Most people believe they know what money is and they don’t need any literal or technical definition to tell them they may be wrong in their belief.
In the United States, most people believe that the US Federal Reserve Notes and US coins, and debit, credit card or checks based on them are money.
Yet we find Article I, Section 10, Clause 1 of The Constitution of the United States declares, that:
“No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts; . . . .”
Prior to the constitution being written and the United States being formed, many colonies had their own forms of “bills of credit” or Fiat money. However, while this section of the Constitution has never been amended or repealed, gold or silver have not been used as money for generations.
Instead in the USA, we use what was noted earlier.
Now, then, you may say, “Then what exactly is money?” “Why aren’t we following the Constitution or why haven’t we amended it?” If you think this you’re probably not the only one confused.
When Russell L. Munk, Assistant General Counsel (a lawyer) for the Department of Treasury was (reportedly) asked the difference between dollars and Federal Reserve notes, he replied in a letter:
“Federal Reserve notes are not dollars. Those notes are denominated in dollars, which are the unit of account of the United States money.”
Unfortunately this only adds to the confusion.
Let’s take a look at a recent dollar bill and contrast it with an older one
That one was issued in 2001, compared to below one issued in 1957
So, while the older 1 dollar bill was stated to be redeemable in Silver, the newer one basically just declares it is a Federal Reserve Note. Both declare that they are legal tender.
Title 31 (Money and Finance), Subtitle IV (Money), Chapter 51 (Coins and Currency), Subchapter I (Monetary System), Section 5103 (Legal Tender) of the United States Code states:
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
Most people understand this to mean - that if you attempt to pay a debt (such as paying for food in a store), then, legal tender must be accepted as a form of payment, right? Otherwise, what is the point of having a definition of legal tender at all? I mean, aren’t people free to receive payment in any form that they want?
In most cases, it doesn’t make sense for anyone to refuse to accept legal tender. However, they can refuse to accept particular forms of legal tender without consequence, such as having a sign saying. “No bills larger than $20”. Or not accepting 1000s of pennies for a $10 debt.
As we move into the digital era, though, even these definitions start to become redundant as money becomes a digital accounting of numbers. These numbers though are controlled by banks through debit cards, credit cards, electronic funds transfers and decreasingly through paper checks.
Perhaps the most important aspect of money is faith or belief in it’s value. This was not really an issue for gold or silver because people knew they were limited in quantity. And as long as dollars were backed by gold there also wasn’t much of an issue. At some point we gradually transitioned to Federal Reserve Notes and perhaps due to the lack of publicity, little faith was lost in the dollar.
The reason I picked the dollar is because it’s a reserve currency. Most other world currencies though follow a similar pattern although the details may differ.
So at this point, you may say, who cares what these notes are backed by, they are still money as they are accepted everywhere (or belief in them is still strong).
India’s legal tender decree
Although that is true here in the US. In India recently something incredible happened. The government decided to decree that the INR500 ($7.50), and INR1000 ($15) bills will no longer be legal tender and that ATM withdrawals will be limited to INR2000 ($30) for some.
The fact that notes are no longer legal tender since Nov. 8, and will have to deposited in banks by end of December, was broadcast on major national television networks.
Several aspects of this are interesting.
- While there was some public outcry, there was not enough to rollback the measure.
- It basically hurts the poor and unbanked are lot more than middle class people (or the rich) who get their salaries deposited directly into banks and don’t keep much cash.
- Just over half of all Indian citizens have a savings account. Only 39% of of those account holders have an ATM card. A mere 2–3% earn enough to qualify to pay income tax.
- The majority of India’s population lives in poverty, and they survive by mostly paying for goods and services in cash.
- 86% of the cash in India became worthless overnight.
It makes me wonder, if 86% of the cash is held in these notes outside of the government’s coffers, why didn’t people simply declare: —
“No thanks, we are happy with our money and we will continue to use it as such. If you ‘the government will not accept it’, that is your problem. We actually do very little direct business with you anyways!”
The thought that this may happen elsewhere is very worrying to a lot of people who prefer to use cash rather than the banking system. It starts to sound like a statement of outright control of everything by the government that basically “We own everything!”
At it took was for a simple statement to be made to effectively change everyone’s belief in ‘what is money’ to be changed overnight.
Cryptocurrencies
This is one of the problems with the centralized control of money. Cryptocurrencies resolve this issue by the fact that the money supply is distributed and fairly created worldwide by miners or by people who already hold the currency. No longer does any one government or banking system control the supply or issuance of currency.
If you followed the situation in India, you’ll have noticed that both Gold and Bitcoin demand sky rocketed once the crisis happened. These both seem to be good ‘stores of value’. Gold has always been such in India and until recently cash itself was often used for that very purpose. However, I don’t think people in India will ever have faith to rely on cash again. And now that there are rumors that India may ban Gold imports, it leaves cryptocurrencies as a very good potential solution.
Although cryptocurrencies are still quite volatile compared to traditional currencies, they have the potential to be incredibly useful assuming you have a phone and an internet connection. The biggest barriers to adoption don’t seem to be technological issues but more in the ‘belief’ in them as money.
There are cryptocurrencies now such as Pivx, Dash, and some others that allow basically instant transactions (and Bitcoin itself is working on the ‘Lightning Network’ to help speed up things).
In a previous article written in August, I wrote about “Hedging Fiat with Cryptocurrency”. What happened in India is a confirmation in the thinking that led to that article in the first place.
What is different now though is, perhaps people will slowly start to adopt a different ‘belief’ in what is money. Since in India people’s belief was shattered overnight, don’t rest assured that it can’t happen elsewhere too.
As we move towards the need to increase taxation and into the territory of negative interest rates, cash itself will tend to be more and more demonized, and it’s likely that there will be more capital controls to slow down money moving across borders.
Cryptocurrencies let you ‘be your own bank’ and not subject to the controls that banks can force on you. This sounds more like the future I’d like to see
