THOUGHTS ON "LEGAL TENDER" AND GAMES OE PRETENCE

Few people understand the purpose ofs so-called "legal tender" Itis widely

believed that the government's legal tender laws protect citizens' money by

formally designating it as the official medium for the settlement of transactions.

The Latin root is "ten dere", to reach out, which includes its commercial meaning-

"offer" SO that it you offer to settle a debt by paying in legal tender your creditor

cannot then sue you for failing to repay your debt.

Since only the notes and coins of the realm constitute legal tender, our economic

freedoms would be severely diminished if transactions could reliably be settled

only in this way.

It would, for example, mean that other common and equally acceptable means of

settlement, such as cheques, credit cards, direct bank transfers, or even silver

and gold coins, none of which fall within the definition of legal tender, could not

validly be used for payments - let alone any mutually agreed bartering of goods

and services. It's therefore no surprise that the real meaning of legal tender is

simply currency that cannot legally be refused in payment of a debt - a negatively

expressed definition. Any more elevated significance is therefore groundless.

Yet the grandiose epithet legal tender endows this simple meaning with a veneer

of great economic significance that masks the fact that it actually isn't needed at

all, given that parties to any transaction are at liberty to agree between

themselves the method and means of settlement which, these days, is extremely

unlikely to be in the form of legal tender.

The great cover-up

How, then, did the notion of legal tender originate? The cloak of respectability

implicit in the phrase "legal tender" is nothing more esoteric than a ploy devised

by central banks to endow their fiat currencies with a credible, albeit bogus,

provenance. Just consider: even if money has been "quantitatively eased" from

thin air by the click of a computer key, or generated from nowhere by the fraud

known as fractional reserve banking, once it receives the central bank's blessing

and is anointed "legal tender", it must be accepted as such.

No powers of reasoning are required: even if everyone knows it is based on pure

fakery, it must be accepted because it's - well - accepted! Until, that is, it isn't

accepted any longer.

Examine a 50,000 Bolivar banknote, courtesy of the government of Venezuela, or

a 100-trillion dollar Zimbabwe banknote. Their appearances are authentic

enough; the notes are coarse and gaudily embossed with whirls and images of

past heroes and glories. In those countries, they are undoubtedly designated

"legal tender" status despite the fact that at 650,000 bolivars to the US dollar, and

100 trillion Zimbabwe dollars equating to 40 US cents, their utter uselessness as

currencies is plain. As a child living in South Africa I well remember seeing the massive yellow

ridges of 'mine-dumps" as we approached Johannesburg from Pretoria, and

being told that they were made of earth thrown up from the goldmines deep

below the ground. The "rand" was the ridge of high ground on which stood the

goldmining towns of Boksburg, Brakpan, Benoni and Springs. How ironic that

when South Africa gained independence in 1961 its new currency was named

the rand, a name that connoted such powerful links with the gold from which

South Africa derived its huge wealth.

At its launch it was convertible at the rate of 2 rand to £1.5 and, by the

hyperinflationary standards of most other currencies, it has done better than

most with £1.5 now converting to 30 rand, a debasement rate against the pound

of a mere 1,500 per cent - but since the pound itself has suffered major

debasement over that period, the rand's true loss of purchasing power since its

inception would have to measured against a stable point of reference, such

as.. gold!

Traders choose their own medium of settlement

Our common understanding of legal tender laws therefore misses the important

point, which is the view of the parties actually involved in trade. Since the role of

money is to facilitate settlement of dealings between purchasers and sellers of

goods and services, governments may pronounce, decree and pontificate until

the cows come home to the effect that a particular medium constitutes the

nation's legal tender, but if neither its citizens, nor their trading partners, trust it

they won't use it. They will make up their own minds on which medium to

choose for settling bargains.

There have been cries heard in Greece, Spain and Italy to the effect that that their

desperate economic woes would be solved if only they could replace the euro

with the drachma, peseta or lira! But try asking them whether those with

whom they trade would accept newly minted drachmas, pesetas or lira as

payment for real goods and services. Any currency, whether designated legal

tender or not, is only as good as its acceptability in trade

The central bank and the central illusion

The dictum "any government that can print money will print money" reminds me

of Patrick Barron's account of his meeting with the Federal Reserve's public

relations team shortly after the 2008 sub-prime lending disaster. After the

team's predictable eulogy on the Fed's measures to rescue the banking system,

Pat innocently enquired whether the Fed had exercised its power to increase the

money supply, which team-Fed duly confirmed. Pat then asked: "And the money

that you created was generated out of thin air. It wasn't there before, but it's there

now. Is that right?" [Also conceded, nervously.]

Pat: "And you say that creating this money out of thin air is beneficial to the

economy. Is that right?" [Conceded, still more nervously.]

Pat: "Then why do you prosecute counterfeiters?" [Meeting terminated.] Pať's serious point is that there is absolutely no difference in the economic

consequences to society between the central bank creating money out of thin air

and a counterfeiter doing the same thing, The sole difference concerns legality

and scale. Whereas private counterfeiters are, rightly, prosecuted the central

bank earns praise for its actions

form

The reason that counterfeiters are punished is because printing money is

of theft: in order to benefit, the counterfeiter must pass his fake money to

another person in exchange for valuable goods or services. Put simply, this

amounts to getting something for nothing, or a transfer of wealth from those

it

"down the line", with whom the fake money finishes u p, to those who received

first - the counterfeiter and the Fed

The Cantillon Effect

The French economist, Richard Cantillon, was one of the first to observe that the

first receivers of the new money benefit at the expense of all subsequent

receivers. Since inflating the money supply must always push up prices, its first

receivers are able to spend it before its price-inflationary effect has taken hold;

whereas: Subsequent receivers now have to bear those higher prices. This

known as the Cantillon efect. Hence my comment that counterfeiting, whether by

a central bank or a criminal with a printing press in his basement, always

represents a transfer of wealth.

It is abundantly clear that printing money cannot increase wealth. In fact, the

disruptive effect on business decision-making of inflating credit while

suppressing interest rates is wealth-destructive, and a major cause of

malinvestment.

Central banks are adept in hiding the destructive effects of money printing by

highlighting its benefit to particular sectors that are favoured such as, currently,

the Chancellor's "Help-to-Buy" scheme. Some were undoubtedly helped, but the

extra money has pushed up new house prices, increased builders' margins and

enriched the executives of house-building giants such as Persimmon

Malign use of statistics

Official statistics are used as a handy tool for masking real policy impacts. The

most favoured is, as ever, that mythological creature named Gross Domestic

Product (GDP). GDP is simply a monetary total of all recorded qualifying

transactions during a stated period, usually a year. Therefore, as Alasdair

Macleod regularly points out, GDP "growth", is merely the sum effect of money

inflation on the prices that make up all those transactions

Sir John James Cowperthwaite, who as financial secretary guided Hong Kong to

undreamed of prosperity, banned the collection of economic statistics since "they

might encourage people to interfere in the economy"!

I referred above to the so-called "Cantillon effect" of what must happen

whenever vast quantities of fake money are injected into the banking system.

The point is that this imposter, the new money masquerading as legal tender for

all, must go somewhere, and its first receivers can't get rid of it quickly enough almost as if their recognition of its falsity impels them to convert it into tangibles

usually property, property-based equities, commodities and luxury baubles of

every description - before the riches nouveau evaporate before their very eyes.

And it is hardly surprising that this swirling money-fountain also explains the

vastly inflated executive pay packages that sicken observant onlookers to the

core. The disgust felt by any rational citizen beholding the multiples of largesse

that can scarcely be claimed as having been earned, is a public disgrace and a

The phenom en -. o king community. " """ea, ls a public

scourge on the wider-working

phenomenon is rampant internationally too. T have referred to the

catastrophic level of currency debasement in South Africa - again due to

perennial money printing on a massive scale by its central bank. The Cantillon

effect of benefitting the first receivers accounts for the fact that the richest 10 per

cent of South Africans (less than half of them white) own almost 95 per cent of

the country S wealth.

Who would have guessed that the cause of this socially divisive phenomenon

lies not with corrupted remuneration committees, but with their countries"

treasuries and central banks?