The History, Meaning, and Future of Legal Tender Stephan Kinsella Kinsella Law Group, Libertarian Papers, C4SIF.org Crypto-Currency Conference Atlanta, Georgia October 6, 2013
Background • Guido Hülsmann, The Economics of Legal Tender Laws, Mises University 2011 (Youtube; Mises.org); and idem, The Ethics of Money Production (2008), chs. 10–11 • Hans-Hermann Hoppe, “Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order,” in The Economics & Ethics of Private Property • S.P. Breckenridge, Legal Tender: A Study in English and American Monetary History (Chicago, 1903; Amazon; online)
Two means of acquiring wealth • Homesteading, production, exchange • Expropriation of such people • First gives rise to productive enterprises, firms, corporations • Second gives rise to states • Growth of productive enterprises constrained by consumer demand and competition • Growth of an exploiting firm like the state is constrained by public opinion since it coerces people and creates victims
The State’s goal • To maximize exploitatively acquired wealth • To do this it engages it creates public legitimacy and favorable public opinion by: • Ideological propaganda • Taxes are really voluntary; • Chaos without the state; etc. • Targeted redistribution that corrupts people into supporting the state
Targeted Redistribution • the production of law and security, i.e. of police, defense, and a judicial system; • traffic and communication • There can be no regular exploitation without monopolistic control of rivers, coasts, seaways, streets, railroads, airports, mail and telecommunication systems; • Education • state power itself (bureaucracy, democracy); and • money and banking to more easily increase state income.
The state takeover of money and banking • What does the state want? • A pure fiat money monopolistically controlled by it, to remove barriers to counterfeiting. • Problem: money arises as a commodity (gold, silver), and counterfeiting can be noticed. • The state must destroy the gold money system to remove obstacles to counterfeiting.
The state takeover of money and banking • First, minting of coins is monopolized by the state. • Money is not thought of as weights of a commodity but as fiat state labels (“dollar” etc.). • Second, the state encourages the use of money substitutes backed up by legal tender laws. • The state then: • monopolizes or cartelizes the banking system (Federal reserve); • nationalizes gold (Roosevelt); • and then cuts the tie to gold (Nixon), giving it unlimited counterfeiting power. • Competition from other national currencies is a threat: dominant state will try to institute an international money or money system controlled by it (UN, treaties)
Legal Tender Etymology • Latin “tendere”: to stretch • Tendon • extend • Tender: to stretch out; to offer • Legal tender: some money decreed by the state to satisfy contractual obligations or debts • Even if the obligation is for something other than money • Idea is that a given contractually promised service or object has an equivalent market price in terms of money • Makes some sense for purpose of administration • Specific performance for service • Even a movable like a car • Exception: immovable/land, uniqueness • A debt has to be paid in money, of course
Legal Tender and Specific Performance • Legal tender: some money decreed by the state to satisfy contractual obligations or debts • Even if the obligation is for something other than money • Idea is that a given contractually promised service or object has an equivalent market price in terms of money • Roman law: any obligation is always satisfiable by payment of a certain some of money (Institutes of Gaius). • Makes some sense for purpose of administration • Specific performance for service • Even a movable like a car • Exception: immovable/land, uniqueness • A debt has to be paid in money, of course
Legal Tender and Exchange Rates • One could imagine money awards being granted as damages in a stateless society with gold as money, for similar reasons • No need for a “legal tender” law • Just pay the market price for the item/service • Legal tender law selects the State’s own favored currency • It can be used to satisfy even debts in other currencies • “Currency”: meaning “current coin”, in “circulation” • Suppose a bimetallic money system: gold and silver • If state makes silver and gold legal tender, it must specify a fiat exchange rate
Legal Tender and Gresham’s Law • As soon as the fiat exchange rate is different than the market rate, “bad money drives out good.” • Normally, good products drive out bad products • Iphone, blackberry • Gold and silver as money, over inferior commodities • Legally overvalued money drives out legally undervalued money
Legal Tender and Gresham’s Law: Example • market: 20 oz silver = 1 oz gold. • Fiat: 40 oz silver = 1 oz gold • If you owe 20 oz silver, on the market you would have to use 1 oz of gold to satisfy that debt. • But legal tender permits you to satisfy it with only ½ oz of gold • Gold is overvalued, silver undervalued. • People stop using silver: bad money drives out good • For smaller purchases, no silver available resort to money substitutes: token coins, banknotes… • What kind of system does this lead to…? Paper money, fiat currency, ultimately divorced from gold, and fractional-reserve central banking
Legal Tender History: England • One justification by the State (England): • If you seek justice in the State’s courts, it can impose conditions on the creditor • This looks like “selling justice” • Prohibited by Magna Carta (1215), ch. 40: "To no one will we sell, to no one will we refuse or delay, right or justice.” • Nulli vendemus, nulli negabimus, aut differemus, rectum aut justiciam. • But the crown took that approach anyway. • They were giving justice, people were seeking justice from it, so it can impose conditions on them • One danger of state monopolization of law and justice
Legal Tender History: US • In the colonies, coins scarce • substitutes used, including various commodities: “wampum”—shell bead money of the Native Americans; corn; bullets; tobacco; pitch, tar, pork; even “country produce” • in 1715 up to 17 commodities legal tender to pay taxes.
Legal Tender History: US • Articles of Confederation (1781): did not clearly grant Congress legal tender power; retained by states. • 1775: Congress, planning for the upcoming war: knew that loans and taxes were not feasible. • Issued bills of credit, to be paid by the states; the states expected to lay taxes to redeem the notes but they emitted bills of their own. • Massachusetts, June 1775, said the colonies’ bills should be legal tender in payment of all debts and damages on contracts, and if anyone should refuse the notes, or even demand a premium to accept them, he should be deemed an enemy of the country. Similar legislation in Rhode Island, New Hampshire, and Virginia.
Legal Tender History: US • Constitution (1789): • “No State shall … coin Money; … make any Thing but gold and silver Coin a Tender in Payment of Debts”. • Congress has the power: “To coin Money, regulate the Value thereof, and of foreign Coin…”; • Act in 1792: “all gold and silver coins which shall have been struck at and issued from said mint shall be a lawful tender in all payments whatsoever.” • The Coinage Act of 1965: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts.”
Legal Tender History: US • US dollar notes: “this note is legal tender for all debts private and public.” • British pound notes: “Bank of England: I promise to pay the bearer on demand the sum of five pounds.” • Funny story about this — ask me after • The Bank of England and Me
Legal Tender and Gold Clauses • To cut the tie to gold, the State could set an exchange rate that drives gold out • Ex: 100 oz of gold owed, worth $100k, but only $50k needed to satisfy the “debt” • In the US: Roosevelt’s Executive Order 6102 (1933): criminalized the possession of monetary gold • Gold clauses: Outlawed by the Gold Reserve Act of 1934, under Roosevelt. • changed the value of the dollar in gold from $20.67 to $35 per ounce • Remained in effect until August 15, 1971, when Nixon announced that the US would no longer convert dollars to gold at a fixed value, thus abandoning the gold standard for foreign exchange • Ban on gold ownership repealed in 1974 by Ford • Gold clauses re-legalized in 1977, under Carter
Is there Still Legal Tender? Why Isn’t gold money? • Now: there is no fiat exchange rate between the dollar and gold, and gold clauses are now permitted. • So … do we really even have legal tender any more? • The dollar is not legally overvalued versus gold. • Possible reasons gold has not re-emerged as money, and why gold clauses are still relatively rare: • Perception of relative stability of dollar (no hyperinflation) • Inertia/networking effects/regression theorem • Transactions in gold subject to taxation (sales tax, capital gains) • Taxes must be paid in dollars • Fear of another state takeover
Two types of contracts/Bitcoin implications • Contemporaneous (executed, point of sale), and executory • Legal tender has little effect on the former, but a big effect on the latter • As do gold clauses • Bitcoin so far used for former • If bitcoin is to emerge as a major currency, we will see “bitcoin clauses” in contracts, or contracts denominated in bitcoins • State’s possible response? • Outlawing “bitcoin clauses” • (and gold clauses) • Imposing a fiat exchange rate that overvalues the dollar versus bitcoin