by Alasdair Macleod, GoldMoney:
Rising interest rates threaten to destabilise both financial asset values and the fiat currencies in which they are priced. This outcome is feared by the chattering classes who increasingly speculate about currency resets.
So far, we have seen cryptocurrencies such as bitcoin, plans for the introduction of central bank digital currencies, plans to de-dollarise Asian trade, and even El Salvador adopting bitcoin as legal tender. But are these resets valid?
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Except for a new currency mooted for cross-border trading purposes between Russia, its former Central Asian satellites and China only at the conceptual stage, all these plans fail in one important respect: as things stand, legally none of them can have the status of a currency. Money, that is physical gold and silver, banknotes and bank credit are exempt from property law with respect to stolen goods which otherwise can be seized from innocent parties who have subsequently acquired them.
Without this exemption embodied in lex mercatoria a currency replacement is useless. The only replacement for fiat is a currency credibly backed by gold. And that is the legal position!
The introduction of new currencies is a topic moving increasingly into public debate driven by both the inflation dilemma faced by central banks and, recently, by the consequences of fiat currency sanctions against Russia. There is a convergence of events at play. While there are the immediate problems of rising interest rates and of the financial and commodity price war being waged between the West and Russia, there are plans for central bank digital currencies (CBDCs) to give the monetary authorities greater control over the use of new currencies that could replace existing fiat.
The problem is that in the monetary sense the public is not even ruled by one-eyed kings; we are all subjects in the kingdoms of the totally blind, at least in the economic and monetary sense. While some very clever people can tell you all about the sophisticated financial instruments few of us have even heard of and their roles in the fiat currency universe, no one in charge appears to understand the root of it all, which is money. This unbelievable situation is easily verified by listening to the utterances of or reading the information emanating from leading central bankers and the research departments of nearly all the participants in the finance industry.
The role of money has been reaffirmed by philosophers and economists from the dawn of money itself, at least until this age of neo-Keynesianism. This quote is over 2,300 years old and is from Aristotle:
“With regards to a future exchange (if we want nothing at present, that it may take place when we do want something) money is, as it were, our security. For it is necessary that he who brings it should be able to get what he wants”[i]
This was reaffirmed by Jean-Baptiste Say two centuries ago in his famous law which defined the role of money in the division of labour. The only form of money legal from Aristotle’s time until even today is metallic. That is gold and silver coin or bullion which can be coined or weighed and does not alter over time — the rest is credit. In the form of banknotes, credit is the circulating representation of money, which we call currency. Since the end of Bretton Woods in 1971, gold has been dismissed as the anchor for currency value by promoters of fiat currency, which is now wholly dependent upon faith and credit in their issuers, who have long forgotten the vital role of metallic money.
Metallic money was settled upon as the medium of exchange by its users, and the responsible role of the state has always been not to replace it, but to standardise it. The state had a fundamental duty to ensure the coinage was good and money’s representation as credit was sound.
That is now forgotten. Nor is the role of interest rates understood. While being a cost to a borrower, for a lender who loses the use of his money, they reflect compensation for that loss and the risk that the borrower might not repay. Included in the lender’s calculation must be an allowance for changes in purchasing power. If a lender buys, say, a 10-year US Government note and currency debasement leads to a loss of purchasing power officially recorded by the consumer price index at 7.5%, then it is likely that a cohort of lenders to the US Government would seek a similar level of compensation for this factor alone.
That is without reckoning on central banks, which suppress the evidence from their debasement policies. The Fed, which bears responsibility for the world’s reserve currency, now finds itself unable to keep the lid on rising interest rates and against its will is being forced by markets to permit them to rise. All central banks are being pushed into similar decisions. Not only are they uncomfortable with markets forcing their hand, but they firmly believe that interest rates are an unnecessary imposition on investment capital and state finances. Their response to market pressures is to enforce yet greater control over markets by redesigning their currencies. But there are insurmountable legal problems, which so far have not entered the debate.
New forms of currency face a huge legal hurdle
No one could be more ill-equipped to design a new currency than planners employed by governments. Instead of the public being permitted to satisfy its own criteria, governments try to evolve currencies away from being determined by its users towards increasing statist control.
The Bank for International Settlements, which is coordinating research into CBDCs is clear on the subject. CBDCs are intended be the equivalent replacement of cash with two key differences:
“The central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability [i.e. cash], and we will have the technology to enforce that. Those two issues are extremely important and is a huge difference to what cash is.” Augustin Carstens – BIS General Manager[ii]
But as a replacement for banknotes, a CBDC cannot share the legal status of cash today, which is specific. It is not clear whether ignoring it is intentional, or the lawyers are yet to be fully consulted.
Here is the central issue. Money, that is gold and silver, and currency in the form of banknotes and representative coin have a different legal status from all other forms of property. If the true owner of money which has been stolen finds it is in the hands of the thief, he may recover it. But if the thief has purchased things in the shop with it in the usual way of business and the shopkeeper takes it honestly in the way of his trade and without knowing it has been stolen, he may retain it against the original owner from whom it has been stolen. That is to say the right to the property in the currency passes by its delivery.
This single exception to property rights extends to substitutes and representations of money, such as bills of exchange, banknotes, cheques, and other cash substitutes exchanged for money, currency, or credit, which are all assimilated to money. It accords with precedents in the Lex mercatoria (merchant law, or the Law Merchant in common legalise). It is the body of trading principles which evolved from the middle-ages along with trade between centres as a system of custom and best practice in Europe.[iii]
In this legal respect, money, currency, and credit are different from, say, stolen artworks or precious stones, which on proof of original ownership can be recovered decades later. The families robbed of their possessions by the Nazis over eighty years ago are still reclaiming their property but have no claim on the cash and bank deposits stolen from them.
The position of a CBDC appears to be intended to be different from cash and deposit currency to allow a central bank to control ownership and direct its use, as the quote above from Carstens makes clear. In other words, the right to property in a CBDC differs fundamentally from that of money and currency.
The idea that a CBDC is a legal replacement for cash founders on this important point, which the General Manager of the BIS appears to ignore. Yet the point is proved by commercial bankers in a different context, as evidenced by their inability to deal with payment fraud. If a bank customer finds his bank account emptied by someone who has stolen access to it, it is a criminal act. But the property right to the bank deposit has passed with the stolen money and the bank having had a valid instruction to transfer balances in good faith can do nothing to recover it.
A CBDC does not appear to be a currency in this legal sense, because the right of ownership is subject to conditions imposed by another party — a central bank. In layman’s terms, banknote cash is a document unconditionally entitling the bearer. A unit of a CBDC is not.
Therefore, a CBDC and its derivative forms of credit cannot be currency in law, the term given exclusively to money, credit and their immediate derivatives. Which, incidentally, applies in all post-barter jurisdictions from the time of Aristotle at least.
Not only is this important topic not discussed by the BIS committee working on CBDCs, but no one, to this writer’s knowledge, seems to be aware of a CBDC not qualifying as money or currency in law. It is true that laws may be passed to change the status of a CBDC, but it is equally true that a law may be passed to force everyone to wear a hat. No law can work when its intent is to undermine the whole basis of trade.
In commentaries on the subject, almost everyone has ignored the purpose of a currency which they confuse with money. It represents credit and nothing else. As Carstens points out, cash, by which he means banknotes, is a liability of a central bank. To this we can add bank accounts, which are credit given by a commercial bank to its depositors. And a commercial bank’s reserves held at a central bank are the liability of the central bank with the same status as the central bank’s banknotes.