by Federico Sosa Valle
If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.
– Friedrich Hayek
I. Introduction
A monetary system, as well as any other phenomenon involving human interaction, whether extended throughout time and geography or, on the contrary, concentrated in a certain circumstance, does not occur in a vacuum; instead, it depends on a set of values of a higher order and, with them, on rules, both positive and empirical, tending to their protection and validity, that give this social phenomenon the institutional framework that makes it possible. Those values and rules may be particular to a certain time and geography, or they may, having been discovered by mere immediate and concrete circumstances, be susceptible of universalisation through a more abstract and general enunciation. For example, fundamental or natural rights, such as life, personal liberty, and property, originated as particular freedoms of a certain group of people – the nobility, for example – against the power of kings and, very subsequently, were universalised to the rest of human persons, to the point that the concept of person was displaced by that of individual. Similarly, the way in which individuals in a given society allocate their scarce resources to the satisfaction of human needs may be regulated by institutions that can be universalised, or by others that are only viable in exceptional circumstances of time and place. Among such institutions, particular or universalisable, we find the monetary systems.
In the field of political economy it is crucial to distinguish properly between those institutions that are made up of empirical rules and those that are made up of positive rules; or, more precisely, those institutional arrangements in which one or the other type of rules are predominant. Empirical rules have a tacit statement, a diffuse system of application, and therefore depend on spontaneous observation. Positive norms, on the other hand, are expressly stated and have a concrete enforcement body, whose purpose is to enforce such positive norms; their observance therefore depends on both spontaneous compliance and deliberate enforcement. These distinctions are related to and inspired by Douglass C. North’s notions of formal and informal institutions and Friedrich A. Hayek’s notions of spontaneous and created orders, although they are not necessarily identical to each other.
We can find entirely empirical institutions, such as those studied in sociology and international relations, although their enunciation will always be a subject of dissent and a source of controversy. Generally, they are issues that escape the positive law of modern states, since their regulatory costs outweigh their benefits, either because the benefits are minimal, as is the case for certain social practices, or because their costs are exorbitant, as is often the case in the field of international relations. Of course, there are cases where empirical norms overlap with positive ones, or where empirical institutional arrangements intersect with positive ones, reinforcing, neutralising, or weakening each other.
For its part, the emergence of positive norms in modernity is notoriously related to, as mentioned above, the emergence of guarantees for individuals vis-à-vis political power. Examples include the Magna Carta of 1215, the Bill of Rights of the Glorious Revolution of 1688, the Virginia Declaration of Rights of 1776, and the Declaration of the Rights of Man and of the Citizen of 1789. In such cases, there is an urgent need for a univocal instrument to enunciate the rights of the individual vis-à-vis medieval, and then absolutist, monarchs and their successors: the modern nation-states. In turn, the application or enforcement of such norms is crucial in order not to turn such enunciations of rights into a stale “catalogue of illusions.” Consequently, both the implementing body and the procedure to be followed to fulfil this purpose must also be positively regulated, just as the branches of government that deal with the positivisation of legal rules in the form of legislation, the administration of public affairs and the justice service that decides disputes through such rules (in many cases consisting of curbing abuses of citizens’ rights by the administration) must be organised in distinct and separate branches: what is known as the division of powers and the system of checks and balances.
However, whether an institution is empirical or positive has nothing to do with whether it has a teleological content or not. Procedural law, whatever its particular characteristics, is predominantly composed of rules with an express purpose. In the legislations of Western countries, the procedural order by which legal proceedings must be conducted is informed by the principles of due process guarantees: for example, not being obliged to testify against oneself, the irremovability of natural judges, the right to be heard, etc. On the other hand, in the field of private property law, the rules governing the subrogation of debts or credits, the use of letters of credit, or freight contracts – to cite a few examples at random – lack a specific purpose and are not extended to the generality of those who interact on the basis of them. On the contrary, each contracting party gives such a normative framework the purpose of its convenience, in accordance with its respective individual plans. Moreover, the fact that civil law in its property sphere and commercial law as a whole are made up of rules that lack a teleological content is what allows the contracting parties to confer on the concluded contracts a purpose, whether consensual, as occurs in the cases of the constitution of civil or commercial companies, or particular to each one of them (as is the case with contracts of sale or freight contracts). Private law of property content is useful for the spontaneous coordination of different individual plans because it is made up of legislated and customary norms that mostly lack a determined purpose, leaving this vacant purpose available to be completed by individuals who interact with others, contract, and carry out their life plans within such a normative structure or institutional framework. In this respect, Friedrich Hayek went so far as to remark that the purposes of each of the individuals interacting with each other, whose respective plans are implemented through law, could even be contradictory.
By contrast, public law, while drawing most of its institutions from notions of private law — such as the notions of state succession, political representation, and sovereign assembly, to cite a few brief examples – must be endowed with an express and declared purpose, and their consequences must be congruent with it (at least as far as the modern state is concerned). Indeed, a central feature of the rule of law is the accountability of officials for their acts of government and, to this end, any possible de facto, hidden, undeclared, or oblique purpose of administrative acts must be prohibited, and citizens, through their respective officials dedicated to this purpose and in accordance with pre-established procedures, must have the elements to be able to evaluate both the efficiency and the legality of such acts of government. The purpose of rules in the field of public law is therefore central.
However, to this we must add that, in the field of public law, the distinction between abstract and general rules, such as laws and regulations, and administrative acts of individual scope, which may consist of the appointment of an official, the approval of a tender or the granting of a licence to carry out a certain activity, in cases of compliance with the requirements emanating from the laws and regulations for such purposes, becomes relevant. In turn, such administrative acts of individual scope may result from the exercise of regulated powers or from acting within a margin of discretion that the laws and regulations themselves have granted to the official. Notwithstanding, however divergent these distinctions may be, they are all united (-as has been said) by the common characteristic of requiring an express and publicly declared teleological content in order to be such.
In turn, certain aspects of human life require such dynamism that the very process of positivisation of legal rules becomes an obstacle. In such cases, the legal body of positive law can refer to customs and usages, either by way of express exception (as is the case in civil law) or by way of general rule, which recognises such usages and customs as sources of law (as is the case in commercial law and public international law). Such customs and usages are nothing other than empirical rules. Thus, in such cases, courts often consult the opinion of experts and other traders, who explain to them how such businesses commonly operate, or the parties do not resort directly to the ordinary courts of law but to an arbitral solution, which will decide the dispute based on criteria of equity: i.e. what is in the best interest of both parties in dispute, given the particular circumstances of persons, time, and place presented by the case. Of course, as in all matters concerning the various institutional frameworks that condition human interaction, there is a trade-off between positive legal rules and commercial customs and usages, one factor of which can be syndicated (though not exclusively) with the problem of transaction costs. Ultimately, the purpose of positive law is, above all, to provide a peaceful means of resolving disputes.
These distinctions are relevant to the subject matter of this essay. Monetary systems, by definition, in order to be such, have to enjoy an extended and general scope, otherwise they could not fulfil their functions of – among other possible functions – acting as a common medium of exchange and a liquid store of value. Therefore, the above categorisations will be relevant when assessing the phenomenon of money systems from an institutional point of view. After all, a money system is an institutional arrangement, and money is an element which has accompanied mankind since ancient times, before the birth of modern states, so we can expect money systems ordered according to empirical institutions or according to positive legislations, in charge of officials obliged to execute certain regulated powers, or in possession of a wide margin of discretionality granted by such normative frameworks.
II. Monetary systems, empirical or positive
Contemporary monetary systems, which are mostly divided between those which are governed at the discretion of the monetary authority or which operate according to a monetary rule or set of rules, can be conceptualised within administrative law as systems which grant a wide margin of discretion to the monetary authority and those which only grant it regulated powers. However, one can also go further and argue that the administration of the monetary system is a matter that exclusively concerns monetary policy and therefore lies beyond the boundary between law and policy. If this were the case, monetary authorities would have no legal responsibility for their actions, which is not far from the practical reality. Now, if contemporary monetary systems lie outside the rule of positive law, then why not try an empirical monetary system?
Well, Carl Menger’s classic essay on ‘The Origin of Money’ involves the characterization of an empirical monetary system: the interaction of the different individuals in their mercantile and civil activities (as far as their patrimonial sphere is concerned) spontaneously selected different goods which served as a common medium of exchange, a store of value and a tool for calculating the relative prices of the different goods. In his own words, Menger observed that certain commodities had become universally accepted means of exchange and wondered why this had happened.
Of course, for Menger, this question was also linked to the question of what money was, whether it was just another commodity (and behaved as such) or, on the contrary, the product of a convention stemming from and supported by authority. Menger acknowledged that it is not impossible for money to be instituted by legislation, but at the same time he affirmed that this is not the only, nor the main, source of money’s origin. According to Menger, money can also originate as a spontaneous and unintended consequence of human interaction. But what is this interaction that leads, without the parties involved consciously seeking it, to the emergence of money? The first clue is to be found in a preference on the part of the rational agent (to express this in more contemporary terms: to reserve value in some commodity that has a high degree of liquidity in relation to other commodities available on the market).
In the language of our own day, what Menger had observed is that a price is a datum about an exchange relationship between different goods that has merely indicative value. To state that a good x has a given current price indicates that it is likely to be sold at that value, although the final result of the transaction to be actually carried out may come to a higher or lower price. If there were no such uncertainty, Menger points out, there would be no arbitrage, nor would there be any of the tasks inherent in mercantile activity. Menger also pointed out that current prices tended to reflect prevailing economic conditions. In the terms of his successor, Friedrich A. Hayek, we might say that equilibrium prices reflect the relative scarcity of different goods in a given market. Consequently, the prices of the goods exchanged will tend to be around equilibrium prices. However, the distance between the equilibrium price of a good and the effective price at which a transaction can be carried out with respect to that good is an index of the level of liquidity of that good.
For example, if we say that the value of the square metre built in such a city is x, if we seek to sell a property located in such a city for such value, the interested party must wait a certain period of time – which may involve a year, or even more – or accept a significantly lower price: what is known as ‘auction price’. As is well known, real estate is a highly illiquid asset. The aforementioned value per square metre does indeed express the equilibrium price that encourages construction to produce real estate at a certain rate to the point that there are neither surpluses nor shortages of constructed real estate, but this does not mean that these are the effective prices at which real estate transactions are carried out, but rather that they will tend to be around that price.
Menger had also noted that the difficulty of the double coincidence of needs made the barter economy extremely inefficient, which in more contemporary terms can be conceptualised as the high transaction costs of direct exchange. In other words: an economy coordinated through a common medium of exchange and relative prices expressed in terms of its value leads to lower transaction costs and, consequently, to greater efficiency in the allocation of resources. However, the fact that money means the introduction of an increase in general welfare (due to the aforementioned reduction of transaction costs in all exchanges) does not imply that this can only be achieved through the decision of a public authority. Menger’s challenge was to explain how money could also emerge spontaneously as an unintended consequence of human interaction; that is, the result of human action, but not of deliberate design.
To this end, Menger constructed a mental model in which economic agents, in successive direct exchanges, chose to reserve their value in some commodity that enjoyed the highest possible level of liquidity in order to carry out immediate future exchanges. In these exchange processes (which today could be modelled as a game of repeated instances) economic agents surrendered their more illiquid goods and retained for themselves their less illiquid goods. Of course, in this process of natural selection, there were other characteristics of the goods that contributed to their being chosen as a store of value for future exchanges close in time: durability, fractionability, transportability, etc. At the same time, Menger himself identified other conditions related to the special circumstances of the given market that would favour the selection of one good over another, such as the rate of interest (restrictions related to time) or the distribution of goods throughout the geography of the market (restrictions related to space).
Such circumstances of time and place were what made precious metals such as silver and gold (for example, and at a given historical moment) to be naturally selected as the common medium of exchange, displacing in this competition alternative commodities such as salt bars, cattle, or seeds. Now, in a concert of goods with different degrees of liquidity, from the moment that one of them, the least illiquid of all, is spontaneously (or with the help of public authority) selected as a means of indirect exchange, this difference in degree with respect to the rest of the goods becomes a difference in nature. This commodity becomes something else.
As Carl Menger concluded, money is the least illiquid good of all. Or again, as Hayek affirmed a century later, money is not a substance but an attribute; therefore, different goods “have currency” to varying degrees.
In turn, when a commodity, which in itself has a value derived from its non-monetary uses, becomes spontaneously selected to fulfil the functions of money, it acquires, as Menger affirmed, an additional value as a consequence of its monetary uses.
In short, commodity money is in itself a case of an empirical money system, which is expressed in its general acceptance as a medium of exchange. Of course, the fact that the commodity currency is a generally acceptable medium of exchange means that the creditors are only obliged to accept it if they have expressly consented to it contractually. It is only with the intervention of the public authority that a currency, in addition to being voluntarily traded, will have to be legal tender; that is to say: the legal capacity to cancel obligations without the creditor being able to legally refuse to accept it, under penalty of the debtor being able to judicially consign his payment in the currency in question. However, without prejudice to this, a monetary system consisting exclusively of a spontaneous currency is conceivable, even if it entails higher transaction costs.
In contrast, a positive monetary system is one that has a currency as legal tender. As has been pointed out, in such an institutional framework, money has the legal capacity to cancel obligations, and the creditor cannot refuse to accept payment in such a currency, either to fulfil an obligation to give sums of money, or to replace, as compensation for non-performance, an obligation to give certain things or of a certain kind. The creditor of a given performance, whatever it may be, cannot refuse to receive the payment made in legal tender, the dispute being reduced to the amount of the indemnity for cases in which the performance owed is not to deliver specific sums of money.
The notion of legal tender is closely related to the concept of personal freedom. Thus, the debtor of a personal performance, arising from a contract for the provision of services, may refuse to fulfil such obligation and choose to replace it by an indemnity to be calculated and paid in terms of legal tender. In this way, the right to personal freedom is placed above the right to property, a feature that is characteristic of Modernity and of the right to equality before the law, since a different solution would mean re-establishing personal servitude.
Of course, if both parties were to agree by mutual consent to replace the provision of a contractually stipulated personal service by an indemnity equivalent to the delivery of a sum of money freely chosen by consensus of the parties, we would find ourselves in legal terms before a novation and, in economic terms, before an optimal solution in the terms of the Coase Theorem. However, as Ronald Coase himself taught, transaction costs exist and, therefore, it is highly unlikely that the parties would enter into such a contractual novation by mutual agreement. Most likely, the parties will have to resort to the award of an arbitral tribunal or to a judicial contest to be decided by an impartial court, which fixes the amount of damages in a currency – legal tender, if any, or chosen by the court for the purpose of paying damages.
But what happens to contracts that involve giving sums of non-legal tender money when they are breached? Can the obligee refuse to accept payment of compensation in lieu thereof made in another currency, even if the latter is legal tender? If the creditor could not refuse, we would then be faced with a monetary system of forced tender, since the legal tender currency not only allows the cancellation of obligations to give quantities of things, but the obligations denominated in sums of money other than legal tender will be considered as obligations to give quantities of things.
In fact, a monopolistic monetary system, which does not admit any kind of competition of currencies, grants to its legal tender also the compulsory tender, ignoring the monetary character of the obligations denominated in other currencies than those of legal tender.
We arrive then at a principle for the definition of currency competition: that system which does not have a currency of compulsory tender, although it can have a currency of legal tender as long as the obligations denominated in other currencies are considered by the legal system as obligations to give sums of money and not as obligations to give quantities of things.
III. Final considerations: the place of concurrent currencies in an isonomic and federal legal system
In a federal political system, equality before the law can be violated under the guise of an alleged legal pluralism. Therefore, in a legal system that enshrines the principle of isonomy and is itself embedded in a federal system, there must be a federal law that guarantees the individual rights and legal equality of all inhabitants, regardless of their place of residence within the federation. This federal law must logically take precedence over local legal orders. Of course, if federalism itself is not to be violated, the respective spheres of competence must be clearly delimited between what is the exclusive domain of federal law and what is the domain of local law.
As far as concurrent currencies are concerned, nothing would prevent the different local jurisdictions from having their own currency, as long as the possibility that individuals may contract in any other type of currency and that the obligations arising from such contracts be considered as obligations to give sums of money and never obligations to give quantities of things remains open. Otherwise, local jurisdictions would be given the power to grant compulsory tender status to their respective currencies. Importantly, the emergence of a national currency in modern states is directly linked to the need to prevent local feudal lords from resorting to the abusive regime that forced their subjects to use their own coinage, as Friedrich Hayek reports in The Denationalisation of Money.
In contemporary terms, a system of concurrent currencies in a framework of interstate federalism would mean having federal rules that guarantee freedom of contract in the stipulation of obligations to give sums of money and allow the different states to issue their respective currencies within their territorial limits, expressly and strictly forbidding to grant them compulsory tender.
In this way, individuals may contract in any currency – national, local, foreign, or private – and the obligations of such contracts are considered to be obligations to give sums of money, which must be fulfilled by paying the agreed amount in the agreed currency. At the same time, both the national and local currencies may be legal tender for the purpose of establishing compensation for non-fulfilment of obligations to rent services and to deliver sums of money. Of course, in order for a system of currency competition to become truly effective, the right to exchange freely in the foreign exchange market should also be granted by the constitution and regulated by federal law, so that individuals can freely agree on the conversion of different currencies, be they foreign, national, local, or private.
In short, within an interstate federation, respect for the principle of equality before the law, as far as a system of concurrent currencies is concerned, requires the constitutional guarantee that no authority, whether federal, state, or of even lower rank, can grant compulsory tender to any currency of any kind, establishing that contracts denominated in private or public, foreign, national, or state currencies must always be considered as obligations to give sums of money and never as obligations to give quantities of things. Likewise, exchange freedom, i.e. unrestricted access to the exchange market for any individual, should also be elevated to the status of a constitutional guarantee.
Federico Sosa Valle is an attorney and a Professor of Law at the University of Buenos Aires. He is a practicing lawyer in the public sector and in the field of commercial law. Sosa Valle is also the Co-Founder and President of the David Hume Institute Foundation in Buenos Aires, Argentina. Send him mail.
Isonomia Quarterly 