with the heyday of the gold standard. As such, it is the pithy summary of a strongly-held view on the nature of money, which at the time of the gold standard had a highly political charge. The only honest money was gold.

Incidence of the usage of the phrase “honest money” in books, 1800-2000. Source: Google Books Ngram Viewer

As an example, Stanley Waterloo’s Honest Money: “Coin’s” Fallacies Exposed, published in 1895. Here, silver currency is made out to be a dishonest con game: “The Silverite Argument: 1/2=1.”

Modern defenders of “honest money” are not as fastidious. In this, they have forgotten, or at least laid to one side, the controversy of the 19th century as to gold versus silver. Nowadays, according to a leading proponent of this doctrine,[1] honest money is metallic money, preferably gold, but also silver; the only honest money is either a coinage of pure gold or silver composition, or a paper issue 100% backed by such money metal; banks that do not adhere to this are a fraud; the state has no role to play here except enforcement of contracts.

The role of the state is reduced, because honest money is commodity money. In the jargon of the economic historians, money is the “most marketable commodity.” It has developed from the give-and-take of trade as the commodity, or form of merchandise, that proved to be most liquid, i.e., most current, most acceptable to any market participant, not as something directly desired, but as something that could be held and used at a later time in a later exchange.

Hence, the market takes care of money as a sort of automatic by-product. And, according to this version of events, silver and gold constituted the most marketable commodities.

The standard is weights and measures, as befits a commodity. This explains the biblical insistence on honest scales. The shekel, mentioned in the Bible as a unit of currency, was a unit of weight.

Coinage came in later on, as a means of simplifying matters. Instead of weighing out the money commodity for each transaction, coinage was developed in terms of standardized units, in various denominations, unvarying in each denomination, presumably with the weight stamped on each exemplar by way of convenience.

Presumably – because in actual fact, there is no historical example of a coinage stamped with its weight, the way a modern ingot is. What’s more, this version of events is without basis in historical fact.

Not that money did not start out as commodity money. It did, only it did not function in the way the “honest money” proponents would have us believe. The earliest records show a functioning commodity system, but one entirely different from this. In ancient Mesopotamia, a commodity money system developed, but it was, primarily, barley that was the “most marketable commodity.” The barley standard seems to have developed out of the need to store and dispense barley by the cities of the Fertile Crescent, which were more or less autonomous and had to provide for their own citizens. This storage took place in the temples, and was centrally organized. Silver was the other mainstay in monetary transactions. It was used for more high-end and inter-local transactions, while barley was used for local, lower-end transactions.[2]

The important thing to note here is that these commodities were used as units of account. “The temples in Babylonia from the Ur III period through the Achaemenid period use barley like money, especially as a unit of account.”[3] A unit of account serves to facilitate transactions on paper, not actual hand-to-hand transactions. In other words, the commodity was stored away to serve as a basis for monetary transactions, while not actually changing hands. Here we see beginning to take shape before us the basis for the banking system that is the bane of the “honest money” proponents: fractional-reserve banking.

“These institutions were in a position to store grain. They needed it to feed their dependents, and it is clear that they could turn it rather easily into all sorts of other things they might need, ranging from labor-services to commodities.”[4] As Powell notes, the majority of the population was relatively poor and dependent upon these temples for work and sustenance. If payments were made in barley, these could be made on paper (actually, clay tablets) rather than in kind; and as such, they could be expanded far beyond the actual holdings. This in turn would feed indebtedness, which is what a fractional-reserve banking system generates.

The indebtedness is attested by the innumerable cuneiform tablets on which these transactions were recorded. And indebtedness led ineluctably to all manner of social oppression, up to and including debt slavery. This, in turn, led to “clean slate” legislation in which debts were cancelled, debtors were freed from slavery, confiscated lands were returned to the original owners. In fact, the first instance of the word “liberty” – the Sumerian amargi, used by Liberty Press as its logo – does not refer to liberty in the abstract, or to economic freedom, but to the very specific act of debt cancellation. “The term should not be translated vaguely as ‘liberty’ or ‘freedom’ in the abstract, but as an economic ‘Clean Slate.’”[5]

The point here is the one I made in my book Follow the Money: “This practice [of fractional-reserve banking] … follows in commodity-based banking’s wake” (p. 15). Commodities used as money do not circulate freely, at least not nearly as much as other commodities, and the more valuable they are, the less freely they circulate. In fact, they have a habit of disappearing from circulation. They wind up in temples or in chests or in vaults, and they circulate only among the very wealthy.  Abraham may have had 400 shekels of silver – “Abraham weighed to Ephron the silver, which he had named in the audience of the sons of Heth, four hundred shekels of silver, current money with the merchant” – but Abraham was a rich man, for a single shekel of silver was the equivalent of a laborer’s month’s wages.[6]

The biblical prohibition on interest needs to be understood in this context. North argues that the Old Testament does not outlaw the taking of interest. He does so by distinguishing between “usury” and “interest” as two different things. “The Hebrew word ‘usury’ was a term of criticism. Usury referred only to interest taken from a poor fellow believer, in other words, interest secured from a charitable loan. Such usury is prohibited by Biblical law. But interest as such isn’t prohibited.”[7] This suggests there are two words for the phenomenon of interest in the Old Testament, or that the word is used in two senses. This is not the case. There is only one word, and it used in only one sense: interest on loans, not just charitable loans but all loans. By the Law of Moses, any interest at all was illegal, at least to fellow Israelites.

How to understand this? The biblical prohibition on interest was part of a larger complex of institutions, such as the Jubilee, aimed at mitigating the effects of indebtedness. Abraham had been called from “Ur of the Chaldees,” one of the leading cities of “the Mesopotamian Way”; God called him to found a new nation, one that would be able to stand against these nefarious institutions and ward off their debilitating effects. The prohibition on interest was there to keep these institutions from gaining a foothold in Israel. Later on, the Phoenicians, through Jezebel, would introduce their land law into Israel and corrupt it from that end. But the prohibition on interest was intended to prevent Israel from falling under the sway of these foreign influences.

So the Old Testament, while not prohibiting commodity money, mitigated the effects of its use, for it is precisely this that the prohibition on interest provided. Honest money, indeed.

But one might object that this was an aberration. Commodity money as the basis of a fractional-reserve system is not at all what is intended (even though that is what the modern gold standard entailed); commodity money which circulates and/or which forms part of a warehouse-deposit banking system is.

This is problematic. For one thing, it flies in the face of recorded history. Coins valued at weight have hardly ever been able to sustain a circulation. They get removed from circulation precisely because there is no difference between the coin and the commodity. In order to keep coinage in circulation, the value of the coin has to be set at a level higher than its market (intrinsic) value, otherwise it will disappear. This is Gresham’s Law looked at from the other side: it is not that bad money drives out good, but that only “bad” money circulates at all. Which is why nearly all systems of coinage have been fiduciary. Contrary to popular belief, coinage was never a system established to make it easier for commodity money to function, with a coin’s weight stamped on it to simplify matters. Rather, it was established precisely to escape the system of commodity money with its accompanying inconveniences and injustices.[8]

There have been attempts to maintain an “intrinsic” value coinage. But what is clear from them is that their purpose was not to provide for a wide domestic circulation, but only for the upper levels of the economy, for high finance and international trade. During the Dutch Golden Age, for example, the Dutch produced what they called negotiepenningen, “trade pennies,” which were pure silver coins of a certain weight to facilitate trade. These were minted exclusively for international trade and were not meant for domestic circulation – hence the name. Similar examples are the Venetian ducat and the Florentine florin.

The greatest example of such a currency was the Byzantine solidus or bezant, a gold coin maintained for hundreds of years in Byzantium, minted at the rate originally set by Constantine: 72 coins per pound weight of gold. But this coin was part of an intricate system of coinage formed of three metals, copper, silver, and gold. The day-to-day economy ran on silver and copper; the upper reaches of the economy made use of gold. And the empire sacrificed prodigiously to maintain that gold coinage. The state strictly controlled trade to ensure that gold was not exported. It spent massive amounts of resources on gaining and maintaining gold mining regions. Tax rates were high to pay for all of these state activities, to control trade and maintain far-flung armies, all for the sake of maintaining the coinage. And economic development stagnated while economies in neighboring Islamic countries bounded forward: The Muslims, for their part, maintained a silver standard and reaped the benefits of it.

Now let’s suppose that we followed the hard money advocates’ advice and introduced a strictly commodity money based on the precious metals. And further, let’s suppose that we followed their advice and maintained this currency on a basis of strict 100% backing, i.e., without engaging in any fractional-reserve banking or making use of any sort of credit instruments that did not have a strict monetary backing. For one thing, this would call for a heavy dosage of state oversight to ensure that all transactions were conducted on the “up-and-up.” Credit would be eliminated, because credit intrinsically expands the money supply. No lending with the promise of money repayment could take place even on a personal basis, that did not have strict 100% monetary backing. For every such “credit transaction” would in essence expand the money supply. Even the corner grocer’s provision of groceries with a promise of repayment when the paycheck comes in, would be illegal and punishable.

So the state would be heavily involved in the administration of such a standard. But beyond that, it would mean an enduring and drastic deflation, with all the traumatic consequences of such a deflation. This is because the money supply, being limited to the amounts of precious metal that are available to be put into circulation, is by the nature of the case kept at a more or less constant level, while the broader economy, with its innovation, its new technologies, its expanding workforce, its expanding output and consumption, continually outstrips that circulation. With expanding goods and services and a constant money supply, the only direction for prices to go is down. And a deflationary environment is one in which spending collapses, consumption collapses, and everyone holds onto the money they have, to spend it only on things of pressing importance. That is the nature of a deflationary economy. The holders of precious metal would see their holdings appreciate in value daily, while those without such holdings would be left to the mercies of a contracting economy and the opportunities, or lack thereof, it affords.

The attraction of “honest,” i.e., market-based commodity money, is that it seems to be immune to the manipulations of dishonest actors, whether they be bankers, or merchants, or minters, or the state. But this is a mirage. Such an institution never has existed and probably never will. Money needs to be adaptable to the needs of the economy. The money supply needs to be capable of expansion. How that is to be achieved is another question, one which I answer in my oft-mentioned book Follow the Money, to which I refer the reader for further investigation.


[1] Gary North, Honest Money: The Biblical Blueprint for Money and Banking (Auburn, AL: The Ludwig von Mises Institute, 2011 [1986]).

[2] A helpful summary of Mesopotamian money can be found in Marvin A. Powell, “Money in Mesopotamia,” Journal of the Economic and Social History of the Orient, Vol. 39, No. 3 (1996), pp. 224-242.

[3] Powell, “Money in Mesopotamia,” p. 229.

[4] Powell, “Money in Mesopotamia,” p. 229.

[5] Michael Hudson, The Lost Tradition of Biblical Debt-Cancellation (New York: 1993), p. 16. Download here.

[6] Powell, “Money in Mesopotamia,” p. 229.

[7] North, Honest Money, pp. 81-82.

[8] My book Follow the Money contains much more on this topic.

Author: Ruben Alvarado