Credit and Creed

A Critical Legal Theory of Money

Andreas Rahmatian

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429594847
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Money is a legal institution with principal economic and sociological consequences. Money is a debt, because that is how it is conceptualised and comes into existence: as circulating credit – if viewed from the creditor's perspective – or, from the debtor's viewpoint, as debt. This book presents a legal theory of money, based on the concept of dematerialised property. It describes the money creation or money supply process for cash and for bank money, and looks at modern forms of money, such as cryptocurrencies. It also shows why mainstream economics presupposes, but avoids an analysis of, money by effectively eliminating money from the microeconomic market model and declaring it as merely a neutral medium of exchange and unit of account. The book explains that money rather brings about and influences substantially the exchange or transaction it is supposed to facilitate only as a neutral medium. As the most liquid of all assets, money enables financialisation, monetisation and commodification in the economy. The central role of the banks in the money creation process and in the economy, and their strengthened position after the bank rescue measures in the wake of the financial crisis 2008-9 are also discussed.

Providing a rigorous analysis of the most salient legal issues regarding money, this book will appeal to legal theorists, economists and anyone working in commercial or banking law.

1
The legal concept of money

1. Money as a legal concept of property as opposed to an economic concept of a medium of exchange

(a) The disappearance of money from law

Sometime around the turn of the last century, the lawyers handed the research and conceptualisation of the phenomenon of money over to the economists. That was a quiet, unspectacular and probably not even conscious change, but it had the effect that from the early twentieth century onwards, textbooks and academic research in commercial law are strangely silent about money. Money is indispensable in all commercial transactions, the very subject matter of commercial law. However, law students these days hear next to nothing about money in their commercial law courses. The old legal theories on money in the nineteenth century, such as by Savigny,¹ which presuppose commodity money and a gold standard, are outdated and no longer applicable to the modern monetary system without substantial modifications.² Today, lawyers specialised in banking and commercial law discuss the legal technicalities of money transfers, such as the contractual relations and ownership in the money before/after such transfers, but they do not dwell on the essence of money in law.³ Money is presumed to be a form of property⁴ – which it is indeed – but there is no discussion about the peculiar properties of this property, nor how this property has come into existence and what its effects are.

1 Savigny, Obligationenrecht I (1851: 440–508).

2 See below under sec. 6.

3 Compare the typical approach in modern commercial law and banking law textbooks, for example. Cranston et al. (2017: 362–371) has a useful practical overview of money with no discussion of the concept of money. McKendrick (2016: 488) has, commendably, a separate chapter on money, but largely discusses payment, payment systems and legal claims to money (personal and proprietary) from pp. 489 onwards, while, for example, Ellinger et al. (2011) on banking law has no chapter devoted to money specifically.

4 Mann (1992: 8), defines money as ‘chattel personal’, the term for tangible (choses in possession) and intangible (choses in action) moveable property in English law, see also Bridge (2015: 13–14, 21).

While lawyers have gradually forgotten what money is, economists have never really understood money in the first place. They presuppose money diffusely as a social reality, a calculation and transaction device that is generally neutral in its effects,⁵ especially in the microeconomic treatment of market mechanisms.⁶ Hence in microeconomics money is disregarded and disappears entirely from the market model of supply and demand. The price at the intersection of the supply and demand curves is the equilibrium price (the quantity being the equilibrium quantity), that point where that clearing of the market occurs.⁷ ‘Price’ is defined as the quantity ratio of goods exchanged, e.g. the price for one sheep is one-third of a cow (barter), or £600 (sale). That price is expressed in money, but money as a notionally separate entity vanishes in the price. It is trite to say that economists have always been aware of the problematic nature of this simplifying equation of price, supply and cost of production which partly determine the price, and money as the neutral yardstick or tool of measuring. Marshall remarks:⁸

When considering costs from the point of view of the capitalist employer, we of course measure them in money…. But when considering costs from the social point of view, when inquiring whether the cost of attaining a given result is increasing or diminishing with changing economic conditions, then we are concerned with the real costs of efforts of various qualities, and with the real cost of waiting. If the purchasing power of money, in terms of effort has remained about constant, and if the rate of remuneration for waiting has remained about constant, then the money measure of costs corresponds to the real costs: but such a correspondence is never to be assumed lightly.

However, cautionary comments by some economists concerning the ‘variation in the medium in which value is estimated or price expressed’,⁹ that is, the variation of the medium of money, have had little practical effect. In macroeconomics, to the extent to which it is monetary theory, economists seek to explain what money does, not what money is.¹⁰ Often the existence of money is explained with the anthropologically unsound reason that money has developed as a medium of exchange to facilitate barter.¹¹ This is reflected in the old story that commerce originated from barter, most prominently put forward in the Scottish Enlightenment by Adam Smith in the opening chapters of his Wealth of Nations (1776): ‘a certain propensity in human nature …to truck, barter, and exchange one thing for another’.¹² David Hume¹³ and Lord Kames¹⁴ adopted the same narrative. The argument that barter is flawed and unwieldy for developed commercial transactions is much older; it was already the jurist Paulus in Ancient Rome who made such a point in favour of money.¹⁵ Before, Aristotle made a similar claim in his Politics.¹⁶ However, there does not seem to be any anthropological proof that in the development of human societies barter was indeed at the beginning of commerce and money.¹⁷

5 Compare the definition of money by Mankiw (2013: 80): ‘money is the stock of assets that can be readily used to make transactions’.

6 ‘Market’ is understood in the way Jevons defines this term: ‘[T]he word has been generalised, so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity’, Jevons, quoted by Marshall, Principles, V, 1, § 2 (2013: 270).

7 Compare the discussion of the market equilibrium in the microeconomics sections in the usual economics textbooks: e.g. Marshall, Principles, V, 3, §§ 3–6 (2013: 283–289), and at § 6 (at 287): ‘When demand and supply are in equilibrium, the amount of the commodity which is being produced in a unit of time may be called the equilibrium-amount, and the price at which it is being sold may be called the equilibrium-price’; Mankiw (2012: 77), Bofinger (2011: 65–68), Streissler (1984: 30–31).

8 Marshall, Principles, V, 3, § 7 (2013: 291).

9 Ricardo, Principles, chapter 1, vii (2004: 30).

10 See e.g. the short passage in Mankiw (2013: 79–84), ‘What Is Money?’ as an illustration, and even this section mostly deals with types of money and the control of the quantity of money.

11 Crowther (1946: 14–16), Mankiw (2012: 620), and critically Heinsohn and Steiger (2013: 18).

12 Smith, Wealth of Nations, book 1, chapter 2 (2000: 14).

13 Hume, Of Money (2003: 122–123).

14 Kames, Sketches, I, iii (2007: 74).

15 Paulus, Commentary on the Edict, book 33, D 18, 1, 1, pr.

16 Aristotle, Politics, book 1, chapter 9 [1257a–b].

17 See Humphrey (1985: 48), Graeber (2011: 21, 43), Heinsohn and Steiger (2013: 6–7), and Chapter 3, sec. 5 on the problematic historical narrative about barter.

Economists also assume that what lawyers call a sale is just a form of barter (one good against money, which is just another good). Most economics textbooks presuppose that tacitly, without further explanation,¹⁸ with the effect that the absence of money in the microeconomic supply and demand model is justifiable and not perceived as a shortcoming. It will be shown later that the exchange which involves the transfer of money against goods is not the same as barter. Thus one will agree with Lord Kames (1774): while Kames stressed that barter was deficient in commercial dealings which necessitated the introduction of money, he, being a lawyer, also stressed the difference between barter and sale, not only in technical law but also for the economic analysis of commercial transactions.¹⁹ A sale, that is, the exchange of goods against money expressing a certain price is a sale in economics, too, not only in law. Thus the economic perspective requires a distinction between sale and barter as well. Money cannot be eliminated from the transaction as if the exchange were a true barter of two commodities, such as wheat against beer. Money influences the characteristics of the exchange substantially; it is not a non-entity, not a medium of exchange that acts as a transparent and neutral transmitter,²⁰ and therefore it cannot be factored out in microeconomic analysis.

18 An exception is Streissler (1984: 2), who stresses the wider meaning of barter in economics, when compared to law, but this is also an economics textbook for lawyers.

19 Kames, Sketches, I, iii (2007: 76). See also Commons (1924: 245): ‘[B]usiness is not an exchange of commodities – it is a purchase and sale of commodities’ (original emphasis).

20 Ingham (2004: 22–23).

Money is entirely a creature of the law;²¹ it is born by and dies through the law, as any other property,²² and the nature and essence of money must be understood in legal categories and concepts first. Only the study of the effects of money in the market, es...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• Quotes on Money and Credit
• Preface
• 1 The legal concept of money
• 2 The creation of money and its legal basis
• 3 Money as a static concept: money in economics
• 4 A dynamic concept of money. The alienation cycle
• 5 The legal underpinnings for the functioning of money as money: the faith in money and the power of the banks
• Conclusion
• Bibliography
• Index