Volume 11, Issue 1 - Money Matters: The Law, Economics, and Politics of Currency

Money performs its economic functions best when its value remains stable over time. This Article explores how that desideratum was achieved, or not achieved, under five identifiable monetary regimes in economic history. Transitions from one regime to another resulted from the demands of economic growth, which some regimes met better than others. The modern fiat money regime is optimal in most economic respects. Whatever amount of money needed to accommodate growth can be supplied at minimal costs. But political control over money creation can be used to increase the short-term control over economic resources of those in power and their constituents. When such debasements of money have occurred, the political economy of every regime interfered with achieving optimal long-term economic outcomes by unleashing inflation. How might the modern fiat money regime avoid that result?

Money undergirds market exchange, but the social significance of money goes well beyond the obvious importance of its highly uneven distribution in modern market economies. In addition, modern money imposes an ostensibly precise and unidimensional valuation on social products, processes and relations that often conflicts with other modes of social valuation. In this regard, monetarization is a particular instance of quantification. Money’s status as an official economic metric is the result of a long, contingent, and uneven historical process. Given alternative forms of valuation, people manage and constrain the commensurability of money through a variety of individual, institutional and organizational practices (often akin to "earmarking"). The social reception of money is active, not passive. A variety of examples are discussed to illustrate and develop these points.

We present updated estimates of central bank transparency for 100 countries up through 2006 and use them to analyze both the determinants and consequences of monetary policy transparency in an integrated econometric framework. We establish that there has been significant movement in the direction of greater central bank transparency in recent years. Transparent monetary policy arrangements are more likely to be found in countries with strong and stable political institutions. They are more likely to be found in democracies, with their culture of transparency. Using these political determinants as instruments for transparency, we show that more transparency in monetary policy operating procedures is associated with less inflation variability, though not also with less inflation persistence.

In this Article I argue that the global credit crunch of 2007-2009 is the result of the multifaceted phenomenon of liquidity illusion. Fundamentally, the problem of liquidity illusion derives from the hollow conceptualization of "liquidity" in mainstream financial theory and practice. Represented most recently by the market completion theory, this paradigm has led to a widespread misunderstanding of the dynamics of the relationship between the process of financial innovation and the liquidity of the financial system. In order to unpack the political economy of liquidity illusion from other factors in the leadup to the global credit crunch, this Article builds upon Hyman Minsky’s vision of financial innovation and crisis. Challenging mainstream views of the liquidity-enhancing process of financial innovation, I identify the three pillars of liquidity illusion in the recent 2002-2007 bout of securitization: a) the paradigm of self-regulating finance; b) the role of Ponzi finance; and c) the function of private authority, namely credit rating agencies.

Nearly forty percent of the world’s financial assets are located in loosely defined British Empire city-state jurisdictions. This article seeks to provide an explanation for this odd development. My explanation of the rise of such a British Empire-centered economy links the development of the Euromarket, or the offshore financial market, to three sets of theories. The first is the hinterland theory that explains why small city-state types of jurisdictions are in an advantageous position when it comes to trading in Euromarket financial assets in comparison to other states. Second is the dependent jurisdictions theory, which suggests that dependent jurisdictions are perceived as safer locations for investment than independent islands, in addition to which they are able to offer better treatment of nonresident capital because they are subsidized by the motherland. As the British Empire was the largest Empire the world has ever seen, it is perhaps not surprising that the British state has inherited the greatest number of such dependent jurisdictions, and that they, in turn, have taken advantage of their "Britishness" to develop their financial centers. Third, I advance a related argument that suggests that the hegemonic position of the British Empire in the world economy prior to the rise of the United States was an important factor as well. Here, I draw on the idea that city-states and, more generally, trading centers tend to be dominated by commercially outward-oriented elites.

The decades before and after the turn of the twentieth century, like those surrounding the turn of the twenty-first, are often understood as periods of globalization. The two periods share key features that characterize the global as a motif, including high mobility of goods, services, people, ideas and, perhaps most centrally, capital. An important distinguishing feature between the periods is the monetary regime: the gold standard for the turn of the twentieth century; managed flexibility (ranging from currency pegs to floating exchange rates) for the turn of the twenty-first. This paper examines the legal infrastructure of these two monetary regimes in order to illuminate two distinct yet related issues. The first is the connection between the form of rulemaking (e.g., legislation versus technocratic regulation) and the means of isolating monetary policy decisions from political influence. The second is the role of the monetary regime in mediating value. Both the gold standard and the managed flexibility regime aim to shield money from partisan intervention, but they do so in different ways; attention to the legal framework sheds light on how these differing regimes pursue the goal of insulating money from politics.

In 1948, when the State of Israel was founded, 125,000 people (about one fifth of the Jewish population) were members of credit cooperative societies, which provided over 20 percent of all market financing. For several years this number continued to rise, reaching a total of 250,000 members in more than 100 credit cooperative societies. Credit associations — part of the thriving cooperative movement of early Zionism — symbolized the attempt to create a new and just Jewish society by fusing socialist and capitalist ideals. From the mid-1950s, however, in a rapid process of centralization of Israel’s capital market and financial institutions, almost all credit associations were absorbed into Israel’s commercial banks and dissolved. Today, Israel’s two largest banks (Leumi and Hapoalim) control over 63 percent of credit provision, and 90 percent of credit is provided to less than 1 percent of borrowers. The official policy of the Bank of Israel is to rule out the establishment of credit associations, credit unions or other non-bank financial institutions. In the light of current renewed interest in "social businesses," i.e., innovative business models designed to achieve desired social outcomes, this Article traces the waning of credit associations in Israel, and the role law has played in that process. Their disappearance from the capital market marked not only a change in economic policy, but also the final abandonment of the ideals which underlay the provision of cooperative financial services: mutuality, partnership and solidarity.

"Odious debts" have been the subject of debate in academic, activist, and policymaking circles in recent years. The term refers to the debts of a nation that a despotic leader incurs against the interests of the populace. When the despot is overthrown, the new government — understandably — does not wish to repay creditors who helped prop up the despot. One argument has focused on whether customary international law supports a "doctrine" of odious debts that justifies the nonpayment of sovereign debts when three conditions are met: (1) the debts were incurred by a despotic ruler (without the consent of the populace); (2) the funds were used in ways that did not benefit the populace; and (3) the creditors were aware of the likely illegality of the loans. Advocates of this doctrine, which was synthesized by Alexander Sack in 1927, typically cite two examples of U.S. state practice for support: the negotiations between the United States and Spain following the Spanish-American War, in which the United States repudiated Cuba’s colonial debt, and the Tinoco arbitration, which repudiated certain debts of the deposed Costa Rican dictator, Frederico Tinoco. Those historical precedents do not support the first condition of Sack’s doctrine of odious debts, but do support the second two requirements. In addition to these two instances, United States history is rich with examples of debt repudiation by states. Those examples suggest a doctrine of odious debts that is broader and more flexible than the one written by Sack. Indeed, it may be appropriate to speak of the doctrines (not just doctrine) of odious debts.

This Article explores the success of the new science of statistics in establishing order within the pandemonium of industrial revolution in the nineteenth century. This success was based on the fact that the expanding circulation of both men and goods that characterized capitalism constituted the ontological foundation of statistics as well. In this respect, one can say that statistics turned variety and multiplicity into the basis of system, if not of uniformity. The study focuses on the 1850 federal census of the United States and, more specifically, on the new taxonomy adopted in the census’s manufacturing schedule for enumerating industrial activity. This taxonomy was organized around a single, universal threshold of capital investment applied to each enterprise, a criterion that replaced various systems applied in previous censuses, all of which were based on an a priori definition of what actually constituted production. The innovation of 1850 resulted in a far more extensive account of manufacturing and was consequently perceived to be a most effective means of measuring the dramatic expansion of the economy. In fact, this was accomplished by making money the rule of measure, and so redefining the essence of industry to be financial rather than material. Profit-making consequently achieved a scientific, and even neutral, status. As such, statistics can be said to have made an epistemological contribution to the legitimization of the new capitalist order.

Nicholas Biddle, the president of the Second Bank of the United States during its fateful battle with the Jackson Administration, was the nation’s first true central banker. He was also a prolific writer whose widely followed speeches, reports, and expository letters to editors and legislators made him the nation’s leading spokesperson for the rising power of finance capital. Relating Biddle’s little-studied legal, legislative, and literary experience to his better-known banking career, this paper considers in turn two fundamental problems of early American finance that Biddle confronted. One was a problem of regulation: while they were entrusted with quasi-sovereign authority over the money standard in the early United States, commercial banks could not actually control the circulation and value of the competing currencies they produced. Central banking, as Biddle conceived it, came partly in answer to bankers’ need to regulate the money supply as sovereigns once had. The second problem was one of representation: just when men of little or no property were gaining political power in the United States, and just when ordinary people were coming to rely on monetary transactions in qualitatively new ways, control over the supply of cash and credit was ceded to unelected bankers and faceless corporations. The logic of popular sovereignty appeared increasingly in tension with the sovereign privileges bestowed on state-chartered banks. Biddle’s vision of central banking arose, in large measure, in response to the ideological challenge of justifying the growing authority of banks and bankers in Jacksonian America.

Medieval coin plays an essential role in the imagined history of money: it figures as the primal "commodity money" — a natural medium, spontaneously adopted by parties in exchange who converge upon a metal like silver to represent the value of other goods. As a natural medium with a price objectively established through trade, commodity money appears to offer an independent means of measure in the market. But as the history offered here reveals, medieval money was nothing like its imagined alternative. England’s early coin became a medium when the government began to spend and tax in that unit of account, took coin as a mode of payment, and allowed it to be transferred between people in the meantime. Individuals participated in the arrangement, paying for coin in exchange for the unique quality — liquidity — that set money apart from a commodity. That quality was orchestrated by the very channels that brought public and private together in the project of making a medium. In fact, insofar as the English equated money with the commodity it contained, they engineered instability into the heart of their medium. Depreciating coin — diluting its commodity content — offered a cure. It also confirmed that coin had never been the "commodity money" imagined in later accounts. Coin was, instead, a constitutional medium, one that related the government to its participants and thus helped to configure the world it appeared merely to measure.

Changes in the foundations of the negotiability of deeds took place in Jewish law in Christian Spain towards the end of the thirteenth century and in the fourteenth century. During the twelfth and thirteenth centuries, sages there adopted the legal tradition that had been shaped in Muslim Spain and North Africa in the eleventh and twelfth centuries. This was a direct continuation of the tradition of the Geonim in Babylon of the ninth to the eleventh centuries, and was based on Talmudic law. According to this tradition, a creditor could sell a loan deed, which is a necessary condition for the possibility of developing a negotiable bill, but two other decrees significantly impeded the emergence of the negotiable bill: one was the rule enabling a lender who sold the deed to forgive the debt, and the other was the requirement of a bill of sale in order to transfer ownership of the loan deed. In the kingdom of Catalonia, the famous scholar Rashba stood at the forefront of the changes, blocking the forgiveness of a debt by a lender who sold a deed of the types: "to the lender and to whom he has empowered," and "to lender or bearer." Both deeds resemble the "pay to order" promissory note in English law. However, there is no evidence of modern negotiable instruments, where the transferee as a holder in due course obtains a bill without defects and with almost no direct links to the transferor. Rashba’s and his followers’ position appears consistent with the economic reality in the region of Catalonia and its capital city of Barcelona as a result of the transformation of the kingdom into a Mediterranean empire. Changes in the kingdom of Castile were hesitant and focused on easing the transferability of deeds by adding special clauses. Harosh ruled in the case of a deed "to lender and whom he has empowered" or a deed "to lender or bearer" that the lender/seller can forgive the debt to the borrower after the sale of the deed, rejecting the innovation of Rashba, his contemporary in Catalonia. Thus, the legal tradition in Castile, a powerful landlocked country, failed to make significant progress toward negotiability at that time, perhaps, unlike Catalonia, because of a lack of economic pressure to do so.