As we stated in yesterday’s posting, we decided to enhance our popularity by foregoing to press on our support for an income tax, and support everybody’s favorite institution: the commercial and central banking system. We anticipate that after reading this posting, and before the end of the day, contributions to CESJ and book sales will have soared to unprecedented heights.
Maybe we shouldn’t have said that in light of our support for the income tax. (I was just saying that to mislead the IRS. Quick. Slip us a contribution, and if it’s under $250 we won’t even send the notification letter. Let’s just keep it between us. We prefer cash.)
To return to our discussion of banking theory, yesterday we mentioned “bills of exchange.” A “bill of exchange” is a private sector contract conveying the present value of future marketable goods and services. Its public sector (“constitutional”) analogue is the “bill of credit.”
Like all money, bills of exchange and bills of credit are contracts. They therefore consist of offer, acceptance, and consideration. “Consideration” is the inducement to enter into a contract, that is, the present value being conveyed between the parties to the contract.
This is why money is legally defined as “anything that can be accepted in settlement of a debt” (“Everything that can be transferred in commerce” — “Money,” Black’s Law Dictionary). It is also why bills of exchange used as money between private individuals and businesses are called “merchants” or “trade” acceptances. When offered to and accepted by a bank of issue, bills of exchange are called “bankers” acceptances.
Only private sector individuals, businesses, or financial institutions can issue bills of exchange. Bills of exchange are based on the present value of something in which the issuer or drawer has a private property stake. This private property stake backs and supports the issuer’s “creditworthiness.”
Only governments can emit bills of credit. Government bills of credit must not be confused with private sector “letters of credit.” Bills of credit are based on the present value of future tax collections to be granted by the citizens, and in which the government does not have a property stake. In essence, a government that emits bills of credit is making promises for other people to keep — but only if they agree by granting the taxes to make good on the promises.
A bill of credit is thus said to be backed by the “faith and credit” of the emitting government. Given the understanding of taxation as a grant from the citizens and not the exercise of a property right by the State, bills of credit are not — contrary to the theory of Georg Friedrich Knapp (“chartalism”) and John Maynard Keynes (“Modern Monetary Theory”) — backed by the “general wealth of the community.”
A bank of issue’s promissory note can be used to back a new demand deposit (checking account) or, rare these days, back an issue of smaller denomination promissory notes called banknotes. Both of these circulate in the community as currency or currency substitutes. This is why banks of issue were also at one time called “banks of circulation.”
Bills of exchange pass in commerce at their present value. This is usually less than the face value of the contract or “instrument,” although the issuer must redeem the bill at face value on maturity. That is why the first offer and acceptance of a bill of exchange is called “discounting” the bill, and all subsequent offers and acceptances of the same bill are called “rediscounting.”