Saturday, June 17, 2017

On currency

David Birch recently grumbled about people's sloppy use of the term legal tender, and I agree with him. As Birch points out, what many of us don't realize is that shopkeepers have every right to refuse to accept legal tender such as coins and notes. This is because legal tender laws only apply to debts, not to day-to-day transactions. If someone has borrowed some money from you, for instance, then legal tender laws dictate a certain set of media that you cannot refuse to accept to settle that debt. These laws have been designed to protect your debtor from a situation in which you demand payment in a rare medium of exchange, say dinosaur bones, effectively driving them into bankruptcy.

Conversely, they also protect you the lender from being paid in an inconvenient settlement medium. In Canada, for instance, a five cent coin is legal tender, but only up to $5. If your debtor wants to pay off a $10,000 debt using a truckload of nickels, you can invoke legal tender laws and tell them to screw off—give me something more convenient.

Joining in with Birch in the grumbling, I'd argue that people make just as many errors with the term currency as they do with legal tender. When we use the word currency, we typically mean a grab bag of paper money, coins, deposits, and cryptocurrencies, or we use it to describe national units of account such as dollars, yen, pounds, pesos, ringgits, bitcoin, etc. But the word currency shouldn't be used so sloppily. 

Henry Dunning Macleod, a monetary theorist who wrote in the 1800s, has an interesting discussion of the etymology of the word. Macleod was a unique character in his own right. Trained as a commercial lawyer, he signed up as director of the Royal British Bank which failed in 1856 due to questionable loans and self dealing. Macleod went on to write a number of large tomes on monetary theory,  history, and law, including the Elements of Economic, on which I am drawing from for this post. Perhaps his main contribution to economics is the coining of the term Gresham's law, according to George Selgin.

From Macleod we learn that currency used to be used an adjective, not a noun. Certain types of goods or instruments were considered to be "current" in the eyes of the law and common business practice. They were said to have "currency," but were not themselves currency. Here is a clip from his book:
Let's break this down. Property that had been granted currency had a different legal status from property that didn't. Let's assume that a good has been stolen and sold by the thief to a third party, a shopkeeper, who innocently accepts it not knowing that it has been stolen. For most forms of property the original owner could sue the third party and get the stolen article back. But not if that good is one of the few to be considered by society to have currency, wrote Macleod. When an article is said to have currency, or to be current, the original owner cannot chase the third party to recover stolen property. So in our example, our shopkeeper gets to keep the stolen good, even if its stolen nature has been proven in court.

Coins had always been current according to mercantile practice, but if you read through Macleod you'll see that over the course of the 1700s, British common law jurists granted currency status to a series of new financial instruments, including banknotes, bills of exchange, stock certificates, exchequer bills, bonds, and more. (I went into this here.) What this illustrates is that an item didn't have to be money to have currency (e.g. bonds were considered to be current), nor did it have to be government-issued to be current (banknotes and bills of exchange were privately-issued).

Granting currency-status to a select group of instruments provided them with some useful mercantile properties. Consider first the converse: when the law did not grant currency to a certain good, any transfer of that good came with strings attached. For instance, if you tried to pawn off an expensive gold ring on a shopkeeper, the possession of that ring in your pocket would not be sufficient for the shopkeeper to establish title. If the ring had been stolen, and he/she accepted it, the shopkeeper might be forced to give it back to its original owner, leaving the shopkeeper out of pocket. So they would be wary at the outset about accepting the ring from you, perhaps requiring a time-consuming verification process before agreeing to the deal.

On the other hand, the shopkeeper would not hesitate to accept a gold coin. Because coins were current according to the law, anyone who received them in trade would not have had to worry about returning them to an angry victim down the line, and therefore could avoid the necessity of setting up a costly verification procedure. This would have encouraged trade in these instruments, rendering them much more liquid than items that weren't current.

According to Macleod, it was only after these early court cases that people started to directly refer to banknotes, coin, yen, dong, pounds, krona, and the like as currency-the-noun, a linguistic switch which Macleod angrily blamed on Yankee "barbarism":
"It is quite usual to say that such an opinion or such a report is Current: and we speak of the Currency of such an opinion or such a report... But who ever dreamt of calling the report or the opinion itself Currency?... To call Money itself Currency, because it is current, is as absurd as to call a wheel a rotation, because it rotates...Such as it is, however, this Yankeeim is far too firmly fixed in common use to be abolished."
It is interesting to note that while not all instruments that had currency were money (i.e. bonds), likewise not all money was granted currency status. According to Macleod, bank deposits did not have currency because, unlike banknotes and coins, deposits could not be dropped in the streets, stolen, lost or transferred to someone else by manual delivery. If you think about it, each movement of a bank deposit requires direct contact with the banking system in order to process the transfer. This effectively weeds out transfers of lost or stolen property, especially in Macleod's day where banking was conducted in person at a branch. Since anyone receiving bank deposits in payment needn't worry about a deposit being dubious, there was no need for the law to grant currency status to deposits.

All of this still has relevance today. Take the case of private cryptocurrencies, ICOs, and central bank digital currencies (CBDC). Because law makers have not been very clear about their legal status, bitcoin and other forms of crypto don't have currency, at least not in the Macleodian sense of the term. This means that a storekeeper who accepts bitcoin (or a future Fedcoin) may also be taking on the liability to give said coins back if they are proven to be stolen. And this lack of currency-status can only handicap a cyptocoin's ability to freely circulate.

If this post achieves anything, it's to illustrate that a special amnesty was once granted to a small set of financial instruments. This amnesty used to be referred to as currency. While we don't have to go back to the old practice of using of the word currency to refer to this special amnesty, we should at least be aware that this amnesty is still present and relevant.


  1. I find this to be a very interesting post and relevant to my effort to use gift certificates as an analog for money.

    A store owner could pay workers in gift certificates. If accepted in trade for labor, these certificates have the same status as commonly accepted money. The only difference (between certificates and money) would be that gift certificates only have "currency" in the issuing store. OTOH, money has "currency" nation wide.

    Hmmm. After reading your post, I will be making a sharper distinction when I use the the term "currency". Thanks for the post.

    1. Thanks Roger. Good point about gift certificates.

      "I will be making a sharper distinction when I use the the term "currency"."

      I'll be stopping by your blog to double check ;)

  2. 'Currency' and 'money' are used pretty much interchangeably in most writing on money. Certainly in my reading (admittedly I tends to avoid economics, but I'd bet its the same) few academics even bother to offer a distinction. It bugged the hell out of me for about 3 years.

    Re the legal definition: I remember reading a line in Nigel Dodd's 1st book Sociology of Money..... it was a quote from a book I fancied but could never afford. Mann - The Legal Aspects of Money.....
    "the question of what can be treated as money under law has nothing to do with quite a different problem, what is money in an abstract sense, what is its essence, its intrinsic attributes, its inherent qualities' - Dodd uses this to criticize Knapp. For me the qualities of currency you discuss above have more to do with money.... they seem related to whatever money *is* rather than the legal framework.

    There's a project a called 'metacurrency' - open source alternative & local currency scheme which used to make a big play out of distinguishing between money and currency.... they emphasized currency over money. Current *see* - as in seeing a value flow - was their tag line.

    Although I didn't agree with subordinating money to currency, I do think the idea of 'seeing' - of visibility of value - is an important element of currency that is related to the notion that it is 'current'. The value in possession must be visible for it to be currency.

    I've got a little more relaxed about using currency/money in my writing of late. You should chill about the whole adjective/noun thing, JP. ;) x

    1. Thanks for the metacurrency tip, I hadn't heard of them.

      "I've got a little more relaxed about using currency/money in my writing of late. You should chill about the whole adjective/noun thing, JP. ;) x"

      Now that you point it out, I do have a thing for converting nouns back into adjectives, don't I? :)

  3. > JP what do you think of this-

    "Banknotes and Their Vindication in Eighteenth-Century Scotland"

    1. I liked that paper. I cited it in my other post on this topic:

  4. Does this meaning of "currency" have any connection to money laundering?

  5. Nit: in the phrase "this has currency," currency is still a noun. It's not an adjective unless you want to say something like "this is very currency." Unless I fell asleep harder in grammar class than I thought.

  6. Great post. One question, it seemed to be Courts decided against Crawford not out of principle but because of the infeasibility in verifying a banknote's history. That means, if it could be done in practice, the Courts would favor giving the banknotes back to Crawford. Is my interpretation correct?