Thursday, May 16, 2013

Binary Banking Theory, II: Bills, Notes, Money, and Credit

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.”



Ben Johannson said...

I think you're missing a critical point here. Taxes are not a "grant" from the citizenry, because it is government which put that currency in citizens' pockets to begin with.

In the U.S. the government is the currency monopolist. It alone produces the good because it alone can create reserves. Government has to spend its currency to its citizens; then and only then can it tax them.

It spends so it can tax, rather than taxing so it can spend.

Michael D. Greaney said...

Oh, very much the contrary! The United States was founded on the principle that the government only gets its rights — ALL of them — from the citizens, especially the right to tax: "No taxation without representation." As John Locke explained in his Second Treatise on Government,

"Sect. 140. It is true, governments cannot be supported without great charge, and it is fit every one who enjoys his share of the protection, should pay out of his estate his proportion for the maintenance of it. But still it must be with his own consent, i.e. the consent of the majority, giving it either by themselves, or their representatives chosen by them: for if any one shall claim a power to lay and levy taxes on the people, by his own authority, and without such consent of the people, he thereby invades the fundamental law of property, and subverts the end of government: for what property have I in that, which another may by right take, when he pleases, to himself?"

Second, you assume erroneously that government has some kind of right to create money. Not so! The U.S. Constitution specifically excluded the right to create money by Congress under the ennumerated powers of Article I, § 8 by deleting "and emit bills of credit," which is the "constitutional" term for "create money." The individual states are specifically prohibited from emitting bills of credit under Article I, § 10.

Your presumption that government creates money and that taxes are not a grant from the citizens is that of the totalitarian philosopher Thomas Hobbes. As he explained in Leviathan,

"A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, "That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign." Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth."

Your position that the State spends so it can tax is a summation of Georg Friedrich Knapp's "chartalism" that presumed universal State ownership of everything, and finds its modern expression in "Modern Monetary Theory" based on Keynes's acceptance of the principle that money is "peculiarly a creation of the State," which assumes an absolute dictatorship that extends even to the alleged power to change the natural law itself through the power to "re-edit the dictionary" and abolish liberty (freedom of association/contract) and private property.

The idea that the State has any rights whatsoever that do not come from the people (who get them from God) essentially turns the State (as Hobbes boasted) into a "Mortall God." Not coincidentally, Keynesian economics is based on that of Walter Bagehot, whose political philosophy was heavily influenced by Hobbes.

The State, contrary to the assertions of the Keynesians, does not and cannot create wealth, i.e., produce anything, at least legitimately. That being the case, and realizing as Adam Smith, Jean-Baptiste Say, and Irving Fisher (among others) pointed out, "money" is the medium of exchange based on PRIVATE property, not State ownership, and represents the marketable goods and services we produce that we exchange for what others produce. Only a producer can licitly create money, and the State does not produce except as an expedient.