What is the meaning of the expression “money”?
In Professor Sir Roy Goode’s book – Good on Payment Obligations in Commercial and Financial Transactions (2nd Edition), he explains by referencing others attempts for a firm description on what money is, dependant on the context it is written or used in and who is trying to define it. Here we are primarily concerned with the legal definition of money. Even by simply defining what the legal meaning of the word is causes us great difficulty, because of the array of contexts the word money can be used in. He goes onto to reference a man who he believes has dominated the twentieth century with his work on the law of money; Dr. F A Mann. Dr Mann wrote five editions of The Legal Aspect of Money, where he wrote:
“It is suggested that in law the quality of money is to be attributed to all chattels which, issued by the authority of the law and denominated with reference to a unit of account, are meant to serve as a universal means of exchange in the State of issue.”
Professor Goode opinion of this is: “The definition also pre-supposes that the State has the monopoly on the creation of money.” Well of course they don’t. You should already be aware that all bank loans are the creation of new money too. He goes on to say; “it is true that the State has a monopoly on the issue of physical bank notes and coin, but the process of acceptance and re-lending of deposits has the effect of creating “money” without the intervention of the State.” and “…it may be objected that bank notes and coins are money, while a bank deposit represents only a claim for money against the bank concerned, and an element of credit risk is thus involved.” [1]
Professor Goode also says that the holder of a Bank of England Note which is a “promise to pay the bearer on demand a sum equivalent to the face amount of the note, and hence constitute promissory notes for the purpose of s.83, Bills of Exchange Act 1882.” [2]
1. That a bank deposit constitutes a debt claim is confirmed by Foley v Hill (1848) 2HL. Cas 28. 2. However, a person presenting a note for payment at the Bank would merely receive other bank notes in exchange: see s.1(4) of the Currency and Bank Notes Act 1954. Since bank notes are legal tender, the substitute notes would discharge the promise given by the original note.
So to define the word money in a simple way is extremely difficult because of the ways many ways that money comes into existence. The Bank of England issue legal tender for the government of the United Kingdom. If you haven’t already seen this short video please take a moment to watch it now. It covers a brief explanation as to how the process of new legal tender gets into circulation.
There are many ‘instruments’ that are used to create money but specifically we are interested in two. They are:
Promissory Note
Bills of Exchange
Both are documents and are also called negotiable instruments. Instruments are a construct of man to do a specific thing. These instruments represent an agreement (contract) for one party to pay a definite sum of money to a second party. Furthermore, the parties understand the documents hold value and are sometimes traded to a third or fourth party.
To understand the differences between the two, it helps to know a few related terms. As the name suggests, a promissory note represents a promise to pay a certain amount to a payee. Payee refers to the party being paid. “Maker” is the legal term for the person who signs a promissory note. The person who writes the bill of exchange or promissory note is the drawer, while the payer is the “drawee.” If it comes from a bank, the bill of exchange gets called a bank draft.
Promissory Note
The maker or drawer, and the payee, are the parties involved in a promissory note. A mortgage contract is a common contemporary form. The homeowner promises to repay a particular amount according to specific terms outlined in the promissory note. While two people, say a husband and wife, may sign the note, they’re considered one party in contract terms. Both are equally liable to fulfill the terms of the note.
Bill of Exchange
A bill of exchange is used in commerce and acts as a payment order. They’re transferable, meaning a third party can take ownership of the bill. Bills of exchange are used between trading partners. For example, when a supplier sells merchandise to a store, a bill of exchange may accompany the shipment detailing the amount due. The document will instruct the merchant to accept the terms, write “accepted” on the bill, and return it to the supplier as an agreement to pay on the assigned date.
So isn’t legal tender a note?
Yes. Legal tender is ‘bearer paper‘ and the payee is the one who holds the instrument. These are negotiable. A negotiable instrument which is payable to whoever has possession (is the bearer). The bank notes that we use for our daily purchases are bearer paper. Whenever we trade them we are exchanging a right to the use of that instrument so a duty is expected of the other party, usually to perform an act that we have agreed upon. This could be something as little as buying a newspaper or a car.
A brief history of banknotes
Image may be NSFW.
Clik here to view.The first recorded use of paper money was in the 7th century in China. However, the practice did not become widespread in Europe for nearly a thousand years.
In the 16th century the goldsmith-bankers began to accept deposits, make loans and transfer funds. They also gave receipts for cash, that is to say gold coins, deposited with them. These receipts, known as “running cash notes”, were made out in the name of the depositor and promised to pay him on demand.
Many also carried the words “or bearer” after the name of the depositor, which allowed them to circulate in a limited way. In 1694 the Bank of England was established in order to raise money for King William III’s war against France. Almost immediately the Bank started to issue notes in return for deposits. Like the goldsmiths’ notes, the crucial feature that made Bank of England notes a means of exchange was the promise to pay the bearer the sum of the note on demand. This meant that the note could be redeemed at the Bank for gold or coinage by anyone presenting it for payment; if it was not redeemed in full, it was endorsed with the amount withdrawn. These notes were initially handwritten on Bank paper and signed by one of the Bank’s cashiers. They were made out for the precise sum deposited in pounds, shillings and pence. However, after the recoinage of 1696 reduced the need for small denomination notes, it was decided not to issue any notes for sums of less than £50. Since the average income in this period was less than £20 a year, most people went through life without ever coming into contact with banknotes.
During the 18th century there was a gradual move toward fixed denomination notes. From 1725 the Bank was issuing partly printed notes for completion in manuscript. The £ sign and the first digit were printed but other numerals were added by hand, as were the name of the payee, the cashier’s signature, the date and the number. Notes could be for uneven amounts, but the majority were for round sums. By 1745 notes were being part printed in denominations ranging from £20 to £1,000.
In 1759, gold shortages caused by the Seven Years War forced the Bank to issue a £10 note for the first time. The first £5 notes followed in 1793 at the start of the war against Revolutionary France. This remained the lowest denomination until 1797, when a series of runs on the Bank, caused by the uncertainty of the war, drained its bullion reserve to the point where it was forced to stop paying out gold for its notes. Instead, it issued £1 and £2 notes. The Restriction Period, as it was known, lasted until 1821 after which gold sovereigns took the place of the £1 and £2 notes. The Restriction Period prompted the Irish playwright and MP, Richard Brinsley Sheridan, to refer angrily to the Bank as “… an elderly lady in the City”. This was quickly changed by cartoonist, James Gillray, to the Old Lady of Threadneedle Street, a name that has stuck ever since.
The first fully printed notes appeared in 1853 relieving the cashiers of the task of filling in the name of the payee and signing each note individually. The practice of writing the name of the Chief Cashier as the payee on notes was halted in favour of the anonymous “I promise to pay the bearer on demand the sum of …”, which has remained unchanged on notes to this day. The printed signature on the note continued to be that of one of three cashiers until 1870, since when it has always been that of the Chief Cashier.
The First World War saw the link with gold broken once again; the Government needed to preserve its stock of bullion and the Bank ceased to pay out gold for its notes. In 1914 the Treasury printed and issued 10 shilling and £1 notes, a task which the Bank took over in 1928. The gold standard was partially restored in 1925 and the Bank was again obliged to exchange its notes for gold, but only in multiples of 400 ounces or more. Britain finally left the gold standard in 1931 and the note issue became entirely fiduciary, that is wholly backed by securities instead of gold.
The Bank has not always been the sole issuer of bank notes in England and Wales. Acts of 1708 and 1709 had given it a partial monopoly by making it unlawful for companies or partnerships of more than six people to set up banks and issue notes. The ban did not extend to the many provincial bankers – the so-called country bankers – who were all either individuals or small family concerns. However, the Country Bankers’ Act of 1826 allowed the establishment of note issuing joint-stock banks with more than six partners, but not within 65 miles of London. The Act also allowed the Bank of England to open branches in major provincial cities, which gave it more outlets for its notes.
In 1833 the Bank’s notes were made legal tender for all sums above £5 in England and Wales so that, in the event of a crisis, the public would still be willing to accept the Bank’s notes and its bullion reserves would be safeguarded. It was the 1844 Bank Charter Act which was the key to the Bank achieving its gradual monopoly of the note issue in England and Wales. Under the Act no new banks of issue could be established and existing note issuing banks were barred from expanding their issue. Those, whose issues lapsed, because, for example, they merged with a non-issuing bank, forfeited their right of issue. The last private bank notes in England and Wales were issued by the Somerset bank, Fox, Fowler and Co in 1921.
It is excepted that all legal tender is fiat, but what does that mean?
Fiat money
Nonconvertible paper money.
Nonconvertible to gold and silver since 1931 in the UK.
Fiat Money
Money that is not backed by anything other than a government trust. Fiat money has no intrinsic value; it only has value at all because all participants in an economy agree to trust the government issuing the currency. All modern money is fiat money. Image may be NSFW.
Clik here to view.
If money is backed by a government trust, then what exactly is that? This must also apply to every nation worldwide since all modern money is fiat.
“Britain finally left the gold standard in 1931 and the note issue became entirely fiduciary, that is wholly backed by securities instead of gold.”
The securities in question are the bonds that governments issue. The creation of legal tender in the Uk is done through the issue of a Gilt. An equity equated to an ownership interest. In the broadest sense, equity gives you ownership. If you own stock, you have equity in, or own a portion — however small — of the company that issued the stock.
Take your time and click on the blue links to read the meaning of these words in the correct context. Read it again and again until your eyes bleed. Then ask yourself this:
- Are you part of an enterprise that engages in business?
- Have you ever been issued any form of certificate?
- What interest do you have in this organisation?
- Who backs the very collateral that the government issues out of?
What do the Bank of England have say regarding their Promise to pay on Bank of England banknotes?
Disclosure: Since its foundation in 1694, the Bank of England has issued notes promising to pay the bearer a sum of money. For much of its history the promise could be made good by the Bank paying out gold in exchange for its notes. The link with gold helped to maintain the value of the notes, although the link was sometimes suspended, for example in wartime. The link with gold was finally broken in 1931 and since that time there has been no other asset into which holders have the right to convert Bank of England notes. They can only be exchanged for other Bank of England notes. Nowadays public faith in the pound is maintained in a different way – through the Bank of England’s operation of monetary policy, the object of which, by statute, is price stability[1].Legally Bank of England notes might be viewed as promissory notes within the meaning of the Bills of Exchange Act 1882. Section 83(1) of the Act provides that a ‘promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.’ However, the status of Bank of England notes also needs to be read in the light of other statutory provisions [2].In this respect section 1(4) of the Currency and Bank Notes Act 1954 is particularly important. This provides that the “holder of [Bank of England] bank notes of any denominations shall be entitled, on a demand made by him during office hours at the head office of the Bank of England or, in the case of notes payable also at some place other than the head office, either at the head office or at that other place, to receive in exchange for the notes bank notes of such lower denominations, being bank notes which for the time being are legal tender in the United Kingdom or in England and Wales, as he may specify.”[1] For information and further references, see the Bank of England’s website at www.bankofengland.co.uk. The framework for the operation of monetary policy and the remit for price stability is explained in the section on Monetary Policy. The section on Banknotes includes a summary of the development of the note issue.
[2] Other legislation relevant to notes and currency include the Bank Charter Act 1844, the Currency and Bank Notes Acts 1928 and 1954 and the Currency Act 1983. These Acts provide for the establishment of a distinct Department within the Bank of England – the Issue Department – for the issue of banknotes. They also require notes issued by the Bank to be backed by securities held in the Issue Department, confer legal tender status on Bank of England notes and contain provisions relating to the issuing and writing off of banknotes.