1.01  The troublesome question, ‘what is money?’ has so frequently engaged the minds of economists that a lawyer might hesitate to join in the attempt to solve it. Yet the true answer must, if possible, be determined. For ‘money answers everything’.¹ Money is a fundamental notion, not only in the economic life of mankind,² but (p. 6) also in many spheres of law. It therefore seems appropriate for the lawyer to seek a definition of money, given the frequent use which is made both of the term itself and its many derivatives, including debt, damages, payment, price, capital, interest, tax, pecuniary legacy, and doubtless many others. All of this terminology may have further consequences; for example, only an obligation expressed in money can involve any obligation of payment or repayment, or carry any right to interest. Money is a term so frequently used and of such importance that one is apt to overlook its inherent difficulties, and to forget that the multitude of its functions necessarily connotes a multitude of meanings in different legal situations.³ The universality of money and monetary systems no doubt also contributes to a certain complacency in seeking to identify a working definition.⁴

1.02  The following examples may provide an initial outline of some of the difficulties caused by this elusive term:

1. (a)  If a contract is to fall within the scope of the Sale of Goods Act 1979 then it must involve a transfer of goods ‘to the buyer for a money consideration, called the price’.⁵ If the consideration moving from the buyer is not ‘money’, then the contract is one of barter, which in many respects differs from a contract for the sale of goods.⁶

2. (b)  Likewise, a contract for the transfer of land only involves the ‘sale’ of that if the buyer is to pay a consideration in money.⁷

3. (c)  For the purposes of the Bills of Exchange Act 1882, a bill of exchange must require the drawee to pay ‘a sum certain in money’.⁸ An instrument requiring the transfer of something other than ‘money’ is thus not a negotiable instrument for the purposes of that Act.

4. (p. 7) (d)  In the United Kingdom, the taking of deposits in the course of a deposit-taking business is prohibited, in the absence of appropriate authorization. For these purposes, a ‘deposit’ is a ‘sum of money’ paid on terms that it will be repaid at a later date, whether with or without interest.⁹ Clearly, in determining whether authorization is required (or an offence has been committed), it is important to establish the precise meaning of ‘money’ in this context.

5. (e)  The terms of a given statute may create an obligation to pay ‘money’ and it may be necessary to decide in what manner the obligation is to be performed. Thus, where a statute required payment ‘in current coin of the realm’ it was held that only payment in physical cash would suffice—payment in goods or in other manner would not discharge the obligation.¹⁰

1.03  The instances just noted suggest a narrow and technical approach to the meaning of ‘money’, perhaps because each of them has a specific and distinct statutory derivation. But a much broader approach is adopted in other cases. For example:

1. (a)  The action for ‘money had and received’ can be brought when the subject matter is not money itself but some form of security therefor or other equivalent.¹¹

2. (b)  Whilst an individual may claim to have ‘money in the bank’, it is clear that he no longer owns physical notes and coins which he handed over to the bank, for property in those items will have passed to the bank itself.¹² Instead, he has become a creditor who can recover his debt by action. He does not ‘own’ anything at the bank, nor is the bank a trustee of the money deposited with it.¹³ Yet, as will be seen, the credit balance standing at his disposal may be used as a means of discharging financial obligations, and thus may be regarded as ‘money’ to that extent.

3. (c)  Equally, for the purposes of the equitable doctrine of tracing, the term, ‘money’ is by no means confined to physical cash—it extends to all assets capable of being identified in or disentangled from a mixed fund.¹⁴

4. (p. 8) (d)  In the context of a will, the term ‘money’ will generally carry a rather broader meaning. At any rate, it has no fixed meaning, and it is the duty of the court to ascertain the testator's intention upon a reading of the document as a whole. Thus, ‘money’ could include the whole of the personal estate and a reference to ‘all my money’ could in some cases extend to the testator's entire real and personal estate.¹⁵

1.04  These few examples have, however, merely reinforced the original assertion, namely that ‘money’ has a variety of different meanings in different situations, and individual cases require separate scrutiny; no hard and fast rule exists in this area. As a result, it becomes tempting to ask at this point whether the search for a general definition of money serves any useful purpose. As with so many legal expressions, all may depend upon the language which accompanies the term and the circumstances under which it is used. That the ease of recognition may be contrasted with the difficulty of definition is emphasized by the evidence of a London accountant given to the Committee on the Resumption of Cash Payments in 1819. When asked to explain a ‘pound’, he said ‘I find it difficult to explain it, but every gentleman in England knows it … It is something which has existed in this country for eight hundred years—three hundred years before the introduction of gold’.¹⁶ It may be objected that this evidence is now of some antiquity. Yet even today, many would find it difficult to provide a more satisfactory response. Equally, differences of emphasis may occur depending upon the location in which the question arises; for example, in less developed societies, a definition of ‘money’ may adhere more closely to traditional interpretations associated with banknotes and coins, whilst a broader approach (perhaps comprising government securities, bank money, and other instruments) may have to be adopted in the context of more advanced economies.¹⁷ Further, as will be seen at a later stage, an obligation expressed in money will generally be discharged provided that the creditor receives the ‘commercial equivalent’ of cash or money, and this formulation by itself tends to suggest that a precise definition of money will be both elusive and perhaps even unhelpful.¹⁸ Finally Professor Goode has asserted that ‘much of the debate on what constitutes (p. 9) money in law is rather sterile and has few implications for the rights of parties to commercial transactions, where payment by bank transfer is the almost universal method of settlement’;¹⁹ in his view, the notion of payment is a far more important legal concept. Given the work upon which he is engaged, the present writer has searched diligently for grounds to disagree with this view; but at least in the context of commercial and financial transactions, it is necessary to admit that the notion of payment is of more practical importance. As will be seen, there is much case law which deals directly with the concept of payment, but there have been very few occasions on which the court has been directly concerned with the meaning of money or has attempted to address that subject in a meaningful way. Can one therefore conclude that a generally applicable definition of ‘money’ would have to be so broadly written that it would serve no real purpose and that, in any event, a satisfactory definition of ‘payment’ would be far more useful in practical terms? Alternatively, is it preferable to avoid a definition of ‘money’ altogether, and simply deal with practical problems on a case-by-case basis?

1.05  Tempting though this approach may be, it is plainly inappropriate simply to abandon the search, at least in the context of a book of this kind. One cannot complete a work on the subject of money without at least attempting a definition, even if both the discussion and the conclusion are in some respects inconclusive or unrewarding. It must also be recognized that the concept of money does not only arise for consideration in commercial transactions. For example, many references will be made to the sovereignty which a State enjoys over its monetary system;²⁰ again, it would be odd if that discussion were to proceed without any attempt at a definition of ‘money’.

1.06  It has already been noted that money is a fundamental notion within the economic life and activities of mankind. It seems to follow that an attempt to formulate a legal definition of ‘money’ cannot proceed in isolation, but must take at least some account of economic theory. In addition, as will be seen, technological and other developments over recent years do have consequences for an attempt to formulate a legal definition of ‘money’—as the available means of payment multiply, the meaning of ‘money’ must correspondingly broaden.

1.07  As noted above, a legal definition of ‘money’ requires at least some consideration of its economic functions. Without attempting a detailed review of a complex area, (p. 10) it may be noted that economists have tended to define money by reference to some of its functions, namely:²¹

1. (a)  as a medium of exchange;²²

2. (b)  as a measure of value or as a standard for contractual obligations;²³

3. (c)  as a store of value or wealth;²⁴ and

4. (d)  as a unit of account.²⁵

1.08  The emphasis placed by economists on each aspect of this definition has tended to vary at different times²⁶ but it seems that the role of money as a medium of exchange is now regarded as its key feature.²⁷ As will be seen, the proposed legal definition of ‘money’ reflects some of these economic considerations. Nevertheless, it is necessary to proceed with caution in this area because, as noted earlier, ‘money’ can have very different meanings in different contexts. The law must provide a framework within which money has a role and its use has specified legal consequences. It is for this reason that bank deposits may be ‘money’ to the economist,²⁸ but they have (p. 11) not always been regarded as such by the lawyer, who may see them as a debt or an obligation on the part of the bank to repay money.²⁹ It is, of course, unsurprising that economists and lawyers should differ in their approaches to questions of this kind, for their areas of concern and objectives are also entirely different. The economist may be concerned with such matters as monetary policy, exchange rate policy,³⁰ and the supply and soundness of money within an economic area as a whole. Lawyers, on the other hand, tend to be more concerned with the protection of the purely private rights of contracting parties and the discharge of monetary obligations.³¹ The lack of common objective between the two disciplines inevitably results in the lack of a common approach or definition.³² In other words, the lawyer must take account of the functional and economic purposes of money, but he will not alight upon a legal definition which is wholly derived from economic considerations. On the contrary, he must necessarily focus upon money as a means of performance of contractual or other legally enforceable obligations.

1.09  So where does the lawyer begin his search for a definition of ‘money’? The following starting points are suggested:

1. (a)  First of all, the role of money as a medium of exchange has already been emphasized. If a country's system of trade and commerce is to be based on money as a means of exchange, then the law must buttress that position and allow for the assured discharge of monetary debts by payment in that medium. Thus, (p. 12) the law must require that creditors accept payment through that medium—in other words, the creditor must accept payment in legal tender.³³

2. (b)  Equally, it has been shown that money functions as a unit of account. Money could only discharge this function if the unit of account is uniform throughout the monetary area concerned. The required uniformity can only be achieved with any degree of permanence if the unit of account is prescribed by law. The essential features of money as a medium of exchange and as a unit of account thus require the underpinning of the law, or the State.

3. (c)  The requirement that money should act as a ‘store of value’ is perhaps less easily reflected in a purely legal definition of ‘money’. And yet it may be possible (or even necessary) to accommodate this aspect in various ways. If money is to act as a store of value, then that value must be identified in a manner which the law can recognize and support. This, again leads to the conclusion that money must, with the support of the law, be denominated or expressed by reference to an identified unit of account, which effectively preserves the nominal value of the medium of payment.³⁴

With these initial thoughts in mind, it is now appropriate to consider the formulations attempted in decided cases and other legal sources.

The Supreme Court of Canada has, in some respects, adopted an even broader definition, describing money as ‘any medium which, by practice, fulfils the function of money which everyone will accept in payment of a debt is money in the ordinary sense of the words, even though it may not be legal tender’.³⁷

1.11  These definitions have not strayed very far from the economists’ view of money; they tend to adopt a purely functional approach. Moreover, they do not emphasize the legal framework within which money must exist if it is to be used as a final and complete means of discharging financial obligations; indeed, the Canadian Supreme Court appears to have taken the view that ‘money’ could exist without any such legal support. By contrast, however, the definitions employed in the Uniform Commercial Code of the United States describe money as ‘a medium of exchange authorised or adopted by a domestic or foreign government as part of its currency’. This language clearly indicates that the authority of the State is a necessary ingredient of the definition of money.³⁸ The point is reinforced by Article 1 (section 8, paragraph 5) of the Constitution, which reserves to the Federal Government the exclusive right to issue money. Moreover, even some economic commentaries have suggested that money must exist within a legally defined framework, or else it is not money at all—Keynes noted that ‘money is simply that which the State declares from time to time to be a good discharge of money contracts’.³⁹ It seems fair to note that more modern definitions of ‘money’ have tended to adopt a broader approach by including not only bank deposits but even government debt securities, which can readily be converted into cash. Thus Article XIX(d) of the Articles of Agreement of the International Monetary Fund states that the term ‘currency … includes without limitation, coins, paper money, bank balances, (p. 14) bank acceptances and government obligations issued with a maturity not exceeding twelve months’.⁴⁰

1.12  It must also be said that monetary sovereignty is one of the attributes of a modern State under international law.⁴¹ The right to regulate the monetary system resides with the State; and the obligation of other States to recognize that monetary system can only apply where the relevant money has been created under the legal authority of the first State. Now, the notion of State sovereignty implies the right to legislate in specific fields falling within the ascertained scope of that sovereignty.⁴² Considerations of this kind suggest that, whilst a legal definition of money must necessarily contain or reflect at least some of the elements of the functional approach (and, hence, the realities of commercial and economic life), it must also include an element which reflects the international law requirement just noted—namely that ‘money’ must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question.

1.13  It is pertinent to note that the State's monopoly over the issue of money is occasionally challenged, not merely through the mundane medium of counterfeit production, but on more technical grounds. A recent example is offered by the prosecution of a Mr Bernarnd von NotHaus in a Federal Court in North Carolina.⁴³ Mr von NotHaus had promoted the use of the so-called ‘Liberty Dollar’ as a private currency for the use in the United States. The paper currency was said to be backed by, and exchangeable for, gold and silver held in storage by the issuing company. This was apparently intended to provide a counterweight to the national unit, which was said to have lost the confidence of the public. But, having used the symbol ‘$’ and labelled his currency ‘dollars’ (albeit ‘liberty dollars’) and used the expression ‘Trust in God’, it is perhaps unsurprising that a jury convicted him of a counterfeiting offence.⁴⁴

(p. 15) 1.14  Yet concerns about the state of the national currency are not confined to minority individuals or organizations. In March 2011, the Senate of the State of Utah introduced legislation—the Substitute Currency Amendments Bill—designed to provide for the use of gold and silver coins issued by the Federal Government as legal tender with the State's borders.⁴⁵ The legislation may be no more than symbolic, since the market value of gold coins would inevitably be significantly greater than the value which they could carry in terms of legal tender. Various other States, including Virginia, have considered the adoption of similar legislation. However, the political objective is to voice concern about the state of national currency and to send that message to the Federal Government. The monetary law implications are unlikely to be significant in practice.

1.15  With these considerations in mind, it becomes attractive to adopt a functional approach—money is that which serves as a means of exchange—subject to the crucial proviso that its functions must have the formal and mandatory backing of the domestic legal system in the State or area in which it circulates. For anything which is treated as ‘money’ purely in consequence of local custom or the consent of the parties does not represent or reflect an exercise of monetary sovereignty by the State concerned, and thus cannot be considered as ‘money’ in a legal sense.

1.16  It is necessary to conclude that a definition of ‘money’ in law must recognize both the functions of money and the legal framework within which it must be created. Against that background, it is possible to turn to theories of money which have previously been formulated.

1.17  The role of the State in the establishment of the monetary system and in the creation of physical money led Dr Mann to conclude⁴⁶ that, in law, the quality of money is to be attributed to all chattels that are:

1. (a)  issued under the authority of the law in force within the State of issue;

2. (b)  under the terms of that law, denominated by reference to a unit of account; and

3. (c)  under the terms of that law, to serve as the universal means of exchange in the State of issue.

It is apparent that the definition relies heavily upon the role of the State in establishing a monetary system and in authorizing the issue of notes and coins. It is thus (p. 16) necessary at the outset to review this approach in broad terms, and to consider two competing theories. It will then be appropriate to return to Dr Mann's definition in a little more detail.⁴⁷

1.18  Under the definition just outlined, money must be issued under the central authority of the State concerned. This approach reflects the State (or Chartalist) theory of money developed by G F Knapp,⁴⁸ who opined that only chattels issued by the legal authority of the State could acquire the character of ‘money’, and that the value to be attributed thereto is fixed by law, rather than by reference to the value of the materials employed in the process of production. Dr Mann supported this approach partly in the light of the universal acceptance of the principle of nominalism.⁴⁹ The State theory of money is the necessary consequence of the sovereign power or the monopoly over currency which States have assumed over a long period and which is almost invariably established by modern constitutional law.⁵⁰ It cannot be open to doubt that the United Kingdom currently retains and exercises sovereignty in monetary matters;⁵¹ (p. 17) accordingly, the State theory of money may be regarded as a part of English law.⁵² The right of coinage had for many centuries been recognized as a part of the Crown's prerogative, and was thus exercisable without parliamentary or other sanction.⁵³ Whilst the right to issue coinage has now been placed on a statutory basis, the exclusivity of the privilege to issue coins has been specifically preserved.⁵⁴ It should be added that the introduction of the euro does not detract from the State theory of money; on the contrary, it is an illustration of that theory, for the creation of the single currency is directly traceable to an exercise of monetary sovereignty by the individual participating Member States.⁵⁵ The State theory thus does not prevent a group of States from introducing a common currency. Likewise, it does not prevent a single State from introducing more than one currency. Examples of the latter phenomenon tend to have something of a historical flavour, but China affords a modern example; the currency of mainland China is the yuan, but Hong Kong continues to issue the Hong Kong dollar, which is an entirely independent monetary unit.⁵⁶

1.19  It should be appreciated that the law relating to banknotes, or paper money, developed in a rather different way, for their history is connected with that of bills of exchange and banking.⁵⁷ Banknotes in the modern sense were not always distinguishable from other negotiable instruments, although even in an early case, it had been held that banknotes would usually be regarded as ‘money’ in a legal context.⁵⁸ (p. 18) When the Bank of England was established in 1694,⁵⁹ it was not a central bank of issue in the modern sense. The legislation did not even state whether the Bank was intended to issue notes at all, still less did it seek to confer upon it an exclusive, note-issuing monopoly which would have been consistent with the State theory of money.⁶⁰ Nevertheless, the Bank began to act as a bank of issue and circulation immediately after its incorporation. But in addition, many country banks continued to issue notes without government control.

1.20  As a result, the growth of money in circulation was not subject to any effective form of regulation and the quality of money could clearly be affected by the solvency of the particular issuer.⁶¹ This state of affairs in turn became the chief topic of discussion between the Currency and Banking Schools during the early part of the nineteenth century. The former school considered that the term ‘money’ should be ascribed only to notes and coin, and that the issue of money should be undertaken directly by the Government or under its control.⁶² As a result, the creation of money would rest in official hands, whilst the distribution of money would occur through banks and through private transactions.⁶³ This approach was endorsed by the Bank Charter Act 1844 which established the modern position. Subject to certain transitional arrangements, the privilege of issuing notes constituting ‘money’ and enjoying the status of legal tender in England and Wales was made exclusive to the Bank of England.⁶⁴

1.21  The Bank Charter Act appears rapidly to have pushed the English courts towards the State theory of money. Less than twenty years later, the court in Emperor of Austria v Day said that the right of a foreign government to issue notes as paper money followed from powers vested in the State itself, as a result of which the court restrained the defendant from printing notes which claimed to be legal tender in (p. 19) Hungary, even though they bore no resemblance to the official currency.⁶⁵ The same theory was also applied in twentieth-century cases decided by the House of Lords and the Privy Council, and to which it will be necessary to return at a later point.⁶⁶

1.22  If the State theory of money appears to have gathered early momentum in England, matters took a slightly more tortuous course in the United States of America. The Constitution⁶⁷ confers upon Congress the power ‘to coin money, regulate the value thereof, and of foreign coin’. Thus, the Supreme Court has noted that ‘to determine what shall be lawful money and a legal tender is in its nature and of necessity a governmental power. It is in all countries exercised by the governments’.⁶⁸ It followed that Congress had the power (and, it may be added, the sole power) ‘to issue obligations of the United States in such form, and to impress upon them such qualities as money … as accord with the usage of sovereign governments. The power … was a power universally understood to belong to sovereignty’.⁶⁹ In view of these considerations, the power of Congress to ‘coin’ money was held to extend to the issue of greenbacks, or paper money.⁷⁰ Under these circumstances, it will be appreciated that the circulation of any other chattels claimed to have the quality of money would be inconsistent with the established monetary prerogative (p. 20) of the Federal Government⁷¹ The first ‘greenbacks’ were issued as part of the Government's efforts to finance the Civil War; for this purpose, Abraham Lincoln signed the first Legal Tender Act in February 1862. The Act authorized the issue of notes which were ‘lawful money and legal tender in payment of all debts, public and private within the United States’. Until that time, the issue of banknotes had essentially been a function of private issuers.⁷² If the Federal Government had now established the exclusive right to issue notes, then it was necessary to decide whether action by the individual States might infringe the monopoly. By Article 1, section 10 of the Constitution, individual States could not ‘coin money, emit Bills of Credit, make any Thing but gold and silver Coin a Tender in Payment of Debts’. The Court in Craig v Missouri⁷³ held that ‘the emission of any paper medium by a State government for the purpose of common circulation’ would be caught by the prohibition. But a few years later, paper ‘money’ issued by a State-owned banking corporation was held to fall outside the prohibition—it was not issued by the State and on the faith of the State.⁷⁴ Later cases held that notes and coupons issued by State banks—which were essentially departments of State governments—were not ‘bills of credit’ for these purposes even though they could be accepted in payment of taxes and other sums owing to the State.⁷⁵ Of course, the exclusive right to issue banknotes enjoying legal tender status is now vested in the Federal Reserve, although the notes represent obligations of the Federal Government, rather than the Federal Reserve.⁷⁶ In a series of cases, the Supreme Court further held that the (p. 21) power to determine the value or convertibility of legal tender⁷⁷ likewise rested with the State. The State theory of money may thus be regarded as a part of the law of that country.⁷⁸

1.23  If one accepts the State theory of money as formulated by Dr Mann, then it becomes necessary to consider its practical consequences. Two points should be made in this context.

1.24  First of all, circulating media of exchange in law only constitute ‘money’ if (a) they are created by or with the supreme legislative authority of the State, and (b) the relevant law confers upon those circulating media a nominal value which is independent of the intrinsic value of the paper/metal from which they are made, of their actual purchasing power, and of their external value measured against other currencies. It follows that gift vouchers, tokens, and similar items—even though exchangeable against the provision of goods or services by their issuers—do not constitute ‘money’ because they lack the support of the supreme legislative authority within the State concerned. For the same reason, promissory notes issued by a commercial or industrial company are not ‘money’, even if they were to circulate and to be accepted as such throughout the community. Likewise, where a statute, without further definition, refers to ‘gold coin’, it must be taken to refer to coin issued under the authority of the State and not to some privately produced replica.⁷⁹

1.25  A currency issued by an insurgent authority and forcibly imposed upon the local population in the course of a civil war is to be regarded as lawful money in the geographical area concerned, because the insurgents exercise de facto supreme authority in governmental matters, which makes obedience to their authority not only a necessity but a positive duty. This position is established by a number of decisions of the Supreme Court of the United States,⁸⁰ which held, amongst other things, that a contract could not be rendered void or unenforceable on public policy grounds merely because the consideration had been expressed in the Confederate dollar. In the present context, this approach has the merit of consistency with the State theory of money, as formulated earlier. It is, however, not entirely clear that the English courts would adopt a similar approach; on occasion, they have refused to (p. 22) recognize the legislative or official acts of an insurgent government.⁸¹ However, the English courts have indicated a willingness to apply laws made by unrecognized governments to the extent to which these deal with private rights and there are no countervailing considerations of public policy.⁸² It is suggested that the English courts could, on this basis, recognize such a monetary law under appropriate circumstances, even though the relevant State or government is not formally recognized by the United Kingdom.

1.26  Similar questions may arise where the conflict is of an international nature, as opposed to a civil war. Notes issued and made legal tender by a belligerent occupant in the course of an international war are ‘money’ because they are imposed by the body which de facto (and even if only temporarily) exercises supreme authority and is responsible for public order and administration.⁸³ As a consequence, a debt contracted in the national currency prior to the onset of hostilities can subsequently be discharged in the occupation currency by payment of so many occupation currency notes as are—under the occupant's legal tender legislation—equivalent to the nominal value of the debt.⁸⁴

1.27  The second consequence of the State theory is that, in law, money cannot lose its character except by virtue of formal demonetization—that is to say, the introduction of a subsequent law which deprives the earlier money of its character as such.⁸⁵ The statement just made implies that money cannot lose its character by custom, or by any other means. As a matter of law, it is suggested that this proposition remains accurate, even though history supplies many examples of the operation of Gresham's Law, where bad money drove good money out of circulation.⁸⁶ Gresham's Law has usually been applied to coins which were perceived to have a nominal value below the intrinsic value of their metallic (gold or silver) content. Inevitably, holders of the undervalued coins would tend to withhold them. But (p. 23) they retained their status as ‘money’, for they were still legal tender for the number of units of account by reference to which they were denominated; and coins do not lose their legal tender status merely because some of the holders elect to save, rather than spend. If a coin—such as a gold sovereign⁸⁷—can be sold for a price in excess of its nominal value, then it is being sold in the character of a commodity, and not as money.⁸⁸ Apart from such ‘commodity’ cases, however, the courts will apply their national legal tender laws and will ignore any premium which the market may happen to place on particular coins.⁸⁹ Equally, the courts will generally ignore the fact that a long-term monetary obligation may lose its effective value over a period. Thus, the annual rental of three shillings a year payable under a 1,000-year lease from 1607, now has very little value, but it remains a money obligation which can be discharged at its nominal value.⁹⁰ These rules flow in part from the principle of nominalism, which will be considered at a later stage.⁹¹

1.28  It may be added that States have occasionally minted gold coins without ascribing to them a specific value in terms of the local monetary unit—the South African Krugerrand is a case in point. Whilst it was (indirectly) described as legal tender, no specific monetary value was placed upon it.⁹² It follows that such coins are not ‘money’, and must be regarded as a commodity. This aspect of definition can be important and is considered later.⁹³

1.29  Although it is not adopted as the key starting point in the present work,⁹⁴ reference must be made to the ‘Societary theory of money’ which holds that it is the usage (p. 24) of commercial life or the confidence of the people which has the power to create or recognize ‘money’. In other words, it is the attitude of society—rather than the State itself—which is relevant in identifying money. Now, to the economist, there is no doubt that public acceptance and confidence are important criteria within the definition of money; people will enter into contracts in terms of money and accept payment in it, because they are confident that other members of the same society will behave in like manner.⁹⁵ This, in turn, leads to the view that anything is money if it functions as such; but, taken by itself, this definition is unsatisfactory in seeking to define the attributes of money from a legal perspective. As demonstrated earlier in this chapter, a purely functional approach to money cannot of itself provide an adequate basis for a legal definition; the Societary theory cannot be reconciled with the undeniable monopoly of modern States over their currencies⁹⁶ and the effective recognition of that monopoly by international law. Whether in situations of crisis or otherwise, money cannot be created—or lose its character—purely by the will of the community;⁹⁷ legal sanction is required for that purpose. The recognition of Confederate notes as ‘money’ by the US Supreme Court does not lend support to the Societary theory; on the contrary, the Court recognized that the acts of the insurgent Government within its territory could not be questioned, for it represented the de facto supreme authority at that time.⁹⁸ The Supreme Court was thus giving effect to the State theory in that case. Nevertheless, the usefulness of the Societary theory cannot be denied. It has already been seen that the theory is of some value in the context of money as a means of payment and, as will be shown below, it is also of some assistance in the context of eurocurrencies. It must be borne in mind that, especially in the modern world, States are frequently unable to control the external value of their currencies and that,⁹⁹ as will be seen, the sovereignty of the State over its own monetary system is now a relatively limited concept.¹⁰⁰ Indeed, in Zimbabwe, hyperinflation reached such a (p. 25) level that it effectively ceased to be used, and foreign currencies were exclusively used for a period, even though this would have contravened Zimbabwe's system of exchange control.¹⁰¹ The situation became so difficult that the use of hard currencies was authorized in January 2009 and, ultimately, the use of the local dollar was ‘suspended’ by an announcement to that effect by the Ministry of Economic Planning on 12 April 2009.¹⁰² The suspension was intended to continue for at least a year because, according to the announcement, ‘there is nothing to support and hold [the Zimbabwean dollar's] value’. There was, therefore, a period in which the population of Zimbabwe determined the medium of exchange for local transactions, abandoning the rapidly depreciating local currency for US dollars and other units. It may thus be said that the Societary theory of money applied for a period, until the legal position was apparently regularized by the announcement described here. At that stage, the State theory may be said to have re-asserted itself, even though the local currency was suspended. It is possible to conclude that the Societary theory will play a greater role in times of monetary chaos and hyperinflation. In addition, and as will be discussed, the existence of the Eurodollar market may also offer some support to the theory. Under these circumstances, there is no doubt that the Societary theory of money plays a greater role than the adherents of the State theory would wish to admit.

1.30  In more modern times, an alternative theory has been advanced, namely, an ‘institutional theory of money’. This theory views money as:

no more than credit against an obligor, whose acceptance as a store of value and as a means of payment by the public is dependent on a comprehensive legal framework that ensures stable purchasing power, its availability even in time of banking stress and its functional capability to settle monetary obligations. It is no longer a chattel, but a transferable credit within an overall institutional framework.¹⁰³

1.31  The new theory notes the traditional functions of money as a measure of value, a store of value, and as a means of payment. It is noted that the State and Societary theories of money were developed at a time when national currencies were linked to gold, and it could thus legitimately be said that the value of money was fixed (p. 26) or determined by the State. This view of money is now effectively obsolete, since the value of money is principally determined by (i) the monetary policy of central banks, and (ii) market forces.¹⁰⁴

1.32  The creation of the euro is cited in support of the institutional theory, noting that the single currency was not established with any intrinsic or objective value; rather, it was merely defined in terms of its equivalence with a series of participating currencies which were themselves only defined by reference to their market values.¹⁰⁵ Further, the value of the euro since its original launch date has been determined in part by the monetary policy of the European Central Bank (ECB) and the eurosystem central banks—neither the European Union nor the participating Member States can determine the value of the euro.

1.33  The theory also notes the reducing role of notes and coin in the modern era.¹⁰⁶ The use of these physical media of exchange is now largely confined to face-to-face retail transactions and, even in that context, cash faces challenges from debit and credit cards and other payment methods. Indeed, the introduction of the euro itself provides evidence that a monetary system can exist without physical cash. For three years following the creation of the single currency, it was possible to make bank transfers and payments in euros, but a cash payment could only be made in the relevant legacy currency at the prescribed substitution rate.¹⁰⁷ In the view of the present writer, this argument is reinforced by two factors. First of all, national banknotes and coins were legal tender for euro obligations only within the original State of issue, and not across the Eurozone as a whole.¹⁰⁸ Whilst national currencies thus ‘represented’ the euro, they only did so in a limited, territorial sense. Secondly, it was provided that an obligation denominated in a legacy currency could be discharged by a bank transfer in euro. Legal force was thus given to the use of the euro, even though it did not then exist in physical form. These considerations tend to emphasize that the notion of ‘legal tender’—which is in many respects linked to the State theory of money—is of ever-diminishing importance. This is a necessary consequence of the increasing importance of scriptural money as a means of payment. Although States still retain their legal tender laws in a formal sense, the move away from physical cash is in some respects supported by other legal developments. For example, the fight against tax evasion and money laundering requires an audit trail, and many laws passed in this area encourage the move towards ‘bank’ money.¹⁰⁹

(p. 27) 1.34  Against this background, the institutional theory of money emphasizes that money consists primarily of a claim against the issuing central bank, but also includes the credit balance of sight deposits made by the public with commercial banks.¹¹⁰ Claims within the latter category are considered ‘money’ because they can be transformed on demand into banknotes, so that they become a direct claim on the central bank.¹¹¹ The difficulty with the latter part of the analysis is that ‘commercial bank’ money necessarily involves a credit risk on the institution concerned, because it may not have sufficient assets to place with the central bank in return for notes. But, in reality, individuals and companies only have access to ‘commercial bank’ money and cannot hold accounts direct with the central bank.¹¹²

1.35  In the absence of any link between the value of money and an external asset such as gold, the institutional arrangements for the creation of money will become crucial, because they will determine (i) the value of money and its stability, (ii) the fungibility and equivalence of central bank and commercial bank money, and (iii) the functionality of money as a means of exchange.¹¹³ The value (ie, the purchasing power of a currency in terms of goods and services) will in large measure be determined by the monetary policy of the central bank. Again, in the absence of a formal link to gold or some other commodity, the value of the currency must be determined by that policy and by public confidence in the central bank. The preservation of the value of the currency depends upon the achievement of price stability—ie, avoiding excess money supply that diminishes the value of the currency through inflation. Given that the external purchasing power of the currency will also be important in an open economy, central banks may also influence the value of the domestic currency through the holding of foreign reserves.

1.36  Considerations of this kind lead to the conclusion¹¹⁴ that ‘money’ is defined as:

1. (a)  a direct or indirect claim against a central bank;

2. (b)  a claim which can be used by the public as both a means of exchange and a store of value; and

3. (c)  a claim which is originated and managed by a central bank in a manner that preserves its availability, functionality, and purchasing power.

1.37  The institutional theory therefore places a focus on the role of the central bank and its role in controlling the amount of money (physical or scriptural) within the national economy. This is a necessary part of its role in controlling inflation and, (p. 28) hence, preserving the value of the currency. The theory thus has the following practical consequences:

1. (a)  the principal objective of the central bank must be the achievement of price stability;

2. (b)  the central bank must have the functional capacity to achieve price stability through its market operations;

3. (c)  the central bank must have autonomous decision-making processes, so that political pressures cannot influence or dilute its primary objective;¹¹⁵

4. (d)  given that commercial bank money is also ‘money’ for the purposes of the definition, the central bank must be able to influence the content of relevant legislation, including the regulatory framework applicable to banks and the financial infrastructure; and

5. (e)  the central bank must oversee payment systems in order to ensure that scriptural money is a fully reliable mode of payment.

1.38  In the modern world, therefore, public confidence in the currency in many respects equates to confidence in the central bank. The need for central bank independence in pursuing the price stability objective necessarily leads to a reduced role for the State itself in monetary affairs.¹¹⁶ The State is responsible for the creation of a legal framework corresponding to the above criteria, for the designation of the title of the unit of account and (where applicable) for setting any recurrent link.¹¹⁷

1.39  Nevertheless, the role of the State should not be underestimated. The institutional theory implies that the State will pursue sound fiscal policies in order to support the success of monetary policy.¹¹⁸

1.40  In any event, to revert to the essential points, it may be said that money is merely a form of contractual claim, whether against the central bank, in the form of bank-notes issued or deposits accepted by such an institution, or against a credit institution, in the form of deposits accepted by it.¹¹⁹ As a corollary, it is argued that ‘payment’ merely refers to the transfer of such a claim. This is certainly true where a payment is made in cash, since the banknotes are effectively negotiated to the (p. 29) payee.¹²⁰ It is also in many respects true in the context of a payment in bank or scriptural money.¹²¹

1.41  There nevertheless remains the difficulty that ‘commercial bank’ money involves a degree of credit risk which is absent in the case of ‘central bank’ money.¹²² An essential part of the institutional theory of money therefore includes a regulatory framework that helps to reinforce confidence in ‘commercial bank’ money. That framework includes prudential rules for credit institutions, compulsory deposit protection schemes, and the regulation of payment systems.

1.42  It might be thought that the financial crisis which dominated world markets in the period between 2007–2009 serves to emphasize the difficulties involved in treating commercial bank money as ‘money’ for the purposes of this definition. Some credit institutions came to the edge of formal insolvency procedures, when deposits would have been lost. Yet concerted action taken by central banks during this period helped to preserve confidence in, and the availability of, scriptural money.¹²³

1.43  It is thus concluded that the institutional theory recognizes the parameters of a modern economy, where scriptural money prevails over cash because the legal and institutional framework ensures the availability, functionality, and reliability of money in its dematerialized form. The theory also recognizes that money has no intrinsic or extrinsic value, and that its value at any given time depends upon confidence in the central bank and its monetary policy, and the regulatory framework put in place to support scriptural money.¹²⁴

1.44  The institutional theory, therefore, has a number of attractions, not least because the State theory as designed some decades ago now appears rather dated and is difficult to accept in its original form. The institutional theory takes account of the many developments which have affected the nature and role of money during the intervening period. The principal difficulty with the new theory is that, especially in its focus on the requirement for an independent central bank, it cannot provide a universal theory. It is true that this particular requirement reflects developments in the more advanced economies, and especially in Europe, where the concept of central bank independence lies at the heart of the eurosystem. But there are many countries in which the central bank does not enjoy such independence, or where (p. 30) such independence may be more apparent than real. As will be seen, considerations of this kind have led the present writer to adopt a modified version of the State theory of money.¹²⁵

1.45  Following this theoretical detour, it is necessary to return to some of the details of the definition of money put forward by Dr Mann—in particular to his fundamental starting point that money could only exist as some form of chattel, in physical form. In the past, these chattels would consist of commodities or quantities of metal; in modern times they consist of coins and banknotes of the kind now familiar in all countries.

1.46  Both coins and notes are chattels in possession, in the sense of the rights which may be exercised over them. The consequences of this position will be discussed shortly.¹²⁶ But it must be appreciated that banknotes additionally constitute a chose in action. In the case of the United Kingdom, they express a ‘promise to pay the bearer on demand the sum of … pounds’; in the case of other countries, a similar promise will be implied.¹²⁷ In other words, banknotes are promissory notes within the meaning of section 83 of the Bills of Exchange Act 1882.¹²⁸ But it must not be overlooked that a banknote ‘is not an ordinary commercial contract to pay money. It is in one sense a promissory note in terms, but no one can describe it simply as a promissory note. It is part of the currency of the country’.¹²⁹

1.47  The precise features of banknotes and coins in circulation within a particular country will be defined by the legislation which establishes the monetary system. It therefore seemed more appropriate to deal with those details in a separate context.¹³⁰ (p. 31) But it is necessary to consider whether the existence of a chattel issued by or under the authority of the State is a necessary feature of the definition of ‘money’. In the light of the development of the financial markets and modern experience, it is submitted that this aspect of the definition can no longer be supported.¹³¹ One of the principal purposes of money is, of course, to serve as a means of discharging obligations which are expressed in that money. It may well be that, in formal terms, the public law of a State will only compel a creditor to accept payment in notes and coins in compliance with its legal tender laws. But laws of this kind are of ever-diminishing importance. They tend to invoke an image of a creditor who, for his own reasons, is keen to avoid receiving payment on highly technical grounds or who wishes to place tiresome legal obstacles in the path of his debtor.¹³² Of course, the reality is entirely different; creditors will often accept large numbers of small denomination coins or notes which do not strictly comply with legal tender requirements, for they will always be in a position to re-use the money so offered to them. Likewise, creditors will frequently accept cheques, bank transfers, credit cards, and any other form of payment that is commercially reasonable in the circumstances. Instruments of this kind are readily accepted in payment of monetary obligations, even though they are issued, arranged, and administered by private entities, as opposed to the State itself. As a technical matter, it may well be that the express or implied consent of the creditor will be required as to the selection of such a means of payment, but that consent will be forthcoming in almost every case; it seems unrealistic to impose any further, legally relevant distinctions based solely upon the requirement for a consent which will almost invariably be forthcoming as a matter of course. In one sense, therefore, the focus ceases to be the legal tender laws, which have a public character. Rather, it becomes necessary to consider issues of private law; under the circumstances of the case, had the creditor expressly or impliedly¹³³ undertaken to accept payment (p. 32) in the manner proffered to him? If so, and if the means of payment does not fundamentally alter the monetary character of the obligations,¹³⁴ then the instrument tendered to him has the effect of discharging the monetary obligation arising under the transaction concerned.¹³⁵

1.48  Money thus continues to exist within a legal framework, and, to that extent, the State theory of money remains valid. However, it is submitted that the creation and existence of money cannot be dependent upon its issue in physical form by or on behalf of the State.¹³⁶

1.49  Under the terms of the traditional State theory, only those chattels issued by the State which are denominated by reference to a distinct unit of account can, in law, be regarded as ‘money’. The requirement that money be denominated in this way appears long established—Blackstone noted¹³⁷ that denomination is ‘the value for which the coin is to pass current’. Such distinct unit of account is peculiar to the State which creates it and is therefore the characteristic feature of a national currency system. The unit of account provides a standard of value against which the value of commodites can be measured.¹³⁸

(p. 33) 1.50  While denomination with reference to a specific unit of account is necessary to confer the quality of money, it should be appreciated that not everything which is so denominated is money. Thus, Treasury bills are expressed in terms of a unit of account, but they represent merely claims to money, and their use of the unit of account is simply a reference to the monetary system. The same general remark may be made in the context of certificates of deposit issued by banks, and many other debt instruments.¹³⁹ In contrast, a Bank of England note is nothing but the corporeal form, the embodiment of the unit of account, its fraction, or its multiple; further, and in contrast to the forms of instrument just described, a banknote represents an immediate right to payment. Herein lies the distinction between Treasury bills and similar instruments (on the one hand) and banknotes and coin (on the other). The former represents or evidences a claim to money; the latter is money.¹⁴⁰

1.51  The definition of the unit of account (pound, dollar, euro, yen) is supplied by the various monetary systems and will thus be discussed elsewhere.¹⁴¹ Here, it must suffice to say that a chattel cannot in law be regarded as money if it represents anything more than the simple embodiment of a unit of account, its fraction, or its multiple, and a liability on the part of the issuing central bank.¹⁴² Despite their history within national monetary systems, neither gold nor silver can be regarded as ‘money’, for their value may fluctuate in terms of money and is determined according to market demand; neither commodity is denominated by reference to a unit of account.

1.52  Money can only serve its required function if it is intended to serve as the universal means of exchange in the State of issue.¹⁴³ It is this aspect of the legal definition which is perhaps closest to that adopted by economists; this is necessarily the case, for neither (p. 34) discipline can adopt a definition of money without reference to its cardinal function. Indeed, the English courts have occasionally felt this aspect of the definition to be sufficient on its own, without reference to the other criteria noted in the text.¹⁴⁴

1.53  Now, if money is the medium of exchange, it cannot be an object of exchange; in other words, money is not generally to be regarded as a commodity.¹⁴⁵ This is not to say that money is immune from the economic rules relating to supply and demand; but the quality of serving as the universal means of exchange within a given economic area is an essential and indispensable requirement of money. For this reason, let it be repeated, bills of exchange, cheques, Treasury bills, and similar instruments cannot of themselves be described as money in the public law sense which has been discussed earlier. Rather, they represent or evidence a claim to money.¹⁴⁶ Likewise, gold may be an object of exchange by reference to its prevailing value, but it is an object of exchange rather than a medium of it; gold is thus not ‘money’. Gambling chips represent money in specific circumstances but plainly lack the universal acceptance necessary to clothe them with the quality of money.¹⁴⁷

1.54  In view of growing interest in Islamic banking and Shariah-compliant financial products, it may be helpful to add that, from this perspective, the only function of money is to serve as a medium of exchange, or as a benchmark for the value of other assets. Money has no intrinsic value of its own. From this it follows that it is not permissible to make money out of money by charging interest,¹⁴⁸ or by speculation on future exchange rates.¹⁴⁹ A detailed discussion of this subject lies beyond the scope of the present work.¹⁵⁰

1.55  That money is to be regarded as a store of value or measure of wealth perhaps reflects the economic view of money, rather than its purely legal aspects. Nevertheless, it is suggested that this particular aspect of money does find some support with the case authorities.

(p. 35) 1.56  In this context, it may be recalled that money functions as a medium of exchange. But a person in possession of money is not legally bound to buy anything, or to exchange his money for goods or services. In such a case, money does not become valueless merely because it is not in use as a medium of exchange; on the contrary, it serves as a store of value, representing the wealth of the holder and his abstract or future purchasing power.¹⁵¹

1.57  This definition of money in its abstract sense—as a store or representation of value or wealth—can usefully be borne in mind in considering the very unusual case of Banco de Portugal v Waterlow & Sons Ltd.¹⁵² In that case, the Portuguese central bank commissioned the defendant printers to produce 600,000 banknotes, known as Vasco da Gama 500 escudo notes. This was duly done and the notes were put into circulation in Portugal. Subsequently, a criminal group succeeded in fraudulently obtaining from the defendants a further 580,000 notes of the same type, printed from the original plates and indistinguishable from the first set. The fraudster managed to put a large number of these notes into circulation in Portugal. Upon discovery of the fraud, Banco de Portugal found themselves compelled to withdraw from circulation the entire issue of Vasco da Gama notes, and to replace both the genuine and fraudulent notes with a new issue.

1.58  When Banco de Portugal succeeded in its claim for breach of contract against the printers,¹⁵³ it was necessary for the court to determine the appropriate measure of damages. In particular:

1. (a)  was the central bank entitled to damages calculated by reference to the face value of the new notes which they were obliged to issue in order to replace the fraudulent notes; or

2. (b)  was it entitled only to recover the cost of the physical printing and production of the new notes?

1.59  The minority in both the Court of Appeal and the House of Lords believed that only the cost of reprinting the necessary stationery could be recovered. In each case, however, the majority opined that the face value of the notes in money could be recovered. When issuing notes, the central bank was effectively parting with, or (p. 36) putting into circulation, a portion of its wealth or was parting with money. The new notes, when issued, became legal tender for their face value and represented purchasing power in terms of commodities; they had to be accepted by the Portuguese Government in payment of taxes and other debts due to it, and the notes thus represented the credit or obligations of the central bank.¹⁵⁴ In other words, the notes constituted a monetary asset of the holder; they must correspondingly constitute a monetary liability of the central bank or other issuing authority. Waterlow's breach of contract had thus resulted in the creation of further liabilities on the part of the central bank, and it was entitled to be indemnified against those liabilities.¹⁵⁵

1.60  The decision in this case accordingly leads to the conclusion that—in legal terms—money represents both purchasing power and a store of wealth or value. The value of money in terms of its purchasing power is wholly unrelated to the cost of materials involved in its production.

1.61  It was noted above that money is not generally to be regarded as a commodity.¹⁵⁶ Expressions such as ‘goods, wares and merchandise’ and ‘goods and chattels’ will therefore usually be construed so as to exclude money, whether in a physical or in any other form,¹⁵⁷ although the general principle must give way if the explicit terms of the relevant statute or other instrument so require.¹⁵⁸ Since the rule is not (p. 37) absolute, it is necessary to examine those few occasions on which money will be treated as a commodity.¹⁵⁹ This will usually arise where coins are being traded or used for their rarity value, or where coins are sold by reference to their intrinsic metallic (as opposed to monetary) value. Money may thus be regarded as a commodity in the following instances:

1. (a)  The decision in R v Dickinson¹⁶⁰ concerned Regulation 30E of the Defence of the Realm Regulations, which made it an offence to ‘melt down, break up, or use otherwise than as currency any gold coin which is for the time being current in the United Kingdom’. Regulation 58 allowed the Court to ‘order that any goods in respect of which the offence has been committed shall be forfeited’. The defendant was found to have committed an offence under Regulation 30E, and a forfeiture order was made in respect of £1,800 of gold sovereigns to which the offence related. The Court appears to have accepted that, in principle, gold coin—as legal tender—could not be regarded as ‘goods’ for these purposes. However, the forfeiture order was upheld on the grounds that the sovereigns had been acquired with a view to melting them down. They had thus been acquired as a commodity, and not in the character of money.

2. (b)  Coin sold ‘per weight’ is being sold by reference to its metallic value—it is not being used as a medium of exchange. It thus cannot be described as ‘money’ for the purpose of the transaction at hand, even though it may later be used as money for the purposes of a subsequent transaction.¹⁶¹ If the purchaser pays an amount in excess of the legal tender value of the coin in question, then this would plainly indicate that it is the metallic content (rather than the money) which is the subject matter of the transaction.¹⁶²

3. (c)  Equally, a coin purchased for its rarity or curiosity value cannot be regarded as ‘money’ in relation to that specific transaction, even though it may otherwise (p. 38) retain its formal status as legal tender.¹⁶³ Indeed, the very fact that one would refer to the purchase of a coin in such circumstances will indicate that the coin is being treated as an object—and not a medium—of exchange.

4. (d)  There may be cases in which the surrounding circumstances make it plain that money is in fact being deployed as a commodity. If an employer distributes gold sovereigns to his employees by way of bonus, it may be inferred that they are intended to acquire the market (rather than the nominal) value of these coins, and they will be liable to income tax accordingly.¹⁶⁴

5. (e)  It is perhaps legitimate to infer from the above cases that money will generally be treated as a commodity where this reflects the intention of the parties concerned.¹⁶⁵

1.62  In more recent times, the distinction between money as ‘money’ and money as a ‘commodity’ has engaged the attention of both the European Court of Justice and the Court of Appeal. The decisions arose in connection with coins minted in South Africa and in this country. Given that South African Krugerrands were only indirectly described as legal tender, and were not stated to have a specific value by reference to a unit of account expressed in rand,¹⁶⁶ it must follow that they were traded by reference to their metallic value; as a result, they should be regarded as ‘goods’ (or a commodity) and not as money. Likewise, British silver alloy coins—such as a half-crown—should not be regarded as money because they have ceased to be a means of payment. Notwithstanding these considerations, in R v Thompson,¹⁶⁷ the European Court of Justice held that Krugerrands were ‘treated as being equivalent to money’. This statement was of very doubtful factual accuracy and in any event the wrong test was applied. The wording just quoted virtually amounts to an application of the Societary theory of money and, as noted earlier,¹⁶⁸ this is not by itself an adequate legal definition of money. Applying the State theory, Krugerrands could not be ‘money’ because they were not denominated by reference to a unit of account. In contrast, the Court was correct in finding that half-crowns were not legal tender and thus had to be regarded as ‘goods’ for the purposes of Article 30 of the EC Treaty (now Article 34, TFEU), which prohibited (p. 39) quantitative restrictions on imports and measures having equivalent effect. In view of this line of reasoning:

1. (a)  the Court wrongly held that Krugerrands were a form of money, and fell outside the provisions of Article 30 of the Treaty;

2. (b)  the Court correctly held that half-crowns were ‘goods’ for the purposes of the Treaty, and restrictions on their transfer were, in principle, incompatible with the provisions of the Treaty guaranteeing the free movement of goods. However, British rules restricting the export of these coins could nevertheless be upheld on public policy grounds, because the national right to mint coinage was traditionally regarded as involving the fundamental interests of the State.

1.63  The Krugerrands at issue in this case should have been treated on the same basis as the silver alloy coins.¹⁶⁹ In each instance, it was the intrinsic value of the coins (rather than their value as legal tender) which should have been at issue.

1.64  Subsequently, matters became a little clearer when the Court of Appeal, in a case arising from the same facts,¹⁷⁰ found that the Krugerrands mentioned previously were ‘goods’ for the purposes of section 52 of the Customs and Excise Act 1952, and were thus liable to forfeiture following an attempt to smuggle them into this country. In the circumstances, it was plain that the smugglers had handled and used the Krugerrands by reference to their metallic value, and not by reference to their value as a form of currency. The judgment of the Court of Appeal was thus clearly right notwithstanding the difficulties posed by the unsatisfactory decision of the European Court of Justice.

1.65  There may be other specialized cases in which money ought properly to be treated as a commodity. For example, a security printer who contracts to produce a quantity of notes and to deliver them to a foreign central bank would be liable in damages for its subsequent failure to produce the notes or for any defect in their design. But the loss suffered by the central bank is the cost of obtaining notes from an alternative source, not for the face amount of the notes themselves.¹⁷¹ But cases of this type will clearly be the exception, rather than the rule. Where the question has arisen in recent times, courts have refused to categorize money as goods or commodities.¹⁷²

(p. 40) 1.66  It may be concluded that notes and coins are being handled as money where—as in the vast majority of situations—these are being used by reference to their legal tender value. Where, however, notes and coins are sold by reference to their curiosity or rarity value, or by reference to their metallic value, then they are being traded as goods or commodities. It will be apparent that this distinction will depend largely upon the intention of the parties concerned, as drawn from the circumstances surrounding the transaction in question. The cases in which money will be regarded as a commodity will necessarily be exceptional.¹⁷³

1.67  The foregoing analysis has examined a number of aspects of money and it is clear that the State retains a significant role in the creation of a monetary system; only the State can define and replace the unit of account and—in the case of physical cash—provide it with legal tender status. But it can no longer be accepted that money can exist only in a physical form or that the State has the monopoly over its creation.¹⁷⁴ It therefore seems to be plain that the State theory of money can no longer be accepted in terms of the formulation proposed by Knapp and those who accepted his views. The dominance of scriptural money and the role of private institutions in the creation of money is now so great that the original theory has an air of unreality about it. However, changing circumstances rarely create new wisdom; they merely provide new insights into ideas that may have been current for many years. The State theory does not necessarily have to be discarded in its entirety; it may be sufficient to modify it to reflect developments that have occurred since it was originally formulated.¹⁷⁵

1.68  If the requirement that money should exist in the form of a chattel is no longer tenable, then it must follow that the expression ‘money’ is an essentially abstract (p. 41) rather than a physical concept. Looking at the State theory of money in the round, it seems that the essential legal characteristics of ‘money’ are as follows:

1. (a)  it must be expressed by reference to a name and denominated by reference to a unit of account which, in each case, is prescribed by the law of the State concerned;¹⁷⁶

2. (b)  the currency and unit so prescribed must be intended to serve as the generally accepted measure of value and medium of exchange within the State concerned;¹⁷⁷ and

3. (c)  the legal framework for the currency must include a central bank or monetary authority responsible for the issue of the currency, and including appropriate institutional provisions for its management through the conduct of monetary policy and the oversight of payment systems.¹⁷⁸

1.69  This revised definition does not in any sense deny the undoubted fact that the issue of physical currency is usually a monopoly of the State or the central bank; it merely recognizes the fact that such physical notes and coins can no longer be treated as the sole form of money in use within a particular country.¹⁷⁹ It follows that the (p. 42) definition of ‘money’ offered above is in some respects true to the State theory, but now defines money in a purely abstract manner. Thus, while monetary laws can define the monetary system and define the unit of account, they cannot now readily limit the definition of ‘money’ itself nor can they directly limit the amount of money in circulation. Such matters can be influenced, rather than be controlled through the conduct of monetary policy, but that is an entirely different matter.¹⁸⁰ Whether a particular asset or instrument constitutes ‘money’ in the sense that it can be used as a means of payment must be determined on a case-by-case basis and may in part depend upon changes in banking practice and technological developments; the nature of the instruments which fall within this definition may thus change from time to time. New forms of money may emerge as a means of payment as they gain a sufficient level of acceptance within the business world or the community generally.¹⁸¹ It may be added that this broader approach to the meaning of ‘money’ appears to have met with the approval of the Federal Court of Australia in Elsinora Global Ltd v Healthscope Ltd (No 2).¹⁸²

1.70  It would follow that a bank deposit could be regarded as ‘money’ in the legal sense because payment by means of a bank transfer is now a widely accepted medium of payment; as has been shown, a bank deposit is not disqualified as ‘money’ merely because it represents a debt obligation of a private institution. However, in order to constitute ‘money’, the asset concerned must be available for the purpose of making immediate payment. On that basis, only monies standing to the credit of a current account or sight deposits should be regarded as ‘money’ for these purposes. On the other hand, term deposits, government bonds, or other securities do not constitute ‘money’—and thus their transfer cannot constitute ‘payment’—because the creditor or holder does not thereby acquire a right to the use of the money or its commercial equivalent;¹⁸³ he merely acquires the right to payment at a later date with interest in the meantime.¹⁸⁴

1.71  In conclusion, it may be said that the State theory—in the somewhat attenuated form proposed above—provides the definition of money in its abstract sense, whilst the Societary theory contributes to a description of money as a means of payment, and to the development of new forms of ‘money’. Whilst the institutional theory offers a new approach to the meaning of ‘money’, it will be appreciated that (p. 43) this theory focuses on the central bank itself and its role as the central institution within the monetary system. At a very high level of generality, the institutional theory bears some of the characteristics of the State theory, in the sense that that the institutional framework of the system must necessarily rest upon sound legal foundations. Whilst obviously a relatively recently developed theory, it may be that the ‘institutional’ approach will gain further traction given the obvious importance of monetary policy and payment systems within a financial framework.

1.72  It has already been noted that ‘commercial bank’ forms of money may be used as a means of payment, and may thus be regarded as ‘money’ in a legal sense. But what characteristics must an instrument display if it is to qualify for this title? In this context it may be helpful to have regard to some of the special attributes of physical cash, for if an instrument is to qualify as ‘money’, then the law must surely attribute to it characteristics which will enable it effectively to fulfil functions which are similar to those performed by notes and coins. If money is to exist in several different forms, then the law should certainly ensure that the rights of a person who receives ‘money’ are essentially the same, irrespective of the precise form in which that money is received.¹⁸⁵ If new means of payment are to constitute ‘money’, then consistency and the lawyer's respect for precedent demand that those new means must display characteristics which are in most respects similar to the more traditional, physical form of money. It thus becomes necessary to seek to draw parallels between the legal attributes of the two forms of money. Against that background, it is proposed to consider some of the special attributes of cash, and to examine the extent to which money in a non-cash form can be treated on the same basis.

Money is, however, capable of being recovered specifically from a holder who received it in bad faith or for no consideration.¹⁹² The common law remedy of (p. 45) tracing allowed the recovery of assets acquired with the money, provided that their identity could be ascertained.¹⁹³ The common law remedy stopped short of the point where the relationship of creditor and debtor suppressed the right in rem.¹⁹⁴ At this stage the equitable doctrine of tracing intervened,¹⁹⁵ allowing money to be followed in rem against a holder who acted in bad faith or gave no consideration, if it could be identified in or disentangled from a mixed fund.¹⁹⁶

1.74  Secondly, banknotes import a promise to pay a stated sum in money and are thus promissory notes for the purposes of the Bills of Exchange Act 1882, although the Act only applies to promissory notes ‘with the necessary modifications’.¹⁹⁷ Thus, a note stolen from the central bank prior to its issue is not a valid banknote because it remains inchoate until delivery to a person who takes it as a holder.¹⁹⁸ Yet it seems likely that a holder in due course of a Bank of England note, which is genuine but which has unlawfully been put into circulation, will be protected.¹⁹⁹ It would also appear to follow from sections 69 and 89(2) that an owner who loses a banknote is (p. 46) entitled to have a new one issued to him against appropriate security;²⁰⁰ but a banknote destroyed by fire has to be replaced unconditionally.²⁰¹ A forged banknote will, in the absence of estoppel, be inoperative.²⁰² On the other hand, it is well established that, where a bill or note is given by way of payment, the payment is presumed to be conditional;²⁰³ this plainly cannot apply to the Bank of England notes, for their delivery will constitute a final and unconditional payment.²⁰⁴ Further, a bill of exchange may be reissued only in certain cases,²⁰⁵ but a Bank of England note may always be reissued after payment in due course.²⁰⁶ In the case of accidental alteration to a bill or banknote, the treatment in each case appears to be uniform; the holder will be entitled to payment if the content of the document can be proved.²⁰⁷ But different treatment is accorded to the two instruments in the event of deliberate alteration. If the alteration is immaterial or latent, the holder of the bill may still be entitled to enforce it by virtue of the provisions of the Bills of Exchange Act 1882,²⁰⁸ but Bank of England notes have been held to fall outside these provisions.²⁰⁹ As a result, banknotes are subject to the common law rule that any material alteration²¹⁰ is a complete defence, even against a holder in due course who could not have detected the alteration. Finally, in the conflict of laws, the transfer of banknotes and bills is governed by the law of the place in which the asset is situate,²¹¹ and the rules relating (p. 47) to the identification of that place differ in each case. The debt represented by an ordinary bill of exchange may sometimes have to be treated as situate at the place where the debtor has bound himself to pay. Indeed, it has been held that bills drawn in India and payable in London and which, at the time of the holder's death were on board a ship on the high seas were assets situate in England and therefore subject to English death duty, because ‘they represent, but they do not constitute, the asset’.²¹² But this reasoning cannot apply to modern banknotes; they are situate where they are actually found, rather than where they can be enforced.

1.75  The principles just discussed were, of course, established at a time when physical money was really the only recognized form of ‘money’. It was thus a happy chance that a number of the questions which might arise with respect to banknotes could be answered with reference to the Bills of Exchange Act 1882 or the principles which it sought to codify. However, the 1882 Act relates to promissory notes which are in writing and signed by the obligor.²¹³ Consequently, the 1882 Act can be of no real assistance in dealing with bank deposits or other, non-documentary means of payment as forms of ‘money’. This state of affairs inevitably hinders the present attempt to draw parallels between traditional and more modern forms of payment. Nevertheless, having regard to some of the attributes of physical cash which have just been discussed, a few comparisons may be made:

1. (a)  In the case of physical cash, a transfer of possession generally connotes a transfer of ownership, at least provided that the transferee has acted in good faith and given value, and will constitute ‘payment’ in respect of the debt obligation concerned.²¹⁴ If funds have been transferred to the payee by means of a bank transfer or through electronic means,²¹⁵ then the credit to the transferee's account will generally be irrevocable²¹⁶ and the credit to his account will constitute his possession of, and thus his prima facie entitlement to the funds concerned.

2. (b)  If the transferee received the funds in good faith and for value, then he is entitled to retain them by way of payment and he is not required to enquire as to the transferor's original source of funds, or any other matter.²¹⁷

3. (p. 48) (c)  Non-physical forms of cash may constitute ‘payment’, so long as the transferee is immediately able to dispose of the full amount of the funds concerned and to apply them in discharge of his own obligations.²¹⁸ Payment in this form is, to this extent, equated with payment in physical cash.

4. (d)  The recipient of a bank transfer acting in good faith would appear to acquire good title to the funds free of any prior equities.²¹⁹ In other words, the bank transfer enjoys some of the features, if not the formalities, of negotiability.

5. (e)  A creditor who receives payment by means of a bank transfer is not in any sense concerned with the credit standing of his debtor,²²⁰ nor will he usually be concerned with any error, mistake, or want of authority on the part of the bank that remits the funds to him.²²¹

6. (f)  In a private international law context, the ability to obtain a good title to notes and coins appears to be governed by the law of the place in which the transaction occurs and the moneys are physically handed over to the creditor. Likewise, in the case of a bank transfer, the creditor's entitlement to the funds and the validity of his title to them will be governed by the law of the place to which the funds are remitted to the account of the creditor.²²²

1.76  The foregoing analysis demonstrates that payment by means of a bank transfer shares many of the legal characteristics of a payment in physical money. This would seem to justify the earlier conclusion that funds standing to the credit of a bank account should be regarded as ‘money’ for legal purposes. It is also appropriate to conclude that a new form of payment may be regarded as ‘money’ if it broadly meets the criteria noted previously.²²³

(p. 49) 1.77  Nevertheless, issues of this kind continue to cause difficulty and new cases emphasize that ‘money’, ‘payment’, and cognate expressions will have different meanings in different contexts. For example, in Visa International Service Association v Reserve Bank of Australia,²²⁴ Australia had introduced the Payment Systems (Regulation) Act 1998 which allowed the Reserve Bank to list particular organizations as a ‘designated payment system’ and to impose access regimes and other standards in relation to such a system. The Reserve Bank designated Visa and MasterCard for these purposes and imposed various rules on interchange fees and other charges. The card issuers challenged their designation as ‘payment systems’ and, hence, the ability of the Reserve Bank to regulate their charging structures. The 1998 Act defined²²⁵ a ‘payment system’ as a ‘funds transfer system that facilitates the circulation of money’.

1.78  The card issuers argued²²⁶ that the 1998 Act was directed only to the final step in the payments process by which contractual promises to pay are transformed into the actual delivery of value through the banking system via transfers across accounts held at the Reserve Bank itself. In other words, ‘payment system’ refers exclusively to clearing, settlement or the transfer of monetary value by which promises to pay are settled through banks as intermediaries for the parties concerned. On the other hand, a credit card system merely created payment obligations which had to be settled through a payment system at a later date. The use of the card created various promises to pay but did not itself effect a transfer of funds. Based in part on the decision in Re Charge Card Services Ltd,²²⁷ the court accepted that no actual funds transfer occurred at the point of time at which the credit card is presented to, and accepted by, the supplier.²²⁸

1.79  Ultimately, however, the court found against the card issuers on the basis that they operated a ‘system that facilitates the circulation of money’ for the purposes of the definition of that term in section 7 of the 1998 Act. The expression was not restricted to clearing and settlement systems but included other systems which supported the payments infrastructure.

1.80  It is also likely that ‘e-money’ should also qualify for the label of ‘money’ in the light of the points noted above. E-money has been defined as monetary value represented by a claim on the issuer which is stored in an electronic device and accepted as a means of payment by undertakings other than the issuer.²²⁹ The legal framework is designed to secure the continued availability of e-money once it has been issued to a holder. For example, an electronic money institution (i) is required to be authorized by an appropriate authority;²³⁰ (ii) is required to meet minimum capital and ‘own funds’ requirements;²³¹ must ‘ringfence’ funds placed with it to purchase e-money;²³² (iv) must both sell and redeem e-money only at its face or par value;²³³ and (v) is prohibited from paying interest.²³⁴

1.81  E-money may be stored on a card which may not disclose the name of the holder; the use of the card entails an immediate transfer of funds to the creditor's bank account, and he can thus accept e-money without reference either to the identity or the credit standing of the holder. Likewise, it would appear that, in the absence of bad faith, the creditor would obtain an unimpeachable title to the funds transferred to him. To this extent, e-money exhibits some of the characteristics of physical cash, and may thus qualify for the label of ‘money’.²³⁵ The fact that both bank deposits and e-money constitute obligations of, or are issued by, private organizations does, of course, further undermine the more traditional State theory of money. It has been argued by others²³⁶ that e-money may qualify as ‘money’ (p. 51) if one accepts the functional definition proposed in Moss v Hancock²³⁷ because (i) the issue of a chattel by the State is not an essential ingredient of ‘money’; and (ii) the existence of formal, legal tender status is likewise not an essential part of a definition of money. Nevertheless, it would be necessary that the relevant instrument should be widely accepted by a range of merchants and service providers. Otherwise, it could not be said to pass freely throughout the community in the payment or discharge of debts.

1.82  It may be of passing interest to note that, when Germany implemented earlier EU legislation on e-money, it described electronic money as ‘Werteinheiten in Form einer Forderung gegen die ausgebende Stelle’ (‘units of account in the form of a claim against the issuing entity’),²³⁸ thus implicitly accepting the monetary status of such payment instruments. This provision has, however, recently been repealed and replaced by a more literal translation of the definition given in the 2009 Directive.²³⁹

1.83  Thus far, the discussion has proceeded in relatively general terms and, broadly, has assumed that the currency under consideration was the pound sterling or, at least, was the domestic currency in the jurisdiction under consideration. It is now necessary to broaden this approach, and to discuss the position of foreign money under English law.

1.85  In view of these remarks²⁴⁵ and the attitude of the English courts to foreign currency obligations following the decision in Miliangos v George Frank (Textiles) Ltd,²⁴⁶ the requirement for an entirely separate treatment of sterling and foreign currency obligations is—in the view of the present writer—much less compelling. As a result, the present edition seeks to deal with money and monetary obligations in a broad sense, with appropriate commentary where any remaining practical or theoretical distinctions between domestic and foreign money throw up specific points requiring discussion.

1.86  Returning now to the main theme, what can be said about the status of foreign money in England? The following general propositions are suggested:

1. (a)  First of all, foreign money is to be regarded as ‘money’ under precisely the same circumstances as sterling is to be so regarded—ie it is always to be regarded as ‘money’ except where delivered for its intrinsic metallic, rarity, or curiosity value. This parity of treatment flows inexorably from the Court of Appeal judgment in Camdex, to which reference has just been made. It must also be said that the decision in the Miliangos case and the dismantling of exchange controls in the United Kingdom²⁴⁷ have tended progressively to diminish the importance of a sharp distinction between sterling and foreign currency obligations.²⁴⁸ In some respects, it may be said that Camdex was a natural development following the decision in Miliangos. The latter decision was to be welcomed on pragmatic grounds, whilst the former perhaps explained some of the more theoretical consequences of the Miliangos case.

2. (b)  Whilst foreign money may be ‘money’ under English law, it cannot constitute legal tender for sterling debts in this country.²⁴⁹ Anything which is legal tender must be money, but not all money is legal tender. Legal tender is such money as is ‘current coin of the realm’. But this statement merely makes the obvious (p. 54) point that foreign money cannot be tendered in discharge of an obligation to pay pounds sterling.²⁵⁰

3. (c)  It is submitted that foreign money is negotiable in England. Negotiability merely means that an instrument is capable of being transferred by endorsement or delivery (rather than by assignment), and such transfer takes effect free from prior equities or claims, even where the note concerned has previously been stolen. Banknotes and coins are, of course, invariably transferred by delivery and the negotiability of such instruments in England should be accepted by a court without further evidence.²⁵¹ It is true that, in a case involving the negotiability of Prussian State bonds, evidence that those bonds were negotiable in Prussia was not sufficient to confer upon them negotiable status in England. To hold otherwise would, according to the Court of Appeal, mean that German currency would be identical to its equivalent in English money.²⁵² This approach to the problem is, it is suggested, flawed; at least in the modern context, the only material distinction (in England) between sterling and foreign currency is that the former serves as legal tender for debts expressed in sterling, whilst the latter currency plainly does not fulfil that function.

4. (d)  A number of statutory instances may be cited which confirm that foreign money is to be regarded as ‘money’ within the United Kingdom. Many Acts of Parliament include specific provision to this effect. For example, the Companies Act 2006 allows that shares which are to be paid up in ‘cash’ may be paid for in foreign currency.²⁵³ For stamp duty purposes, ‘money’ is again stated to include foreign currency,²⁵⁴ and rules which criminalize the forgery of money in the United Kingdom apply equally to foreign money as they do to sterling.²⁵⁵ It is perhaps fair to say that, if statutory references to ‘money’ are given their ordinary and natural meaning, then the term will usually include (p. 55) foreign money, as well as sterling.²⁵⁶ Following the Camdex decision which has already been noted, references to ‘money’ will perhaps more generally be taken to include both the domestic unit and foreign money.²⁵⁷

5. (e)  An action for money had and received can be brought regardless of the currency in which the relevant funds were received, and it follows that foreign currency is ‘money’ for the purposes of this type of action.²⁵⁸

6. (f)  An obligation to pay a fixed sum in a foreign currency may be a ‘debt’, with the result that it can provide a basis for a statutory notice leading to a winding-up petition.²⁵⁹

1.87  Of course, the fact that an obligation is expressed or payable in a foreign currency may have specific consequences before the English courts. For example, sterling must be regarded as a constant measure of value because that is the role which a currency performs within the context of its domestic legal system²⁶⁰ but a foreign currency may appreciate or depreciate in value as against sterling. Such movements clearly have commercial consequences and may also have legal implications. Issues of a legal character have tended to arise in the context of taxation matters. For example:

1. (a)  In one case,²⁶¹ a company was obliged to pay interest in respect of debentures issued by it. Bondholders could either accept the sterling amount of interest payable in London or (alternatively) they could present their warrants for payment in New York, receiving payment in US dollars at a preset exchange rate of US$4.86 to one pound. Under what is now section 349(2) of the Income and Corporation Taxes Act 1988, the company was obliged to withhold 25 per cent of the interest payable to bondholders and to despatch these sums to (p. 56) the Revenue on account of the tax liability of the holder. On despatching the warrants, the company thus paid to the Revenue 5 shillings per pound. When some of the warrants were cashed in New York at the fixed rate of exchange, the holders in fact received significantly more than the equivalent of one pound because, by that time, only US$3.39 was required to purchase one pound sterling. As a consequence, the Revenue argued that the amount deducted should have been 25 per cent of the larger sum received by the bondholders concerned. At first instance, the Revenue's claim was dismissed on the grounds that foreign money was a commodity and thus could not be regarded as ‘interest of money’ for the purposes of the statutory rule.²⁶² Given that US dollars were being used as a means of payment, this view was not sustainable even by reference to the broader commodity theory discussed earlier in this section; it is even less sustainable in the light of the Camdex case. The Court of Appeal reversed this ruling, mainly on the grounds that the phrase ‘interest of money’ was apt to include foreign currency obligations and everything which, in a commercial sense, could be said to constitute a ‘payment’.²⁶³

2. (b)  The Court of Appeal has rightly held that—for income tax purposes—profits arising from the sale of US dollars were to be treated as a trading profit and taxable accordingly.²⁶⁴

3. (c)  Foreign currency (but not sterling) is a chargeable asset for capital gains tax purposes—one may gain or lose as a result of disposing of foreign currency.²⁶⁵ This is consistent with the strict legal view expressed earlier, namely that (so far as English law is concerned) the pound does not gain or lose value,²⁶⁶ but other currencies can gain or lose value in relation to it, thus creating a taxable gain or profit.

1.88  It is perhaps fair to say that these instances do not really reflect upon the status of foreign currencies before the English courts. They merely illustrate the incontrovertible facts that

1. (a)  in the United Kingdom, taxation will usually be assessed in or by reference to sterling amounts;²⁶⁷

2. (b)  so far as English law is concerned, sterling is a uniform and unchanging measure of value;²⁶⁸ and

3. (p. 57) (c)  transactions in foreign currencies and fluctuations in their value (relative to sterling) may create profits, gains, or losses which may have an impact upon the ultimate sterling tax liabilities.

1.89  Apart from these relatively specialist cases, it is suggested that—so far as the English courts are concerned—sterling and foreign currency obligations fall to be treated in an essentially similar manner, for example as regards the payment of interest,²⁶⁹ performance,²⁷⁰ the consequences of breach, and other matters.²⁷¹

(p. 58) 1.90  It should be said, however, that there remains some modern authority that would differentiate more sharply between domestic and foreign currencies. For example, the Australian Currency Act 1965 acknowledges—admittedly by implication—that transactions can lawfully be entered into by reference to a foreign currency.²⁷² Although not strictly inconsistent with these sections, it is necessary to note the decision of the Federal Court of Australia in Conley & another v Deputy Commissioner of Taxation.²⁷³ In that case, the tax authorities served on a bank a statutory demand to pay over monies held in a taxpayer's US dollar account with the bank's Sydney branch. The notice required the bank to pay over an amount sufficient to meet outstanding taxes of some A$50,000,000. In the light of the commodity theory of money, there was some discussion as to whether the US dollar account was ‘money’ for the purposes of the legislation. The court did not explicitly decide this issue, although it referred to an earlier decision to the effect that a foreign money obligation should be regarded as an obligation of debt, rather than delivery.²⁷⁴ Nevertheless, the court held that the notices were invalid because they did not stipulate for a rate or mode of conversion. Conley was later cited as authority for the proposition that the legislation referred only to Australian currency and not to foreign money.²⁷⁵ On the other hand, the Supreme Court of New South Wales has held that a debt expressed in German marks could provide the grounds for a statutory notice leading to the winding up of a company, even though the required form of notice specifically contemplated that the relevant debt had to be expressed in Australian dollars.²⁷⁶

1.91  The enormous growth of the eurocurrency market over recent decades requires that a section should be devoted to a discussion of its characteristics.²⁷⁷

(p. 59) 1.92  The term, ‘eurocurrency’ is generally taken to refer to a deposit denominated in a currency other than that of the country in which the deposit-holding branch is situate.²⁷⁸ Eurodollars are thus US dollars deposited with and payable by a bank outside the United States.²⁷⁹

1.93  In order to assist in a consideration of the legal nature of eurocurrencies, it may be as well to provide some historical background. The creation of the eurodollar market²⁸⁰ is a fascinating and complex subject, but a brief discussion must suffice for the present purposes. The eurodollar market originally came into being for essentially economic reasons. During the course of the 1960s and 1970s, the United States spent heavily overseas for defence, investments, and imports. The United States thus began to incur substantial trade and payment deficits and, as a result, substantial quantities of US dollars accumulated in foreign hands abroad.

1.94  The eurodollar market thus has its origins in US trade deficits, but the growth of the market was fuelled by a combination of regulatory factors. First of all, regulatory policy in the US prohibited the payment of interest on current accounts and limited the rates payable on time deposits. Furthermore, reserve requirements were imposed on US dollar liabilities of banks within the US itself; federal deposit insurance premiums were assessed with reference to the domestic base of dollar liabilities but the corresponding liabilities of overseas branches were excluded from this calculation. As a result, it was possible to obtain a higher rate of return on eurodollars than was available on its purely domestic counterpart. Developments in 1964 and 1965 then led to massive growth in this market. In 1964, the United States enacted its interest equalization tax; this amounted to a tax on the export of capital and effectively barred both American and foreign companies from using the financial markets in the United States to finance their operations outside that country. In 1965, the effect of this tax was reinforced by new regulations on foreign direct investment and by the Federal Reserve Board's Voluntary Foreign Credit (p. 60) Restraint Program. Borrowers seeking to fund their overseas activities in US dollars were thus pushed towards the eurodollar market.²⁸¹ The eurodollar market thus developed in order to allow transactions in US dollars outside the regulatory framework of the issuing State.

1.95  The eurodollar market itself is principally a market which subsists between large banks and financial institutions. These banks will place deposits with each other for relatively short periods²⁸² and they will carry interest at the market rate prevailing when the deposit arrangement is agreed. The recipient institution will then use the deposit as a means of funding a transaction for a customer. Apart from eurocurrency loans, the existence of such large pools of dollar deposits also led to the growth of the eurobond market. Since eurobonds are bearer instruments, it has not always been easy for governments to ensure that interest paid on such instruments is declared and assessed for taxation purposes.²⁸³

1.96  It may also be instructive to consider how a ‘eurodollar’ comes into existence. Suppose that A holds a dollar deposit with B Bank in the United States. A decides to transfer that deposit to C Bank, which is located outside the United States. As a result, A has a US dollar deposit with (or claim against) C Bank whilst C Bank has a corresponding claim against B Bank. At this point, A's eurodollar deposit is in many ways merely an indirect means of holding a dollar deposit with a bank within the United States.²⁸⁴ At this point, however, one can begin to grasp the ‘multiplier’ effect of the eurodollar market. C Bank has an asset in the form of proceeds of the deposit which has been placed with it. C Bank could thus lend those dollar funds to a borrower. He may in turn use them to acquire assets or investments. The seller may then elect to deposit those dollar proceeds with another bank outside the United States, D Bank. It will be seen that the first deposit originating within the United States has spawned a whole series of assets and liabilities, each of which are equivalent in amount to the first deposit. To this extent, it may be said that the operation of the banking system actually creates eurodollars. The eurodollar market is in many respects unregulated and, of course, this is one of the main (p. 61) attractions to those involved in the market. As will be seen below, this state of affairs has consequences for the status of eurodollars as ‘money’.

1.97  This very brief introductory survey provides the factual matrix against which to answer a question which must be considered in a monetary law context, namely, what is the legal nature of the eurodollar?

1.98  It is very clear that eurodollars could not be treated as ‘money’ under the former State theory of money, for such dollars do not exist in physical form. But the revised State theory merely attributes to the legislature the power to define the unit of account which is intended to form the domestic medium of exchange. Eurodollars are clearly denominated by reference to a domestic unit of account which is intended to serve as the general medium of exchange in the United States. If, as they plainly do, dollars serve that purpose in the United States, then they constitute ‘money’; and dollars cannot forfeit their characterization as ‘money’ merely because they are held outside the country of origin. This formulation, however, gives rise to a further conceptual difficulty because of the ‘multiplier’ effect which was described earlier—eurodollars are created by the banking system outside the United States, and it is thus difficult to describe the United States as the country of origin at all. This state of affairs has led some writers to conclude that money may exist both in a public and national form, and also in a private and international form.²⁸⁵ If this distinction is accepted, then it is plain that it is the location of the deposit-holding bank which is key to the existence of the eurodollar; that bank must be situate outside the United States. A deposit with a US bank at one of its branches within the United States is simply a deposit in the national currency; an inter-bank deposit in dollars with the London branch of the same bank is a eurodollar deposit. It is possible to identify other characteristics which distinguish eurodollar from national currency obligations. For example, because of the amounts involved, payment will be made by means of a bank transfer, rather than through any other medium.²⁸⁶ Equally, a bank which accepts a eurodollar deposit will receive the proceeds of that deposit by means of a credit to its own account with an institution within the United States and, as has been shown, that is a ‘national dollar’ credit rather than a ‘eurodollar’ credit. Every eurodollar deposit is thus ultimately ‘mirrored’ by a national currency deposit held through the correspondent banking network.²⁸⁷

(p. 62) 1.99  In terms of their legal analysis, both a eurodollar deposit and a national deposit involve a debt claim against the institution which has accepted the deposit.²⁸⁸ Furthermore, the eurodollar claim, as much as the national currency, is subject to the laws of the country which issues that currency—the lex monetae—in two particular aspects.²⁸⁹ First of all, the issuing State is at liberty to redefine its monetary system and to change the unit of account. Even in the context of a eurodollar (international) deposit, the parties have inescapably contracted by reference to the US dollar. Any change in that unit of account would thus be applied to the eurodollar contract, for a monetary obligation implies an obligation to pay in whatever is the lawful currency of the issuing State when the payment falls due.²⁹⁰ Secondly, it has been noted that a eurodollar deposit is ultimately mirrored by a corresponding national deposit. Partly, as a consequence of that position, the reciprocal payments involved in a eurodollar deposit contract ultimately involve a transfer through or affecting the clearing system of the issuing State.²⁹¹ Fundamental questions of performance may thus in practice be affected by the laws of the issuing State, even though the contract itself may be governed by a different system of law.²⁹² At least in theory, therefore, a eurodollar deposit involves a greater degree of legal risk for it is at the mercy of both the lex monetae in the extended manner just described, and the law applicable to the contract.²⁹³

1.100  Is it possible to draw any meaningful conclusions from this general discussion? One is left with the impression of a currency which lacks a ‘country of issue’ in the sense in which that expression was understood in the context of the more traditional State theory of money. To the extent to which eurodollars can be regarded as ‘money’,²⁹⁴ it may be said that they exhibit features of both the State and the (p. 63) Societary theories of money. The connection with the State theory stems from the inescapable link to the lex monetae and the unit of account prescribed by it. On the other hand, the eurodollar market came into being and enjoyed its massive growth outside the country which issues that currency and without the formal or official sanction which may be regarded as an implicit requirement of the traditional State theory. Thus, if eurodollars are ‘money’, they owe their existence, at least in part, to their acceptance as a means of payment by financial institutions executing transactions within a private law framework—in other words, to the Societary theory of money.²⁹⁵

1.101  It is fair to conclude that, whilst the State theory remains dominant within the field of monetary law,²⁹⁶ the growth of the eurodollar market has breathed some new life into the Societary theory.(p. 64)