Kinsella on Liberty Podcast, Episode 085
This is the audio (from my iPhone) of my talk “The History, Meaning, and Future of Legal Tender,” from the Crypto-Currency Conference: Bitcoin and the Future of Money (Atlanta, Oct. 5, 2013). Slides below. Video/professional audio to be released later. Pix here and here.
Update: Video is available here.
Update: An (only lightly edited) transcript is appended below.
|Introduction:||[From Doug French]:Our next speaker has done nothing less than pathbreaking work in the area of intellectual property. He probably could be considered the “Satoshi of IP” if you will. An American intellectual property lawyer, a libertarian legal theorist, he’s created the website The Libertarian Standard, he’s created the academic journal Libertarian Papers, he’s written a number of books, including my favorite, The Louisiana Civil Law Dictionary. He is best known for a book called, that really turned the libertarian world on its ear. This argument continues on. It rages on. He continues to take any and all comers online. But he is…well, this is the perfect time in the cyber world to have a lawyer in the house. And he is our lawyer in the house. Please help me welcome Stephan Kinsella.|
|Thanks very much Doug. I’m really glad to be here. I just flew in from Houston. I would really like to thank Jeff for giving me the chance to speak on a non-IP topic which I do enjoy.So my topic today is on legal tender. I’m going to explain briefly how I recently got interested in this topic and then go into some background. When I was in law school, in 1989 or so, I was clerking at a firm in Baton Rouge. I was asked by the partner to research the question of whether it was legal or illegal to refuse to take a payment of cash under legal tender law. So if you owe someone a million dollars and you bring them a briefcase full of cash, can they say, “I refuse to accept that offer. I want you to write me a check instead”.
So I started research what is legal tender. If you look at your dollar bills it will say this note is legal tender for all debts public and private. It’s sort of a mysterious meaning. What exactly does that mean? How much money do you have to pay to satisfy a debt? So I started getting interested in it.
A couple of years later I was in graduate school in law in London and I looked at the British pound notes and they have other language which says, “Bank of England. I promise to pay the bearer on demand the sum of 5 pounds”. Or 10 pounds or whatever the note is.
So, like a smartass, I walk down to the Bank of England one day, in the middle of the financial district, with a backpack. I was dressed like a student. I walked in the front door and I asked, I said, “Can I redeem this for five pounds of whatever it is five pounds of”?
And they said, “Do you have an appointment”?
I said, “No”.
So they sent me out. And they said you have to have an appointment to come into the Bank of England. So they said you might want to visit the Bank of England Museum around the corner. So I walked around the corner. I went to the Bank of England Museum. I was the only guy there. And I started asking the curator these questions. And he went to the back and he brought me a mimeographed (I think that is an old word for photocopy), a mimeographed sheet of typewritten papers explaining why that language doesn’t mean that they really have to give you five pounds of silver or whatever it meant. They claimed it just means that if you have an old note that is out of circulation we will replace it. So a five pound note, you get a new five pound note for it. So that is what that promise means. [See The Bank of England and Me]
So over the years I have always been puzzled by this mysterious language which is omnipresent and yet nobody seems to understand what it means. So as bitcoin started heating up I started thinking more and more about it. So Jeff and I talked and we thought this might be a good topic.
So to research this, I researched a good deal of things. Probably three of the primary things I relied on, and if you find this talk of interest, you might want to look at some of these. Guido Hülsmann has a fantastic lecture on the economics of legal tender laws at the last Mises University. It is online. And I will post these slides on my website later, so StephanKinsella.com. So feel free to look it up there. Hoppe has a great article which I rely on heavily in this talk. And, also, I found a 1903 fantastic old treatise on Google Books on legal tender.
[See: 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)]
I’m going to back up for a second and try to put this legal tender issue in context before we get into the actual mechanics and issues of legal tender itself. This is drawing on the work of Hans Hermann Hoppe and others like Franz Oppenheimer. Franz Oppenheimer argued that there’s only two ways of creating wealth. One is the political means and one is the economic means. One is cooperative and peaceful and one is coercive and exploitative. [See The Nature of the State and Why Libertarians Hate It]
This is what Hoppe argues as well. He basically points out that there are only two ways to acquire wealth in the world that we live in. One would be homesteading, production and exchange. So you find or you appropriate a resource that is unknown in the world. You increase the sum total of the wealth of the world and your wealth.
Production means transforming these resources into more valuable configurations. So that’s production. That is also a way of increasing wealth.
And exchange is when two people exchange things that they own and they’re both better off after the transaction. So the sum total of wealth in the world increases that way as well.
And then the second way is expropriating producers, appropriators and homesteaders and exchangers. So the first method gives rise to productive enterprises like firms and corporations and businesses. The second gives rise to governments and states.
Now if you think about private enterprise, private industry, productive enterprises, their growth is constrained by a couple of things. Number one, they have to have consumer demand for what they’re making. And there’s competition in the market. So that’s a constraint on the growth of private firms.
But the growth of an exploiting firm, like the state, is constrained mostly by public opinion. And the reason is because by its nature it coerces people and creates victims. And by its nature it is a small portion of society. So you have a small minority dominating the larger majority. So the only they can get away with this is to somehow persuade the victims that the state is legitimate.
So what is the state’s goal? The state is a wealth maximizer, just like we are. It just doesn’t have any ethics. So its goal is to…and by the way, I don’t know if this crowd is entirely libertarian, and that is fine, but you are listening to one. And, in fact, I am of the anarchist variety that thinks the state should be totally abolished. Libertarians here would know that already but just fair warning.
So the state’s goal is to maximize its wealth that it can exploit from its victims. It tries to do this by engaging in activities to increase its public legitimacy, so that it gets away with it. There are two main things the state does. It engages in ideological propaganda to try and persuade us that the world is not the way it really isn’t, that taxes are really voluntary, that we would have chaos in the street without the state, etc..
And then the second thing the state does is it exchanges in a variety of redistribution measures by which it seeks to corrupt the people that it redistributes money to into supporting the state. Not just any redistribution will do. There are certain targeted types of redistribution that tend to work for the state. These include the monopolization of the production of law and security, police, the feds, the courts, judicial system. Also traffic and communication because the state can’t go around robbing people without control of the rivers, the roads, mail, telecommunications, the internet. Also education, of course, which feeds back to the first purpose of ideological propaganda. So the state controls these things.
And also the state redistributes state power itself, especially in the modern sense, in democracy. So the bureaucracy is open to anyone who wants to apply for a job. So potentially we’re all employees of the state. By democracy the state lets us believe that we are really the owners of the state. The state really is us. You will hear this nonsense promoted by the state all the time. If you complain that the government just put your brother-in-law in jail for smoking marijuana, people say, “Well, don’t complain. You are the government”.
“Thanks. Small consolation”.
The final piece is the monopolization, the seizure of control of money in banking. And in a way this is the most important for the state. This is where we’re going to get to legal tender. This is the easy way the state has to increase income. The state doesn’t control money in banking. It has to get loans. It has to tax people. And that is difficult.
So what does the state want in terms of control of money in banking? What it really wants is a pure fee on money, monopolistically controlled by the state so that all barriers to counterfeiting are removed so it can print as much money as it wants to. But the problem the state faces is that money arises in the free market without the state as a commodity, like gold or silver. And then counterfeiting of such money can be noticed by people. It won’t work. Even the state can’t get away with that. So the state really has to destroy the gold system, the silver and gold commodity money system, so that obstacles to counterfeiting are overcome or removed.
So how does the state do this? It systematically does this. First, the minting of coins gets monopolized by the state. And one thing this does psychologically is labels for money, like an ounce of gold or an ounce of silver, are replaced gradually with state labels like dollar, drachma, mark, whatever. So people stop associating what money is with an amount of a commodity. It is a label that the state grants to money.
And then the state encourages the use of money substitutes like paper backed up by legal tender laws which I will get to in more detail in a moment. Then the state monopolizes or cartelizes the banking system as we see in America in the Federal Reserve. Then it nationalizes gold as Roosevelt did in the 30’s. Then it cuts the tie to gold as Nixon did, giving it unlimited counterfeiting power.
But it’s not completely unlimited because there is more than one country in the world, more than one nation state. So all these countries have their own currencies and if any one state inflates too much, then there’s a flight to other currencies. So the dominant state, namely the United States, has an interest in dominating and controlling the world’s international money system. Over time it will try to institute either a single world currency that it controls or that the central bank controls or some kind of subtle but hidden system of interlocking agreements under the UN or various treaties that gives it control of the world’s monetary system which we see now. Hans Hermann Hoppe hypothesized that one day we will have a new UN currency dominated by the US called the Phoenix or something like that. So you can see this coming.
Now let’s go back to legal tender. You see the role it plays in this process of the state control of society and exploitation. So the word legal tender comes from the word tender which comes from the Latin tendere, meaning stretch. Right? Think of your tendons in your body, stretch. Or the English word extend. So the word tender means to stretch out, to offer, to make an offer, like an offer to pay money.
So the legal tender idea is a government rule or law that specifies that a given contractual obligation can be satisfied by the offer of a certain amount of money that the government declares to be legal tender even if the contract specifies otherwise. So if you have a contract to be paid in Swiss francs, then the debtor can still pay in U.S. dollars, if U.S. dollars are legal tender.
Now the idea that you can pay a contractual obligation in money is not necessarily statist. In fact it makes a lot of sense for administrative purposes. Under the Roman law two thousand years ago, obligations were held to be satisfied by a certain sum of money. The idea is that every service or every item on the market has a market price. And even if you promise to give someone a goat or to sing at their kid’s birthday party, if you fail to live up to your obligations, then a certain sum of money could compensate the other party for that. That is not too controversial. If they don’t you give the goat then you can get enough money to go buy a goat. It works out pretty well; this is the idea of restitution.
There are some exceptions to this. Certain goods that are unique, like a piece of land. The idea is that a piece of land, the courts will enforce that kind of contract. They will make the land transfer to the guy that it was promised to because the land is unique and where it is located, etc.
There is really not a big problem with the idea of paying off a debt in money. But then the question is how much money? And this is what legal tender laws almost always do. They specify fixed exchange rates. This is what the government is after. If the government merely said you can pay off any contract in dollars. So if you have a contract in Swiss francs, well, you are paying them in dollars but you’re paying them enough dollars that’s equal to that current value of Swiss francs. So you just buy the Swiss francs right after the deal is over. It is just a little inconvenience. It is not a big deal.
Of course, that’s not what the government wants. The government wants to favor debtors, usually itself. Usually the government’s a big debtor. So what they want to do is specify an exchange rate that lets you pay off the debt at overvalued legal tender money. So it’s a way of robbing the creditors.
Now this gives rise to a phenomenon called Gresham’s law. I’m not going to do too much economics here, but raise your hands if you have never heard of Gresham’s law. Okay. I’m not going to ask the rest if you understand it. Gresham’s law is based upon the expression by, I think, Irving Fisher, an economist, who said, “Bad money drives out good money”.
This is a little counter intuitive because usually on the free market good products drive out bad products, right? Like Blackberry is tanking now and the iPhone is doing well. That’s maybe one example. And even in money, right, gold and silver rise in money instead of shells or leaves or cigarettes because they’re superior. They’re better money. So really on the free market we could expect good products and good money to drive out bad products and bad money, right? So really what Gresham’s law is, it’s really not that bad money drives out good money. It’s that the legally overvalued money drives out the legally undervalued money.
Let me give you an example of this. Imagine on the free market the ratio of silver and gold prices is 20 ounces of silver to 1 ounce of gold. So they’re roughly equivalent on the market. So if you’re offering to sell something for 20 ounces of silver, if the guy pays you an ounce of gold, you’ll take that because they’re roughly equivalent.
Now the government comes in and established legal tender and says that one ounce of gold is equal to 40 ounces of silver. So you can see that in this case what the government has done is they have made gold legally overvalued and silver legally undervalued. So if I owe someone 20 ounces of silver I can pay them 20 ounces of silver which is worth an ounce of gold on the market. Or I can take my ounce of gold and take half of it and buy 20 ounces of silver and pay off the guy that way. So it lets me stiff the guy.
What this results in is no one is going to use silver anymore because they’re going to be stiffed by this provision. So it would drive out the good money which would be silver in this case. Now in this particular example what would happen is that you would have a system where previously silver is used for small change and gold is used for big purchases. But now silver disappears. You only have gold. So what do people start doing for small purchases? Well they start resorting to substitutes like tokens, coins, bank notes, etc.. See where this is going? The government gets us used to paper money and things that don’t really have, I won’t say intrinsic value, but a commodity value of their own. So that’s Gresham’s law. This is one effect of legal tender laws.
Now on the history of legal tender, let’s look at how it started being justified by the state, say in England. So the crown would say, listen, if you’re coming to the state’s courts to enforce a contract, you’re seeking justice from the king’s courts, then you have to submit to conditions we want to place on you. So if we say, yeah, we’re going to help you enforce your contract, but we’re going to insist that you take payment in legal tender that we decree at a certain exchange ratio.
Now actually, if you think about it, this is selling justice. The courts are using their, the government is using its courts to sell justice, to make a profit off of monopolizing the institution of justice and then selling this service which actually is a violation of the Magna Carta from 1215. In the Magna Carta, the crown agreed to the Magna Carta, which has a provision which says in Latin (I won’t read the Latin) but the translation is “to no one will we sell, to no one will we refuse or delay right or justice”.
So they’re not supposed to sell justice but they do it anyway with these legal tender laws which is one danger of the government controlling the courts and the law and the justice system.
Let’s turn to the U.S. now. In the colonies before the Revolution, coins were scarce. They couldn’t bring a lot of coins on the ships over with them. Maybe they didn’t have a lot of coins anyway. So they started using substitutes. And these were declared legal tender by the various state, the colonies, the colony governments.
Some of you may have heard of wampum before. I never knew what wampum was, but wampum is the shell bead money that Native Americans used. Those were legal tender. Black was worth something. White was worth something else. It was bizarre. Other things have been used for money, legal tender: corn, bullets (although you can only give someone so many bullets, force them to take so many bullets), tobacco, pitch, tar, pork and even country produce. You can pay your servants with country produce. In the year 1715, up to seventeen commodities were legal tender to pay taxes in the colonies.
Now we’ll look at these a little bit out of order. In 1775, right before the Revolutionary War, Congress was planning for war. They knew war was coming. They needed to raise money. They knew that they didn’t have any creditability, as a new government, to raise money by loans. And they didn’t have taxing power. They couldn’t raise a lot of taxes anyway.
So what they did is they started issuing bills of credit but they were declared to be payable by the states. So they expected the states to go out and raise taxes on their citizens with their taxing power, of the colonies I should say. Well, I guess they were states by then. And pay off the bills that way.
But Massachusetts and other states refused to do this. They started issuing their own bills of credit and making them legal tender. This language here is striking. It shows you how seriously the government takes its monopoly over money and these legal tender laws. They said that if anyone refuses to these notes in payment for a debt, or even if you demand a premium, in other words you think gold is better than a note that’s denominated in gold but they really can’t be redeemed in gold, if you demand a premium, like you say I’ll take that note for a ten percent discount because there’s a risk, that’s illegal too. And you would actually be deemed an enemy of the country. And other states, like Virginia and New Hampshire, Rhode Island had similar laws.
Now in 1781, returning to my top bullet there, so the Articles of Confederation were finally ratified. And it wasn’t clear that Congress was granted the power to define legal tender. It remained with the states. Turn forward a few years, after the war is over, the Constitution is ratified in 1789. Everything flips. The states are denied the power to coin money and Congress is granted the power to be the one in charge of legal tender. This was settled in Supreme Court cases later, but it is pretty clear now.
Right after this Congress passes an act in 1792. All gold and silver coins which shall have been struck and issued from a mint shall be lawful tender and all payments. And then there is a 1965 act which has similar provisions.
So that’s where we are now. Now let’s turn to the use of gold and gold clauses. So how could the state, say the U.S., cut the tie to gold? Well one way they could do it is they could set the exchange rate that is not market, like using Gresham’s law which we mentioned before which is the state did for a while. They keep changing the exchange rate of gold. It used to be $1 was a twentieth of an ounce of gold. Then it was 1/35th. Nowadays it’s a market rate. So we’ll just quickly go through the history of gold and gold clauses.
In 1933, Franklin Roosevelt issues an executive order criminalizing the possession of gold in the U.S., monetary gold. So gold was seized by the government and outlawed. Right after that, the Congress, under Roosevelt, outlawed gold clauses. A gold clause is a clause in a contract where, if you are afraid of inflation and the dollar, you could say you owe me a million dollars…well, you owe me whatever the current dollar amount of a hundred ounces of gold is in ten years or whatever the term of the deal is. That way, if there is inflation, you have to get paid in dollars in the current…pegged to the price of gold. So they outlawed that, of course, because that is one way to do an end run around the government’s legal tender system.
Now, in 1974, under President Ford, the ban on gold ownership was finally repealed. In 1977, under Carter, gold clauses were re-legalized for contracts entered after October, 1977. And Nixon cut the tie to gold. So in this time all three things happened. The dollar is no longer redeemable in gold. There is no ratio anymore.
So the question is do we still have legal tender in the U.S.? In a way, we do not have legal tender, right, because you can have a gold clause, you can peg your contract in gold. It’s not illegal. You can own gold. And the dollar doesn’t have any fixed ratio. It just fluctuates. So why isn’t it just a mere inconvenience now?
Well, in a way, it is. So why hasn’t gold reemerged as money? Well, there are various possible reasons why it hasn’t. One might be that the dollar is not perceived by most people as being in the stage of hyperinflation. So there is no big urgency to use gold clauses.
There is also Mises’ Regression Theorem which is the idea that money arises step by step and always has a history. It is like a network effect. Like Facebook is more popular than Google+ right now. It is the same idea. Once something is money, people keep using it unless something terrible happens.
Also, gold is subject to taxes, sales tax and other types of taxes which money is not. Taxes have to be paid in dollars, too. That could be another reason. And, finally, there could be fear of another state takeover. Like if gold clauses ever had an effect, the state wouldn’t let us use them. They only let us do things that don’t really threaten them.
So getting to bitcoin here. What’s the implications for bitcoin? First, let’s step back and think what gold causes are. There are two types of monetary transactions that you can think about that are of relevance to legal tender. One is what’s called an executed, or maybe a contemporaneous transaction. For example, if I walk up to a merchant and I say I’d like to buy that newspaper. He says give me a dollar and I make the deal. It’s done right there. There are no future obligations on either party.
The second type is an executory contract, sometimes called executory contract. That’s one where there is an obligation in the future. So we have a contract now. I want you to build a house for me. And when you’re done building the house, I will pay you $500,000. That is an executory contract. At the end of the contract, the work done by the service provider, if he is not paid, he can sue in court to get the money he’s owed. The legal tender law kicks in only there because the obligation to pay him can be satisfied in whatever money the government declares to be legal tender.
So legal tender laws never have much of an effect on contemporaneous transactions because if you walk up to some guy and he wants the artificial price for his goods, you just refuse to pay and you walk away. You don’t do the deal. So legal tender laws only affect the second type of contract.
Now, as far as I’m aware, I think bitcoin, from what I’ve seen, is used mostly for the first type of contract right now. I’m not aware of a lot of gold clause contracts much less than I am aware of the practice of people entering into long term significant contracts with bitcoin clauses or denominated in bitcoins. Not even an employment contract but a longer term contract. Like let’s say a loan. I loan you a thousand bitcoins. You need to repay me 1100 bitcoins in a year. Something like that.
For bitcoin to emerge as a full-fledged money, seems to me, it needs to start being used for the second type of monetary transactions as well. And I suspect that it will as it gains steam. And when it does, the relevance of this legal tender discussion is that the state can do what it has done before with gold clauses. It could outlaw bitcoin clauses. It would have to find a way to define it so that it covers like coin and others as well, right, any kind of electronic currency. And then probably re-legalize gold clauses while they’re at it. And then the other way with it. They could declare a fiat exchange rate. They could say one dollar is equal to one bitcoin. They could do something like that. They would legally overvalue the dollar; legally undervalue bitcoin.
I’ll conclude here. This is the relevance of legal tender law. This is where I think it could be heading. And the bitcoin community needs to be aware of this and try to keep an eye on the government.
Thank you very much.