INSTITUTIONAL THEORY

OF MONEY

THE ESSENCE AND LEGAL STATUS

OF MONEY AND SECURITIES

а.Ю. грибов

ИнстИтуцИональная

теорИя денег

сущность И правовой режИм

денег И ценных бумаг

Москва

РИОР

2008

A. YU. GRIbOv

INSTITUTIONAL THEORY

OF MONEY

THE ESSENCE AND LEGAL STATUS

OF MONEY AND SECURITIES

Moscow

RIOR

2008

RIOR PUBLISHING HOUSE LIMITED

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First published in Russian Federation in 2007

© A. Yu. Gribov, 2008

© Publisher, RIOR Publishing House, 2008

© Translators, Daria Kulesh, Emma Fenwick, 2008

The right of A. Yu. Gribov is identified as author of this work.

Translated and copyedited by ELSE Professional Business Editors, Moscow

Literary Editors, Translators: Daria Kulesh, Emma Fenwick

ISBN 10: 5 369 00276 6

ISBN 13: 978 5 369 00276 6

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Introduction

The aim of this study is to deduct and demonstrate current defini-

tions (which are essential for the normal functioning of a country’s

financial system) of a security, money, currency and, most impor-

tantly, of the rules of circulation for different forms of money and

securities.

Definition of a security

A security is a document that has been completed in the prescribed

manner and in accordance with compulsory requirements, and which

secures a sum total of property rights and non-property rights that are

subject to certification, concession and unconditional realisation as

prescribed by federal law, and which may be alienated by the right-

possessing side to any party, regardless of the wishes of the legally bound

side.

In some cases, for example, with acceptance of a promissory note,

the legally bound side can change without the agreement of the right-

possessing side.

With the alienation of a security, all rights (obligations) secured by

it transfer in the aggregate.

A security has an obligatory nature regardless of which bearer it is

filled in for.

A security of which the owner’s rights are secured in a special reg-

ister (ordinary or computerised) is a registered security.

In a case provided for by law or in accordance with it, for the reali-

sation or alienation of rights certified by a security, evidence of these

rights, which is kept in a special register, is sufficient.

A security for which the right-possessing side is the owner of its

bearer is called a bearer security. A bearer security is completed in a

single copy.

Rules for circulation of securities

Securities, with the exception of bearer securities, are treated in

accordance with liability laws.

Bearer securities are treated in accordance with laws of estate, but

they are issued and redeemed in accordance with liability laws.

6

IntroductIon

Definition of money

Various property goods can be used as money — objects, liabilities

and entity-liability combinations, which fulfil the following functions

of money:

• a measure of value;

• means of circulation;

• means of accumulation.

Money can have value:

1) either on the strength of its natural useful properties — use value

(commodity money):

• precious and other metals;

• rare minerals;

• hides, grain, livestock;

2) or as containing a liability (credit money or financial money):

• promissory notes;

• banknotes and billon coins containing an insignificant amount of a

precious metal;

• deeds for accounts in banks and registers;

• bonds;

• cheques;

• other securities;

3) or as entity-liability combinations, for example, coins with a spe-

cifically valuable content of a precious metal1.

Definition of currency

Currency — liabilities, stipulated for circulation, of a State bank

(treasury, reserve system) — State cash or non-cash money — is defined

as bearer securities issued by the State without a time-limit for presen-

tation in the bearer’s name with an endorsement, which must be ac-

cepted in all regions of a country in accordance with the norms of its

public law.

1 Extremely rarely encountered in practice. The circulation of money as entity-liability

combinations with components that are comparable in significance is not included in

this study.

IntroductIon

7

Rules for circulation of different forms of money

The rules of circulation of different forms of money are defined by

the rules of circulation for those material goods that fulfil the functions

of money.

According to the circulation rules, all forms of money can be di-

vided into three broad categories: entities, liabilities and derivative

securities (derivatives).

Entities:

1) natural, non-standardised commodity money;

2) metal ingots of exact weight;

3) full-weight metal coins.

This type of money (entities) is treated in accordance with the rules

applied in the law of estate/proprietary law.

Pure liabilities:

1) registered securities in cash form:

a) registered bills;

b) registered bonds, promissory notes of banks, and other quasi-

money;

c) nominal shares and other stock valuables;

2) nominal accounts in non-cash form:

a) non-cash currency (deposit money, cheque accounts);

b) any business-type accounts, which reflect:

• promissory notes;

• bonds, banks bills, and other quasi-money;

• nominal shares and other stock valuables.

This type of money (liabilities) is circulated in accordance with the

rules applied in law of obligations.

Derivative securities, where the right to own an entity, which is the

bearer of the liability, generates a legal binding relationship with the

debtor:

1) ordinary bearer bills;

2) banknotes from private banks;

3) cash currency — State bank notes and coins;

4) bonds, bank bills, and other quasi-money in the form of bearer

securities;

8

IntroductIon

5) shares and other stock valuables in the form of bearer securi-

ties.

Such derivative securities are circulated in accordance with laws of

estate, with the exception of their issue and redemption, in which case

they are circulated in accordance with laws of obligation.

In this study, use has been made of detailed quotes from Russian and

foreign researchers into the legal and economic nature of money, in

order to deduct and demonstrate these definitions and rules.

Part I

WHY IS AN INSTITUTIONAL

THEORY OF MONEY NEEDED?

On errors in the legal treatment of the concept

of money and securities and their consequences

In 1995, during Russia’s first banking crisis, the largest of the ruined

banks was the Moscow interregional commercial bank (MMKB) —

formerly Promstroibank of the Moscow region. Despite the consider-

able sum of its assets, the bank returned very little in the way of funds

to the creditors. The bank’s lawyers played a large role in this, taking

an extremely interesting stance, which contradicted the economic

treatment of the category «money».

Relying on the Civil Code of the Russian Federation (CC RF),

which had been adopted a year before the crisis, they maintained that

money is not a liability, but an entity. And since the money which re-

mained in the assets of the bank was the money of investors — natural

persons, then the creditors — legal persons — could not demand from

the bank entities that did not belong to them.

There was some legal logic in this, and it led to certain results. If the

clients of the bank — legal persons — could claim from a legal point of

view that their monetary relations with the bank were subject to liabil-

ity laws, and not laws of estate, then they would have succeeded in

recovering much more from the ruined bank.

The described legal risk of keeping and using money through a bank

system is becoming extremely high, which leads, throughout the Rus-

sian economy, to a reduction in the amount of non-cash monetary

circulation in the country, and, consequently, to a fall in gross domes-

tic product (GDP).

Thus it is vitally important to take away this legal risk, not only for

the benefit of the banking sector, but also in order for Russia’s economy

as a whole to develop normally.

Having begun to take shape, the practice of market relations has

nevertheless defined non-cash money as a liability of a bank, for current

accounts and for thrift accounts, respectively.

10

Part I. Why is an institutional theory of money needed?

But in relation to paper money, the country’s leading legal experts

did not waver. Paper money is a physically tangible entity, as they said

and wrote in Article 128 of the Civil Code of the Russian Federation

(Art. 128, CC RF): «Entities, including money and securities, are objects

of civil rights…»

The ambivalence of the economic nature

of money and its legal definition

Natural law is the law established among people by natural

reason.

Institutes of Gaius

The development of economic market relations exposes the contra-

dictions that have accumulated between practice and theory, both in

economics and in interdependent legislation.

The country’s leading economists pay too little attention to the

drawing up and expert examination of economic legislation that already

exists and that is being developed, which regulates, in particular, turn-

over of funds and financial turnover, which leads to a disparity of lead-

ing legal treatment of money and securities to their economic content,

which must determine their legal formulation. The rules incorrectly

defined by legislation for the circulation of money and securities have

a negative influence both on turnover/circulation of monetary funds in

the country and monetary policy as a whole.

These kinds of relations are known as ambivalent, because, in a

material sense, developing social relations are the origins of law, and

these relations are linked to the method of producing material goods,

the material conditions of the life of society, the system of economic

ties, forms of ownership as the ultimate cause of origin and actions of

law.

Are we able to accept the provisions of Article 128 of the CC RF,

knowing that they do not correspond with basic economic principles?

Cicero affirmed that, «true law is a reasonable tenet that corresponds

with nature»; «natural law came about earlier than any written law»;

«law is established by nature, and not by human decisions and decrees»;

«a law established by people may not violate order in nature»; «the con-

the ambivalence of the economic nature of money...

11

formity or disparity of human laws with nature (and with natural law)

appears as the criterion and standard of their justice and injustice»1.

Karl Marx later concluded that law and the State relate to super-

structure with regard to basic industrial and economic relations. Legal

relations arise from economic relations, serve them, are a necessary

form of their expression and existence.

Since the economy is the basis of a State, and the State and law are

its superstructure, if we continue the analogy, we must come to the

conclusion that theory must be the foundation of legislation.

Basis

Economy

Political economy

Superstructure

Law and State

Legislation

In one of his letters to C. Schmidt, F. Engels explained: «…the effect

of State power on economic development can be threefold. It can work

in the same direction — then development is made more quickly; it can

work against economic development — in which case, now, for every

large people it crashes over a certain period of time; or it can create

obstacles to economic development in certain directions and push it in

other directions. This case eventually leads back to one of the first two.

However, it is clear that in the second and third cases political power

can cause the greatest harm to economic development and can waste

an enormous amount of effort and material»2.

Legislation that contradicts its foundation — economic theory — is

an obstacle to the development of a country’s economy.

1 A History of Political and Legal Studies / edited by V. S. Nersesyants. Moscow, 1998.

pp. 84–86 (История политических и правовых учений / Под ред. В.С. Нерсесян-

ца. М., 1998. С. 84–86).

2 K. Marx, F. Engels. Complete works. 2nd edition. Vol. 37, p. 417 ( Маркс К., Энгельс Ф.

Соч. 2-е изд. Т. 37. С. 417).

12

Part I. Why is an institutional theory of money needed?

Methodological foundations of analysis:

theories of money and the institutional

approach

The problem of money has been considered by many schools

of economics, but, unfortunately, it occupies little space in

institutionalist theory. Institutionalists most commonly exam-

ine property rights, transaction expenses, the essence of

companies and the role of the State in the market economy.

The problem of money is usual y posed only from the point of

view of defining money supply and demand for money.

The provisions of neo-institutionalism, and especial y the

economics of law, which allowed interrelationships between

economics and legislation to be revealed, became the meth-

odological basis of analysis.

I.P. nikolaeva1

Theories of money

Russian examiners of questions concerning the evolution of the es-

sence and forms of money traditionally take the classic approach, on

the whole understanding money to mean a particular type of goods.

This approach dates back to the Marxist tradition, although these days

it is experiencing significant modifications.

Researchers in other countries treat money on the basis of a whole

range of theories, which should be categorised as follows:

1) on the influence of money supply on the economy:

• the quantitative theory of money;

• I. Fisher’s quantitative theory of money;

• the Cambridge version of the quantitative theory of money;

• modern/contemporary monetarism;

2) the functional theory of money;

3) the theory of the proper essence of money:

• commodity;

• metallic;

• nominalist;

• State, etc.

1 Comment of the official opponent on A. Yu. Gribov’s dissertation on the subject of «The

institutional nature of modern money and securities».

Methodological foundations of analysis...

13

The aforementioned theories explore those aspects of money and

money handling which are not examined in this study. Thus, the metal-

lic theory of money (T. Men, D. North, A. Montchrestien, K. Knies)

regard valuable metal money as the wealth of a nation. The quantitative

theory of money (C. Montesquieu, D. Hume, J. M. Keynes, I. Fisher,

M. Friedman et al.) dwells principally on the direct relationship be-

tween the growth of money supply in circulation and a rise in commod-

ity prices. The informational theory of money regards money as infor-

mation1.

As the main challenge of this study is the complex theoretical anal-

ysis of the nature of contemporary money and securities as a category

of economics, in order to show the contradictions between how they

are treated economically and legislatively, a particular methodological

approach is proposed.

The fact is that, on the one hand, money is an objective phenome-

non originating and developing as a result of the natural evolution of

commodity production, and on the other hand, its real forms are

strengthened by legislation, which is a prerogative of the State. Money

circulation and movement of securities is also regulated by the State.

In this study, an attempt is made to move away from the traditional

approach, as not one of the theories listed above can, on its own, serve

as a methodological foundation of analysis.

The first most important methodological principle is the pluralistic

conceptual approach, in accordance with which principles and tools of

exploration of several economic theories are used: the commodity,

nominalist, State and functional theories of money, as well as a number

of neo-institutional ideas.

In the commodity theory, money is regarded as a special kind of

universal commodity, which is used as a universal equivalent, and

through which the value of all other goods is reflected. Money is a com-

modity which performs a range of functions, and is, figuratively speak-

ing, «the good of all goods»2.

1 For more details see Dictionary and guide to contemporary money and monetary

institutes, by V. Yarovitskii. http://www.yur.ru/money/sprav/1.html ( Яровицкий В.

Словарь-справочник по современным деньгам и денежным институтам // http://

www.yur.ru/money/sprav/1.html)

2 B. A. Reisberg, L. S. Lozovskii, E. B. Starodubtseva. Modern Economic Dictionary.

( Райзберг Б.А., Лозовский Л.Ш., Стародубцева Е.Б. Современный экономический

14

Part I. Why is an institutional theory of money needed?

However, this is insufficient for a description of money, particularly

its modern forms. It is impossible, using only the tools of the commod-

ity theory of money, to discover the essence of financial money, such as

shares and other stock. Furthermore, the essence of a phenomenon can

never express the total wealth of its actual content and forms of mani-

festation. Therefore, our research is also based on the neo-institution-

al theory.

Neo-institutional theory and economic analysis of law

Unlike other economic theories, the neo-institutional theory anal-

yses economic categories as a result of the concerted actions of indi-

viduals. Economic categories such as money, goods and the market are,

from the perspective of this theory, the coordinated result of interaction

between individuals, consciously making specific concessions for each

other in order to achieve a goal and realising individual interests, which

could otherwise never be achieved.

It should be noted that economic theory, with the development of

different branches of neo-institutionalism, encompasses all the new

spheres of analysis — from legal matters to problems in making objec-

tive and democratic choices. «Economic imperialism» has even begun

to make accusations against it. Neo-institutional theory, which is made

up of multiple trends, does not contradict other trends in economic

theory, but, rather, fills their gaps.

As a methodological foundation for research, a new branch of neo-

institutional theory is applied in this study — economic analysis of law,

which was identified as an independent discipline in the mid 1960s.

R. Coase and R. Posner became key figures in the development of

economic analysis of law.

The works of G. Becker also had enormous significance for the

economic analysis of extra-market forms of conduct, criminality in

particular.

Economic analysis of law conducts analysis using economic methods,

but its fields of investigation include both the economy and the legal

sphere.

словарь // http://www.smartcat.ru/Terms/term_10234006.shtml)

Methodological foundations of analysis...

15

In Russia’s study of economics, the principles of economic analysis

of law are only just being applied, while in other countries, particu-

larly the USA, it has already become a powerful trend. Economic

analysis of law, which emerged in the 1970s, is now one of the most

influential trends in the study of the economy of the USA and other

western countries. There probably remains not one legal standard, nor

one single element of a legal system that has not been subjected to

economic analysis of law in recent times. In practice, this is conveyed

in the successive transfer of micro-economic analytical instruments to

non-market relations, one of which is law.

A classic work in the field of economic analysis of law is the book by

Richard Posner, «Economic analysis of law», published for the first time

on the USA in 1972. It was not translated into Russian and published

in Russia until 20051. Economists of this type have made a contribution

by proving that the legal system and matters of its function have clear

explanations within the framework of economic theory.

Economic analysis of law studies two types of problems: firstly, how

economic agents react to various legal establishments; and secondly,

how legal standards themselves change under the influence of eco-

nomic factors.

It is worth noting that our analysis of the interaction between the

economic and legal natures of money takes place in the course of eco-

nomic analysis of law, and so the mutual influence of the economic

nature of money and law will be examined.

The basic thesis of economic analysis of law consists in the following:

legal rules must imitate the market. According to American economist

J. Hirshleifer, the conceptual framework of economic analysis of law

comprises three theorems: the theorem of A. Smith, the theorem of

R. Coase and the theorem of R. Posner2.

1 R. Posner. Economic analysis of law: 2 vol. set, M., 2005. ( Познер Р. Экономический

анализ права: В 2 т. М., 2005) ( N.B. : R. Posner is not an economist, but a judge.)

2 J. Hirshleifer. Evolutionary models in economics and law: cooperation versus conflict strategies // Research in Law and Economics, 1982. Vol. 4. P. 2–4 (quote from

R.I. Kapelyushnikov. Economic theory of property law (methodology, basic concepts,

circle of problems). Moscow, 1991 ( Капелюшников Р.И. Экономическая теория прав

собственности (методология, основные понятия, круг проблем). М., 1991). //

http://lib.web-malina.com/getbook.php?bid=2197&page=10

16

Part I. Why is an institutional theory of money needed?

We shall examine the essence of these theorems, as well as the pos-

sibility of adapting them to our own study.

According to A. Smith’s theorem, voluntary exchange increases the

welfare of participants in a transaction. From this he concludes that

legislation must, as far as possible, encourage exchange, firstly, remov-

ing artificial barriers of any kind, and secondly, ensuring legal protec-

tion of voluntarily concluded agreements. Correspondingly, legislation

must ensure the safety of participants in contracts, that is, the investors

and the owners of securities, etc.

According to R. Coase’s theorem, all opportunities for a mutually

profitable exchange are fully concluded by the interested parties them-

selves, on the condition that transaction expenses are nil, and the

property rights precisely defined. Consequently, legislation must ensure

clear specification of property rights for all economic resources, such

as money and securities.

R. Posner’s theorem is linked with R. Coase’s theorem. It states

that when transaction expenses are positive, that is, when in the course

of the exchange objective obstacles arise, which prevent the achieve-

ment of effective results, different variants of the distribution of prop-

erty rights prove not to be of equal value from the point of view of the

interests of the company. As a result, legislation must elect and estab-

lish the most efficient distribution of property rights of all available

options.

Analysis of law according to R. Posner

Posner deducted a criterion of efficiency of legal decisions. In his

opinion, legal decisions must correspond with the criterion of economic

efficiency. He defines this criterion either as the «principle of maximi-

sation of wealth» or as the «principle of minimisation of transaction

costs». It is necessary to reform legal institutions only on the basis of

considerations of efficiency.

In the theory of economic analysis of law, the legal system begins to

reflect the market, and is regarded as a mechanism that regulates the

distribution of limited resources. A legal system must imitate the market.

Therefore, legal standards, like elements of the market, must be estab-

lished on the basis of considerations of efficiency.

Methodological foundations of analysis...

17

The following general requirements for a legal system result from

such an approach.

1. The law must facilitate a reduction in transaction costs, in par-

ticular, eliminating artificial barriers in the course of a voluntary ex-

change, and ensuring the execution of concluded contracts.

2. The law must also clearly define and reliably protect property

rights, thus impeding the transformation of voluntary transactions into

compulsory ones. The elimination of uncertainties in allotment of prop-

erty rights will lead to expansion of the field of voluntary exchange.

3. Legislation must elect and establish the most efficient possible

distribution of property rights, similar to what economic agents would

reach themselves, if not hindered by high transaction costs1.

The normative conclusions of economic analysis of law have already

begun to penetrate the judicial and legislative practice of many coun-

tries. Posner’s thesis on the «imitation» of the judicial system helps the

market to reveal and get rid of norms that prevent the economy from

working efficiently2. Leaning on Posner’s thesis, we shall compare the

economic and legislative interpretation of money and securities, in

order to expose the basic trends of overcoming inconsistencies between

them and thus to construct legal standards based on the criterion of

economic efficiency.

The selection of methods of legal protection of property rights must

also be directed by the criterion of economic efficiency. Posner sees a

legal analogy of the market in the case-law system. Within the frame-

work of this system, he claims, decisions are made by courts in general

in accordance with the criterion of economic efficiency3. In the gen-

eral mass of publications on the economic analysis of law, in concrete

examples of different precedents and legal standards, it is argued that

these precedents and standards were actually established in conform-

ity with the principles of economic efficiency.

As the economic analysis of law draws heavily on the neo-institu-

tional theory of property rights, which was developed in the second half

1 See: N.V. Yartseva, Modern Concepts of an Economic Idea: textbook ( Ярцева Н.В.

Современные концепции экономической мысли: Учеб. пособие) // http://irbis.

asu.ru/mmc/econ/u_sovrcon/4.4.5.ru.shtml

2 Ibidem.

3 See: R. A. Posner. Economic analysis of law. Boston, 1972. P. 102.

18

Part I. Why is an institutional theory of money needed?

of the XXth century by American economists and winners of the Nobel

Prize in Economics in 1991, R. Coase and A. Alchian, we shall dwell

on a few aspects necessary for our analysis. (American economists

Y. Barzel, H. Demsetz and R. Posner, amongst others, later actively

participated in the development and use of this theory.1)

The fundamental challenge posed by the theory of property rights,

as formulated by these western economists, consists in the analysis of

the interaction between the economic and legal systems. Property rights

determine which costs and remunerations agents can expect for their

actions. Restructuring property rights leads to changes in the system of

economic incentives, and the altered behaviour of economic agents will

be a reaction to these changes. This logic — from the structure of rights

through the incentives system to the behavioural consequences — is

clearly reflected in the analysis of the processes of specification or dilu-

tion of property rights.

The concept of property rights in the context of a new approach

extends to all rare goods. It encompasses powers over both material

objects and human rights.

Let’s single out the most important factor of this definition for us:

the theory of property rights uses the term «property rights», not «prop-

erty». Property is not a resource in itself, but property is formed by a

share of rights to use a resource.

Historical school of law

As economic ideas began to move into the field of law, legal ideas

began to move into the area of economics. At the onset of the nine-

teenth century, a new, so-called historical school of law was formed,

which opened the way to a different understanding of law. According

to this school, law is a product of life, which reflects only those relations

that are formed in reality.

The law changes whenever culture, national consciousness and a

way of life move forward. Through this point of view it is possible to

explain the meaning and essence of known problems, in order to be

1 For more details see: «Terminology of contemporary market economics» (Термины

современной рыночной экономики) // http://sre.mnogosmenka.ru/sre0721/sre0727.

htm

Methodological foundations of analysis...

19

aware of the real needs of active life, which must be regulated by them

(it is not clear what must be regulated and how). The dependence of law

on the economy is particularly manifested in the realm of civil law. Like

law, which regulates relations between parties as regards the ownership

of property, it is particularly intertwined with various factual peculi-

arities, which characterise economic life of this people in this day and

age.

For example, the more industry and trade are developed, the more

immovable property rights come into line with movable property rights,

and freedom of circulation, which characterises movable property,

gradually applies to immovable property as well. In the developed in-

dustrial and commercial way of life, various constraints are more and

more commonly/frequently revoked.

For a clear understanding of the legal system of society, apart from

studying resolutions of positive law, attention must be paid to actual

economic relations, which result in legal standards. Therefore, in order

to understand economic relations in a certain country, one must famil-

iarise oneself with the basic institution of law. Legal standards in rela-

tion to property and contracts are particularly important here. The

level of freedom of individuals, the boundaries and content of prop-

erty rights, conditions of concluding contracts — such are the main

categories of legal standards on which the system of the commercial

economy depends.

The inadequate economic competence of many leading Russian

legal experts and legislators, both in matters of fundamental political

economic theory and in the use of terms, has caused, first and foremost,

a woolliness of economic definitions in existing legal field in Russia and

a lack of economic expert examination of laws.

Evolutionary institutionalism

The evolutionary branch of institutionalism1, whose founder, Doug-

las North, became a Nobel Prize winner at the end of the 1970s, also

provides, in our opinion, the necessary theoretical basis for the analy-

1 Evolutionary institutionalism became firmly established as a particular trend in 1982,

when ‘An Evolutionary Theory of Economic Change’ by R. Nelson and S. Winter was

published. The book was published in Russian in 2000. Evolutionary changes in eco-

nomic literature in Russia and elsewhere are thoroughly examined: J. Shumpeter,

20

Part I. Why is an institutional theory of money needed?

sis of changes in legislation, concerning the treatment of modern mon-

ey and securities, which can be viewed as a particular case of the insti-

tution.

From the point of view of North and his followers, the evolution

(history) of the economy of different countries must be discussed from

the perspective of institutional changes. Institutions are the «rules of

the game» in any society, a restrictive framework which limits interrela-

tions between people, reduces the uncertainty of these interrelations,

and brings order to everyday life. «Institutes,» writes North, «create

basic structures, with the help of which people throughout history have

achieved order and thus lowered the level of their uncertainty»1.

According to North, the institutional environment evolves over time.

Institutional changes can occur spontaneously (then the informal rules

of the game change for separate economic subjects), and deliberately,

under the influence of the State, changing certain rules of the game2.

Russia’s market economy is coming into being, that is, institu-

tional changes are taking place. Moreover, they are not the result of

previous courses of development, i.e. the changes are revolutionary. In

the meantime transformation costs are springing up.

V. M. Polterovich notes that the most important factor of transfor-

mation expenses is disorganisation3. There are two aspects of this to

distinguish.

Firstly, in the process of reform, the old system is destroyed before

the efficiency of the new one becomes apparent. The manifestation of

this phenomenon of disorganisation represents the inadequacy of the

legislative treatment of money and securities in relation to their modern

economic nature. Market agents are settling in the private sector that

is being generated in anticipation of future revenue; however, only some

of them realise their expectations, since they can suffer losses as a result

R. Nelson and S. Winter, W. Rostow, M. Todaro, W. Lewis, R. Nureyev, V. Mau, A. Il-

larionov, S. Bessonov, D. North, R. Hardin, B. Weingast, P. Milgrom.

1 D. North. Institutes, institutional changes and functioning of the economy. Moscow, Nachala, 1997. P. 32.

2 For example, formal rules of the game borrowed from outside Russia do not correspond

with customs and traditions accepted in Russian society, and such borrowing cannot be

successful. Economic development is slowing down due to the predominance of local

informal rules.

3 V. M. Polterovich. On the road to a new theory of reform ( Полтерович В.М. На пути

к новой теории реформ) // http://ecsocman.edu.ru/ecr/msg/182837.html

Methodological foundations of analysis...

21

of the inadequacy of legislation in relation to the nature of modern

money and securities.

Secondly, there is a lack of coordination in the actions of different

agents, including the State, which does not provide market agents with

an efficient legal system in accordance with the criterion of imitation of

the market in law.

Inefficient stable standards of conduct are known as institutional

traps. These include barter, non-payments, insufficient guarantee on

deposits, and so on. V. M. Polterovich notes: «Countries with a devel-

oped market economy have different systems of market institutions.

Each of these has taken shape under the influence of the culture and

history of that particular country. With borrowing comes the danger

that institutional conflict may arise between standards that have taken

root and those that are being instilled. Sometimes institutional conflict

leads to the appearance of non-viable institutions — such as the law on

bankruptcy during a non-payment crisis. However, in many cases,

stable yet ineffective formations appear — these are mutants, which are

a type of institutional trap»1. In Polterovich’s opinion, «what is needed

is not a ‘strong’ but an ‘efficient’ government. Efficiency means the

development and maintenance of mechanisms to expose and integrate

public preferences, orientation towards goals shared by society, and the

ability to achieve them»2.

Economic agents have the right to request the State to create an ef-

ficient legal system. This position is substantiated within the framework

of the property rights theory, which was proposed by D. North. A State

can be seen as an agency that provides services in exchange for taxes:

«…we pay the government in order that it establish and protect prop-

erty rights»3. The creation of a legal system to protect property rights

requires the delegation of powers from the central authorities to its

agents. But the agents, naturally, will be opportunistic. Consequently,

the structure and conduct of bureaucracy (executors of the wishes of

the management) will be determined by transaction costs to control

it.

1 Ibidem.

2 Ibidem.

3 See: R. I. Kapelyushnikov. Economic theory of property rights (methodology, basic concepts, circle of problems). Moscow, 1991. // http://lib.web-malina.com/getbook.

php?bid=2197&page=10

22

Part I. Why is an institutional theory of money needed?

Our study of the essence and forms of money is also based on the

methodological historical method principle. According to this principle,

the concept of «money» as a scientific category is examined in histori-

cal development. Money only arises when market relations appear, and

evolves along with these relations. The development of this category

brought about the need to study it and, correspondingly, the appearance

of different scientific approaches.

As the methodological premise of our analysis, differentiation, on

the one hand, and the similarity between the concepts of «money» and

«securities» on the other, are used. This makes it possible to develop

unified principles of their legislative regulation.

In uncovering the economic essence of money, we shall adhere to

the following methodological principles:

• the study of the essence of money presupposes the exposure of its

internal characteristics;

• analysis of the essence of money must begin with its origin, i.e. with

defining the reasons and prerequisites of its appearance;

• the question of the essence of money must be examined in relation

to all transactions involving money.

The theoretical arguments listed contain general tenets concerning

the methodology of the study of the economic and legal aspects of

money and securities. It is necessary to add methodological approach-

es to concrete theoretical problems, and this will be done in the follow-

ing discourse.

Legal differences in the treatment

of objects and liabilities

An object has its own distinguishing signs, the most impor-

tant of which is the externally expressed material form of

an object.

d. V. Murzin1

There is a clear difference between property laws and liability laws.

The application of either standard is mutually exclusive.

1 D.V. Murzin. Securities — incorporeal goods. Legal problems with the contemporary

theory of securities. Moscow, 1998. P. 16 ( Мурзин Д.В. Ценные бумаги — бестелесные

вещи. Правовые проблемы современной теории ценных бумаг. М., 1998.

С. 16).

Methodological foundations of analysis...

23

When jus ad rem grants its bearer the opportunity to directly exert

influence upon it (when the object of the law is the article), the law is

called proprietary. In Rome, property law was closely related to propri-

etary interest, and ownership and other laws on other people’s articles

are closely linked to them. In cases where the subject has no direct right

to an article, but has only the right to demand that another party gives

him an article, this law is called contractual. Thus, differences between

proprietary and contractual laws develop according to the object of the

law: if the object of a law is an article, then we are dealing with propri-

etary law; if the object of a law serves the action (or abstention from

action) of another party, but the subject of the law may only demand that

an agreed action be completed (or abstention from the action), then this

is contractual law. In other words, various civil legal relations corre-

spond to defined groups of objects of civil rights. From this perspective,

differentiation between property and contractual laws holds great sig-

nificance, as it predetermines the differences in legal conditions for

concrete objects.

Unfortunately, nowadays attempts to merge the different legal pro-

cedures are not uncommon. Instead of onerous concessions of rights,

attempts are made to «buy and sell» «uncertificated securities», and to

consider shareholders as «holders of rights» to shares and «to rent inter-

est in land»1.

The classification of property rights into proprietary and contrac-

tual is not referred to among Roman lawyers, who spoke only of the

differences of property suits (actiones in rem) and personal actions

(actiones in personam). The differentiation between proprietary and

contractual laws was worked out later by legal experts, though based on

the materials that Roman lawyers had had. Nevertheless, the latter paid

attention to the fact that the legal position of a party holding proprietary

rights to an article and the legal position of a party entering into an agree-

ment with the owner of an article to the effect that the latter is obliged

to give him the article for temporary use are not the same. In the first

case, the owner has the opportunity to directly exert influence on the

article — to use it, destroy it, transfer it to another party, and so on

(‘directly’ in the sense of independently from any other party). In the

1 E.A. Sukhanov. Civil Law. Vol. 1. Moscow, 1998. P. 297 ( Суханов Е.А. Гражданское

право. Т. 1. М., 1998. С. 297).

24

Part I. Why is an institutional theory of money needed?

second case, the debtor’s rights to the article are limited, firstly by the

period of use which he has agreed with the owner (or the time when the

latter demands the article, if a concrete period of time has not been

stipulated), and, secondly, the need to return the article (that is, he may

not destroy or sell it).

The principal difference between the transfer of property rights (the

establishment of easement) and a party’s acceptance of the obligation

to transfer ownership of an article (carry out another action) lies in the

fact that the obligation of one party to grant another ownership of a

known article does not immediately create property rights to this article

for the other party. Only as a result of fulfilling such an obligation and

under other necessary conditions does the party who has acquired the

article become its owner. Only the right to demand transfer of the arti-

cle springs directly from the obligation. Therefore, the party who bought

the article still does not become its owner even on condition of payment

of the purchase price. This party only has the right to demand transfer

of the article to him, and only becomes the owner after the article has

actually been transferred and on the condition that the person who

transferred the article had property rights to it.

Thus the difference between proprietary and contractual laws that is

accepted in modern civil law, is also found (conditionally) among the

Roman lawyers. As a result of this difference in the object of law the dif-

ference in defence arises, which Roman lawyers expressed as a contrast

between property and personal actions. Modern law has come up with two

categories to express this idea: absolute and relative (Table 1).

This idea is based on the following principle: legal relations for

ownership of material goods by specific parties have an absolute na-

ture — the authorised holder of right is in opposition, so to speak, to

an undefined group of individuals (by all other parties) who are obliged

to refrain from any infringements of the law against his property and

not to hinder the realisation of his rights. The Roman legal experts also

considered that, since the object of proprietary interest is a physical

item and anyone can encroach upon it, proprietary interest must be

defended against every infringer of the law, whoever it may be; propri-

etary interest is used as an absolute defence against a personal action.

In contractual law, a party may request an individual or several pre-

cisely defined individuals to execute a particular action. Therefore,

Methodological foundations of analysis...

25

Table 1

Comparison of proprietary and contractual rights

Criterion

Proprietary interest

Law of obligation

Object

Article

Right to demand execution

of an action (or abstention

from it)

Influence of the

Direct

Request for influence

right-possessing

party

Nature of legal

Absolute — with regard to

Relative — with regard to a

relations

everything

strictly defined party or

group of individuals

Number of rights

Trio of competences:

Single competence:

with regard to object

Instruction

Request for defined action to

of law

Ownership

be executed

Use

Status of object of

Complex:

Simple:

law

Belongs to X

Exists or does not exist

In possession of Y

(logically — 1 or 0)

Used by Z

Period of legal

Indefinite (perpetual)

Definite (as a rule)

relations

infringers of contractual law are either one party or several specific

parties, against whom the subject of the law may bring a personal action.

Here, protection of contractual law is of a relative nature.

Having rented out a material object, the owner does not lose his

property rights to it. When intangible and immaterial receivables are

transferred, the creditor simply «quits», his relationship to this right

ceases, he completely withdraws from the legal relations.

Both in Roman and modern civil law, from the very beginning, a con-

tractual legal relationship was seen at its natural end as a means of fulfill-

ing a certain action within the fixed deadline. It differs in this way from

property rights, established for an indefinite, extended period of time. In

cases where a debtor deliberately does not fulfil his duties, the creditor

is granted legitimate means, that is, established by law, of compulso-

rily realising his right of demand. Such a method of forcing the debtor

to satisfy the demands of the creditor under a commitment in Rome

was a personal action or forced penalty. Ancient Roman lawyers also

defined a debtor as a party who whose debt could be recovered against

his will.

26

Part I. Why is an institutional theory of money needed?

Legal standards are a particular kind of judgement. Their content

reflects the wishes of a legislator in that duty of fulfilment about which

there is no doubt. In this sense, legal standards are true judgements.

But a judgement with internal necessity turns into a deduction which

is used to justify the judgement. «The transition of a judgement into a

deduction, which is a justification of its grounds, is a synthetic link,

a definite system of seniority, which is also a logical development»1.

Situations that arise in the course of the logical development of nor-

mative judgements must obviously also not provoke doubt with regard to

wishes concluded in them. The will and intention of a legislator, devel-

oped as a chain reaction — «judgement-deduction-judgement» — are

as reliable as their primary element — the standard of law, although we

must still always proceed from the fact that in publishing a normative

act, a legislator has thought through all its logical and factual conse-

quences and conclusions at which a body that applies the law may ar-

rive.

Drawing from the definitions:

• an entity is an object belonging to the material world;

• an obligation is the right to request a certain person to carry out

certain actions or to refuse to do so.

The right to request is immaterial; an entity, material.

Speaking in terms of logic, many entity-objects and liability-objects

do not overlap, or the application of property or contractual legal stand-

ards are mutually exclusive.

Using the following logical symbols — ∃ means ‘exists’, ∀ means

‘for any’, ∅ means ‘empty set’, ∈ means ‘goes into’, ∉ means ‘does not

go into’, ∩ means ‘overlap’, e means ‘entity’, E means ‘set of entities’,

1 S.B. Tsereteli On the system of logical development of idea forms // Voprosy philosophii.

1967. Issue 2. P. 79 ( Церетели С.Б. О системе логического развития форм мысли //

Вопросы философии. 1967. № 2. С. 79).

Methodological foundations of analysis...

27

o means ‘obligation/liability’, and O means ‘set of obligations/liabili-

ties’, we shall note:

E ∩ O = ∅

(1)

(∀e ∈ E) (e ∉ O)

(2)

(∀o ∈ O) (o ∉ E)

(3)

Correspondingly, the rules of circulation for entities must also be

applied to liabilities. Is it really possible to have a right of ownership to

a right of demand? Is it really possible to give to whomever the right to

temporarily use a right of demand? E. A. Sukhanov believes that «ob-

jects of property rights are a narrow concept, encompassing only goods,

i.e. items belonging to the material world.»1

Either there is a right of demand, or there is not. It can be trans-

ferred, but for several people to use such a right at the same time is not

possible, since it draws twice as many rights and corresponding obliga-

tions without agreement with the creditor upon a commitment.

Dualism of proprietary law and contractual law is caused by the

absolute non-identity of an article and a person.

There are principal differences in the treatment of objects and lia-

bilities.

Property rights, ownership, holding property, and instruction to right

of demand cannot exist, as the right is not a material object.

Personal actions are not applied to obligations, and suits forcing

fulfilment are not applied to goods, as goods cannot be compelled to do

anything — they are not spiritual beings.

In institutionalism and neo-institutionalism, the position conveyed

by Coase prevails, that on the market, material goods themselves do

not circulate, but rather bundles of rights to them, and it is precisely

these bundles of rights that reveal the real relations between economic

subjects in regards to material goods.

Let’s consider some examples of the formation of bundles of rights

with a monetary loan as an obligation and as an article.

An example of the formation of a bundle of rights with a monetary loan

as an obligation.

1 E.A. Sukhanov. Objects of property law // Law, 1995. Issue 4. P. 94 ( Суханов Е.А. Объ-

екты права собственности // Закон. 1995. № 4. С. 94).

28

Part I. Why is an institutional theory of money needed?

Let us assume that a certain X borrowed 100 US dollars from Y in

non-cash form for a term of five days and lost them on the second day.

On the third day X borrowed 80 euro from Z in non-cash form for a term

of one year (taking an exchange rate of 1 dollar to 0.8 euro). On the sixth

day there are the following legal relations — bundle of rights (Fig. 1):

1) contractual — X is obliged to pay Y 100 US dollars in non-cash

form immediately;

2) contractual — X is obliged to pay Z 80 euro in non-cash form in

360 days’ time;

3) contractual — the bank is obliged to pay X 80 euro in non-cash

form on demand.

Fig. 1. The legal relations that arise for a loan of money as an obligation

Protecting his rights, Y has the right to demand satisfaction from X’s

assets, which is expressed in the form of the right of immediate demand

to the bank for 80 euro, which the officer of the court on the decision

of the court withdraws by coercion from X bank and transfers to Y

bank.

Example of the formation of money as an object.

Let us assume that a certain X has borrowed from Y 1 kg of gold in

the form of an individually defined bar with Y’s stamp for a term of five

days and lost it on the second day. On the third day, X borrowed from Z

10 kg of silver in the form of an individually defined bar with Z’s stamp

for a period of one year (taking an exchange rate of 1 kg gold = 10 kg

silver). On the sixth day, when the deadline for payment by X has come,

there are the following legal relations — bundle of rights (Fig. 2):

Methodological foundations of analysis...

29

Fig. 2. The legal relations that arise for a loan of money as an object

1) proprietary — Y has the right of ownership to 1 kg of gold in the

form of an individually defined bar with Y’s stamp;

2) contractual — X is obliged to give Y 1 kg of gold in the form of

an individually defined bar with Y’s stamp immediately, as the period

of temporary ownership and use has elapsed;

3) proprietary — Z has the right of ownership to 10 kg of silver in

the form of an individually defined bar with Z’s stamp;

4) proprietary — X has the right to own and use 10 kg of silver in the

form of an individually defined bar with Z’s stamp for 360 days;

5) contractual — X is obliged to give Z 10 kg of silver in the form of

an individually defined bar with Z’s stamp in 360 days’ time.

Protecting his rights, Y does not have the right to demand satisfac-

tion from X’s assets, which are expressed in the form of 10 kg of silver

in the form of an individually defined bar with Z’s stamp, since the right

of ownership to these 10 kg of silver belongs only to Z, and nobody

except the owner has the right to remove this article from X 1.

1 To reassure the reader, let’s say that Y has the right to demand payment from X on account of the goods or other rights belonging to X upon his property right, for example, the right to own and use 10 kg of silver in the form of an individually defined bar with

Z’s stamp for another 360 days.

30

Part I. Why is an institutional theory of money needed?

These examples demonstrate the formation of different bundles of

rights and the difference in handling money in proprietary and con-

tractual form, thus showing that different forms of treatment exist for

different forms of money.

Part II

SECURITIES

Definition of the problem

It must be noted that the essence and nature of securities are being

examined exclusively for future use in the definition of the essence and

nature of forms of money such as banknotes and coins with nominal

value.

In Russia’s working legislation, there is no simple definition of the

concepts of «money» and «securities». Neither is there a precise indica-

tion of which rights — proprietary or contractual — must be applied in

relation to them. Although Article 128 of the CC RF states that «goods

including money and securities belong to objects of civil rights…»,

several instances where this norm is contradicted are to be found in the

texts of the CC RF and other laws.

Here are a few examples.

1. In the comments on Article 128 of the CC RF it is written that

«goods are material objects of the outside world»1. From this comment

it follows that so-called non-cash money and uncertificated securities,

defined in Article 149 of the CC RF, which do not exist in material

form, for precisely this reason cannot be goods. However, on the other

hand, Article 128 of the CC RF makes no difference between paper

securities and non-documentary ones, putting both in the category of

goods, which is incorrect.

2. Paragraph 3, Article 302 of the CC RF denies the possibility of

using replevin in relation to bearer money and securities: «Bearer mon-

ey and securities may not be obtained on demand from a conscientious

acquirer.» But according to the law any right of ownership is protected

by replevin. It turns out that one of the most important actions in rem

does not apply to money and bearer securities, which forces one to

doubt the correctness of their being attributed to the category of

goods.

1 Commentary on the Civil Code of the RF, Part I / Resp. editor O. N. Sadikov. Moscow,

1995. P. 179.

32

Part II. Securities

3. Paragraph 2, Article 144 of the CC RF states: «The absence of

obligatory/binding properties of a security or the disparity of a secu-

rity with form established for it implies its worthlessness». But how can

an object be worthless? This concept is only applied to an obligation/

liability.

4. In paragraph 2 of Article 147 of the CC RF it is claimed that

«refusal to fulfil an obligation, a certified security, with regard to a lack

of grounds to the obligation or to its invalidity, is not allowed». This is

a direct indication of the contractual, and not proprietary, nature of a

security.

5. In Article 816 of the CC RF it is written that «in cases that are

provided for by a law or other legal acts, a loan agreement can be con-

cluded by means of the issue and sale of bonds.» This indicates the

contractual, and not proprietary, nature of a security.

6. If a security is an entity (according to Article 128 of the CC RF),

and a share is a security (according to Article 143 of the CC RF), then

a share is an entity. However, Article 48 of the CC RF defines the rela-

tionship of participants to the property of an economic society as con-

tractual.

7. If a bill (B) is a security (according to Article 143 of the CC RF)

and a bill is an obligation (according to the Convention on a uniform

law on derivative and simple shares and Article 815 of the CC RF), then

some securities are obligations, which contradicts Article 128 of the CC

RF, which classifies securities as entities.

As the rules of an international agreement take priority over the rules

of an internal agreement (paragraph 4, Article 15 of the Constitution

of the Russian Federation, Article 815 of the CC RF), Article 128 of

the CC RF contradicts the legislation in terms of attributing promis-

sory notes, like securities, to entities.

Accepting the logical evidence, it can be established (B — bill, S —

security) that:

B ∈ O,

(4)

i.e. a bill belongs to the set of obligations (source — Convention on a

uniform law on derivative and simple shares);

B ∈ S,

(5)

i.e. a bill belongs to the set of securities; consequently,

definition of the problem

33

O ⊂ S,

(6)

i.e. the set of obligations and the set of securities overlap; consequent-

ly, by induction

∃ s ∈ O,

(7)

i.e. there are some securities that belong in the set of obligations and

∃ o ∈ S,

(8)

i.e. there are some obligations which belong in the set of securities (are

obligations/liabilities).

However, based on Article 128 of the CC RF:

∀ s ∈ E,

(9)

i.e. any security is an entity.

Then from the fact that

∃ o ∈ S,

(8)

and

∀ s ∈ E,

(9)

it follows that:

∃ o ∈ E,

(10)

i.e. there are some obligations that belong to the set of entities, which

contradicts the following:

∀ o ∉ E,

i.e. any obligation does not belong in the set of entities (see (3)).

Then we see that (4) contradicts (9), and in conflict (4) is higher

than (9).

Therefore, assertion (9) is false.

8. Knowing that non-cash money is a liability, and not an entity, we

reach the logical verdict that:

• ownership is only a proprietary category;

• for a loan (Article 807 of the CC RF), money is transferred into the

ownership of the debtor;

34

Part II. Securities

by deduction

Article 807 of the CC RF (loan) regulates only the loan of goods

(not liabilities);

non-cash money is not an entity (but a liability);

by deduction

Article 807 of the CC RF (loan) does not regulate relations with

non-cash money

and

• ownership is only a proprietary category;

for commercial credit (Article 823 of the CC RF), money is trans-

ferred into the ownership of another party;

by deduction

Article 823 of the CC RF (commercial credit) regulates only the

commercial credit of an entity;

Article 823 of the CC RF (commercial credit) does not regulate

commercial credit of non-cash money.

9. Why is a loan agreement (contract) an obligation, whereas bonds

are an entity? After all, they express practically the same content and

differ only in form.

10. Having traced the history of the development of literal contracts

(receipts), we can see that the development of circulation transformed

them into promissory notes. But in Roman law, literal contracts were

related to contractual law, while the CC RF applies property law to

promissory notes (like a type of security).

So which laws and actions can we use in relation to securities? If the

answer is proprietary, that means that there is a right of ownership for

securities and personal actions can be applied to them. But if securities

are recognised as an obligation, then property law and personal actions

for securities are not suitable, but rather receivables and actions char-

acteristic of liabilities are applicable.

definitions of securities in legislation outside russia

35

Definitions of securities

in legislation outside Russia

Nobody has yet succeeded in understanding the notion of

securities either in life, in science, or in legislation.

G. F. Shershenevich

In common law there is no precise definition of the essence of a se-

curity; only unifying concepts of securities are given.

The UK

The term «securities» means stocks, securities and shares ( Settled

Land Act, 1925, paragraph 117).

As applied to a legal entity, «securities» means all types of shares,

share capital, bonds, preferred shares and other securities of a similar

type, which are used by legal entities ( Transport Act, 1962, para-

graph 92).

«Securities» is understood to mean shares, share capital, bonds,

preferred shares, loan capital, promissory notes, or a share in a collec-

tive investment scheme, in accordance with the provisions of the Fi-

nancial Services Act, 1986, and other types of securities ( Stock Transfer

Act, 1963, paragraph 4, taking into account the provisions of the Finan-

cial Services Act, 1986.

‘The main meaning of the word «securities» is not open to doubt.

The word denotes a debt or claim the payment of which is in some way

secured. The security would generally consist of a right to resort to some

fund or property for payment, although in this case we can exclude

other forms of debt (particularly guarantees offered by a physical per-

son). Nevertheless, in any specific case, the use of the word or phrase

in its main sense provides for some form of secured liability (Singer V.

Williams [1921] AC 41, 49, HNL, per Viscont Cave).

The USA

The term «security» is understood to mean all types of promissory

notes, share capital, treasury shares, guarantees, evidence of debt,

certificates attesting to the owner’s share in a company’s revenue or

participation in any kinds of agreements on division of profit, certifi-

cates of the guarantee of other companies by securities, certificates of

36

Part II. Securities

preliminary agreements or subscription certificates (provisional sub-

scription certificates), transferred shares, investment contracts, voting

trust certificates, indivisible share participation relating to rights to

extract oil, gas and other useful minerals or all types of interest or means

of payment as a whole, known as «debt security», or certificates attest-

ing to the owner’s share in a company’s revenue or his participation in

any provisional certificates, receipts, guarantees or rights to subscrip-

tion or acquisition of any of the aforementioned obligations ( Securities

Act, 1933, paragraph 2 (1)).

A rather incomprehensible definition of the essence of a security is

to be found in the Uniform Commercial Code of the USA (para-

graph (c), pages 8–102):

«A security is either documentary or non-documentary. If a secu-

rity is documentary, the terms «security» and «documentary security»

can mean either an intangible property interest, or a document which

represents such an interest, or both of these depending on the con-

text.»

Other countries

Germany’s Civil Code and Trade Code do not contain a clear defi-

nition of a security.

Only in the Code of Property Law of the Swiss Confederation is

there a more-or-less decent definition of the essence of a security (Ar-

ticle 965):1

«A security is any document to which a right is related in such a way

that one cannot lay claim to it and one cannot transfer it to another

party without said document».

1 Artikel 965 des Schweizerischen Obligationenrechts // http://www.admin.ch/ch/d/

sr/220/a965.html

Securities as an economic category and legislative treatment...

37

Securities as an economic category

and legislative treatment of them

Entities are not simply material objects, but material objects

whose source of value is their natural useful properties. The

source of value of documents1(including securities) is infor-

mation, that is, social rather than natural qualities.

V.a. Byelov

The origin of securities as a particular object of property turnover is

linked to the historical period when people needing to transfer large

quantities of goods and money were faced with a lack of economically

justified means to make such a transfer.

Lawyers found a solution as long ago as 6–5 B.C., when they had

the sense to convert the very documents that certified concrete transac-

tions into a special kind of commodity, a special value system, that

coincided neither with goods in the proper sense of the word nor with

money. Until transaction documents were completed in the form of clay

or wax tablets, or on papyrus or parchment, they were not widely in

circulation.

Paper was invented in the 6th century in China, and in the 9th and

10th centuries, its method of production became known in Western

Europe. It was then, under conditions of a natural economy and feudal

division, a long way away from a market economy, that paper docu-

ments concerning concrete transactions received general recognition

and distribution as a particular object of economic circulation.

Types of securities

Securities are shares, bonds, promissory notes and other (including

derivative) certificates of property rights (rights to resources), which

have been separated from their basis and are recognised in this capac-

ity by legislation.

The federal law dated 29 April 1996 No. 39-FL «On the securities

market» specifies that «…a security…is characterised… by the following

indicators: it secures the aggregate of property and non-property rights

subject to certification, concession and unconditional execution in

accordance with the forms and order established by this federal law».

1 Including agreements (contracts)

38

Part II. Securities

There is also a definition of a security in Article 142 of the CC RF:

«A security is a document1 that certifies…property rights…».

However, it follows from this that there is a mistake in Article 128

of the CC RF, which places securities among goods, as a document

which reflects a law of obligation vested in it is an obligation, but not

an object.

In paragraph 2 of Article 147 of the CC RF, the contractual nature

of securities is directly referred to: «Refusal to fulfil an obligation certi-

fied by a security, with reference to the obligation’s lack of foundation

or its invalidity, is prohibited».

We understand goods to mean material objects of the external world.

They include both objects of material and spiritual culture, that is,

products of human labour, and objects created by nature itself and used

by people in their life’s work — land, useful minerals, plants, and so

on.

The most important characteristic of goods, due to which they are

also becoming objects of civil law, is their capacity to satisfy all sorts of

human needs.

Each type of legal relations with different types of property, as a rule,

corresponds to its own type of security, which in turn can play a part in

civil transactions (Table 2).

There are dozens of types of securities. They are distinguishable by

the rights and obligations, which are vested in them, of the creditor

(purchaser of the security) and the issuer of the securities. However,

not all of them are distinguished when reflected in business accounts

(a few types of securities that have similar features can be singled

out).

In accordance with Article 143 of the CC RF, the following count

as securities:

1 Federal Law No. 77-FL on legal deposit copy of documents, dated 29 December 1994,

defines a document as «a material bearer with information stated in it in the form of a

text, sound recording (phonogram), image or combinations of these, designed to be

broadcast in time and space for the purposes of public use and storage» (Article 1).

Federal Law No. 149-FL on information, information technology and the protection

of information, dated 27 July 2006, states that «documentary information is stated in a

material bearer by means of documentation of information with properties which allow

the definition of such information or, in cases established by the legislation of the Rus-

sian Federation, its material bearer…» (Article 2).

Securities as an economic category and legislative treatment...

39

Table 2

Correspondence of types of property and securities

Types of resources

Corresponding securities

Land

Mortgage (mortgage certificate), shares in land

Real estate

Mortgage, privatisation voucher, housing certificate

Production

Bill of lading, circulating warehouse certificate

Money

Bond, banknote, promissory note, deposit or savings

certificate, cheque, etc.

Stock

Shares (ordinary, privileged)

Derivative securities — derivatives (indices, options,

futures)

1) government stock;

2) bonds;

3) promissory notes;

4) cheques;

5) deposit and savings certificates;

6) savings bank books payable to the bearer;

7) bills of lading;

8) shares;

9) privatisation securities;

10) other documents which fall into the category of securities ac-

cording to laws on securities or order established by such laws.

Bond — this is a security that certifies the right of the holder to re-

ceive from the party that issued the obligation, within the specified

period, the nominal value of the bond or some material equivalent.

A bond also grants its holder the right to receive the interest stated in it

on the nominal value of the bond or other proprietary interest (Article

816 of the CC RF). A bond can provide for other proprietary interest

of the holder, if this does not contradict the legislation of the Russian

Federation. Bonds can be issued by the State, and by private companies

in order to raise loan capital (Article 2 of Federal Law No. 39-FL on

the securities market, dated 22 April 1996). Bonds provided by a mort-

gage give their holders an additional guarantee against loss of their

funds, as a mortgage gives the owner of the bonds the right to sell mort-

gaged property in the event that a company is not in the position to

realise due payments. However, unsecured bonds also exist, which are

debt securities based only on trust in the credit rating of a company, but

40

Part II. Securities

not guaranteed by any property. Such bonds are issued by companies

in a stable financial position.

Bill/Promissory note — this document certifies the in no way stipu-

lated obligation of the drawer of the bill (promissory note) or of any

other payer mentioned in the bill (bill of exchange) to pay borrowed

monies at maturity of the bill (Article 815 of the CC RF).

Cheque — this is a security containing an unspecified order of the

issuer to the bank to effect payment to the holder of the cheque of the

amount specified in the order. Only the bank where the issuer holds

funds, which he is entitled to manage by issuing cheques, can be listed

as the cheque payer (Article 877 of the CC RF).

Savings (deposit) certificate — this security certifies the sum of an

investment in a bank and the right of the investor (certificate holder)

to receive the sum of the investment upon the expiry of a set date as well

as the interest, stipulated in the certificate, at the bank which issued the

certificate, or at any subsidiary of this bank. Savings (deposit) certifi-

cates may be bearer certificates or nominal certificates. In the event of

premature presentation of a savings (deposit) certificate for payment

by the bank, the sum of the investment and interest are paid for call

deposits, if a different rate of interest has not been set by the conditions

of the certificate (Article 844 of the CC RF).

Share — this is an equity security which secures the rights of its

owner (shareholder) to receive part of the profits of a joint-stock com-

pany in the form of dividends, to participate in the management of the

company, and to own part of the stock remaining after its liquidation

(Article 2 of the Federal Law «On the securities market»).

A whole range of secondary securities ( derivatives) also exists, which

secure the rights and obligations of the issuer and the investor in relation

to the fulfilment of certain operations with securities. This kind of se-

curities includes options, futures and indices.

Option — this is a short-term security, which grants its owner the

right to buy or sell another security during a specified period for a fixed

price to a contracting party which, for a price, takes on the obligation

to realise this right.

Financial futures — these are standard short-term contracts for the

purchase or sale of a certain security for a fixed price on a fixed date in

Securities as an economic category and legislative treatment...

41

the future. If the owner of an option may waive his right, having lost

the cash bonus which he paid to the contracting agent, then the futures

contract is compulsory for the subsequent performance.

Characteristics of securities

In accordance with the law and customary business practices, a

document which certifies title of ownership and which meets the fol-

lowing requirements is usually recognised as a security:

• negotiability;

• availability for civil transactions;

• commonality of forms and properties.

Negotiability — this is the capacity of a security to independently

participate in civil-legal transactions through simplified procedure, for

example, by performing an endorsement or simple transfer of a bearer

security (Article 146 of the CC RF).

Negotiability indicates that a security exists as a special commodity

which, consequently, must have its own market with organisation dis-

tinctive to it, codes of practice, and so on. Most of those resources,

whose owners’ rights are reflected by securities, must also belong to the

market as goods.

Availability for civil transactions means that a security must represent

title of ownership: for example, commodity circulation of weapons,

pharmaceuticals, and so on is restricted.

Commonality means that a security must have clearly standardised

properties that are defined by law (face value, place of issue, etc.). It is

precisely this which simplifies the circulation of goods and gives it State

protection.

N. O. Nersesov on securities

The founder of Russian theory on securities, N. O. Nersesov, wrote

at the end of the 19th century:

«Bearer securities ( Inhaberpapiere, les titres au porteur) comprise

one type of securities. Therefore an account of the study of bearer se-

curities would be a useful preface to some preliminary words on the

legal nature of securities in general. The very term «securities» ( Werth-

papiere, les valeurs or les effets) until now has not had a precise defini-

42

Part II. Securities

tion, either in spoken language or in legislation. Additional terms are

needed to describe the concept of securities, such as interest-bearing,

credit, monetary and commodity securities. But none of these are no-

table for their accuracy. Not every security bears a particular interest,

like, for example, a bill of lading, invoice, warrant certificate, tickets

for travel by rail and sea, theatre and concert tickets, and so on. In

other words, not every security is interest-bearing. Furthermore, not all

securities are based exclusively on an obligation, i.e. they do not all

grant the legal owner the right of demand from a particular debtor; as

do shares, for example. Consequently, the term « credit securities» does

not embrace all types of securities.

There is a multitude of securities of which the subject is not a spe-

cific sum of money, but rather some kind of entity — such as all the

traditional securities: bill of lading, invoice, warrant certificate; there-

fore, the term « monetary securities is not a well-founded one. Finally,

not every security is at the same time the object of trade transactions,

such as, for example, dinner and theatre passes, etc.; thus the term

« commodity securities» also proves to be inaccurate.

In legal literature the term «securities» is fairly widely used, espe-

cially from the second half of this (19th — note by the Editor) century

onwards. But there is much disagreement among lawyers on the ques-

tion of the concept of these securities. Some confine the concept of

securities to order securities and nameless securities; others include

registered securities ( Rectapapiere), such as, for example, nominal

shares. Some exclude passenger tickets, dinner passes, entrance tick-

ets to public shows, etc., from the concept of securities. Hahn, a com-

mentator on the German Civil Code, even includes paper money and

postage stamps in the category of securities. Famous commercialist

Thol considers securities to be any documents with proprietary-legal

content, so in this he includes a freight letter, a broker’s note and a

loan obligation. Endemann regards securities as representatives of

value ( Werthtrager). According to him, the security itself has no real

value, like any other physical object, but is a bearer of value. The

value is based on trust that the debtor (the issuer of the document)

will fulfil his promise. Therefore, the value of similar document is

based on credit. Endemann counts as securities, among others, State

paper currency, which is also a representative of value, as it embodies

Securities as an economic category and legislative treatment...

43

the opportunity to be realised (exchanged for metal coins) in the fu-

ture.

The most widespread definition is that securities are an obligation

embodied in a document ( verkörperte Forderungsrechte).

Brunner opposes this definition. He says that rights cannot have a

body in which they are personified. Following this theory, one has to

distinguish between corporeal and incorporeal rights ( körperliche und

unkörperliche Rechte). But Brunner’s observation is more witty than es-

sentially correct. In saying that an obligation is embodied in a document,

lawyers aim to point out the close link between the law and the document,

and the considerable significance of this for the law that results from it,

an idea which Brunner himself expresses in his final pages.

Knies’ definition differs in its comparatively high precision. Having

analysed the distinguishing features of securities, he arrives, finally, at

the following descriptive definition: a security exists when a right is so

closely linked with a document that its owner may demand realisation

from the counter party. Just as ownership of an object is transferred

through the extradition of said object, so the right of demand to a

specified sum of money or a certain commodity in another’s possession

changes through the transfer of a security whose contents consists of

the cited sum of money or commodity.

There is a similar discrepancy in opinions due to the lack of a precise

definition of the legal nature of securities. The majority of lawyers either

do not dwell on this question at all, or give an imprecise definition.

Essential characteristics of securities

Instead of giving a definition of securities in several words, we shall

point out their essential characteristics.

Securities become such as a result of the right that lies in the docu-

ment. The document itself has no value (not taking into account the

material, of course); the value only comes from the right which the

document expresses. Therefore, the essence of securities is that connec-

tion that exists between said right and the document.

Therefore, the first essential feature in the concept of securities is

that they are documents about individual rights1. A document concern-

1 The author believes that a security can also define public law (a government bond is an

obligation of the Ministry of Finance).

44

Part II. Securities

ing civil law can have threefold significance: the establishment, trans-

fer or realisation of a right. A document by means of which a right is

established may, in turn, have double significance: either it serves as a

simple means of proof, a surface form of the legal act, or it has con-

siderable significance for the origin of this right ( corpus negotii), as

without the document there is no right. It is essential for the concept

of securities that a right is closely linked with the document, and that

ownership of the document is considered a necessary condition for

the accomplishment of the aim for which the document serves. It

follows from this that a document, as simple proof of the establish-

ment of such legal relations, cannot be regarded as a security, if only

realisation or transfer of the right are not granted through ownership

of the document.

Thus it is essential for the concept of a security that a document has

considerable significance either for the origin, or the transfer, or the

realisation of the right.

Securities arise principally in the interests of facilitating the transfer-

ability or realisation of a right, but attention can also be drawn to a type

of security in which the aspect of circulatability is lacking: for example,

nominal shares, the transfer of which is normally carried out according

to the principles of cessio. Nevertheless, they are securities, because ownership of the document is considered an essential aspect in the

matter of using the right associated with that share. This can also be

said of other types of registered documents of commodity circulation

( Rectapapiere).

The abovementioned essential aspect of the concept of securities

(with the ownership of a document, the realisation of its rights are

begun) determines the following logical consequences.

1. The property of the creditor in relation to securities is based on

the moment of formal legitimisation, that is, the creditor is considered

to be whoever has ownership of the document, and ownership, in turn,

is governed by legitimate possession of the document. Legitimate pos-

session here is the irrefutable assumption of the rights of ownership

( praesumptio juris et de jure). The debtor, fulfilling his obligations in the

name of the owner, is freed from further responsibility, although it

subsequently proved that the document passed to the owner not from

the proprietor. The latter has only a personal action against the direct

Securities as an economic category and legislative treatment...

45

infringer of his rights. For example, a depository sold bearer securities

that were in his custody or got reparation for them from the debtor. In

the first case, the rights of ownership to the document and the rights

linked to it are transferred to the bona fide purchaser, and in the second

case, the debtor is definitively freed from further responsibility. The

depositor, whose interests were infringed by similar actions of the de-

pository, may seek damages only from the latter as a direct infringer of

his rights.

2. Securities cannot be liable to vindication in accordance with the

principles of civil law. The very use of vindications for securities has a

different meaning, as the objective of such a replevin is not the return

of the document as such, but the recovery of the rights closely linked

with it. Moreover, the rigorism of this regulation is relaxed by special

decree of positive legislation.

3. In the event that a document is lost or destroyed, the right con-

nected with it must also discontinue. Positive legislation makes it pos-

sible in such cases to recreate the previous status through amortisation

or cancellation of the lost document and payments in exchange for a

duplicate.

4. Document ownership is also considered a necessary condition for

transfer of the right to it, regardless of whether it is a matter of transfer-

ring rights of ownership or of establishing a mortgage right»1.

Securities as unilateral contracts

In essence a security is none other than a unilateral contract2 con-

cluded in a single copy, in which one of the parties may be changed with-

out the agreement of the other party (freely traded obligation). «Let us

note that negotiability is a very important legal characteristic. The dif-

ference between a traded security (bond, promissory note) and a simple

debt payment lies in the lack of formalities such as notification of the

debtor. The purchaser conscientiously, for a price, acquires the legal

1 N.O. Nersesov. Representation and securities in civil law. Moscow, 1998. P. 138–142

( Нерсесов Н.О. Представительство и ценные бумаги в гражданском праве. М.,

1998. С. 138–142).

2 A security must be regarded as a unilateral contract, as the will of only one side — the

issuer — is needed for its issue, while another side — the holder — is needed for its

circulation.

46

Part II. Securities

title of holder of the traded security, which is free of any defects. By

contrast, a simple assignor of a debt acquires only such a title as was

actually held by the assignee, and is subject to any actions of third par-

ties.

Thus circulatability ensures «pure» relations between each subse-

quent holder of the security and the issuer»1.

In support of this theoretical premise of circulatability, the CC RF

claims that rights cannot be certified by a security that is inextricably

linked with the identity of the creditor, particularly claims for alimony

and reimbursement of damages caused to life and health.

Jhering states that a bearer security is only legally a secure means of

establishing ( Begrundung) an obligation2.

Nersesov quotes the theory of a unilateral promise as the source of

bearer securities: «Securities arise due to the one-sided actions of a

debtor, who prepares a document, signs it and in so doing creates a new

value. The conditions of validity of the document must be served ex-

clusively on behalf of the debtor. However, the document, while it re-

mains in the hands of the debtor, does not have value, it is only a piece

of paper, and only acquires value upon transfer into the hands of an-

other. The wishes of the latter (the acquirer) are circumstantial and play

a subsidiary role or, rather, this second aspect is a condition ( conditio)

under which said security acquires legal validity. Thus the document as

such is considered valid due to the will of the debtor unilaterally rep-

resented in it, but its practical effect is frozen until it passes into the

hands of the acquirer»3.

The evolution of contracts into securities

Particular attention should be paid to the fact that such contracts

are unilateral only and in them the issuer always gives the obligation,

while the holder is always the «creditor». It is important to note that

real contracts of this type can instantly be drawn up in the form of a

security, whereas consensual contracts are presented in such a form as

1 Clifford Chance: Review of the issue of Eurobonds. 1997. March.

2 N. O. Nersesov. Aforementioned work. P. 201 ( Нерсесов Н.О. Указ. соч. С. 201).

3 Ibidem. P. 200.

Securities as an economic category and legislative treatment...

47

a result of the fulfilment by the «creditor»-holder of his (usually first)

obligation.

From our reasoning we arrive at the diagram shown in Fig. 3, from

which it follows that:

• a share is a document that forms an actual contract on pooling of

capital after a shareholder’s deposit of money or other valuables, in

which the shareholder party may change without the agreement of

the other side (issuer) — a legal party in the form of a joint-stock

company;

• a bond is an actual loan agreement of objects of law — money, where

the creditor party may change without the agreement of the bor-

rower (issuer);

• a warrant certificate is an actual storage contract where the warrant

holder may change without the agreement of the (issuer) warrant

giver;

• a bill of lading is, in its own way, a «transport» storage contract,

which differs from a warrant certificate in regard to the place of

storage: it is an object of transport (ship, train, aeroplane, etc.),

travelling in time and space;

• a bill/promissory note is an abstract literal contract, where the bill

holder (creditor) may change without the agreement of the bill

giver (issuer) by means of an endorsement, and the borrower can

change without the agreement of the holder by means of acceptance

(sometimes collateral security).

Section IV of the CC RF, «Individual types of obligations», cor-

roborates this, stating that securities certify property rights resulting

from contracts including loan agreements (Articles 815–817), bank

deposit agreements (Article 844), cheque payment contracts (Article

877) and warehouse storage agreements (Article 912).

It should be noted that rights certified by a security are never cor-

poreal, but are always of a contractual nature, as they define legal rela-

tions between two parties.

«Bearer securities are literal contracts of modern law»1.

«A transfer note, assignatio and other such legal relations also rec-

ognised by our legislation demonstrate the possibility of acquisition by

1 N. O. Nersesov. Aforementioned work. P. 199.

48

Part II. Securities

Fig. 3. The evolution of contracts into securities

Securities as an economic category and legislative treatment...

49

an outside party of the right of demand from a contract concluded by

others»1.

The emergence of securities simplified the certification of ownership

of rights to a defined entity (legitimisation). Legitimisation using a

security must be accomplished exclusively by formal methods, which

obliges one not to take into account any other circumstances, even

those that discredit the owner of a document (therein lies the feature

of public reliability of a security). In relation to a security, the debtor

does not have the right to verify whether the party demanding fulfilment

is his creditor. In order to free himself from responsibility associated

with the security, the debtor must fulfil the requirement of the party

that is responsible according to the officially established formal indica-

tors.

So, powers in relation to a bearer security belonged to its actual

owner, while powers for registered and order securities belonged to the

owner of the corresponding document with an indication of the owner

as the first acquirer or endorsee (originally registered securities, as a

rule, could be transferred using endorsements on general foundations

with order securities). Therefore to transfer rights it was necessary only

to complete the procedure required and sufficient for future legitimisa-

tion of the acquirer of rights before the debtor for a security. Such a

transfer could take place by means of a simple delivery of the document

(security with or without an endorsement) to the acquirer of rights.

Bearer securities as complex legal relations

In any registered (order) security, the holder is defined by an indica-

tion of an individual sign of the party — name or title (sometimes ad-

dress). Only in a bearer security the bearer’s right of ownership signifies

the right to make demands to the issuer — and this is an exceptional case.

The second paragraph of Article 142 of the CC RF is only applied in

this exceptional case: «With the transfer of a security, all of its rights are

transferred in aggregate», because in an unethical transfer of a registered

security, rights of claim towards the issuer remain with the previous

holder of the security.

1 Ibidem. P. 146.

50

Part II. Securities

But even in this exceptional case, there is an argument for recognis-

ing a bearer security as an obligation. The fact is that the very word for

bill/promissory note in Russian — вексель (vieksiel) — arrived in the

Russian language from German, in which it is pronounced very simi-

larly — Wechsel. The primary meaning of the word Wechsel is exchange.

In this case it is translated as «exchange document», «that which can

be changed». And, of course, in English it is translated as promissory

note. Thus, in the English language, the very concept of the promis-

sory note is formed from the nature of an object, and a ready-made

foreign (German) name arrived in Russia, which did not disclose its

nature.

By analysing this problem a little more thoroughly, we see that a

bearer security is a derivative security, the simplest derivative.

Unfortunately, the existence of complex securities is not mentioned

in the CC RF, and neither do securities as futures, forwards, converted

contracts for the supply of exchange goods, index securities and more

complex futures for index securities feature in Russia’s legal sphere.

Let us compare the legal relations shown in Figure 4.

«From our definition of unnamed documents, it is clear that the

bearer form is the last step in the historical process of facilitating meth-

ods of transfer of obligations. A lot of time had to pass between the

unconditional non-transferability of obligations, which was the case

for all peoples at the first level of legal development, and equating them

with real objects through bearer forms»1.

Only in such an exceptional case (bearer securities) is the following

opinion justified:

«If we examine unnamed documents at the crucial moments of their

existence, i.e. at the beginning (when they come into being) and at the

end (when they are satisfied), then they become obligatory relations

( obligatio); and if we examine them in their period of existence in ma-

terial turnover (in circulation, negotiations), then they become real

objects, like each res»2.

We can note here that when such an «unnamed» security is in cir-

culation, people make use of the rules that are applied to objects, but

the nature of these securities nevertheless remains obligatory.

1 N. O. Nersesov. Aforementioned work. P. 22.

2 Ibidem. P. 205.

Securities as an economic category and legislative treatment...

51

Figure 4. Legal relations that arise through the circulation

of registered and complex securities

«When it is necessary to deal with bearer securities while they are

being circulated in civil turnover, the standards of proprietary law must

be applied to them. Unnamed documents can be the object of posses-

sion, ownership, mortgaging and so on. The right of ownership to them

is acquired in the same way as the right of ownership to personal prop-

erty is acquired. Possession here is assumed at conscientious ownership;

this assumption is irrefutable ( praesumptio juris et de jure). To put it

simply, for bearer securities, as for securities in general, one must make

a distinction between the right to a document and the right from a docu-

ment. The first is provided for by conscientious acquisition of the doc-

ument, the second, by simple, factual ownership; the first is dealt with

in accordance with the rules of proprietary law, and the second in ac-

cordance with the rules of law of obligations.

52

Part II. Securities

The legal basis of the origin of bearer securities is the unilateral

promise of the debtor; in order to acquire the rights from these it is

necessary to own the document.

Bearer securities are unilateral formal obligations in circulation, like

real entities»1 (Fig. 5).

«Some institutions of civil law are, so to speak, caught between pro-

prietary law and law of obligations. This also relates to bearer securities.

By some characteristics they are subject to the definitions of law of

obligations, and by others, to proprietary law»2.

Let it be repeated once again that the above relates to bearer securi-

ties only, and in no way applies to registered securities.

Inadequacy of economic nature and modern

legislative treatment of securities

«It would not be wrong for us to attribute the main reason for the

difference of opinion in the legal nature of unnamed securities to the

influence of the prevailing dogma of Roman law. According to the

theory of the latter, there is a pronounced difference between the areas

of proprietary and contractual law; res and obligatio are two legal con-

cepts that stand in marked contrast to each other. Counting bearer

securities as obligations, German legal experts saw, at the same time,

that it was impossible to apply to them all the conclusions of Roman

contractual law. Meanwhile, in the law of modern peoples, this marked

difference between these areas of civil law does not exist»3.

The first error in the existing CC RF is the absence of any differen-

tiation between the following laws:

• obligation — the right of demand, expressed in a security;

• proprietary interest in the material bearer of the right of demand.

In the overwhelming majority of cases, the value of the material

bearer of demand (material object) is incommensurably less than the

value of the right of demand (obligation) conveyed in this object. The

value of the object can therefore be disregarded, applying the mathe-

matical concept of «little-o». Thus, it is necessary to imply the right of

1 N.O. Nersesov. Aforementioned work. P. 205.

2 Ibidem.

3 N. O. Nersesov. Aforementioned work. P. 205 .

Securities as an economic category and legislative treatment...

53

.

— proprietary

right to the paper slip;

mplex legal relations):

Circulation of a bearer security (co

Fig. 5.

circulated according to the norms of secondary legal relations

primary right — demand to issuer; secondary right — proprietary

54

Part II. Securities

demand under the term «security» — a freely traded obligation, expressed

through some kind of material bearer (usually paper).

In the legal sense, securities are documents which are valuable, not a

material object on the strength of their natural properties, but due to the

right to some value that is contained in them.

As D. V. Murzin correctly emphasises, «a security represents value

not in itself, even being a material object, but acts as an instrument for

the definition of the essence and magnitude of transferred rights»1.

The second error in the CC RF is the expansion of specific propri-

etary rules for the treatment of bearer securities to all other securities.

Murzin, having analysed the features of securities, arrived at the con-

clusion that «the concept of the security in part 1, paragraph 1, Article

142 of the CC RF relates, most likely, only to bearer securities, and the

exceptions are so prevalent that they make the dogmatic definition itself

an exception to the general rule»2.

According to G. F. Shershenevich, registered securities cannot be

called entities3, while R. Savatier has suggested that only a record in

the appropriate books transfers a right that is represented in a registered

security4.

In fact, registered securities are not handled in accordance with the

principle of «the right to a document», because the right is precisely

consolidated between two clearly defined parties.

The right to a document and the right from a document

The need to make property relations more dynamic led to the ap-

pearance of legal constructions which made it possible to include rights

in property turnover like real objects. The expression «the right is em-

bodied in the document», or something similar, is usually used to de-

scribe this phenomenon. However, M. M. Agarkov believes that «this

1 D.V. Murzin. Securities are incorporeal entities. Legal problems with the modern theory of securities. Moscow, 1998. P. 16 ( Мурзин Д.В. Ценные бумаги — бестелесные

вещи. Правовые проблемы современной теории ценных бумаг. М., 1998.

С. 16).

2 Ibidem. P. 30.

3 G.F. Shershenevich. Manual of Russian Civil Law. Moscow, 1995. P. 156 ( Шершене-

вич Г.Ф. Учебник русского гражданского права. М., 1995. С. 156).

4 R. Savatier. Theory of obligations. Moscow. 1972. P. 109 ( Саватье Р. Теория обяза-

тельств. М., 1972. С. 109).

Securities as an economic category and legislative treatment...

55

formula should not be given greater significance than a figurative ex-

pression which does not have the level of precision that is necessary in

legal constructions»1.

L. Enneccerus elaborated thus: «In securities, the right to the paper,

as to a document, follows from the right that is expressed in the paper,

whereas for bearer securities and order securities, the right coming from

the paper comes from the right to the paper, as to a document»2.

K.I. Sklovsky, describing the historical priority of property rights

over contractual rights, remarks: «Contractual rights are used in known

cases as a fiction of an entity, forming incorporeal entities and, on this

basis, the ‘right to a right’»3.

With regard to the expressions «right to the document» and «right

from the document», it ought to be noted that the phrases «right to the

medium» and «right from the medium» seem to be more correct when

the media can be:

• paper — Europe;

• polymer — Australia, New Zealand, Singapore;

• silk — Central Asia until the last century4;

• parchment — Ancient China;

• leather — Russia in the 18th century5;

• clay tablets — Ancient Egypt;

• wax-covered wooden boards — Ancient Rome;

• birchbark documents — Novgorod in the 13th century;

• a section of wall on which the obligation was carved with a chisel;

• a section of asphalt on which the obligation was written in chalk,

and so on.

But computer records, such as:

• non-cash shares in the NASDAQ system (USA) and the RTS (PTC)

system (Russia), and

1 M.M. Agarkov.A study of securities. Moscow, 1993 ( Агарков М.М. Учение о ценных

бумагах. М., 1993).

2 L. Enneccerus. Course of German Civil Law. Moscow, 1950. P. 27 ( Эннекцерус Л. Курс

германского гражданского права. М., 1950. С. 27).

3 K.I. Sklovsky. Ownership in Civil Law. Moscow, 1999. P. 57 ( Скловский К.И. Собствен-

ность в гражданском праве. М., 1999. С. 57).

4 A.S. Melnikova. The money of Russia. 1000 years. Moscow, 2000. P. 234 ( Мельнико-

ва А.С. Деньги России. 1000 лет. М., 2000. С. 234).

5 Ibidem. P. 60.

56

Part II. Securities

• traders’ obligations to the largest commodity exchanges in the world

(conducted through a computer), etc.,

have proprietary expression only for one party — effecting the fixation

of property rights — and these records may not be transferred to other

parties, because only the owner of the computer that holds information

on the medium (hard disk) and on which the register is conducted has

the proprietary right of ownership to this information bearer.

It follows from this that, for the party that is not effecting the fixa-

tion of property rights in the transaction, this right has no proprietary,

material expression.

When depositing securities in a bank custody account, their transition

from tangible — material (on a paper medium) — into intangible — im-

material (non-cash — in the form of deeds to a custody account) — does

not change the essence of the securities, their nature and their value

content. Only the medium on which they are represented changes.

Property rights reflected in an obligation are not changed when the

medium of the obligations changes.

At the same time, the principle of the «right from a document» is

completely inapplicable to registered causal securities, as it makes

absolutely no difference who has this security or whether it exists at all,

because the commanding role in this instance is acquired by the entry

made in the register of the party that is obliged in these legal relations,

not by the record on the security.

Neither will this principle ever be applicable to non-cash, uncer-

tificated securities, because these do not have a medium expressed for

the right holder. And it is in precisely these securities that the principle

of the supremacy of the register becomes exclusive.

Moreover, using the logical method of argument a contrario, one

can logically conclude that, if the proprietary right of ownership to

one’s own paper copy of a contract, such as a loan, exists, then the loan

is a property right, which is incorrect. (If B comes from A, and B is

false, than A is false.)

Thus, using a number of methods, we have explained that a secu-

rity is not an object, but a type of contract (agreement).

To any critics of this point of view I pose the question: what is the

pivotal difference between a loan agreement (contract) and an obliga-

Securities as an economic category and legislative treatment...

57

tion, which makes it possible to ascribe a loan agreement to the sphere

of law of obligations, and an obligation to the sphere of property law?

The answer is that there is no pivotal difference, as is confirmed by

Article 816 of the CC RF: «In cases provided for by law or other legal

acts, a loan agreement may be concluded by issuing or selling obligations»

(author’s bold).

58

Part III. Money

Part III

MONEY

Money as an economic and value category

As you will remember, Article 128 of the CC RF categorises money

as objects, although the world’s leading economists believe that the

function of money may be fulfilled by both objects and obligations.

There follows a number of quotes.

Encyclopedia Americana:

«Money can be anything of which the use is accepted everywhere

and universally for payment for goods, services and debts»1.

Russian Legal Encyclopedia:

«MONEY — 1) in the economic sense — special goods or objects

that serve as a general countervalue within the framework of

commodity circulation of a specific national economy; 2) in the

legal sense — items which are object of civil law and fulfil in

civil turnover the function of a general instrument of counter-

value to the extent that it is not prohibited by the State (M. prop-

er), as well as items produced after models defined by law, by

specialist government enterprises, and recognised by the State as

the sole legal means of payment with a properly forced exchange

rate in relation to M., which is expressed in a national monetary

unit (national currency) (monetary symbols)»2.

R. Barr:

«Money has had different forms over time and space. Its physical

properties are not definitive: all kinds of money — silver and gold

coins, banknotes, cheques, bank transfers — are means of pay-

ment; they do not have common physical characteristics, and

some of them are not even of a material nature»3.

1 Encyclopaedia Americana. Vol. 19. 1988. P. 349.

2 Russian Legal Encyclopedia. Moscow, 1999. P. 719–720 (Российская юридическая

энциклопедия. М., 1999. С. 719–720).

3 R. Barr. Political economy. Vol. 2. Moscow, 1995. P. 281.

Money as an economic and value category

59

Rist:

«Paper money acquires the capacity to retain value as a result of

an act of volition»1.

Aristotle:

«Money became money ( nomisma) not through its internal char-

acter, but on the strength of the law ( nomos), and it is within our

power to change this situation and render it useless.»

C.R. McConnell, S.L. Brue:

«Metal and paper money are obligations of the State and agents

of the State. Current accounts represent obligations of commer-

cial banks and savings institutions»2.

K. Marx:

«Exchange value, separated from the goods themselves and exist-

ing alongside them as an independent commodity, is money»3;

«Money is a particular commodity which thus represents the

adequate existence of the exchange value of all goods as a par-

ticular, allotted commodity4;

«Credit money means money in the form of some kind of

obligation»5.

L.N. Krasavina, analysing Marx, elaborates:

«Money in itself is not an object but a historically defined form

of economic — that is, socio-productive — relations between

people in the process of commodity exchange. Money is a his-

torically developing economic category: at each stage of goods

production, it is filled with new content of a specific type of

production relations, expressed through a universal cost equiva-

lent. This content is complicated by a change in reproduction

conditions and objective criteria for the formation of labour input

and commodity value that are necessary for society. In the pre-

capitalist stages of development, money expressed the production

relations between individual goods manufacturers; under condi-

1 S. Rist. Histoire des doctrines relatives à la monnaie et au credit. Paris, 1938.

2 C.R. McConnell, S.L. Brue. Economics: principles, problems and politics. Moscow, 1992.

P. 265.

3 K. Marx, F. Engels. Complete works. 2nd edition. Vol. 46. Part I. P. 87.

4 Ibidem. Vol. 13. P. 35.

5 K. Marx. Capital. A critique of political economy. Vol. I // K. Marx, F. Engels. Complete works.Vol. 23. P. 151.

60

Part III. Money

tions of pre-monopoly capitalism, it expressed the production

relations between the goods manufacturer and society; and under

monopoly capitalism, between the goods manufacturer and the

world market»1.

A.G. Gryaznova:

«Money is an economic category in which public relations are

manifest, and with whose assistance public relations are

conducted»2.

O.I. Lavrushin:

«Money is an economic category in which public relations are

manifest, and with whose assistance these relations are built;

money acts as an independent form of exchange value, and me-

dium of exchange, payment and hoarding»3.

P. Berger:

«Money is issued by three kinds of institutions: commercial

banks, the State Treasury and an issuing bank»4.

L. Harris:

«Money is defined as any commodity which functions as a me-

dium of exchange, a unit of payment and a means of retaining

value»5.

N.G. Mankiw:

«Money is the sum of assets regularly used by people to acquire

goods and services from other individuals»6.

C.J. Woelfel:

«The admissibility of concrete forms of money for the payment

of debts is established by a law which defines it as a LEGAL

MEANS OF PAYMENT and, consequently, allows a debtor to

present it to clear his debt»7.

1 L.N. Krasavina. Currency and credit under capitalism. Moscow, 1989. P. 9 ( Красави-

на Л.Н. Денежное обращение и кредит при капитализме. М., 1989. C. 9).

2 A.G. Gryaznova. Finance and credit encyclopaedic dictionary. Moscow, 2002. P. 267

( Грязнова А.Г. Финансово-кредитный энциклопедический словарь. М., 2002.

С. 267).

3 O.I. Lavrushin. Money, credit, banks. Moscow, 1999. P. 9 ( Лаврушин О.И. Деньги, кредит, банки. М., 1999. С. 9).

4 P. Berger. The money mechanism. Moscow, 1993. P. 21.

5 L. Harris. Monetary theory. Moscow: Progress, 1990. P. 75.

6 N.G. Mankiw. The principles of economics. St Petersburg, 1999.

7 C.J. Woelfel. Encyclopedia of banking affairs and finances. Moscow, 2000. P. 290.

Money as an economic and value category

61

Money is the greatest invention of civilisation and infiltrates all

spheres of human activity. It is fundamentally more important than

simply an instrument of the economic system. It is fair to say that an

efficiently functional monetary system exerts a positive influence on

the circulation of revenue and expenses, which is also the essence of

economics. A monetary system that works well promotes more effective

use of available production and human (labour) potential; it ensures

full employment and prevents the growth of inflation and social tension

at the same time. And on the other hand, a poorly functioning monetary

system that is inadequate with regard to existing reality can cause sharp

fluctuations in production levels, a recession in the economy, and

various social crises.

«The essence of money lies in the fact that it serves as a necessary

active component and composite part of the economic activity of so-

ciety, and of the relations between different participants in the repro-

duction and distribution process»1. Money is a constituent of commod-

ity relations. The advent and development of goods brings with it the

advent and development of money. This inseparable pair — goods and

money — is a perpetual form of movement in economic life.

«Money ‘underwent’ a protracted evolutionary process and under

the influence of the progress of civilisation radically changed its form,

character, content and essence.

The most important factors in the transformation of money were

the development and growing complexity:

firstly, of productive forces;

secondly, of production relations, including trade-money relations,

and credit relations as a part of the latter. Money, as is widely known,

is a part of trade-money relations;

thirdly, of the superstructure: the State and the laws which are cre-

ated by the State.

So, that which gave rise to this phenomenon of human society, by

developing and becoming more and more complex, led money to a

similar result»2.

1 A.G. Gryaznova. Aforementioned work. P. 267.

2 M.P. Berezina. Credit money: Academic essay for practical use // Business and banks, 2003. Issue 21–22 ( Березина М.П. Кредитные деньги: Научное эссе с пользой для

практики // Бизнес и банки, 2003. № 21–22).

62

Part III. Money

The commodity origin of money

Many schools of theory link the question of the origin of money with

the development process of the exchange of goods.

For any product to become a commodity, it had to:

• be produced not for personal use, but for sale;

• satisfy certain requirements, i.e. have utility value. Moreover, the

commodity must be useful to the purchaser, a fact that is confirmed

by the sale and purchase of the commodity;

• have value. The value of a commodity consists of any costs associ-

ated with it, and moreover, not the individual costs of the manufac-

turer (cost price), but costs recognised by the public. This must also

be acknowledged by purchase and sale.

Only the sum of these three conditions makes a product a commod-

ity. The absence of any of these means that the product is not a com-

modity. For example, if a certain product is produced for personal use

or it is impossible to buy or sell it, then this product is not a commod-

ity.

The exchange of individual products of social labour between prim-

itive communities had an incidental character. The development of

commodity exchange was linked with the first large-scale social division

of labour — between cattle-breeding and agricultural tribes. The second

large-scale division of labour — the separation of crafts from agricul-

ture — led to commodity production and regular exchange between

private owners.

A. Smith wrote: «… Any rational person, at any level of the develop-

ment of society after the division of labour, had to organise his business

so that he permanently had a certain amount of the type of commod-

ity which he was sure that nobody would refuse to accept in exchange

for products of his trade»1.

As a result of the development of commodity exchange, a particular

commodity stood out, which had the greatest sale capacity — money,

having divided the process of the mutual exchange of commodities

(C — C) into two simultaneously functioning processes: sale (C — M)

and acquisition (M — C). This made it possible to overcome individu-

1 Quoted from: E.F. Borisov. Economic theory: reading book. Moscow, 2000. P. 20 ( Бо-

рисов Е.Ф. Экономическая теория: Хрестоматия. М., 2000. С. 20).

Money as an economic and value category

63

al, quantitative, time and space constraints that are characteristic of

trade, and thus to significantly reduce transaction expenses of ex-

change.

Functions

Every phenomenon, in order to display its existence and character-

istics, must show its worth in practice. «The economic essence of mon-

ey manifests itself in its functions»1, and modern economic literature

draws the concept of money from the functions it fulfils. «Anything that

fulfils the functions of money is money»2. Thus, anything which people

accept as money and which fulfils the functions of money can be used

as money.

According to Marx, money fulfils five functions:

1) a measure of value;

2) a medium of exchange;

3) a means of payment (all spheres of commodity circulation);

4) a store of value;

5) universal money3.

Many Western academics recognise just three functions of money:

1) a medium of exchange (payment);

2) a measure of value;

3) a means of hoarding and saving (retaining value)4.

However, they all agree that anything which people recognise as

money and which fulfils the functions of money can be used as money.

Generally speaking, in economic theory there is no single opinion

on the functions of money. The point of view of Professor Yu. I. Kashin

is worthy of attention; he suggests that universal money is not an inde-

pendent function, but just a spatially limited area of its use. Equally

interesting is his evaluation of the transformation of such function as

«a means of hoarding and saving» into the function of «reposing mon-

ey», guaranteeing credit-issuing circulation through its presence in any

1 O.I. Lavrushin. Aforementioned work. P. 13.

2 C.R. McConnell, S. L. Brue. Economics. P. 264.

3 See: K. Marx. Capital. A critique of the political economy. Vol. I // K. Marx, F. Engels.

Complete works. Vol. 23. P. 118–151.

4 See: P. Samuelson. Economics. Vol. I. Moscow, 1992. P. 258; A.J. Dolan, C.D. Campbell, R.J. Campbell. Money, banking affairs and monetary and credit policy. Moscow-Leningrad, 1991. P. 30–34; P. Berger. The money mechanism. Moscow, 1993. P. 13–15.

64

Part III. Money

depository1. From time to time, money is given a secondary function —

an ideological-proclamatory function. This played a significant role

after the Battle of Kulikovo (when Russia won a decisive victory over

the Mongol opressors), and also when Russia was liberated from the

Poles (uprising of Minin and Pozharsky), as well as from 1917 to

1924.

The functions of money are regarded as a manifestation of its es-

sence. Furthermore, these functions are fulfilled only with the partici-

pation of people who can separate the value of goods from their user

and exchange value, who accept money in the process of commodity

exchange and other payments, and also use it as a means of hoarding.

This means that money is an instrument of economic relations in so-

ciety, but the functions of money can only be fulfilled with people’s par-

ticipation.

Within the framework of this study, we are primarily interested in

the economic function of circulation and payment, and the legal rules

of monetary circulation.

As a means of payment, money is used for payments outside the

sphere of commodity exchange. A particular characteristic of this func-

tion of money is a time interval between the movement of money and

the movement of goods and services: for example, taxes, welfare pay-

ments, interest on credit. Money is easily accepted as a means of pay-

ment. This is a convenient social invention, which makes it possible to

pay owners of resources and producers of «goods» (with money), and

which may be used to purchase any of a wide selection of goods and

services available on the market.

As currency, money functions within the sphere of commodity ex-

change. Today, money is a medium of exchange first and foremost, and

can be used to buy and sell goods and services.

As a medium of exchange, money enables society to avoid the in-

conveniences of barter exchange. Representing a convenient way of

exchanging goods, money allows society to make use of the products

of geographical specialisation and the division of labour between peo-

ple.

1 See: Yu.I. Kashin. On the subject of modifying the functions of money // Money and credit, 2002. Issue. 1. P. 64–66 ( Кашин Ю.И. К вопросу о модификации функций

денег // Деньги и кредит, 2002. № 1. С. 64–66).

Money as an economic and value category

65

It is important to note that business entities choose the form of

money that most precisely corresponds to the requirements before

them: if they need to buy a newspaper, they will get small change ready;

if a legal person is expecting to have to pay taxes, then he will have ready

in advance the required amount of non-cash money in his bank ac-

count. If payments are maintained over time, or if there is no specific

deadline for a potential payment, the business entity will try to choose

the form of conserving value which would, firstly, have the necessary

liquidity, and secondly, yield a certain revenue over time. Conservation

of value in the form of money can lead to «lost profit expenses». In

order to avoid this, every business environment nowadays has the op-

timum balance between liquidity, profitability and risk capital. How-

ever, as a rule, other resources, such as bank deposits and revenue se-

curities of companies, banks and the State are also used.

Properties

Money must have the following properties:

• liquidity;

• portability;

• durability;

• divisibility;

• standardisability;

• recognisability.

The most important of these properties in money is liquidity. Abso-

lute liquidity means that an owner of money, using this money, can at

any time fulfil any financial obligation, because money can always be

used a legal tender. The most important requirement for conforming

to this characteristic is for money to receive general (and, ideally, gov-

ernmental) recognition, both from purchasers and vendors, as a me-

dium of exchange.

Settlement of commodity conflicts using money

Based on the study of factual material, Karl Marx scientifically

proved that money is a historical category that is inherent in goods

production. But in order to understand the origin and commercial

nature of money, and to explain how and why money made its mark in

the world of trade, let us look first of all at commodity conflicts and

ways of resolving it. Modern economic theory identifies the following

66

Part III. Money

basic commodity conflicts that have arisen through exchange and have

been resolved with money as a universal cost equivalent between:

• consumer and exchange value;

• concrete and abstract labour (between subjective and objective util-

ity);

• the private and public nature of labour.

Money according to its own underlying essence is exchange value

separated from a commodity, used in everyday economic practice.

Commodity — unity of consumer and exchange value; and value is

the unity of the utility of a commodity and the cost of producing it.

Value is the material form of the cost of abstract public labour, express-

ing the relationship between the vendor and the purchaser, or between

cost and profitability.

Consumer value — the ability of a commodity to meet this or that

requirement of a person; its usefulness.

Exchange value — the ability of a commodity to be exchanged in

specified quantitative proportions for another commodity.

«Objects which have a very high consumer value often have an ex-

tremely low exchange value or even none at all; in contrast, objects

which have a very high exchange value often have a very low consumer

value or none at all. There is nothing more useful than water, yet one

can buy nothing with it. On the other hand, a diamond has almost no

consumer value, but in exchange for it one can receive a very large

quantity of goods»1.

Money as a measure of value and as a medium of exchange forms a

union of opposites. One function presupposes the other, as the use of

money ensures the movement of value and consumer value. On this

basis, Karl Marx developed the methodological principle: «… a com-

modity turns into money primarily as the unity of a measure of value

and a medium of exchange…»2.

In the union of the functions of a measure of value and a medium

of exchange, their contrast and contradiction become apparent. First-

ly, as a measure of value, money acts as ideal money, and in the function

1 Quoted from: E. F. Borisov. Aforementioned work. P. 22.

2 See: K. Marx. Capital. A critique of the political economy. Vol. I // K. Marx, F. Engels.

Complete works. Vol. 23.

Money as an economic and value category

67

of a medium of exchange, it acts as real money. Secondly, the function

of a measure of value is fulfilled by full-bodied money, while in the

function of a medium of exchange, it is replaced by tokens of value.

To quote Karl Marx: «As a result of the first process of turnover, sale,

emerges the initial point of the second process, money. Goods in their

initial form were replaced by their equivalent in gold. This result may, first

of all, suspend the process, as a commodity in this second form has a

natural existence capable of waiting. A commodity in the hands of its

owner has no consumer value, when it is available in a form that is always

fit for use, as it is always in a position to be exchanged, and it only depends

on the obligations when and at what point on the surface of the world of

trade it enters into circulation again. The presence of a commodity in the

form of a gold chrysalis forms an independent period in its life, in which

it can remain more or less for an extended period of time»1.

When a commodity enters the market, that is, into the sphere of

exchange, this contradiction appears as a conflict between the con-

sumer value and the exchange value, or between the private and the

public profitability of a commodity. This conflict is solved by dividing

the commodity into two: the commodity and money.

The solution of this contradiction in a commodity is the exchange

operation of a commodity for money, during which the user value of

the commodity is definitively separated from its value. Thus the market

solves the problem of providing for the public in the person of purchas-

ers with goods that it needs, while the producers of these goods are

rewarded with corresponding income.

Thus, the necessity of money is caused by the conflict between ex-

change value and consumer value within a commodity. The contrast

between these two categories of values, which are linked with each

other, occurs in the debates of all classical economists on the subject of

the theory of prices. For A. Smith, this contrast is between consumer

value and exchange value, while for the founders of the marginal util-

ity theory it is the contrast between subjective and objective utility.

These two sides of value represent the union of opposites. The union

of consumer value and exchange value is defined by the fact that these

are comparable values. Exchange value is a certain quantity of con-

1 Ibidem.

68

Part III. Money

sumer value, measured on a universal scale accepted for this purpose

by society.

In our opinion, Russian economist M. A. Portnoy described very

well the reason for the origin of money under the conditions of com-

modity production:

«And so, every commodity, i.e. product, that is created to be sold,

bears within itself a contradiction as the object of public economic rela-

tions, acting as the unity and conflict of opposites, and is expressed as a

range of interlinked and mutually conditional contradictions between:

• the individual and society;

• consumer value (utility) and value (social utility);

• presence and essence;

• private and general (public).

These conflicts cannot be solved by themselves. To solve them, the

commodity in question must be confronted with its opposite, whose

role was fulfilled, at the more primitive stage of trade, by another com-

modity, and at more developed stage, by money. The commodity con-

flict is solved by exchange — a buy-sell transaction — in which the

vendor — the owner of the commodity — participates on the one hand,

and the purchaser — the owner of equivalent value — on the other. At

the same time the vendor acts as a separate individual, personifying the

private principle, and the purchaser represents the public, embodying

public interest. The exchange is an act of public recognition of the use-

ful quality of the productive activity of a particular individual (or en-

terprise), and at the same time solves the conflict between the indi-

vidual and the public, and all subsequent conflicts.

Since the purchaser represents the public in this act, the purchase

of the commodity means that the public as a body has approved the

productive activity of the individual who is the owner and seller of this

commodity.

As a result of the exchange, the consumer value (utility) of the com-

modity is separated from its value (public utility).

With the development of trade and the appearance of money, the

world of trade split into two poles: at one pole are all the goods that

embody the current consumer value (utility); and at the other is the

money which embodies value (public utility).

Money as an economic and value category

69

All goods are now becoming varieties of one or the other phenom-

enon. They all represent utilities designed to meet various needs, when

their universal essence is expressed henceforth in money. Goods are

now products with a corresponding purpose, while money is the em-

bodiment and measure of their value.

Goods, having been traded, are transformed from their potential

value into real value. Before they had been sold, they were products of

private economic activity, the expediency of which remained under

question. After the buy-sell transaction, the commodity becomes a

component of public wealth, expressed in money. Private energies ex-

pended on creating it are recognised as an adequate proportion of

public energies, the scale of which is represented in monetary form.

Thus, money is:

• the embodiment of value, the personification of public utility;

• the essence of goods as values, their universal characteristic as compo-

nents of public wealth» 1.

It would be hard to exaggerate the significance of money as a me-

dium of exchange, as it allows one to avoid the barter form of trade.

The replacement of barter exchange by monetary exchange separates

the act of sale from the act of purchase. If money exists, the vendor of

a commodity only has to find someone who wants to buy his commod-

ity, and having received the money, he can buy anything he wants. The

replacement of the bartering method of transactions with a system that

uses money as a medium of exchange leads to a reduction in turnover

expenses. Far less time and energy is needed for monetary exchange

than for barter. By lowering turnover expenses, money stimulated the

development of specialisation and trade.

Let us sum up the significance of money’s function as a medium of

exchange. As such, money:

• mediates the movement of goods and services, facilitating their

circulation process;

• overcomes constraints of quantity, time and space characteristic of

barter exchange;

• reduces turnover expenses.

1 M.A. Portnoy. Money, its forms and functions. Moscow, 1998. P. 22–23 ( Портной М.А.

Деньги, их виды и функции. М., 1998. С. 22–23).

70

Part III. Money

Money, which arose naturally from the need to resolve commodity

conflicts, nevertheless became more than simply a subject of heightened

interest for the administrative systems of governments. Governments

began to impose means of payment that were controlled by the State

(currency) on controlled economies, and through legislation to limit

the circulation of other methods of payment; and, as a result, the only

legal monetary resource left was the currency of that particular govern-

ment.

Both the monetarist and the Keynesian theories directly advocate

the regulation of forms of money, money supply and interest rates in

order to influence the economy.

Thus, the money which arose in an evolutionary way from eco-

nomic relations was gradually ousted by the State and replaced with

money that arose through law and legislation. It is only in times of

economic crises, when the State proves unable to properly support the

function of the national currency as money, that the economy falls back

on the use of full-bodied, commodity money or barter.

In this way, the ambivalence of the basis and superstructure, of the

economy and legislation, is revealed in the change in the nature and

essence of money.

The role of money is characterised by the results of its use and its

influence on various aspects of the activity and development of society.

The role of money is most evident in the results of its part in the

establishment of commodity prices. The role of money changes as

conditions of economic development change. Its role increases with a

shift to a market economy.

The concept of «money» is interpreted differently in Russian legal

practice, than in the country’s economic practice. Article 140 of the

CC RF is entitled «Money (currency)» and states: «The rouble is the

legal means of payment and is to be accepted by nominal cost through-

out the territory of the Russian Federation». Thereby, the legal defini-

tion of the word «money» is the same as the economic meaning of

«currency» and is considered to be «the monetary unit of a particular

government, established by law»1.

1 L.N. Krasavina. International currency-credit and financial relations. Moscow, 2000.

P. 34 ( Красавина Л.Н. Международные валютно-кредитные и финансовые отно-

шения. М., 2000. С. 34) .

Money as an economic and value category

71

However, it will be demonstrated in this study that the concept of

«currency» does not include commodity or financial money, and is only

a subset of the concept of «credit money»; and, of course, is essen-

tially a subset of the concept of «money».

So as to avoid confusion, we shall use the economic meaning of the

word «money».

Money supply

Neither among economists, nor among government officials, is there

a consensus of opinion on the question of which separate elements

make up monetary supply in the economy. It is extremely difficult to

draw a line between money proper and other liquid assets which par-

tially fulfil the functions of money. Only local currency has absolute

liquidity as a method of payment that has to be accepted — which is

provided for by public law. Other liquid assets are a means of payment

only in the event that the beneficiary agrees to accept them, i.e. a trans-

action exists on the basis of civil law. However, one should remember

that a certain proportion of payment transactions and commodity

turnover is served by liquid assets, which are gladly accepted by benefi-

ciaries, but whose circulation is prohibited in a country on the basis of

public law — for example, the US dollar in Russia1. In Russia it is also

forbidden to circulate bars of precious metals and materials which

contain them, as well as precious stones and rare-earth metals2.

In a narrow sense, the supply of money, known as M0, consists of

cash, that is, metal and paper money which is in circulation. M1, ac-

cording to C. R. McConnell and S. L. Brue3, comprises M0 and check-

able deposits, i.e. deposits in commercial banks, different savings banks

or savings establishments, for which cheques can be written4. In Russia,

checkable deposits are not as widespread as in other western coun-

tries.

Western economists also distinguish «quasi-money» — aggregates

M2 and M3. «Quasi-money» are certain highly-liquid financial assets

1 This is with the exception of operations of subjects with banks that have an appropriate

license.

2 See Federal Law No. 3615-1 «On currency regulation and currency control», dated 9

October 1992.

3 C.R. McConnell, S. L. Brue. Economics. Moscow, 1992. Vol. 1. P. 264.

4 On the condition that local vendors everywhere accept cheques as a means of payment

for goods and services both for retail and wholesale transactions. ( Author’s note) .

72

Part III. Money

such as chequeless savings accounts, deposit accounts and short-term

government securities, which do not function directly as a method of

payment, but may easily and without risk of financial losses be changed

into cash or cheque accounts. In contrast, for example, with the USA,

in Russia deposit accounts may be closed by the depositor and, before

the expiry of the deadline, without payment of a fine.

M2 includes elements of the medium of exchange (cash and check-

able deposits), in accordance with M1, and other elements, which may

be converted quickly and without loss into cash and checkable depos-

its.

The third, «official» definition of M3in the USA is based on the fact

that large (100,000 dollars or more) deposit accounts, which enter-

prises usually own in the form of certificates of deposit, are also easily

converted into checkable deposits. An active market for such certificates

does, in fact, exist, and so it is possible to sell (liquidate) them at any

time, albeit with a possible risk of loss (in Russia an example of this is

presented by the loan bonds of different tranches, which are sold with

a significant reduction from their nominal value, if the deadline for

redeeming them expires in 5–6 years or more).

To calculate the total money supply in the Russian Federation,

provision is made for the following aggregates:

• M0 — cash money;

• M1 = M0 plus operating accounts and demand accounts;

• M2 = M1 plus deposit accounts;

• M3 = M2 plus certificates of deposit and State loan bonds.

There is a whole range of assets (they differ from country to country,

but a certain similarity is apparent), which differ only slightly from each

other by degree of liquidity or availability of monetary funds.

Which of the definitions of money listed above is preferable? Most

western and Russian economists choose M1. Why? This simple defini-

tion includes everything that is directly used as a medium of ex-

change.

Money as an economic and value category

73

The evolution of money forms

The functions of money in their evolutionary process were fulfilled,

and continue to be fulfilled, by both objects and obligations.

Money has different forms over time and space. The form of money

in the economic sense must be understood to mean the type of mate-

rial goods which fulfils the function of money at the appropriate level

of economic and legal development of society (Fig. 6).

Fig. 6. Ratio of different forms of money in circulation

The prevalence of and demand for one form of money or another is

defined by indicators such as negotiability, convenience, portability,

durability, divisibility, demand, and sufficient amount in circulation.

It is necessary to point out the following basic forms of money which

arose in the process of evolution:

1) natural money:

a) non-standardised goods including metals by weight (commercial

metals);

b) precise-weight metal ingots;

2) credit money:

a) commercial bills;

b) banknotes of private banks;

74

Part III. Money

c) currency:

• cash currency:

• state banknotes (treasury notes) backed by metal;

• state banknotes (treasury notes) not backed by metal;

• coins with nominal value;

• non-cash money — deposit money (checkable accounts);

3) financial money:

a) quasi-money;

b) stock which fulfils the function of money to a limited extent.

These forms sprang up successively, as a rule, and were prevalent in

certain periods of time (Table 3). New forms of money arose primarily

because it was necessary to minimise trading costs and to accelerate

accounting and trade operations (Fig. 7).

Fig. 7. The ousting of old forms of money by new forms of money

Money as an economic and value category

75

3

3

0

1

0

10

1

16

29

37

Table 3

2000

1

2

1

1

0

13

1

25

27

29

1980

2

3

1

1

1

17

1

36

23

15

1940

3

3

10

2

3

20

2

25

20

12

1913

4

3

15

5

4

20

3

23

14

9

1875

ent times, %

7

4

25

10

5

20

5

10

9

5

1850

8

4

30

13

10

17

6

6

4

2

1815

10

4

37

20

5

5

16

1

1

1

1769

ent forms of money at differ

23

5

44

10

3

0

15

0

0

0

1450

30

5

52

10

1

0

2

0

0

0

e of differ

1300

Shar

60

10

27

3

0

0

0

0

0

0

1000

0

80

20

0

0

0

0

0

0

0

0

m

-

es

froeda cial bills

ith

operty

Money

al com

s m

s w

in

in

o

ecious metals

o

Natur

modity

Metal ingots

C

pr

Commer

Banknotes of

private banks

State banknotes

C

nominal value

Deposit money

Quasi-money

Other pr

rights — shar

76

Part III. Money

In his work «Money: its forms and functions», M. A. Portnoy cat-

egorises the fundamental historical phases of commodity money rela-

tions (Table 4)1.

Table 4

Schematic classification of the basic historical stages

of commodity-money relations

Key commodities

Money

1. Natural exchange

Products

Products (livestock, fur, fish, etc.,

metals and, finally, silver and gold)

2. Regular trade

Products

Gold and silver

3. Capitalist production of the free competition era

Products (consumer and investment

Gold and silver; credit money (commer-

goods); land; workforce (labour);

cial bills, banknotes, deposit money)

monetary capital

4. Modern capitalism

Products (consumer and investment

Credit and financial money (commercial

goods); land; workforce (labour);

bills, banknotes, deposit money, bonds,

business; monetary capital

shares and other securities)

They all have the right to exist even today, and only public (or State)

recognition can force one kind of material goods or another out of

circulation or confer on it the status of legal money.

Looking at these forms of money in consecutive order, we shall try

to define their properties as objects and as obligations.

1 M.A. Portnoy. Money: its forms and functions. Moscow: Ankil, 1998. P. 7 ( Портной А.М.

Деньги: их виды и функции. М.: Анкил, 1998. С. 7).

Money as an economic and value category

77

Natural money

Natural commodity money

Fig. 8. Prevalence of natural commodity money

When certain goods or services are directly exchanged for others, it

immediately becomes apparent that some goods are needed for a wid-

er range of purchasers than other goods, and this gives rise to public

acceptance of them as forms of money (Fig. 8).

If we look at the evolution of money in the early stages of the devel-

opment of society and public relations, we discover that at that time, it

was mainly natural commodity money that was in demand:

• kauri shells (Polynesia, India);

• squirrel and sable pelts, slate spindle whorls — weights used in spin-

ning1 (Ancient Russia);

• bricks of natural salt (Ethiopia)2;

• iron hoes (Sudan)3;

• beaded belts — wampums (South American Indians);

• bottles of vodka and tins of stew — in remote regions of Russia dur-

ing so-called developed socialism (1970–1980s);

1 A.S. Melnikova. Money of Russia. 1000 years. Moscow, 2000. P. 18 ( Мельникова А.С.

Деньги России. 1000 лет. М., 2000. С. 18).

2 J. Cribb. Money. Dorling Kindersley, 1999. P. 8.

3 Ibidem.

78

Part III. Money

• copper and bronze (Ancient Rome);

• iron (Sparta)1.

Among nomads, cattle played the role of money; among landowners,

cultivated vegetable crops; among hunters, animal pelts2.

In Ancient Rome and Ancient Greece, wealth was measured by the

number of cattle, and herds were driven to market with which to pay

for anticipated purchases. Homer judged the worth of Achilles’ shield

and armour in oxen: in Latin, the word pecunia (money) is derived from

the word pecus (herd). It is interesting that the Latin root of the word

«capital» comes from capital, meaning cattle. In Russian, exchangeable

counterparts were called kuna — from the skin of the marten (kunit-

sa).

«Pelts of valuable furry animals fulfilled the function of «fur» mon-

ey. The units of value of these goods that were equivalent to money were

«kuna» (marten pelts) and bela (squirrel (belka) pelts). In a Smolensk

document dating from 1150, a fox pelt was valued at 12 kuna. Various

kinds of levies (yasak) were paid into public coffers in leather pelts. Pelts

were a common form of money for ancient states — Sparta, Rome,

Carthage. Chronicles of Scandinavian peoples recount how on land

where animals were to be found in abundance, pelts were used as mon-

ey, to pay for purchases and to pay taxes and fines. In the code of laws

of the time, it was stated that for an insult, the offender must pay one

fox pelt, for physical mutilation a sable pelt, and so on. […] «Fur» and

«leather» money were still in circulation during the reign of Peter the

Great. And until very recently, pelts were used as money in Alaska.

When metal money was first used in Ancient Russia it was called

«kuna» (the price of a marten pelt) or «bela» (the price of a squirrel

pelt), and only with the passage of time did these old names gradually

die out»3.

«Also, rice was used in Japan, tea in China, cotton cloths in Africa

and dried fish in Iceland. For example, prices in Iceland in the 15th

century were as follows:

for a horseshoe — 1 dried fish;

1 R. Barr. Aforementioned work. P. 283.

2 L.V. Orlenko. The history of trade. Moscow, 2006. P. 58 ( Орленко Л.В. История тор-

говли. М., 2006. С. 58).

3 Ibidem. P. 59.

Money as an economic and value category

79

for a pair of women’s shoes — 3 fishes;

for a keg of wine — 100 fishes;

for a keg of butter — 120 fishes.

Natural money, being of material value itself, was most suitable in

the role of money at this time, when commodity production was as yet

insufficiently developed and had not become the basic form of public

production. The necessity of using natural money was the result of the

disunity, the insulation of individual goods manufacturers, for whom

only the exchange of products acted as a way to connect economically

and socially, confirming the utility of their product and compensating

the owners of the goods for the value of that product in the form of

equivalent material valuables»1.

It is worth noting that society, during severe economic crises and

upsets, losing faith in the possibility of other, higher forms fulfilling the

function of money, lowers itself to this form of commodity circulation,

bashfully calling it barter.

For example, in Russia at the end of 1991, during a period of eco-

nomic reforms, the deficit in goods became so severe that money ceased

to be of any use — all trade began to take place on the basis of barter.

And there and then, «monetary» commodities appeared (automobiles,

timber, steel, petrol, meat), in exchange for which you could receive

anything you needed. For example, for a tonne of petrol you could get

4.2 tonnes of cement, 70kg of meat, or 1100 red bricks.

Some economists call this the commodity-accounting phase.

This is how Professor N. G. Mankiw of Harvard University describes

the situation in his book, «The Principles of Economics»:

«In cases when a commodity takes over the role of money, having

intrinsic value, it is called commodity money. The concept of in-

trinsic value is applied to money which will still have value when

it is not being used as money. A well-known example of commod-

ity money is gold, which has intrinsic value because it is used both

in industry and to manufacture jewellery… Another example of

commodity money is cigarettes. During the Second World War,

prisoners in PoW camps sold various goods and services to each

1 M.A. Portnoy. Money: its forms and functions. P. 32 ( Портной М.А. Деньги: их виды

и функции. С. 32).

80

Part III. Money

other using cigarettes as a means of hoarding, a unit of accounting

and a medium of exchange. In this situation, even non-smokers

gladly accepted cigarettes as payment, as they knew that they could

always use them to obtain other goods and services»1.

Circulation

Natural money, having served individual and small wholesale ir-

regular turnover, circulates in accordance with the simplest property

rules: whoever has the article in his hands is the owner. The simple

transfer of the article from the hands of one to another constituted the

simplest exchange. As a rule, no contractual relations encroached upon

the exchange.

As the variety of goods on the market increased, the problem expe-

rienced by vendors and purchasers of determining the dominant com-

modity in circulation became ever more pressing.

In an evolutionary process, metal began to force other goods out of

circulation because it had the greatest capacity to be used in the econ-

omy not only as an instrument of circulation but also (after treatment)

as tools of labour or weapons: a plough, pitcher, knife, sword, shield or

other, similar goods could be transformed more easily than other com-

modities into no less valuable items, which meant that exchange value

could be converted into consumer value almost immediately after the

exchange process.

Precise-weight metal ingots

As regular trade developed, and particularly as the volume of whole-

sale transactions grew to several carriages or wagons of goods such as

expensive fabrics and high-quality metal wares, and as industrial rela-

tions reached the stage of contracts for the construction of palaces and

fortresses, society started to consider gold to be the universal equivalent

(Fig. 9). As Cantillon writes, «gold and silver, and only they, are small

in size (with high value — A. G. ), of equally high quality, easy to trans-

port, do not produce by-products when they are exchanged, are easy

to store, the objects which can be produced from them are beautiful

and brilliant, and they can be used infinitely»2.

1 N.G. Mankiw. The Principles of Economics. St. Petersburg, 1999. P. 589.

2 Quotation from: R. Barr. Political economy. Vol. 2. Moscow, 1995. P. 283.

Money as an economic and value category

81

Fig. 9. Prevalence of precise-weight metal ingots

In other words, this commodity ensured a simple transaction and

reduced transaction expenses.

Gold bars used as money were circulated in the form of a standard

geometric mass of uniform shape, composition and weight, which was

certified by a special stamp on the bar. The production and branding of

these bars, naturally, was the prerogative of the highest authorities, that

is, sovereigns and high priests. This attests to the fact that they were

sufficiently widely exchanged even in long-distant historical times, and

that eventually exchange developed into regular trade, which dictated

the need for a standard monetary equivalent certified by the higher

authorities.

Such ingots were in circulation in Ancient Babylon between 3000

and 2000 B.C. Small bars of solid-weight gold (about 14g) with the

Pharaoh’s stamp were in circulation in Egypt around 3000 B. C.; bars

without a stamp were worth less, as few people were able to distinguish

gold from a counterfeit, but they trusted the stamp of the Pharaoh. Only

expert craftsmen and masters of the gold industry could forge the Phar-

aoh’s stamp at that level of technological development, and each of

these men was well-known. Also, the punishment for such forgery was

extremely severe.

It is worth noting that the first promissory component appeared in

this money and, even then, the first demand appeared not for consumer

value, but for exchange value.

82

Part III. Money

The exchange value in the gold bars was the ruler’s legal guarantee

of their composition and weight. «In situations when one could only be

certain of the authenticity of metal currency by means of a compli-

cated testing process, for which the average person was neither qualified

nor equipped, the stamp of a universally recognised government body

could serve as a convincing guarantee of the authenticity of the cur-

rency… The challenge, which the government took upon itself to answer,

initially consisted not so much of producing money as certifying the

weight and quality of the materials being used as money everywhere…

Pieces of metal were seen as money proper only if they had the stamp

of the relevant government body, whose duty it was, as indeed it should

be, to attest to the fact that the money did in fact weigh the prescribed

amount and contain metal of the proper standard, which is what gave

it its value»1.

«The names of some modern currencies hark back to when they were

gold money of precise weight. For example, the English pound sterling

used to be equal in England to one pound of pure silver, in William the

Conqueror’s time. In this form it was not minted, but acted as account-

ing money. The pound sterling was divided into twenty parts — shillings,

each of which, in turn, was divided into twelve pence, or pennies. It is

the penny, in fact, that was minted and in those times was the largest

coin (K. Marx). However, in the 13th century, the weight of the English

penny was equal to the weight of 32 wheat grains, «rounded, dried and

taken from the middle of the ear»2.

In 14th century Russia, bars of silver in the form of rounded batons

with deep diametrical grooves, weighing up to 200g (Lithuania), or

batons of triangular cross section weighing 197–200g (Novgorod), or

elongated hexagons weighing about 160g (Kiev), having been given the

name «grivna», were designed mostly for large accounts and payments.

They were used to pay for important trade transactions, indemnities

and monetary investments in monasteries, and to purchase large land-

ed estates.

Novgorod grivnas that were split in half acquired the name «poltina»

(«half»)3. Russian precise-weight ingots had no stamp or, therefore,

1 F.A. Hayek. Private money. Tver, 1996. P. 49.

2 M.A. Portnoy. Aforementioned work. P. 59.

3 A.S. Melnikova. Aforementioned work. P. 45.

Money as an economic and value category

83

promissory component, which signifies an extremely low level of de-

velopment1.

Circulation

The consumer value of such an entity was equal to the value of the

metal, while the exchange value exceeded it on the scale of the value of

the guarantee marked on the stamped area.

In such ingots, a promissory/liability component appeared in addi-

tion to the object component, and this was defined by the dual nature

of this material commodity in the prevalence of the object component.

However, the significance of the promissory component (the Pharaoh’s

guarantee of the composition and weight of the ingot), provided for by

the property of the ruler, his right to collect taxes, to lead aggressive

wars and carry out raids, made owners think about whether it was ef-

ficient to remelt ingots — for then the promissory component was lost

forever, which entailed a significant loss of value.

However, the rules of circulation were carried over from the previous

form of money — natural commodity money. Simple exchange func-

tioned within the framework of property law, and the promissory com-

ponent was only a part, a property of the whole entity.

Full-bodied metal coins

Gold, silver and copper coins were undoubtedly objects and had

permanent value, like the value of the metal they contained. The

value, for example, of the gold used to stamp gold coins was in no way

dependent on the problems of the government that stamped them

(Fig. 10).

The first known coins were made in the kingdom of Lydia (on the

territory of present-day Turkey) in the 7th century B.C. out of electrum,

a natural alloy of gold and silver. A particular design was stamped on

them to confirm the prescribed weight. The minted design played the

part of a stamp by which the ruler guaranteed the accuracy of the com-

position and weight of the coin2.

1 At this time in Russia, so-called «drogichinskiye» stamps became the promissory com-

ponent of commodity money. These were lead stamps on rubbed pelts. (see: A.S. Mel-

nikova, aforementioned work, P. 18).

2 J. Cribb. Aforementioned work. P. 10.

84

Part III. Money

Fig. 10. Prevalence of full-bodied metal coins

On the territory of Rus’, the minting of silver and gold coins dates

back to the times of Prince Vladimir I (Kievan Rus, end of the 10th —

beginning of the 11th century). On some gold coins, the inscription

«Vladimir on the throne» was continued on the reverse with «and behold

his gold», and this signified the guarantee of the coin’s composition. In

the «Russkaya Pravda» code of laws, metal money was still called kuna,

although silver grivnas have also appeared by then. Between the 12th

and the 15th centuries, princes tried to mint their own «specific» coins.

In Novgorod, foreign money was in circulation — «yefimki» (from

Joachimsthaler — German silver coins which were being used as an

international means of payment in the whole of Eastern Europe). In

the Moscow principality, the initiative to mint silver coins was taken by

Dmitri Donskoi (14th century), who began to smelt Tatar silver money

into Russian grivnas. Ivan III (end of the 15th century) established that

the right to mint coins could belong only to the «elder» of the princes,

the occupier of the Moscow throne. The first regulation of the Russian

monetary system was passed under Ivan the Terrible. At the beginning

of his reign, «moskovkas» and «novgorodkas» were circulating freely,

and the former, at face vale, was equal to half a «novgorodka». At the

beginning of the 17th century, a single monetary unit was established in

Russia — the kopeck (a horseman with a spear [ kop’ye in Russian]was

depicted on the coin), which weighed 0.68g of silver. This roughly cor-

Money as an economic and value category

85

responded with the weight of a «novgorodka»; «moskovkas» were still

being minted, as were half-kopecks and the «polushka» — a quarter of

a kopeck. In addition, the rouble, the poltina and the altyn were intro-

duced to the counting system, although the minting of the silver rouble

did not become the rule until Peter the Great’s reign. Gold money —

the chervonets — appeared in Russia from 1718 onwards.

The growing role of the State as a body of enforcement in money

circulation was demonstrated by the fact that «the population was no-

tified before new money and polushkas were issued. In populous plac-

es, documents were hung up with the text of the tsar’s decree on the

new money. This decree was read out after worship in churches, and

«hailed» by town criers at the markets for several days»1.

«Nowadays we do not use gold coins, but they were circulated at

markets over several centuries. The particular popularity of gold as

money is due to the fact that it is relatively simple to carry, it is easy to

measure, and it is possible to check it for the presence of impurities.

When gold coins are used as money in the economy (or paper money,

which can be exchanged for gold on demand), we say that the gold

standard is operating in the economy»2.

As a further example we can use the words stamped on «Nikolai’s»

gold coins, worth 25 roubles: «7 zolotniks 3 dolias of pure gold». [ Trans-

lator’s note: zolotnik — old Russian measure of weight equivalent to

4.26g; dolia — measure of weight equivalent to 44mg.]

The circulation of this form of money, its proprietary and promis-

sory content, its user value and exchange value, its legal nature and

security, were the same as that of precise-weight metal ingots.

1 L.V. Orlenko. The history of trade. Moscow. 2006. P. 217 ( Орленко Л.В. История тор-

говли. М., 2006. С. 217).

2 N.G. Mankiw. Aforementioned work. P. 589.

86

Part III. Money

Nikolai 2nd, Emperor and Ruler

25 roubles of gold,

of All Russia

21/ Imperial units.

2

1896

25 roubles, of pure gold

3 zolotniks1

1 Old Russian measure of weight, equivalent to 4.26 g

Money as an economic and value category

87

Credit money

Commercial bills

Fig. 11. Prevalence of commercial bills

The first commercial bills of exchange presently known were notes

written on stone tablets for safekeeping of valuables, in use in Babylon in

3000 BC (see next page). «Gold and valuables were kept on shelves in

bankers’ depositories or immured into the walls (an early form of modern

banking safes). For this service, Babylonian banks took 1/60th of the

value of the goods deposited. Once they had received money or valuables,

the bankers wrote out receipts — pieces of stone with cuneiform signs on

them, corresponding to the value of the goods deposited. Thus, the valu-

ables could be taken out by anyone upon presentation of the receipt and

proving his right to ownership of that receipt (for example, with a signa-

ture or the impression of a stamp from the person who deposited the

money and in whose name the receipt had been made out).

The experience of the Babylonians was then imitated in Ancient

Greece»1.

Another interesting example is the Tabularium, the most ancient

and secure building in Ancient Rome. Even today, it is partially pre-

1 L.V. Orlenko. The history of trade. Moscow, 2006. P. 108 ( Орленко Л.В. История тор-

говли. М., 2006. С. 108).

88

Part III. Money

Stone receipt with cuneiform writing, for the depositing

of a client’s valuables. Ancient Babylon, 3000 BC.

served at the base of the Capitoline hill. There lay clay tablets (tabulas)

on which certified statements for citizens’ tax debts were preserved.

Because there is written evidence that in Ancient Rome one could be

put into slavery for not paying one’s taxes within a set period, it is clear

that these tabulas could be sold by the State to slave owners. There is

more than one case described in which the ‘mob’ revolted, usually end-

ing up pillaging the Tabularium and breaking the tabulas in half.

The ancient Chinese have been credited with inventing paper mon-

ey. In the 10th century China merchants stopped using the heavy iron

coins issued by the Chinese government for small purchases, and used

receipts instead. Receipts started to be used not only for depositing

coins but also for goods, for paying taxes and to issue credit. The use of

these lowered the cost of currency distribution and considerably broad-

ened trading opportunities.

The development of trade relations and wholesale trading was ham-

pered by coinage being used for major trade. When wholesale trading

developed into deals with silk convoys and ships carrying spice, sacks

and chests full of gold coins were already being used. These were not

very convenient, first of all, because of their large volume, and sec-

ondly, because of the need for reliable storage during shipping. At a time

where there were whole tribes1 of robbers making a living from attack-

ing trade routes, things became extremely dangerous.

1 Vikings, Chechens, Turks, etc.

Money as an economic and value category

89

In addition to their light weight, commercial bills of sale had one

other advantage: they kept the merchant from being robbed (payment

for bills of sale could only be issued to the actual person named on the

endorsement).

Another important quality of the bill of sale was the cheapness and

simplicity of its production — it was not necessary to buy the expensive

metal kept at the mint and the assay office, it was enough just to write

out the paper and endorse it.

These bills of sale were civil documents and represented the abstract

obligation of the merchant or trader to pay the person indicated within

a specified period the amount of the specified precious metals.

Promissory notes gave rise to a new form of currency: credit. The

producer selling goods on credit received a bill of exchange (a promis-

sory note) and could use it instead of money to pay for goods purchased

from a third party.

«The rise of this type of currency as a social phenomenon only came

about because capitalism established close ties between those involved

in public production, much closer than those between traders»1.

«The main types of credit currency were bills of exchange, called

«trading» currency by Marx, especially transfer notes, although these

could seldom be used as payment as they could not be endorsed. When

this became legal (around the 17th century), they became more widely

used as payment. In other words, promissory notes used as bills of ex-

change became recognised as methods of payment when it started being

used as such. However, commercial bills of sale had several limitations

on their use in domestic exchange, relating to the territory, the times,

those who took part in the exchange, the nominal value (denomination)

of the paper, and warranties. As a result, they could not be universally

accepted. However, if we look at a range of international payments, a

significant number of these were accomplished with bills of exchange:

at the turn of the 20th century, these accounted for 80% of all payments.

The fact that they were performing the function of world money is

evident»2.

The bill of exchange could be issued by anyone for any sum, any

amount of coins or any weight of gold.

1 Portnoy M.A. Aforementioned work. P. 14.

2 Berezina M.P. Aforementioned work.

90

Part III. Money

These two characteristics — the unlimited number of issuers and the

unrestricted amount of the bill of exchange — significantly limited the

acceptance of the bills, because hardly any beneficiary had reliable

information about the solvency of the issuer and the amounts of the

deals hardly ever matched the amounts the bills were made out to.

Gradually, the number of authorised issuers decreased and only

banking establishments that dealt with promissory notes, receiving and

supplying currency as part of their work were recognised, thus getting

rid of the problem of unreliable issuers about whom nothing was

known.

Circulation

Certified bills of exchange, as already noted, came into being for

convenient circulation in major wholesale trade, and to improve and

make more reliable the deposition of valuables, as well as making produc-

tion cheaper and simpler. The backing for these bills was the merchant’s

property, either personal property, that given in exchange, or the mer-

chant’s success in trading, their caution or ability to earn money. How-

ever, improving the reliability of the depositing and keeping of valuables

made circulation more difficult, as the issuers challenged endorsements

which were not made out in the proper way. Every endorsement was chal-

lenged in local courts and it was possible for only the merchant who had

made the endorsement to be present. Promissory regulations were there-

fore drawn up so that any endorser could seek damages in case an issuer

refused payment. This action implied, more or less, the following:

«I trusted you and accepted a bill of exchange from you for this merchant.

But this merchant doesn’t believe me and won’t pay. Take your bill of

exchange and work it out with the merchant». The circulation regulations

deterred traders when there was no reliable or quick long-distance com-

munication. Only when such communication was made possible did the

promissory notes gain power as a type of money.

Merchants — known for their prudence — devised the blank en-

dorsement, which led to the circulation of blank promissory notes for

bearers and greatly simplified circulation. In this way, anyone bearing

a blank promissory note became a legally bound creditor without ques-

tion.

The bearers’ promissory notes started a new circulation phenome-

non: as derivatives, or derived securities, they allowed the bearer to

Money as an economic and value category

91

make concrete transactions and this gave the bearer far more rights in

relation to the issuer. Although the issue and redemption of these prom-

issory notes complied with the law (abstract requirements for settle-

ment), the circulation of these notes began to tie in more with the

current development of property rights.

The holder of a promissory note to bearer had the right of ownership

on the bill slip with an inscription, and the blank form gave an uncon-

ditional abstract right to request precious metals or coins from the

debtor.

The problems with these derived secure documents and their dual-

ist and legal nature are described in more detail in part 2.

It should be noted that the civil nature of the promissory notes only

gives their holder judicial backing as opposed to State support when

used as currency.

In the last decade of the 20th century, promissory notes from the

Russian joint stock companies EES Russia, Gazprom and Energoatom

were used to settle existing wholesale accounts, mostly because of the

mistrust of the banking system which had arisen after the two system

level bank crises (in 1995 and 1998).

M.P. Berezina believes in the 1990s the number of payments made

without using bank funds came to 70 — 80% of all cash free pay-

ments 1.

Banknotes from private banks

Bankers’ Houses replaced, not without some profit, private prom-

issory notes with banknotes (bank bills) — bills unified by sum (face

value), which was convenient and cut down on the costs of circulation

(see fig. 12). In contrast with traders’ promissory notes, banknotes

were issued only payable to bearer and upon presentation, could be

circulated over an unlimited amount of time and were backed by

gold.

Such liabilities proved more reliable and became very popular, at-

tracting the maximum demand on the market, giving their bearers an

air of respectability.

1 M. P. Berezina. Aforementioned work.

92

Part III. Money

Fig. 12. Prevalence of banknotes from private banks

The Count of Monte-Cristo in Alexandre Dumas’ novel of the

same name boasted that he’s carrying around a one-million bill

from the Rothschilds, and thus greatly impressed his contempo-

raries.

Such bank notes — literally, «notes written by banks», used to be a

proper noun, but became a common noun as time went by.

«A banknote (bank bill) — is a security unified by sum ( author’s com-

ment), which certifies the self-addressed order of the issuing bank to

pay its bearer immediately upon presentation the sum of money in coins

which currently are in circulation»1.

«A banknote is nothing else but a banker’s bill, according to which

the holder can receive money at any given time and which the banker

uses instead of promissory notes»2.

Even though banknotes had the same «bill nature», they were more

stimulating to circulation because of the following properties:

• The broadly known wealth of the issuing banker;

• No fixed term in circulation;

• Bearer-oriented nature;

1 Russian Legal Encyclopedia. Moscow, 1999. P. 720 (Российская юридическая энцик-

лопедия. М., 1999. С. 720).

2 Marx K., Engels F. The complete works. Vol. 25. Part 1. P. 444.

Money as an economic and value category

93

• Issue of unified sums (face values);

• Backing with gold and other bank’s assets, which were considerably

higher than those of traders.

Banknotes, i.e. paper money, don’t have any intrinsic commodity

value. Paper money is a symbol, a sign of exchange value. What then

caused the permanent disappearance of gold from circulation? There

must be objective causes, apart from wars and other troubles, apart from

lavish rulers and cunning bankers. Here is the simplest explanation —

paper money is convenient in circulation, it’s easy to carry. A phrase by

the great Adam Smith comes straight to the point — he said that paper

money must be viewed as a cheaper circulation tool.

Consumer value of money impeded circulation, and thus to the front

came exchange value, which caused a process later known as demon-

etization — the withdrawing of gold, which no longer performed the

functions of money, from circulation.

Circulation

Consumer value of nearly all cash credit money consisted in the

quality of the paper and the engraving, which was important to those

with artistic taste, but was worth only about 1 percent of its face value,

which embodied the exchange value of the security in case the issuing

party’s business went well and the beneficiary was aware of that. If,

however, the beneficiary received true or false information that the is-

suing party’s business was experiencing difficulties, the security’s ex-

change value would begin to decrease. Lastly, if the beneficiary believed

the issuing party to be bankrupt, the security’s exchange value became

equal to its commodity value and depended only upon the beneficiary’s

artistic taste and his wish to keep this particular product of the printing

industry.

A banknote from a private bank is a unified by sum «self-addressed»

private bank bearer bill with a non-fixed «upon presentation» term and

a blank endorsement.

This derivative security, whilst being an unconditional obligation,

similar to commercial bearer bills, during its issue and paying off was

subject to the law of obligations, within which it is important to spe-

cifically underline the abstract nature of an obligation, caused by the

need to simplify court disputes for the benefit of trade turnover. The

94

Part III. Money

essence of the obligation relations which were in place during the pay-

ing off of a banknote, was the unconditional obligation to hand out a

certain amount of precious metal or coins of a certain weight, compo-

sition and form.

However, circulation of such banknotes was subject to the more

developed and better known at that time law of estate. The person who

in the physical sense possessed the bill, undoubtedly became the cred-

itor in this obligation case.

The bearer of a banknote had the property right to the banknote

paper bill with an inscription, as well as the unconditional abstract right

to demand precious metals or precious metal coins from the banker.

Banknotes were backed by the enormous — by the standards of that

time — wealth of bankers. The wealth of the Rothschilds had been

legendary for a long time.

It is necessary to mention that the private law nature of private

banks’ banknotes as a variety of bills provides their holders only with

support in court, in contrast with state-endorsed private law support

provided to holders of currency.

Currency

Public and legal origin

The uniqueness of currency as a form of money consists in the fact

that it hasn’t evolved from commodity relations and economic theories,

but is designated by a State document. Its «parents» are not political

economy and industrial relations, but public law — State public rela-

tions in the field of money circulation (fig. 13).

If in earlier times public relations would push forward certain com-

modities to be circulated as forms of money, then at present, with

public relations developed to a higher level, the public delegates the func-

tion of defining money forms to the State (or, in some cases, the ruler

himself would usurp this function) and it is the State (king, emperor,

tsar, president and parliament) that define money forms on the grounds

of a volitional decision.

It is the compulsion power of the State that strengthens currency.

«…By Chinese laws of the 13th century, those who refused to accept

Money as an economic and value category

95

Fig. 13. Prevalence of currency

imperial paper money were sentenced to death, in France the same

offence was punished by 20 years of penal servitude, and according to

English legislation, refusal to accept government banknotes was seen

as State treason»1.

A revealing argument that proves the State-enforcement origin of

currency is the treatment of money counterfeiting not only as a crimi-

nal, but also as a political offence. The struggle against money coun-

terfeiting in the USA was initially led not by the police or the FBI, but

the president’s personal secret security service2.

Because it is the State that issues currency, it is the State that creates

additional legal norms of the public law, which are in force as well as

the «usual» public law support applicable to banknotes and bills.

These additional legal norms include every trader’s duty to accept

currency payments, as well as more strict prosecution measures against

counterfeiters compared to swindlers who forge bills and banknotes of

private banks.

Aristotle, as early as in his time, made the point that «money became

money ( nomisma) not through its internal character, but on the strength

of the law ( nomos), and it is within our power to change this situation

and render it useless»3.

1 Orlenko L.V. The history of trade. Moscow, 2006. P. 92 ( Орленко Л.В. История тор-

говли. М., 2006. С. 92).

2 Similar in its tasks to the Russian Federal Guard Service.

3 Woelfel Ch. J. Encyclopedia of Banking and Finance. Samara, 2000. P. 290.

96

Part III. Money

The Federal Law «On currency regulation and currency control»

(draft of the 29.12.1998) states the following:

1. «The currency of the Russian Federation»:

a) Roubles in the form of Central Bank of the Russian Federation

bank bills (banknotes) and coins, being in circulation, as well as being

or having been recalled from circulation, but still liable to exchange;

b) assets in roubles on accounts in banks and other credit institu-

tions within the Russian Federation;

c) assets in roubles on accounts in banks and other credit institu-

tions outside of the Russian Federation on the grounds of an agreement

concluded by the Government of the Russian Federation and the Cen-

tral Bank of the Russian Federation with appropriate foreign institu-

tions about the use of Russian currency on the territory of the foreign

state as a legitimate means of payment.

<…>

3. Foreign currency is:

a) monetary units such as banknotes, T-Notes, coins, being in

circulation and acknowledged as the legitimate means of payment in

the appropriate foreign state or group of states, as well as monetary units

being or having been recalled from circulation, but still liable to ex-

change.

b) assets on bank accounts in monetary units of foreign states and

international monetary or payment units».

As a rule, in most countries of the world national currency is defined

as provided by law for circulation liabilities of the Central Bank ( Treasury,

Reserve System), endowed by the Government with the following prop-

erties:

• it is a legal means of circulation which has to be accepted on a com-

pulsory basis as a means of payment for goods and services on the

whole territory of a country;

• it is circulated as bearer liabilities without time-limit, which exist

both in cash (banknotes and coins) and non-cash form (deposit

money — assets on bank accounts);

• it is acknowledged as the sole means of tax settlement;

• Government has a monopoly on its emission.

Money as an economic and value category

97

In the legal sense, one may with good reason define modern cur-

rency as the two forms of money which act as the only acknowledged

legitimate means of payment and the sole means of tax settlement:

• cash, or banknotes and coins of the Central Bank;

• non-cash, or deposit money.

Classification of money forms on the basis of «cash — non-cash»

Let us go back to the issue of correlation of terms money, currency,

cash and non-cash.

Money, i.e. property goods which function as a means of circulation,

a measure of cost and a means of accumulation (preservation of cost),

in Russian public practice are divided into cash and non-cash. While

utilizing such terminology, we must make sure it is clearly defined.

If we define as cash certain forms which have object content to such

a measure that a man is able to hold them ( Detencio), we can recognize

as cash the following objects:

• non-unified goods such as furs, salt, crops, metals by weight;

• unified goods such as metals, orange juice, wood, meat;

• precious metal (inc. gold) ingots of precise weight;

• ordinary bills, quasi-money in cash form, such as State bonds, fund

assets, which partially function as money etc.;

• State banknotes (T-Notes) and coins;

• notes emitted by private banks.

Each of the money forms, which constitute the notion of cash mon-

ey, can be contrasted with its non-cash form, that is created by the

placement of the given cash form into a special repository, in order to

facilitate its circulation.

It is extremely important to underline this feature. It is the conven-

ience of circulation, inherent to non-cash money forms, that makes a

society transfer its cash forms into their non-cash equivalent, and only

a crisis of public circulation may force a society to withdraw money

from appropriate repositories, but only temporarily (!). At the same

time, the non-cash form doesn’t disappear as an entity, simply enough

its object component is minimized, becoming a paper bank statement

and a data object measuring 10 000 thousand silicon domains on a

magnetic bearer in an appropriate repository (bank, depository).

98

Part III. Money

The term money includes the following notions:

• «commodity money»;

• «financial money»;

• «currency»

The first two notions have a limited circulation function, which is,

however, sufficient to recognize its presence.

Each of these notion forms — respectively — has its own subforms,

which can be classified on the basis of «cash — non-cash» (see Ta-

ble 5).

Table 5

Classification of money forms on the basis of «cash — non-cash»

Money form

Cash

Non-cash

Commodity money

non-unified goods — furs,

salt, crops, metals by weight

unified goods — metals,

Non-cash contracts, taken

orange juice, wood, meat

account of by special

electronic systems of

commodity exchanges

precious metal (inc. gold)

«Gold» accounts in banks

ingots of precise weight

and specialized depositories

such as Kitco

Credit money — fi-

Ordinary bills

Depo accounts in banks and

nancial (with a

specialized depositories.

Quasi-money

limited function as a Fund assets, partially

means of circula-

functioning as money

tion)

Credit money —

State banknotes (T-Notes)

Deposit money (cheque

currency

accounts)

Central Bank coins

Banknotes of private banks

It follows from Table 5 that, in particular, notes emitted by private

banks, with their economic and legal content identical to currency, are

mistakenly not referred by the Federal Law of 09.10.1992 № 3615-1

«On currency regulation and currency control» to the national cur-

rency of the Russian Federation.

Thus,

• the notion currency is a submultitude of the notion money;

Money as an economic and value category

99

• notions State banknotes, Central Bank coins, notes of private banks

are submultitudes of the notion currency, as well as the notion cash

money;

• the notion deposit money is a submultitude of the notion currency,

as well as the notion non-cash money.

Cash currency

Fig. 14. Prevalence of cash currency

State banknotes (T-Notes) with full or partial metal provision

Paper money is a relative novelty in the financial world (see Fig. 15).

For the first time it was put into circulation in ancient China in the IX

century, when the government deprived merchants of their right to issue

receipts and printed its own receipts of fixed value, which became the

official replacement for coins and significantly facilitated payments.

This was the first step in the world taken to form a currency — the mon-

etary unit of a given State, established by law1.

However, in other countries substitutes for «real money», i.e. coins,

were broadly used as well. Their face value was confirmed by a mo-

1 International currency, credit and financial relations / Ed. by L.N. Krasavina. Moscow,

2000. P. 34 (Международные валютнокредитные и финансовые отношения /

Под ред. Л.Н. Красавиной. М., 2000. С. 34).

100

Part III. Money

Fig. 15. Prevalence of paper money

narch’s stamp or a merchant’s (banker’s) signature and private stamp.

For example, in ancient Russia pieces of stamped leather were used for

the purpose, and in 13th-century China Khubilai Khan ordered to

«mint» money from mulberry tree bark, which he attested with his own

Imperial stamp.

The initial causes of the evolutionary origin of banknotes lie in the

following factors:

• Firstly, governments, realizing an opportunity to get gratuitous pub-

lic credit, adopted merchants’ practice.

• Secondly, previously minted defective billon coins logically led to a

decision to replace metal as the bearer of value information with a

more convenient and less expensive one, i.e. paper.

In connection with this issue, Karl Marx remarked: «In its role of a

circulation intermediary, gold had experienced all sorts of misfortunes,

it had been cut or even thinned until it became a simple symbolic scrap

of paper»1.

The first experiments with paper money sometimes were quite fun-

ny. «For example, the French Governor of Canada in 1658 ordered to

use as money playing cards with his own signature. The reason for such

decision was the fact that money from France was delivered to its colo-

nies with a considerable delay, and settlers faced a shortage of means to

pay for goods and make other settlement between each other. It was in

this situation that the Governor decided to turn playing cards, which

were available in abundance, into local credit money. With his signature

he attested the right of the owner of such a card to exchange it for real

1 Marx K., Engels F. The complete works. Vol. 13. P. 107–108 ( Маркс К., Энгельс Ф. Соч.

Т. 13. С. 107–108).

Money as an economic and value category

101

coins, once a ship delivering them arrives from France. The Governor’s

signature confirmed his duty to the owner of the card and the right of

the latter to «convert» the card into real money.

Thus, plain facts themselves encouraged bankers and governments

to realize that money becomes an increasingly symbolic and very cheap

instrument of economic activity. Despite the fact that paper notes from

bankers were merely a symbol of gold, people didn’t object to using

them.

Governments resorted to issuing paper money in North America in

the late 17th century, i.e. earlier than in Europe. The first step was made

in 1690, when the State of Massachusetts started printing paper

money»1.

In Europe, the first banknotes appeared in 1694, with the foundation

of the Bank of England. By the Bank Charter Act of Robert Peel, passed

in 1844, the exclusive right to issue banknotes was granted to the Bank

of England only. This Act also stipulated a special system of banknote

backing, which later became known as the «English» system: all cur-

rency issue, excluding a firmly fixed sum, was to be backed by the

metal supply of the issuing bank, mainly by gold. The issue of banknotes

not backed by metal was called fiduciary issue. It was the first system of

partial banknote backing, which replaced the system of full backing.

In Russia, issue of banknotes was caused by a number of reasons.

Coin circulation during the reign of Empress Elizabeth (1741–1761)

and the following years was based on copper money, because silver and

gold were in short supply at the time. The broadening of trade links,

which embraced the giant territory of Russia, demanded great quanti-

ties of money of a more convenient sort than copper coins, which

prevailed in circulation, but were hardly suitable for large-scale trade

transactions. For instance, a payment worth 100 roubles in five-kopeck

copper coins weighted as much as about 1 centner.

Issue of paper money is closely linked to certain technical and ma-

terial conditions, the level of a country’s productive powers, including

invention and improvement of paper production, introduction of paper

and other printing industry machines, availability of specialists able to

provide for money production. Establishment of a special enterprise is

1 Orlenko L.V. The history of trade. Moscow, 2006. P. 92 ( Орленко Л.В. История тор-

говли. М., 2006. С. 92).

102

Part III. Money

also necessary. Since in Russia, until early in the 19th century, no such

conditions were provided, the introduction of paper money was held

back.

The first Russian document on introduction of banknotes into cir-

culation was the «personal, given to the Senate Decree of Emperor

Peter the Third of the 25th of May, year 1762»1. In this decree, in par-

ticular, it was stated that:

«…We haven’t ceased reflecting upon invention of the most facile

and reliable means, to facilitate the circulation of copper money and,

in commerce itself, create a convenient and beneficial establishment

of a distinguished State Bank, by which each and every person, accord-

ing to their wealth and wish, for moderate interest rate, could profit,

and the circulation of Bank bills to be immediately introduced, as the

best means, which by many an example in Europe is verified …»

By the same decree it was ruled that:

«1. Bank bills to be made as soon as possible for 5 000 000 roubles

with various face value, viz. 10, 50, 100, 500 and 1000.

2. These bills to be printed on special paper, specifically made for

the purpose, and further precautions to be taken, so that there could be

no forgery.

3. For those who require the bills signed for further security, or for

other necessary instructions, a new Decree is to follow immediately

after this one.

4. When made, the aforementioned bills for 5 000 000 roubles to be

immediately delivered to bureaucratic institutions, which distribute the

greatest share of money, so that these institutions use and spend them

as cash money itself, for. –

5. We wish and by this Decree command that these bills are indeed

to be circulated as cash currency and as such used to pay all of Our

taxes and duties, not excluding customs duties…»

Two offices of the State Bank were established in Moscow and Saint-

Petersburg. However, with the instantaneous issue of bills for 5 million

roubles, the bank was granted only 2 million of backing money (one in

silver coins, and the other in copper coins), while the remaining 3 mil-

1 The complete Laws of the Russian Empire. Vol. 15. Code: E 121/1; H, 19/3158.

Money as an economic and value category

103

lion were to be supplied from the sate treasury in the next three years

(one million per year).

The Decree forbid the State Bank to «dispose of the financial capi-

tal for its own good or at its own will», but gave the following instruc-

tions: «to those who come in possession of bills, and would wish to have

cash instead, cash money is to be immediately distributed upon receipt

of the aforementioned bills, without any receipts and written record-

keeping; and, most importantly, without any delay or red tape, or if one

comes in possession of cash money, and would wish to exchange it for

bills of equal value, he is to be served with the same efficiency; for this

purpose, Institutions that manage this Bank are to keep a certain

amount of exchanged bills… thus, the Bank will remain always inex-

haustible, and the circulation of money great, fast and convenient, so

that any addition to the 5 000 000 would not seem absolutely necessary,

but only a result of Our extreme precaution».

The State Bank had no right to collect any commission for taking

or giving out bills, so that their value in circulation was as close as pos-

sible to the value of an appropriate amount of coins.

The implementation of this Decree was declined by Catherine the

Great, but the beginning of the Russo-Turkish war (1768–1774) made

her issue the first paper money in the form of assignations in 1769, ac-

cording to the Manifesto of the 29th of December 1768.

Specialists from Russsian Gosznak (State Administration for the

Issue of Banknotes) A.E. Mikhaelis and L.A. Kharlamov argue that

«they vaguely resembled money in the modern sense. Most probably,

they were bank liabilities — receipts exchangeable for coins» (here and

further bold type mine — A.G. )

Assignations replaced the extremely inconvenient copper money;

they were highly popular and beneficial to the development of trade.

They were also used to pay civil servants’ salaries. At first, all issued

assignations were backed by coins and, when brought by an individual

into a bank, were immediately exchanged for copper, silver or gold

coins. Not long after, however, the number of assignations began to

exceed the available supply of coins, and because of the excessive as-

signation issue, especially during the war with Turkey, their exchange

104

Part III. Money

rate began to fall. In the last year of Catherine the Great’s reign, one

assignation rouble was worth only 68.5 kopecks»1.

In France, the issue of banknotes started in 1800–1803, in Ger-

many (then Prussia) — in 1846. Regular bankruptcies of private banks

due to uncontrolled issues of banknotes, increase in social tension and

aggravation of economic troubles made all European states follow the

earlier example of England, i.e. impose a monopoly on banknote issue.

These countries introduced a new system of banknote backing, known

as the German system. In contrast with the English system, with its

limit of fiduciary issue (the issue of banknotes not backed by the pre-

cious metal supply of the issuing bank), the German system envisaged

a minimal quota for banknote backing. In the late 19th — early 20th

century in different countries this quota made up from 50 to 30 percent

of total banknote issue. Later on, yet another backing system was

formed, known as the American system, the essence of which was the

may so be called «doubling» of partial backing: 15 percent of banknote

issue was backed by gold and, furthermore, 90 percent — by State se-

curities. Special instructions were in place in France, where the legisla-

tor would simply determine the maximum volume of banknotes, which

could be in circulation, without pointing out by what and to what per-

cent it was backed, despite that fact that, without doubt, certain mini-

mal backing norms did exist.

Thus, the volume of banknote issue was linked to the size of issuing

banks’ gold supplies, which created an opportunity to exchange ban-

knotes for gold, which at the time acted as the monetary metal, but in

periods of gold supply shortage the same factor led to financial crises.

During the First World War, exchange of banknotes for gold was almost

completely ceased, despite that in legislation this fact was grounded

only years later. Banknotes, initially, replaced proper money in circula-

tion, and then they replaced paper money as well2.

With the introduction of paper money (in Russia — assignations),

the essence of money had gone through major changes, and its double

nature was confirmed once and for all. A certain object content re-

mained — the cost of paper, ink and print. But it accounted for far less

1 Mikhaelis A.E., Kharlamov L.A. Russian paper money. Perm, 1993. P. 3 ( Михаэлис А.Э., Харламов Л.А. Бумажные деньги России. Пермь, 1993. С. 3).

2 See: Russian Legal Encyclopedia. Moscow, 1999 (Российская юридическая энцик-

лопедия. М., 1999).

Money as an economic and value category

105

than the actual value of a banknote (assignation). The Central Bank’s

promise to pay gold for the assignation became its main value compo-

nent. Usually, this would be a gold bill of the Central Bank1. On pre-

Revolution Russian banknotes one may read: «This bill is exchanged

upon presentation for … parts of pure gold».

Circulation

The previously described banknote issued by a private bank by both

its economic nature and its derivative object content, and also by its

primary liability content greatly differs from a State banknote.

In case with issue and repayment of State banknotes, not private law,

but public law was in force. The essence of liability relations, which

arose when a banknote was paid off, was either an unconditional obli-

gation to give out a certain quantity of precious metal or coins of certain

weight, content and form, or an unconditional obligation of the govern-

ment to accept the banknote as the means of paying taxes and customs

fees.

The derivative proprietary right of circulation also changed, it was

confirmed by the public law obligation to accept money in certain form

during all trade operations as the means of payment, which is to be ac-

cepted on a compulsory basis. This right of the bearer was supported by

the power (the capacity for legal compulsion) of the State.

Cash currency is guaranteed by the property of the State and its

Central Bank, by the State’s right to collect taxes.

The holder of a State banknote not only had a proprietary right in

the paper note, but also the right to use this note to make any payment

anywhere within the country. The banknote symbolizes an uncondi-

tional abstract right to demand precious metals or precious metal coins

from the State or an abstract right to use the banknote for tax pay-

ment.

The holder’s right to accept payment is replaced by the issuing

party’s duty to accept payment.

State banknotes (T-notes) not backed by metal

In 1762, in order to put the first paper money into circulation as

soon as possible, a new requirement in Moscow and Saint-Petersburg

1 «At present not a single country retains the possibility to exchange banknotes for gold»

(R. Barr. Aforementioned work. P. 288).

106

Part III. Money

prescribed at least 20 percent of tax payments’ sum total to be made in

25-rouble assignations1.

At the time, credit money in Russia had already developed into cur-

rency — the monetary unit of a certain country stipulated by law, the sole

means of tax settlement and repayment of State credits.

«Credit, too, as a public form of wealth, forces money out2 and

usurps its place»3.

V.A. Byelov describes currency as follows: «…objects, which conform

to legal requirements and are accepted by the State as the sole means

of payment with a compulsory exchange-value, and take the form of a

national monetary unit.

Paper money is yet another kind of monetary unit, identical to bil-

lon coins by its economic nature. Face value of paper money was con-

siderably higher than their cost as objects (paper notes made and dyed

by a certain method). Money circulation was provided for by the State,

which established and protected its compulsory exchange-value, i.e. its

obligatory acceptance for all payments at its nominal cost.

Banknotes (bank notes and bills; in Russia, one also points out as-

signations [1769–1849] and credit bills [1841–1919]) are bank bills (in

Russia — only State banks or the Treasury) in the form of self-addressed

orders to pay their bearer immediately upon presentation the amount

of money, indicated as a round number, in small coins of full value or

paper money. By their economic nature, these are transferable self-

addressed bearer bills, with the payment date specified as «upon pres-

entation»… In England, the first attempt was made to regulate the issue

of such documents. Bankers’ self-addressed bills became known as

«bank notes» and a special system of legal regulations was also created.

The usage of promissory notes in inner market circulation began to

dwindle. Moving into international trade and replacing money and

monetary units, in inner circulation promissory notes themselves were

replaced by receipts»4.

1 Katz L.Z., Malyshev V.P. Russian Paper Monetary Units Encyclopedia, Vol. 1. Saint-

Petersburg, 1998. P. 591 ( Кац Л.З., Малышев В.П. Энциклопедия бумажных денеж-

ных знаков России. Т. 1. СПб., 1998. С. 591).

2 Apparently, Marx talks about natural commodity money — gold, silver etc.

3 Marx K., Engels F. The complete works. Vol. 25. Part 11. P. 121.

4 Byelov V.A. On currency convertibility // Business and banks, 1996. Issue 26 ( Белов В.А.

Кое-что о конвертируемости валют // Бизнес и банки, 1996. № 26).

Money as an economic and value category

107

Money, which is deprived of its intrinsic value, is called «decreted»,

or paper money. The Anglo-American term is fiat money, and it derives

from fiat — decree, edict; because paper money is put into circulation

by a Government decree. For instance, we may compare the official

paper dollars (printed to order of the USA Government) and paper

dollars used in the «Monopoly» board game (printed by Parker Brothers

game company). Why only the official paper dollars are suitable for

buying things in the real world? The answer is obvious: because the USA

Government announced that these dollars are a legitimate means of

payment and on each of them it is said that: «This note is legal tender

for all debts, public and private»1.

An episode from the reign of Holy Roman Emperor Frederick II

(1194–1250), described by L.V. Orlenko, is a curious example. The

Emperor tried to make his subjects accept gilded leather «augustals» at

the nominal value of gold2. However, without a firmly defined legal base

and the State’s real authority, the attempt was doomed.

«Reflecting on the general abandonment of the gold standard in

money circulation, we must note that the role of gold in the period of

capitalism is quite ambivalent. On the one hand, it’s always in view and

is perceived by the society as the sole form of full value money, and also

as the embodiment of wealth. On the other hand, it isn’t anymore the

only available form of money and is forced to share this role with the

offspring of capitalism — the rapidly progressing credit money. The

ambivalent role of gold has been hidden for a long period of time, be-

cause credit money emerges and develops on the base of gold, performs

an increasing amount of work, but without the dramatic effects that

accompany the functioning of gold at the time.

In a capitalist society the role of money in the economic process

undergoes drastic changes. In the epoch of trade money played an in-

termediate part in a trade agreement as a means of circulation and

payment, as well as a means of wealth accumulation. However, at

present the main role of money is to be the necessary prerequisite for

and the starting point of capital turnover, and then an essential part of

capital.

1 Mankiw N.G. Aforementioned work. P. 589.

2 See : Orlenko L.V. The history of trade. Moscow, 2006. P. 91 ( Орленко Л.В. История

торговли. М., 2006. С. 91).

108

Part III. Money

Money is necessary to put productive capital to work, to get it mov-

ing and constantly keep it moving. To achieve this, money must be

constantly moving itself. However, this is not a basic movement, but a

movement during which the value of capital grows, thus, the sum of

money that represents this value must grow to an equal measure.

Gold turns out to be unfit for this task. One is forced to provide for

accumulation of the sum of money, which represents the growing value

of capital, in a mechanical way, i.e. by increasing the mass of collected

gold. With the development of capitalism, especially with the approach

of the industrial capitalism era, it is immediately discovered that there’s

simply not enough gold! More and more gold must be mined just for

the purpose of minting coins and putting them into circulation. All this

effort, apparently, is almost entirely useless, because money only serves

the movement of capital, acting — as «the uninitiated» see it — as the

unavoidable, but unavailing intermediary, with whose presence on the

stage of economic life one has to put up.

A significant amount of gold can be saved when paper money, con-

vertible into gold, is used in circulation. However, even in this case

there’s not enough gold. The motif of the insufficiency of gold for

monetary purposes is constantly present in economic works on this

subject throughout the 19th — early 20th centuries.

That despite the shortage of gold, the monetary system was still able

to fulfill its tasks, is explained by the fact that since its very onset capi-

talism creates and puts into its own service more and more credit

money, which, instead of gold, successfully serves a growing number of

settlements. However, because this credit money exists on paper, be-

cause it has to use paper as its bearer, contemporaries don’t recognize

it as independent money of a new, higher degree, but perceive it as

simple paper money convertible into gold, which serves only as the

replacement of gold in circulation. This confusion is in place up to

present date, when the term «credit-paper money» is used in eco-

nomic literature when referring to modern credit money»1.

«The reasons why real money (silver and gold coins) were forced out

of circulation by unchangeable paper money are often explained by the

fact that gold serves barter only transiently, turning into ideal money.

Money circulation itself separates the real content of a coin from its

1 See: Portnoy M.A. Aforementioned work.

Money as an economic and value category

109

nominal content, separates its metal being from its functional being. In

circulation itself already there is a hidden opportunity to replace met-

al money by its function, replace coins by monetary units made from

other materials or just by basic symbols. Thus, paper money originates

from the function of money as the means of circulation»1. Credit mon-

ey originates at a certain stage of commodity production development,

when payment by installments becomes widespread. In K. Marx’s

Capital credit money2 is defined as money in the form of a liability3.

Circulation

Banknotes and coins of the Central Bank are defined as unified by

sum «self-addressed» State bearer bills with their term defined as «upon

presentation» and with a blank endorsement.

In contrast with the previous type of banknotes, the right to claim

gold in exchange for the banknote has been lost. All the other properties

have remained.

As well as the bearer of a banknote with metal backing, the bearer

of a State banknote without metal backing not only has the proprietary

right to the paper note with the inscription itself, but also possesses the

right to make by this note any payment within the country. However,

contrary to the first case, the State banknote embodies only the uncon-

ditional abstract right to be presented as a means of payment in the

situation of paying tax.

Coins with nominal value

Money with nominal value must be considered separately as an

example of natural money evolving into credit money (fig. 16).

It is believed that the first of the best-known attempts to introduce

credit money was made by Emperor Nero, who decreased the content

of gold in coins (common folk at the time believed he was «spoiling»

coins). Thus, for the first time in history the value of metal in a coin

became lower than its nominal value, but still was high enough to define

consumer properties of metal.

1 See: Marx K. Capital. A Critique of Political Economy. Vol. 1 // Marx K., Engels F. The complete works. Vol. 23. Moscow, 1960. P. 136.

2 Ibidem. P. 151.

3 Efimova L.G. Is tax payment by «dead» money a possibility? // Business and banks, 1998.

October issue ( Ефимова Л.Г. Возможна ли уплата налогов «мертвыми» деньгами? //

Бизнес и банки, 1998. Окт).

110

Part III. Money

Fig. 16. Prevalence of coins with nominal value

Gold, circulating as jewelry, at present is always mixed with copper,

silver, nickel and zinc to increase its shine and durability. Consumer

properties of such gold improve, but its exchange value as the gold-

containing metal decreases. Thus, if gold was «diluted» by other metals

to an insignificant measure, there was no social controversy. However,

as soon as this proportion exceeded the limits of what was accepted by

the public conscience, unrest grew and riots sprung up — thus the so-

ciety tried to make the State executives change their viewpoint.

«At first coin minting was a private trade (in Russia, for example,

coin minters were known as “livtsy” — “casters” and “serebryaniki” —

“silversmiths”). Then minting was monopolized by the State and coin

production began at State premises known as Mints.

In the world of ancient civilizations, as has already been stated above,

coins were made from pure silver and gold (Greece) or their alloy (Lydia).

Then they started adding hardeners (for instance, copper in gold alloys).

Too high an amount of hardener resulted in coin spoiling.

Coin spoiling by the State is a deliberate act of decreasing the weight

or the standard of coins while preserving their face value, in order to

get profit1. This means that, together with the monopoly on coin mint-

ing, the State got the opportunity to spoil coins.

1 In the form of the difference between the liability content and the object content of

money.

Money as an economic and value category

111

The decrease of the amount of metal in coins is usually more or less

palpable and is achieved by various means. For example, it is done by

simply decreasing the weight of freshly minted coins without any dam-

age to the quality of metal or by spoiling the metal, mixing it with a

cheap additive, whilst the weight of coins either stays the same or in-

creases. Also, sometimes a precious metal is simply replaced by a non-

precious one.

Coin spoiling was broadly practiced in slave-trading and feudal

societies, especially during wars which put all involved parties in a tense

financial situation. Thus, in Rome the weight of coins was a kind of

barometer, which indicated periods, when tyrannical power of the

Emperor, or social unrest, significantly increased. Historians provide

us with the following evidence: a silver denarius during the reign of

Augustus (63 BC — AD 14) weighed 3.89g; in Nero’s time (37–68), its

weight went down to 3.41g and 15 percent of additive was mixed in. In

Commodus’ time (161–192), it weighed 2.85g and the amount of ad-

ditive had grown up to 50 percent; at Septimius Severus’ time (146–

211), it’s already up to 60 percent, and an old denarius is now twice as

expensive as a new one. Quite often coins had a copper core, covered

with thin silver plating. This was nothing else but official counterfeiting

of coins»1.

It was coin spoiling that demonstrated the State’s power. Common

folk and traders accepted these coins because, on the one hand, it was

acceptable for paying taxes, and, on the other, apparently, the State

could force traders to accept this and no other money as the means of

payment for their goods.

Coins began to differentiate into full-value coins and change. Full-

value coins are a type of monetary unit in the form of an ingot (usually

round-shaped), made from an alloy containing a precious metal. Face

value of a full-value coin was equal to the value of the amount of pre-

cious metal contained in it. Billon coins are another sort of monetary

units, looking the same as full-value coins, but, in contrast to the latter,

their face value was higher than the value of the alloy they were made

from, as well as higher than their production cost.

1 Orlenko L.V. The history of trade. Moscow, 2006. P. 90 ( Орленко Л.В. История тор-

говли. М., 2006. С. 90).

112

Part III. Money

Copper coins (fig.17) nominated in silver, minted in the time of

Russian Tsar Nicholas I (1840), can serve as an example1.

Fig. 17. Coins, issued in Russia in 1840 (copper):

1/ kopeck in silver (1.7g), 1/ kopeck in silver (5.1g), 1 kopeck in silver

4

2

(10.2g), 2 kopecks in silver (20.4g), 3 kopecks in silver (30.7g)

In Russia, coin spoiling by Princes and Tsars, spoiling of silver

«grivnas» by cutting off pieces and the emergence of «thief» money led

to complete disappearance of full-weight coins, social unrest and riots

(«copper riot» in the time of Tsar Alexei Mikhailovich in the mid.-17th

century) Trying to avoid difficulties, the government began to mint

copper money with an enforced exchange rate. As a result, the market

value of the silver rouble began to grow compared to its face value,

silver almost entirely disappeared from circulation and was hoarded by

money-lenders and money-changers, and commodity prices in gen-

eral went up.

Difficulties experienced by «bimetallic» countries are explained by

Copernicus-Gresham’s Law, discovered in 1526 by the Polish scholar

Nicolaus Copernicus and in 1560 by the English financier Sir Thomas

Gresham: «Bad money drives good money out of circulation»2. This

means, that if two kinds of coins, interconnected by a legal correlation

of exchange, are in circulation in the same country at the same time,

there arises the trend for disappearance of the better (in terms of their

1 Krivtsov V.D. Aforementioned work. P. 71.

2 Anikin A.V. Economics and Finance English-Russian Dictionary. Saint-Petersburg, 1993 ( Аникин А.В. Англорусский словарь по экономике и финансам. СПб.,

1993).

Money as an economic and value category

113

commercial value) coins. What happens is precisely this: good money

is either hoarded or used in foreign trade, or remelted and then ex-

changed for bad money.

Eventually, copper money was withdrawn from circulation. In the

late 17th century, the amount of silver in rouble coins was decreased by

30%. In Russia, up until the 17th century, mining of precious metals was

extremely underdeveloped, and because of that Mints, which in the 17th

century were monopolized by the State, remelted foreign coins. Ac-

cording to the «monetary regalia» of Peter the Great, export of precious

metal bars was strictly banned, whilst export of spoilt coins was al-

lowed.

As the price of the precious metal component in coins with low face

value continues to grow, there arises a problem of the object component

of coin value being higher than its liability component.

«The Swiss Government decided, from the 1st of January 2007, to

withdraw from circulation one-centime coins (0.0076 US dollars). It

costs 11 centimes to produce a one-centime coin, as Hans-Rudolf

Merz, Head of the Federal Department of Finance, has calculated. His

plan included saving another 230 500 dollars by eliminating five-cen-

time coins as well, but consumer organizations, fearing that round

numbers on price tags would in fact mean growth of prices, won the

fight to save five-centime coins.

The cost of metal content in United States one-cent coins (97.5%

zinc core, 2.5% copper plating) rose up to 77% of their face value. Also,

if one adds the minting and distribution costs (0.0061 dollars per one

cent), it turns out that the United States Mint’s costs involved in pro-

ducing a one-cent coin exceed its face value by 38%. The US cent has

been through this before: in 1982 the cost of its copper content ex-

ceeded its face value, and as a result the coin’s weight was lessened from

3.1 to 2.5 grams, and the copper content was reduced from 95 to

2.5%.

The five-cent coin weighting 5g (75% copper, 25% nickel) costs

Americans 4.5 cents, or 5.75 cents including production costs, which

exceeds the face value by 15%.

The value of metal content in Russian coins may also be higher

than their face value… But the information on metal content in Rus-

sian coins is restricted… In Russia, too, the cost of metal content is

114

Part III. Money

close to the face value. In a one-kopeck coin metal content exceeds

its face value by over 100% percent… In the early 1990-ies the Central

Bank of Russia even had to cease minting small change, as the then

First Deputy to the Central Bank President Arnold Voilukov confessed

in 2003: «Our coins contain copper and nickel, and thus reminting

them even with the help of rather primitive technologies would be

profitable».

Even paper money may turn out to be cheaper than the material it

is made of. The catastrophic inflation that hit Germany in 1922 (pric-

es were multiplied by 5570) and 1923 (by 1300 billion) made banknotes

more expensive than paper. And in 2003, a Web portal for travelers

Inyourpocket.com, calculated that in Byelorussian restrooms it is

cheaper to use one-rouble bills than toilet paper. However, in 2004

President Lukashenko withdrew one-rouble banknotes from

circulation»1.

Liability nature of cash currency

It is easy to see that at the present stage of economic development

the term «currency» refers not to an object as such, which has certain

consumer value, but to an abstract formal obligation of a country’s

Central Bank, which only has certain exchange value, created by the

demand for currency to pay taxes2.

Money in the form of currency is a particular variety of a bill, which,

in its turn, is a security (Article 143 of the Civil Code of the Russian

Federation). Further on, when we use the term «currency», let us con-

sider the fact that it is a security (fig. 18).

Sir John Richard Hicks in his classic work «Value and Capital» ob-

served that: «A security of any sort, which brings in a fixed interest… is

a promise to pay a certain sum of money in the future. However, there

are certain types of documents, which contain an obligation, the doc-

uments that aren’t usually referred to as securities, but considered to

be money itself, though the same classification applies to them. Bank

deposits, at present usually referred to as money, are a promise to pay

1 Grozovsky B., Soukhmansky M. More expensive than money // Vedomosti, 2006. Issue 69 (1596). 19th of April ( Грозовский Б., Сухманский М. Дороже денег // Ведомости, 2006. № 69 (1596). 19 апр.).

2 From the above it is clearly concluded that the stability of currency depends mainly on

the state’s tax-collecting capacity.

Money as an economic and value category

115

Fig. 18. Money — securities — bills — cash

money in the future; even banknotes are a promise to pay money. Such

nature of banknotes doesn’t require any explanations and is perceptible

to common sense in cases when banknotes represent a promise to pay

certain… money (gold or bank bills of some other bank superior in

influence to the given bank). However, if superior money disappears

from circulation, a paradoxical situation arises. And this paradoxical-

ity reflects the very essence of the problem, it is definitely not inciden-

tal. It is a blessing — to have a constant reminder about this paradox in

the form of the inscription on the one-pound banknote: “The Bank of

England promises to pay the bearer on demand the sum of one pound

sterling”»1.

On pound sterling banknotes it is legibly written: « Bank of England.

I promise to pay the bearer on demand the sum of…». This is followed by

a signature of the of the Chief Cashier of the Bank of England. By its

form and content this is a State bearer promissory note with an «upon

presentation» term.

On USA banknotes, there is no direct promise, but signatures of the

Treasurer and the US Secretary of the Treasury are present. However,

on old American banknotes, for example on Greenbacks of 1862, there

is an inscription: « will pay the bearer on demand».

1 Hicks J.R. Value and Capital. Moscow: Progress, 1993. P. 277.

116

Part III. Money

Money as an economic and value category

117

On 10-dollar Canadian banknotes dating back to 1906 it is also in-

scribed: « will pay the bearer on demand».

On Scottish banknotes of 177 is was written that: « Royal Bank of

Scotland hereby obliged to pay the bearer on demand … by order of the

court of Directors».

Old Russian banknotes leave no doubt as to their nature: on ban-

knotes between 1779 and 1830 was written: «St. Petersburg Bank pays

the bearer of this government assignat (author’s bold — A.G.) …in

rouble currency, in the year of…» The year of the currency was even

shown, insofar as the content of precious metals in it changed depend-

ing on the year of minting1. On the 1779 banknote the four signatures

(of the two senators, the chief director of the board of banks and the

1 The year of minting was no longer printed on banknotes after the war of 1812.

118

Part III. Money

St. Petersburg Bank zhalrich the bearer of this government assignat

100 units of rouble currency. 1779. St Petersburg.

The assignor bank pays the

bearer of this government

assignat 10 units of rouble

currency. 1791.

Money as an economic and value category

119

The assignor bank pays the bearer of this government assignat 25 units of

rouble currency. 1811.

120

Part III. Money

The assignor bank pays the bearer of this government assignat 100

units of rouble currency. 1807.

The state assignor bank pays

the bearer of this government

assignat five units of rouble

currency. 1802.

Money as an economic and value category

121

aushi…

. Opravly

vernment assignat 10 units of rouble currency

ys the bearer of this go

The assignor bank pa

122

Part III. Money

The assignor bank pays the bearer of this government assignat 25 units of

rouble currency. Opravlyaushi…

Money as an economic and value category

123

.

vernment assignat 100 units of rouble currency

ys the bearer of this go

The assignor bank pa

124

Part III. Money

Money as an economic and value category

125

126

Part III. Money

ya

. Burgska

reasuries, S. P

cy.

with this note, immediately on presentation

silver curren

ote), 50 roubles in

e n

(of th

reasuries and the State Lending Bank . The Savings T

reasury

reasury: signature

.B. of the Savings T

redit note . of the Savings Tc and Moscow and the Lending Bank alike will issue, in accordance

ashier S.P

Administered by the Saving T

Director of the Lending Bank

c

Money as an economic and value category

127

ediately m

ill im

cy w

silver or gold curren

roubles inEERH m the exchange funds

ote, T

is n

of th

be issued fro

tation

presenn

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redit N

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Administrator signature

Director signature

Cashier signature

128

Part III. Money

State Credit Note. 1855. One rouble in Silver.

The Cashier of Credit Notes Expedition immediatly pays the bearer

One rouble in Silver or in Gold coin

Administrator

signature

Cashier

signature

Money as an economic and value category

129

State Credit Note. 1860. Five roubles in Silver.

The Cashier of Credit Notes Expedition immediatly pays the bearer

Five roubles in Silver or in Gold coin

Administrator

signature

Cashier

signature

130

Part III. Money

State Credit Note. Three roubles in Silver or Gold Coins.

The Exchange Cashier of the State Bank pays the bearer Three roubles

in Silver or Gold Coins

Administrator

signature

Cashier

signature

Money as an economic and value category

131

State Credit Note. Five roubles in Silver or Gold Coins.

The Exchange Cashier of the State Bank pays the bearer Five roubles

in Silver or Gold Coins

Administrator

signature

Cashier

signature

132

Part III. Money

The State Bank exchanges credit notes for gold currency without limit on

the sum (1 rouble= 1/15 of an imperial unit and contains 17,424 dolias of

pure gold).

Money as an economic and value category

133

The exchange of government credit notes for gold currency is secured by all

property of the State.

Government credit notes are to be accepted throughout the Empire, on an

equal par with gold currency.”

134

Part III. Money

teed by all state property

cy is guaran

p.

s lose all rights to property and will face exile to a hard

labour cam

otes for gold curren

alid throughout the Empire, on a par with gold currency

ge of state credit nan

e exchh 2. State credit notes are v

1. T

3. As a result of counterfeiting credit notes the guilty partie

Money as an economic and value category

135

e sum

th

it on

of pure gold)

out lim

ith

cy w

One Rouble

otes for gold curren

redit N

ges Can

k exchan

tate B

e S

(1 rouble= 1/15 of an imperial unit and contains 17.424 dolias

hT

Manager [signed]

Cashier [signed]

136

Part III. Money

teed by all state property

cy is guaran

p.

s lose all rights to property and will face exile to a hard

labour cam

otes for gold curren

alid throughout the Empire, on a par with gold currency

ge of state credit nan

e exchh 2. State credit notes are v

1. T

3. As a result of counterfeiting credit notes the guilty partie

Money as an economic and value category

137

e sum

th

it on

of pure gold)

out lim

ith

cy w

otes for gold curren

Three Roubles

redit N

ges Can

k exchan

tate B

e S

(1 rouble= 1/15 of an imperial unit and contains 17.424 dolias

hT

Manager [signed]

Cashier [signed]

138

Part III. Money

teed by all state property

p.

s lose all rights to property

cy is guaran

ard labour cam

otes for gold curren

alid throughout the Empire, on a par with gold currency

ill face exile to a h

d wan

ge of state credit nan

e exchh 2. State credit notes are v 3. As a result of counterfeiting credit notes the guilty partie 1. T

Money as an economic and value category

139

State Credit Note

Five Roubles

The State treasury exchanges credit notes for pounds sterling, without limit

on the sum, according to the exchange rate 40 roubles=1 pound sterling

140

Part III. Money

1. The exchange of state credit notes for gold currency is guaranteed

by all state property

2. State credit notes are valid throughout the Empire, on a par with

gold currency

3. As a result of counterfeiting credit notes the guilty parties lose all rights

to property and will face exile to a hard labour camp.

Money as an economic and value category

141

limit on the sum (1 rouble= 1/15 of an imperial

e Roubles

enty-Fiv

Tw

unit and contains 17,424 dolias of pure gold).

The State Bank exchanges credit notes for gold currency without

142

Part III. Money

teed by all state property

cy is guaran

p.

s lose all rights to property and will face exile to a hard

labour cam

otes for gold curren

alid throughout the Empire, on a par with gold currency

ge of state credit nan

e exchh 2. State credit notes are v

1. T

3. As a result of counterfeiting credit notes the guilty partie

Money as an economic and value category

143

limit on the sum (1 rouble= 1/15 of an imperial

e Roubles

enty-Fiv

Manager [signed]

Tw

Cashier [signed]

unit and contains 17,424 dolias of pure gold)

The State Bank exchanges credit notes for gold currency without

144

Part III. Money

teed by all state property

cy is guaran

p.

s lose all rights to property and will face exile to a hard

labour cam

otes for gold curren

alid throughout the Empire, on a par with gold currency

ge of state credit nan

e exchh 2. State credit notes are v

1. T

3. As a result of counterfeiting credit notes the guilty partie

Money as an economic and value category

145

director of the local bank) only appeared handwritten and only in

ink1.

From 1840, the word «pays» was replaced by the word «issues».

On the reverse of banknotes of the period between 1855 and 1872,

the following excerpts were printed from the High Manifesto: «Govern-

ment credit notes are provided for (author’s bold — A.G. ) by all of the

State’s property and by exchange, unceasing at any time, for coin cur-

rency from the predetermined fund»2.

On «tenners» in 1909, the front of the banknote bore the inscription:

«The State Bank exchanges credit notes (author’s bold — A.G. ) for gold

coins without a limit on the sum (1 rouble = 1/ of an imperial, contains

15

17.424 parts of pure gold)». On the reverse of the banknote was in-

scribed: «The exchange of government credit notes for gold currency is

secured by all of the State’s property. Government credit bills are valid

throughout the Empire, on a par with gold coins.»

It was even written on Soviet banknotes, up to 1991, that they were

secured by the gold reserves of the country or «all of the Republic’s

property», and the Bolsheviks themselves in 1921 issued currency in 1.5

1 V.D. Krivtsov. Averse: Catalogue for Collectors. M., 1999. P. 81 ( Кривцов В.Д. Аверс: Каталог для коллекционеров. М., 1999. С. 81).

2 Ibidem.

146

Part III. Money

and 10 billion rouble notes called «Obligations of the R.S.F.S.R.»1 In

1924 «Payment Liabilities»2 were issued.

The direct indication either to a liability, or to a security demon-

strates to us the liability character of paper money.

The judicial system’s mixture of property and other (mainly obliga-

tory) rights in Russia today can in many ways be explained by the influ-

ence of Anglo-American legal concepts. In this system of law it is ac-

cepted to differentiate «things in possession» ( choses in possession) i.e.

things which can be physically possessed, and «things in demand»

( choses in action), i.e. various rights (which in turn can be regarded as

a literal interpretation of the phrase «intangible assets» — res incorpo-

rales, from Roman civil law). However in the European, continental

legal system, the regime of property and the regime of rights are clear-

ly differentiated. Thus, Art. 90 of the German Civil Code directly de-

crees that only «tangible objects» can be things.

Whilst investigating the current, tangible make-up of paper money,

it is possible to introduce an interesting example. In the USA a certain

Tari Steward founded the American Bank Note Company, which pro-

duced notes called « Million dollar bill». These notes were manufactured

using the identical paper as original American dollars, and had an

identical design. However, when it comes to their sale, it is immedi-

ately made clear that these are not genuine American currency and that

they are not suitable for circulation. They are sold as «great presents for

family and friends». On the reverse of these notes was decreed «This

certificate is guaranteed only by belief in the American dream»3.

The exchange rate of government liabilities for goods and services

lies behind the value of the real banknotes, an expression of the liabil-

ity of the government. The value of any monetary unit depends on its

buying power4. The Harvard University professor H.G. Mankiw defines

the value of money as being the amount of goods and services which

can be bought with one monetary unit5. If an identical object is not

secured by the State, it is only worth the sum of its tangible constituent

1 A.S. Melnikova. Aforementioned work. Pp. 167, 193.

2 Ibidem. P. 245.

3 More details can be found at http:/www.i-a-m.org

4 Barr. R. Aforementioned work. P. 289.

5 Mankiw H.G. Aforementioned work. P. 607.

Money as an economic and value category

147

148

Part III. Money

Money as an economic and value category

149

parts, which is defined by T. Steward, including the additional cost, as

8 US Dollars.

In addition to this it is definitely necessary to note that the over-

whelming part of such tangible components of real money is created

purely as a defence against forgery and falsification of the liability it

expresses and documents. If paper money were not forged this part

would be considerably less important.

«In all its abstractness, paper money is «cash in hand» in the sense

that it is a visible and tangible material»1.

A thing possessing natural, useful properties, when divided into two

parts, divides its use value. If we take a blank sheet of paper, having as

its useful characteristic the possibility of entering onto it a volume of

information, and divide it in half, then the use value of the two separate

pieces of paper will be approximately half as much. However, if we were

to tear a Bank of Russia 10 rouble note in half, it would be an entirely

different story. The half without the serial number would not be worth

anything, and the other half (with the number) would still have a use

value of 10 roubles. Why? Because everyone knows that the Central

Bank of the Russian Federation accepts — at their face value — ancient,

torn or even charred bank notes if the corresponding serial number is

still preserved on them. This example clearly shows that it is necessary

for the bank-issuer, when accepting its credits at face value, at least to

compare this data with the corresponding serial number of said note in

the section «Emissions of money» of the passive part of its balance. Old

banknotes are withdrawn from circulation and destroyed by the Central

Bank, and the sum total of the Central Bank’s obligations, shown in

the «Emissions of money» section, is decreased by the sum total of the

destroyed banknotes’ face value.

Moreover, the word «emission» itself emphasises the obligatory

nature of paper money.

The monetary reform in Russia in 1991 is a very interesting example.

One «glorious» day, the then Prime Minister Pavlov declared all 50 and

100 rouble notes invalid. On this day, the value of the liability expressed

on these notes became equal to zero. These banknotes really just be-

came mere things, and their value became equal to the value of the

1 Barr. R. Aforementioned work. P. 288.

150

Part III. Money

paper, ink and typographic services used to produce them. Some of the

people who did not manage to exchange their banknotes for the new

ones used them to paper the walls of their flats.

Moreover, Article 30 of the Federal Law No. 86-FL «On the Central

Bank of the Russian Federation (The Bank of Russia)», of 10th June

2002, states: «Banknotes and coins are unconditional liabilities of the

Bank of Russia and are secured by all its assets (author’s bold — A.G. )

Banknotes and coins of the Bank of Russia must by law be accepted at

their nominal value for all types of payment, for depositing into an ac-

count, for investments and for transfer across the whole territory of the

Russian Federation.»

The issuer itself decrees directly and unequivocally that its banknotes

are a legal liability. So why does the government of the Russian Fed-

eration not want to acknowledge such an obvious fact?

By the way, speaking of coins, the given norm clearly decrees that

coinage of the Russian Federation is also a liability of the Bank of Rus-

sia. In defining its status it is possible to conclude that coinage, like

banknotes, is a State self-addressed bearer bill valid upon presentation

with a blank endorsement. The only difference between coinage and

banknotes with the same face value is the liability’s material bearer.

Banknotes and coins with the same nominal value clearly demonstrate

a unity of content whilst the form varies.

Later the law describes in detail precisely the obligatory character

of money:

«Article 31. Banknotes and coinage of the Bank of Russia cannot be

declared void (as having lost power as a legal means of payment), if a

sufficiently long transition period is not established to exchange them

for the new banknotes and coins. No limitations of any kind in relation

to the sum or subject of exchange are permitted.

During the exchange of banknotes and coinage of the Bank of Rus-

sia for the new form of tender, the period of withdrawal of banknotes

from circulation must be no less than one year, but must not exceed five

years.

Article 32. The Bank of Russia exchanges old worn out banknotes

without any limitations (author’s bold — A.G. ), in accordance with its

established rules.

Money as an economic and value category

151

Article 33. The Board of Directors makes the decision about the

release into circulation of new banknotes and coinage and about the

withdrawal of the old ones, sets the nominal values and forms of the new

tender. A description of the new tender is released to the public via the

media».

Article 4 of this law states: «The Bank of Russia…alone exists as is-

suer of cash money and organises the circulation of cash.»

And yet again the very concept of «issue» indicates the obligatory

character of money. It is not possible to issue tangible objects (fig. 19).

Non-cash currency — deposited money (checking accounts)

Cashless currency arises either as a result of a credit emission, car-

ried out by the central bank of the relevant state, or as the result of a

transfer of cash currency in the form of banknotes or coins to a de-

posit account (a type of savings agreement) (fig. 20).

Deposited money as a form of credit money represents currency in

paperless form. From an economic point of view, the existence and

development are a result of the following:

• Reducing costs of circulation;

• Speeding up of circulation;

• Practicality and comparative security of cashless transactions;

• Simplicity of supervision of circulation for the State.

This form of money has the following important properties:

1) the side liable to the investor is not the central bank itself, but

the private bank in which the funds are accommodated. In turn, the

central bank is liable to the private bank. On one hand, storing govern-

ment banknotes in a private bank, which bears responsibility to the

investment only to the extent of its own capital, makes the money less

secure in the case of the bankruptcy1 of the bank. On the other hand,

the storing of money in an unsuitable place, for example at home,

poses a risk not only to the banknotes themselves, but also to the lives

of the owner and his family;

2) this is not a bearer liability, but a nominal one, i.e. it has a prop-

erty content which a person is not able to hold ( detencio). In the legal

1 The term «bankruptcy» derives from «bank» and «rupture».

152

Part III. Money

Circulation of paper currency as a bearer security

Fig. 19.

Money as an economic and value category

153

Fig. 20. The share of deposited money

language of the Ancient Romans it would be termed «the right of hold-

ing». In addition, the Latin animus possidenti (the intention to treat

something as one’s own) is fully preserved, giving the illusion of owner-

ship ( posessio);

3) the liability becomes dividable by any number with the minimal

known discretion, which in turn improves the circulatory function of

this form of money.

Deposited money acquired the function of money only with the

process of realization of cashless bank accounts i.e. only in the mid 20th

century. This became possible only at the time of a corresponding

level of development of industrial power, in part thanks to the release

of banking mainframes by the company IBM and the introduction of

CHIPS, an electronic system of inter-bank accounts.

L.G. Efimova writes: «In connection with this, economists for a long

time did not acknowledge call deposits as being money. When, in 1930,

John Maynard Keynes, in his book «Treatise on Money» included call

deposit in his concept of money, G. Parker Willis, a famous professor

of Colombia University, reacted to this entirely critically1. Amongst

later economists, practically no opponents to this point of view re-

mained2.

1 Dolan E. G., Campbell C. D., Campbell R. G. Money, banking and money-credit policy.

Moscow-Leningrad, 1991. P. 40–41.

2 See, for example: Samuelson P. Economics. Vol. 1. Moscow, 1992. P. 258; Dolan E.G., Campbell C.D., Campbell R. G. Aforementioned work. P. 32.

154

Part III. Money

According to the French economist Pierre Berger, money is issued

by three types of institutions: commercial banks, the state treasury and

the issuer bank1. In this way, the opinion that the only bank able to issue

its money is the Central Bank of the Russian Federation, appears to be

erroneous2»3. Therefore it is not by chance that Article 29 of the Law

on the Bank of Russia stipulates the exclusive right of the Bank of Rus-

sia only to emit cash currency.

The problem of the right to issue cashless (credit) money has not

been unequivocally solved by the legislator. Insofar as a ban on cashless

emissions exists, any commercial bank may issue (and does issue) its

money in the form of balances in payment and current accounts. Nobel

Prize laureate Friedrich Hayek spoke out in favour of the issue of private

money4. He proposed that the monetary liability expressed by the cur-

rency issued by any concrete issuer would amount to the nominal value.

However, different types of currency should be freely exchanged ac-

cording to the rate of exchange. At the same time F. Hayek spoke out

for the necessity for each issuer to support the value (buying power) of

his currency in relation to the average set of wholesale products (a stand-

ard of price) by means of special, pre-determined measures of influ-

ence. «I expect that, at least in wealthy regions, far exceeding present-

day national territories, people will be willing to regard an average set

of wholesale products as a price standard, in relation to which they

would prefer to safeguard the constancy of their money»5. Despite

scepticism from opponents, Hayek’s ideas clearly came to fruition in

Russia, where promissory notes of the company «Gazprom» indeed

fulfil the function of money, in both wholesale transactions and in the

accumulations of financial institutions. The researcher himself sug-

gested that the full realization of his idea requires corresponding po-

litical reforms, because governments are unlikely to relinquish the

1 Berger P. The money mechanism. Moscow, 1993. P. 21.

2 The error described above is the result of the instability of legal and economic terms

«currency» and «money».

3 Efimova L.G. Can taxes be paid by «dead» money? // Business and banks, 1998. Issue 42 ( Ефимова Л.Г. Возможна ли уплата налогов «мертвыми» деньгами? // Бизнес

и банки, 1998. № 42).

4 The term «private money» describes monetary units issued by several competing private

(non-State) banks.

5 F.A. Hayek. Private money. Moscow: Institute of the National Economic Model, 1996.

P. 126.

Money as an economic and value category

155

profitable privilege of issuing money1. However, his idea about private

money was partly realized in the form of call deposits.

Some economists and lawyers suggest that such «private monies» do

not have a cash/tangible form. Here we are forced to disagree and to

point out that «self-addressed» bank bills, issued in exchange for de-

posits, which are so widespread now in Russia, are in fact «private

monies». When such money is termed «private», their private-legal

content is implied, in contrast to currency, which has public-legal

content.

It is very important to note that their private-legal character applies

only in the relationship between the investor and the private bank,

whilst the legal relationship between the private bank and the State bank

it remains one of a public-legal character.

Thus, deposited money (cashless currency), in the form of bal-

ances in the accounts of enterprises and organisations, is money of both

the Central Bank of the Russian Federation and of the commercial

banks. When a customer withdraws money from his account, then, in

essence, one is talking about of the conversion of cashless currency

(deposited money) to cash currency, to the banknotes and coinage of

the Central Bank of the Russian Federation.

Now we will investigate the legal character of non-cash money. For

the purpose of this book, we understand cashless currency as balances

in credit in various client accounts in banks, to which the application of

Chapter 45 of the Civil Code of the Russian Federation extends. They

are accounts which are specially intended for carrying out various

transactions: payment, current, current currency, correspondence, ac-

counts for the financing of capital investments etc.2 From a legal point

of view, an entry into a bank account serves as a quantitative expression

of the legal-liability claim of the client towards the bank. However, this

circumstance does not impede the recognition of the bank liabilities as

money, taking into account that the latter fulfils the function of a means

of payment.

As a liability of the relevant storehouse (bank, depository), cashless

money is subject to the law of obligations. An entry into a bank account

1 In this case, «money» means «currency.

2 It must be noted that Chapter 45 of the CC RF isn’t applicable to depo accounts, because

not non-cash money, but non-document securities are the basis of such contracts.

156

Part III. Money

attests to what sum (to what measure) the bank is the debtor of its client.

In this way, the legal relationship we are examining appears to be rela-

tive and arises by the will of each party to the bank account contract.

According to this contract, the obligation of the bank consists of the

completion of concrete, positive actions. It should carry out the instruc-

tions of the client in making payments to a third party, in releasing cash

funds to the client within the limits of the balance of his account and

likewise it should accept payments owed to the client. The owner of the

account’s right of demand can be violated above all by the bank, to

which the client has the right to lay the same claim1.

At the present time, the overwhelming majority of money in circu-

lation in Russia is deposited, cashless money, which has almost no

tangible expression (discounting the paper receipts on which bank

statements are printed). In this way, contemporary deposited cashless

money presents itself as a non-document nominal security:

• for the bank: dividable State nominal «self-addressed» bills with a

blank endorsement in the form of an electronic accounts entry;

• for the client of the bank: dividable bank «self-addressed» bills with

a blank endorsement in the form of an electronic accounts entry.

When considering the security of such a form of liabilities, we say

that the liability of the Central Bank itself is secured, just as in the case

of cash currency:

• by the State’s obligation to accept it [cashless currency] as payment

of taxes;

• by the compulsory acceptance [of cashless currency] as payment for

goods and services across the whole territory of the country.

The liability of the private bank should, in theory, be secured by the

aforementioned liabilities of the Central Bank, but in the assets of any

bank, non-cash currency occupies, in accordance with Basle Principles,

no less than 12%, and as a rule, no more than 25%. As a result of the

active credit policy of any bank, its liabilities are fundamentally secured

by the quality of its credit portfolio.

Despite unity of form, the means of administration of money, on the

part of the clients, varies from bank to bank, leading to a certain amount

of confusion amongst economists.

1 See Chapter 45 of the CC RF.

Money as an economic and value category

157

There is no such thing as «electronic money», but there is an elec-

tronic method of gaining access to deposited funds; there is no «plastic

money», but there is a method of gaining access to accounts with the

help of plastic cards.

We will now introduce the basic methods of the administration of

(access to) money:

1. Personal access or by post:

• payment order;

• cheque;

• encashment;

2. Access with the aid of electronic networks:

• retail e-banking systems : SWIFT, CHIPS, FedWire;

• slips from plastic cards like VISA, systems like CyberCash, Cyber-

plat;

• systems like CheckFree.

Circulation

This form of money has no consumer value, since it does not exist

in tangible form (perhaps it does possess a certain value of joyful emo-

tion, arising when the rich man admires his bank balance, but this is

hard to evaluate). The exchange value, as already indicated, depends

only on the generally recognized, current reputation of the issuer, and

also on the short and long-term expectations of fluctuations of the

money in terms of a commodity basket (its buying power).

Since the development of a reliable long-distance communications

and computing technology, the banking system was finally able to rid

itself of the complex derivative legal relations. This form of money has

practically no tangible form.

It is secured against the right to demand its acceptance in payment

of taxes and for any payment between two legal parties, with the excep-

tion of a relationship known to be retail (not wholesale) commercial.

This exception, of accepting cash currency as payment for goods, is

conditionally licensed by the government in order to support a steady

demand for non-cash currency.

158

Part III. Money

Demand for currency

Besides generally known factors of demand for money, including

those described by Keynes and Friedman, demand for cash and non-

cash currency not guaranteed by gold, forms as a result of the following

factors, which, rather than being of economic character, are of a pre-

cisely juridical, public-legal nature.

1. The necessity of paying taxes. Any upstanding government ac-

cepts only its own currency as payment of taxes. Correspondingly, the

demand for currency depends on:

• The capabilities of said government to collect taxes;

• The ability of the economy of said government to produce taxable

grounds, for example, taxable additional cost and taxable preserva-

tion of property;

• Desire and capability of tax-payers to pay taxes.

However, it is sufficiently obvious that high rates of taxation lead to

the flight of industry to other jurisdictions, and low rates of taxation

lead to weakening of the government’s ability to defend its borders and

to maintain order within the sovereign territory. Tax rate in the USA is

the main publicly discussed issue and fluctuates, depending on the

condition of the economy and the general public will, in the region of

20–30%.

2. The necessity of transactions with the State for the purchase of

State property. This is not an overly important factor, which actually

works in the case of the privatisation by the government of wealthy

enterprises.

3. The necessity of having precisely State-supported means of pay-

ing any debt or making any payment within the territory of said State.

This issue arises particularly sharply with the significant risk of disputes

emerging when deals (transactions) are being made. If there is sufficient

faith in the judicial resolution of a conflict, settlement of a debt with

an improper means of payment can be a serious argument against the

payer. But this factor directly depends on the strength of the govern-

ment. In periods of discord and change of government, the aforemen-

tioned factor works against the currency or in favour of such private-

legal liabilities, like bills/promissory notes or bank liabilities or in favour

of natural commodity money.

Money as an economic and value category

159

4. The demand for currency for hoarding purposes, arising as a

result of a lower level of faith in the government, compared to other

issuers. This emerges usually in the case when confidence in one’s own

government or in its ability to keep inflation in check, is essentially

lower than confidence in other governments. An example of this is the

Russians’ total lack of confidence in the Russian rouble as a means of

stabilising prices, arising in part as a result of Pavlov’s reforms, which

withdrew 50 and 100 rouble banknotes from circulation without com-

pensation, and also as a result of many years of inflation and hyperinfla-

tion, which had regularly cheapened cash and non-cash currency. The

author is personally acquainted with people who had invested

10,000 roubles in Sberbank in the 1980s, which at that time was enough

to buy a «Volga» car or a decent house, and now is enough only to buy

a children’s bike.

5. The demand for currency for hoarding purposes, arising as a

result of confidence in a government which capably supports a reliable

and functional banking system. For example, the total collapse of the

banking system in 1998 does not facilitate long-term storage of money,

in the form of long-term rouble deposits.

A series of experts (the author included) believe that the fundamen-

tal causes of bank crises are not so much the sharp fluctuations in

property prices (for building societies), in share prices (for investment

banks), currency etc., as much as the incorrect fulfilment by the govern-

ment of its regulatory function, which involves not allowing the warp-

ing of the credit portfolios of banks in one or another branch of the

economy. For example, in the USA after the crisis of 1930–1933 banks

were prohibited by legislation from acquiring shares.

6. Convenient currency legislation. If the government prohibits the

circulation of its own currency abroad, it is difficult for it to hope that

foreign citizens and businesses will accumulate this currency.

160

Part III. Money

Financial money

Here we should consider:

1) highly liquid assets, for which only insignificant fluctuations in

value are possible and which are termed «almost money»

2) stocks and shares (securities), which partially fulfil the functions

of money.

Quasi-money

Quasi-money (from the Latin quasi — as if) is the name for the

monetary means represented by fixed term and savings investments (in

commercial banks, special credit institutions), deposit certificates,

State treasury liabilities etc. (Fig. 21)

Fig. 21. Prevalence of quasi-money

In order to define the ease with which any type of assets can be

turned into an economically-viable medium of circulation, economists

use the term «liquidity». As money fulfils the economic role of a means

of circulation, it is the most liquid type of asset. The liquidity of other

assets can vary. The majority of organisations, at any moment, can be

sold with minimal transaction costs and fluctuations in share prices;

therefore they serve as relatively liquid assets. «It is only the likeness of

Money as an economic and value category

161

money, since it is not possible to use them directly as a means of buying

and paying. In the conditions of contemporary capitalism, quasi-mon-

ey is the main and the most dynamic component of monetary

aggregates»1 .

Many economists emphasise such a factor as liquidity when answering

the given question. From their point of view, any product which can be

turned very quickly into money, can be included in the monetary mass.

On the one hand, it is a highly practical and simple model for discus-

sion, allowing us to regard as aggregate M1 precious metals and other

goods, which can be turned into money on the goods market in the

twinkling of an eye. But then the question arises: what period of liquid-

ity does a product have to have, in order for it to be included in the

monetary aggregate? And if such a period is equals one day, then why

not include in the M1 aggregate those market goods which become

money in the course of a market session, such as metals, cereals, oil,

concentrated orange juice? And what about a studio apartment in

Moscow with a one-day period of liquidity?

Stocks and shares,

partially fulfilling the functions of money

As we have already elucidated, in order to consider any product as

money, it is necessary to prove that it fulfils the functions of money.

Securities, depending on their type, can, in suitable conditions,

fulfil all the functions of money to some degree (fig. 22):

• there exists a widespread practice of mortgaging securities (princi-

pally corporate shares) as a guarantee when taking a loan. Thus,

mortgaged securities fulfil the function of money, serving as a meas-

ure of value. Moreover, market estimates of corporate shares reflect

the value of the company;

• during mega deals, involving acquisitions of companies in the USA,

transactions are usually carried out with the shares of the company-

absorber (parent company), which serve as the means of payment2.

1 L.N. Krasavina. Currency and credit under capitalism. Moscow, 1980. P. 126 ( Краса-

вина Л.Н. Денежное обращение и кредит при капитализме. М., 1980. С. 126).

2 Inevitably, a question arises about the number of people who accept this or that type of

money as a means of payment. This number can be either enormous — billions of users

in case of the US dollar in cash form, or tiny — about 100 users in case of the Yap island

162

Part III. Money

Fig. 22. Prevalence of securities

Equally, company shares, estimated on the market, sometimes ful-

fil the function of circulation during the resolution of disputes. For

example, on the 10th of August 2004, the company Yahoo! agreed to

drop its patent lawsuit against Google, in exchange for 2.7 million

shares in the latter1;

• the intended purpose of such a security as a bank cheque is exactly

one of the functions of money: to serve as a means of payment;

• the direct intended purpose of deposit certificates is to serve a means

of accumulation;

• a bill/promissory note can fulfil the function of a means of payment

(if the issuer issues it together with a payment of some monetary sum

at the time of a deal of one kind or another), the function of a means

of saving/accumulation owing to a discount and the function of a

means of circulation. Well-known issuers, such as the company

«Gazprom», fulfill the last function.

Let us consider a concrete example: cheques.

According to Article 877 of the Civil Code of the Russian Federation

«a cheque is recognised as a security, containing an unconditional in-

stone money. Definition of the sufficient number of users is a massive undertaking, which

deserves to become a separate piece of research.

1 http://www.inline.ru/internet.asp?NewsID=46541 (Credit: The Washington Post).

Money as an economic and value category

163

struction by the cheque-giver to the bank, to make a payment of the

sum specified on the cheque to the cheque-bearer.»

From the point of view of legislation, transactions made by cheque

are just as common as transactions made by payment order. It is obvious

that cheques fulfil the function of a means of payment and a means of

circulation. Their measure of worth is reflected by the sum inscribed

on the cheque. However, the function of saving/accumulation is es-

sentially reduced in a cheque, insofar as it is valid for a relatively short

period of time. Although, one must acknowledge that 20–30-year old

banknotes also become invalid in a number of countries.

The following example is Minfin bonds, known in Russia as «OGV-

VZ» (Obligations of the State Inner Currency Loan).

It is obvious that they fulfil the function of a means of payment,

although not in a very wide sector. The main ideologue, which at-

taches the payment function to «OGVVZ», was and remains the Russian

Ministry of Finance (Minfin), which offers the possibility to use Min-

fin bonds for clearing a debt, buying debts of foreign governments,

carrying out mutual tax-related settlements and regulating/classifying

payments.

In transactions between Russian parent companies and their sub-

sidiaries abroad Minfin bonds are used extremely often as a means of

circulation and even as international currency. Often they are used as a

means of giving credit to subsidiaries abroad. It is necessary to note that,

in contrast to the use of local currency, the use of securities as a means

of payment requires the agreement of the receiver (beneficiary).

A means of accumulation easily manifests itself theoretically by the

very nature of a bond as a means of saving, and practically, via the

analysis of fund portfolios of banks, insurance companies and various

funds, which are the most active investors into Minfin bonds.

The measure of value is reflected by the document’s face value and

its market rate.

Generally speaking, we are concluding that if one or another secu-

rity fulfils the function of money, then it is possible to recognize it as

money.

In economics, there are many things of which it is impossible to talk

in precise terms.

164

Part III. Money

For example, do types of money such as coins actually fulfil the

function of money, in super-wholesale transactions of 1 billion roubles

(33 million US Dollars)1 and over? No, they do not. Does this mean

that coins are not money? Things are not at all simple. It is not possible

to describe one type of money with 100% certainty as ideally fulfilling

the function of money, because:

• non-cash money is impractical for small transactions;

• cash is impractical in the case of a delayed shipment of goods, where

a letter of credit would be more convenient;

• in remote regions payment in commodities (vodka, ammunition

etc.) is preferred;

• transactions involving company acquisitions and mergers are often

paid for by shares of the acquirer-company.

Not one type of money ideally fulfils the function of money; each

type of money is convenient in one or another situation (fig. 23).

For example, coins serve the sector of transactions well, when the

sum to be paid does not exceed the value of the 10 highest denomina-

tions of coins, and, in case of banknotes, when the sum to be paid does

not exceed the 300 highest denominations of currency. In relation to

bigger deals, cashless methods of payment are more convenient. In a

cash-orientated economy, it is not unheard of for expensive property to

be bought with cash, but this is moving away from the area of the the-

ory of money, and more a case of the theory of efficient taxation.

Thus, some shares also fulfil the function of money, but not ideally,

and they are only used in some sectors of economics. For example,

bills/promissory notes of the Russian companies «Gazprom» and «Sber-

bank RF» were widely accepted as payment during real, high-pressure

deals for metal and metal products in the regions.

1 Rouble to US Dollar exchange rate is given at the time this research was carried out.

Money as an economic and value category

165

Fig. 23. The convenience of circulation of the various types of money

166

Part III. Money

Object and liability components of money

The physical properties of money do not appear as essential. Mon-

ey does not have common physical properties, and some types of mon-

ey do not even have a material form. (table 7)

Table 7

Object and liability components of different money forms

Form of money

Component, %

Principles

Guarantee

of circulation

Object

Liability

Natural

Non-standard-

100

0

Proprietary

Consumer character-

ized goods e.g.

law

istics

skins, salt,

crops, metals

by weight

(commodity)

Stamped metal 95

1 — con-

Proprietary

Consumer character-

ingots of

sumer

law

istics plus issuer’s

precise weight,

5 — ex-

(Prince’s) guarantee

stamped

change

of exact weight,

«kunas»

composition and

quality, which added to

exchange value

Coins made of

90

2 — con-

Proprietary

Consumer character-

precious metals

sumer

law

istics, plus responsi-

10 — ex-

bility of manufacturer-

change

issuer (Prince) for

exact weight and

composition, which

added to exchange

value

Credit

Commercial

0.1

99.9

Law of

Obligation of the

bills

obligations

issuer (merchant,

for regis-

industrialist) to issue

tered bills,

value indicated (in

proprietary

gold, coins, goods)

law for

was guaranteed by his

bearer bills

property and earning

in circula-

potential.

tion.

object and liability components of money

167

Table 7 cont.

Form of money

Component, %

Principles

Guarantee

of circulation

Object

Liability

Banknotes from 0.1

99.9

Law of

Liability of a private

private banks

obligations

bank to issue gold,

for issue and coinage etc was

encashment, secured by its assets

proprietary

law for

circulation

State banknotes 1

99

Law of

Liability of the State

(T-notes):

obligations

bank to issue gold,

for issue and coinage etc is

encashment, guaranteed by its

proprietary

assets, the State’s

law for

property, the right of

circulation

the State to collect

taxes

with metal

Liability of the State

«guarantee»

bank to issue gold,

coinage etc is guaran-

teed by its assets, the

State’s property, the

right of the State to

collect taxes, by the

liability of the govern-

ment to accept

currency X as payment

for taxes and the

clearing of State credits

Without metal

The abstract liability of

«guarantee»

the State bank is

secured by the liability

of the government to

accept currency X as

payment for taxes and

the clearing of State

credits

Coins with face 5–70,

30–95

Law of

Consumer character-

value (the stage depending depending obligations

istics plus liability of

of transition to

on a coin’s on a coin’s for issue and manufacturer-issuer

credit money)

composi-

composi-

encashment, (Prince), which was

tion

tion

proprietary

secured by his

law for

property, his right to

circulation

collect taxes and to

lead aggressive wars

168

Part III. Money

End of table 7

Form of money

Component, %

Principles

Guarantee

of circulation

Object

Liability

Deposited

0.01

99.9

Law of

Same as above, but

money (check-

obligations

divided, nominal and,

ing accounts)

as a rule, from a

private bank

Financial

Quasi-money

0.01–0.1

99.9–99.99 Law of

The abstract liability of

obligations

the financial institution

to issue, within the

period specified,

currency, either in

cash or cashless form,

was guaranteed either

by the right of the

government to collect

taxes or by the credit

portfolio of the bank

Stocks and

0.01–0.1

99.9–99.99 Law of

Share is guaranteed

shares, partially

obligations

by the competence of

fulfilling the

the shareholder;

functions of

bonds — by the right

money

to demand payment,

in case of other

securities — other

rights were guaran-

teed by the issuer’s

property and earning

potential

It is essential to note that precise calculations of the object and li-

ability components of different types of money are only possible with

concrete examples.

For example, if the cost of manufacturing US Dollar banknotes

equals 50 cents, then the object component value of one-dollar coin

will equal 50%, and in 100 dollars it will be 0.5. Equally, when attempt-

ing to define the object component of non-cash currency, it is possible

to carry out the following calculation: information about the name of

the owner of the account and the state of his bank balance occupies no

more than 40 bytes. A hard disc with a capacity of 40 gigabytes nowa-

days costs no more than 100 dollars. Therefore, the cost of storing such

information is 10-7 dollars. If a certain account-holder only has 1 dol-

object and liability components of money

169

lar in his account, then the object component will equal 10–5 and if he

has 1 billion dollars, then the object component will equal 10–14 %.

Yu. Maltsev and I. Shkarinov write: «The legislator calls money an

object only because of the convenience and expediency of regulating the

legal relations linked to owning and managing money in accordance with

proprietary law, although in essence these relations are ones of obliga-

tory/liability nature.

…The consumer value of money lies in the fact that it serves as a

general equivalent, mediating the exchange of all other property. Its

economic character of general equivalent has not yet been reflected by

the law and is the cause of misunderstandings, which the formation of

purely legal constructions leads us to… In fact, insofar as it is impos-

sible to effectively apply methods of defence (vindicatory and negatory

lawsuits), characteristic of the law of estate/proprietary law, to the

demand for cash, then the status of money as some sort of material

object loses its meaning»1.

Table 8

Legal relations, arising during the use of different money forms

Legal relationship

Form of money

Primary

Secondary

Non-standardized

The right of ownership and

–

goods e.g. skins, salt, other proprietary rights

crops, metals by

weight (commodity)

Stamped metal ingots The right of ownership and

–

of precise weight,

other proprietary rights, the

stamped «kunas»

right to demand exchange

for the specified amount of

gold

Precious metal coins

The right of ownership and

–

other proprietary rights, the

right to demand exchange

for the specified amount of

gold

Commercial bills:

Registered/Nominal

Unconditional abstract

liability of the tradesman to

1 Maltsev Yu., Shkarinov I. On the problem of guarantee-free indisputable money with-

drawing from banks’ correspondent accounts // Business and banks, 1996. Issues 22–23

( Мальцев Ю., Шкаринов И. К проблеме безакцептного и бесспорного списания

денежных средств с корсчетов банков // Бизнес и банки, 1996. № 22–23).

170

Part III. Money

Table 8 cont.

Legal relationship

Form of money

Primary

Secondary

pay the intended party

within the intended period

the specified amount of

certain precious metals

The right of ownership of

the paper slip with inscrip-

tion

Bearer

Unconditional abstract

liability of the tradesman to

pay the intended party

within the intended period

the specified amount of

certain precious metals

Banknotes from

The right of ownership of

Unconditional abstract

private banks

the paper slip of the

liability of the tradesman to

banknote

pay the intended party

within the intended period

the specified amount of

certain precious metals or

precious metal coins

State banknotes

(T-notes):

with metal «guarantee» The right of ownership of

Unconditional abstract

the paper slip of the

liability of the tradesman to

banknote

pay the intended party

The public right to use this

within the intended period

banknote to make any

the specified amount of

payment within the borders certain precious metals or

of the country

precious metal coins,

unconditional abstract right

of presentation as a means

of settling any transactions

with the State.

without metal

The right of ownership of

Unconditional abstract right

«guarantee»

the paper slip of the

of presentation as a means

banknote

of settling any transactions

The public right to use this

with the State.

banknote to make any

payment within the borders

of the country

(now it is limited in compari-

son with deposited money)

object and liability components of money

171

End of table 8

Legal relationship

Form of money

Primary

Secondary

Coins with face value

The right of ownership of

Unconditional abstract right

(the stage of transition the metal bearer, the public of presentation as a means

to credit money)

right to use this banknote to of settling any transactions

make any payment within

with the State

the borders of the country

(now it is limited in compari-

son with deposited money)

Deposited money

The right to demand from

–

(checking accounts)

the bank to issue cash

currency / make a specified

payment, public right to

accept this money for any

transaction within the

borders of the country (with

the exception of retail)

Quasi-money

Private-legal right to

–

demand payment of

deposited money from a

bank or the Treasury within

a specified period

Shares and other

Rights of the shareholder or

–

proprietary rights

other stock rights

Having analysed the forms of money, we obtain a graph of their

proportional prevalence at different times (fig. 24).

From fig. 24, we can conclude that, with the development of civil

and industrial relations, the demand for exchange value of money is

higher than for its direct consumer value.

However, during an industrial crisis and the resulting crisis of public

confidence in the national currency, a reverse process takes place, when

all those involved in the circulation of goods, expecting to go com-

pletely bankrupt, try to convert exchange value into consumer value.

In this way, a society’s turning away from one form of money during a

time of crisis bears witness to the fact that this type of money has lost

the function of money and therefore is being ousted from monetary

circulation. Up until the crisis it was regarded as money, but during and

after the crisis it is simply no longer accepted.

However, in case of normal development, the object component/

value of different forms of money strives towards zero, since an im-

172

Part III. Money

Fig. 24. Share of different money forms

provement in the circulation of money leads to reducing representation

of liability information in object form. We can illustrate this with the

following example.

In Ancient Babylon liabilities (promissory notes) were written on

stone tablets weighing up to a kilogram, in Ancient Rome they were

written on clay tablets weighing up to 300 grams. After that the bearer

of such information became a parchment with a weight of 100 grams,

from the fifteenth century onwards it became paper (10g) and nowadays

the information is carried nearly everywhere on electronic bearers,

where one liability occupies approximately 100 thousand molecules of

silicon: much less than 1 mg. Bill Gates’ development of electronic

technology and «the reduction of the co-efficient of information

friction»1 with the creation of the quantum computer will reduce the

electronic bearer to between 10 and 100 atoms.

1 Gates B. The road into the future. Moscow, 1997. P. 20

object and liability components of money

173

Now the value of a product is fully separated from its physical form

and appears in a distinct, public form, without the need to be attached

to some or other type of material commodity body. It represents a pub-

lic symbol of a physical commodity and functions in the same vein,

relying only on public guarantee. Its value now is expressed simply by

a number, confidence in which is confirmed by the agreement of sepa-

rate parties, and also by the agreement of the public and the govern-

ment. The latter guarantees this confidence in the name of the public

and on the basis of the power invested in it by the people, by means of

the corresponding legislation and established procedures.

Thus, the public role of money, as a representative of value, signifies

that every type of commercial money is full-bodied money, regardless

of whether or not it has a physical content. Whether money is full-

bodied is defined not by its existence in a purely material form, but by its

ability to completely fulfil the functions dictated by the demands of the

corresponding stage of commercial relations development1.

1 Portnoy M.A. Aforementioned work. P. 27.

174

Part III. Money

Analysis of the movement of money forms

Turning to the analysis of Article 128 of the Civil Code of the Rus-

sian Federation, we will move away from the fact that the following

arises from the economic nature of money: it is not possible to talk about

the legal nature of money in general. It is only possible to talk about the

legal nature and corresponding legal regime of a concrete type of legal

property goods, which carries out the function of money1.

By analysing the table of the forms of money (see table 3), the table

of the material and liability content of different forms of money (see

table 7) and also the corresponding graphs, it is possible to come to the

conclusion there is an evolutionary ousting of one form of money by

another more suited to the corresponding level of industrial relations

and in contemporary economics literally all types of money exist, hav-

ing, however, varying degrees of prevalence in economic relations.

Likewise it is necessary to point out, in accordance with M.A. Port-

noy, that different forms of money have different abilities to fulfil the

functions of money. For example, banknotes are an inadequate means

of preserving value (accumulation), nominal credit bills are not quite

suitable as a means of circulation, and financial money is inadequate

both as a means of circulation and as a means of payment. At the same

time, all of these are adequate as a measure of value2.

It is particularly worth noting the following tendencies:

• absolute majority of contemporary money forms are of liability

character;

• financial money is at present the most actively developing form of

money;

• the development of electronic systems of access to deposited and

financial money ( e-banking and e-trading systems) allow fund-hold-

ers to reduce «inactive» sums of deposited money by means of short

term investment in stock and shares, which exerts essential influence

on the global liquidity of the international system as a whole.

1 Efimova L.G. Is tax payment by «dead» money a possibility? // Business and banks, 1998.

Issue 42 ( Ефимова Л.Г. Возможна ли уплата налогов «мертвыми» деньгами? //

Бизнес и банки, 1998. № 42).

2 See: Portnoy M.A. Aforementioned work. P. 164.

analysis of the movement of money forms

175

• the spiral development of history exemplifies the fact that mankind,

having become acquainted with «portfolio» distribution of stock and

shares into different branches of economics for increased stability,

has created stable «portfolio» deposited money ( SDR, ECU) and

even banknotes ( EURO);

• the development of commercial markets and electronic systems of

accessing natural products markets, and likewise the use of the «li-

quidity line» as a mechanism distinctive to deposited money, in the

sector of contracts relating to stocks and shares, allows investment

funds to retain an essential part of their assets in exchange traded

commodities (ETCs), such as of oil products, light and dark metals

and even concentrated orange juice, which again endows commod-

ity money with the function of accumulation (fig. 25).

Fig. 25. The expansion of the sphere of application

of specific functions of money

The signing of international deals, such as, for example, «oil for

supply of provisions» between Iraq and the international community,

the acquisition of Russian credits by Iraq with oil and oil products;

«gifts» in the form of trains full of oil products to government officials

of several developing countries — finds us drawing a conclusion that a

certain tendency has taken shape, i.e. certain ETCs are acquiring the

function of circulation and, consequently, developing into money.

176

Part III. Money

Such ETCs in circulation take the following forms:

• nominal securities in the form of storage receipts, bills of lading;

• bearer securities in the form of bearer storage receipts, bills of lading

«upon presentation»;

• «metal» and other commodity accounts, arising as a result of the

storage of goods in special depositories. The Canadian company

«Kitco» is the best-known of such depositories of precious metals,

which gives its clients the right to carry out non-cash operations

between themselves. Equally well-known is non-cash circulation of

such goods and rights for them on various commodity exchanges in

the West, amongst which the Chicago goods exchange and London’s

metal exchange stand out for their popularity and volume of trade.

Thus, it is possible to establish that the historical spiral development

of forms of money results in all types of existing money advancing to a

new level.

At present, forms of money which are of a liability nature, serve the

overwhelming majority of deals. Applying to them object/material rules

of circulation is not only unacceptable, but also creates huge problems

in the circulation of money, and consequently negatively affects the

credit-monetary system and the development of economics as a whole.

Many lawyers confirm, that one or another form of money inade-

quately fulfils one or another function of money. In particular, there is

much criticism of the fulfilment of the function of payment by securi-

ties. Here we once again emphasise that not one form of money ide-

ally fulfils any one function (table 9).

Table 9

Fulfilment of the money functions by different forms of money in Russia

Percentage of function fulfilment

Form of money

Means

Means of accumulation

Measure

of circulation

(value preservation),

of value

and payment

holders

Natural

Non-standard-

2

0

100–120

ized goods e.g.

Property for rent, building

skins, salt,

materials, cars, flats,

crops, metals by

(B, PF, IC, IF, physical

weight (com-

persons)

modity)

analysis of the movement of money forms

177

Table 9 cont.

Percentage of function fulfilment

Form of money

Means

Means of accumulation

Measure

of circulation

(value preservation),

of value

and payment

holders

Stamped metal

0.1

3

100

ingots of precise

Barter is

Oil, non-ferrous and

weight

especially

ferrous metals (enterpris-

well-developed

es which use them as raw

in the coal

materials, IF)

sector (coal for

metal)

Precious metal

0.1

0.1

110

coins

Value increases with time

(for numismatists)

Credit

Commercial bills

20

10

110

In payments for

(B, PF, IC, IF)

metal

Banknotes from

20

10

85

private banks

During receipt of Risk of bankruptcy +

wholesale goods inflation (B, PF, IC)

from factories in

the regions

State banknotes

50

50

90 in case of 10% inflation

(T-notes)

Prohibited from 10–20 in case of hyperin-

without metal

use at above the flation

«guarantee»

defined limit

between

juridical persons

(practically

prohibited from

circulation in

wholesale

trade). Only

short-term

liquidity: routine

payments, due

taxes

Deposited

60

90

90

money (check-

Circulates poorly

ing accounts)

in the retail

sector,

Except credit

cards

178

Part III. Money

End of table 9

Percentage of function fulfilment

Form of money

Means

Means of accumulation

Measure

of circulation

(value preservation),

of value

and payment

holders

Banknotes

99

25

97

The best price

The black

In case of inflation of 3%

currency in all

market,

(with the exception of the

(both domestic

property,

1970–1973 crisis)

and foreign)

between

s

contracts

physical

persons, since

the government

prohibits their

US Dollar

circulation

Deposited

99

10

97

shadow

payments for

wholesale trade

and property

Financial

Quasi-money

1

0.1

99

Percentage of income

almost equals inflation

(B, PF, IC, IF)

Shares and

1

0.1

120–150

other property

Profitability of normal busi-

rights

ness (related enterprises,

colleagues, physical

persons)

Key: B = banks, PF = pension funds, IC = insurance companies, IF = investment funds.

Part IV

MISTAKES IN LEGISLATION

AND THE ROLE OF ECONOMIC

THEORY

The origin of mistakes

In terms of law only material objects are recognised as

things.

the German civil code, § 90

A mistake relating to the nature of money in Russian civil legislation

arose because of the fact that Roman law was taken as its basis, without

considering the new tendencies in monetary circulation and the mon-

etary system.

In actual fact, in Ancient Rome only object acted as money: metals

(copper, silver, gold), because, at that level of trade relations, promis-

sory notes, bills and assignations were not in circulation.

Life has changed substantially since the time of Ancient Rome.

Naturally, evolution has also touched the sphere of money. However,

contemporary legislators, having revived Roman law in the Civil Code

of the Russian Federation, have not taken into account the fact that

metal ceased to fulfil the function of a measure of value long time ago,

and that deals are no longer conducted with the need for a weighman

with scales and weights.

It is possible that the said mistake was a result of an unfaithful trans-

lation from Latin, insofar as the Latin word «res» had the two following

meanings:

1) a separate, legally independent material entity with clear spatial

boundaries;

180

Part IV. Mistakes in legislation and the role of economic theory

2) any object (including intangibles — jura) of private law or the

civil process ( ausa), and also a whole complex of assets ( bona, hereditas;

patrimonium)1.

Gaius2 thus divides things into tangible ( corporals), which it is pos-

sible to feel or touch ( quae tangi possunt) and intangible ( incorporales)

which it is not possible to feel or touch ( quae tangi non possunt). Gaius

interprets the latter not as things in the sense of objects of the external

world, but precisely as rights3. «Intangibles are things which cannot be

touched, including those which are listed in the law, such as inheritance,

usufruct, liabilities, whatever their form, and the fact that inheritance

includes physical items is not at all important… nor the fact that a large

part of what is left to us, according to some sort of liability, is a physical

object… but the law of inheritance itself, the law of usufruct, liability law

are all regarded as res incorporales, i.e. intangible objects»4 (Gai.2.14)

This fragment is also reproduced literally in Digests5 (D.1.8.1)

Contemporary Russian law, however, recognises under the concept

of «a thing» only objects of the material world, which exist in their

natural condition in nature or are created by the labour of man6.

As N.O. Nersesov explained, «references to Roman law (in this

case — A.G. ) are out of place because securities are essentially a product

of the cultural life of new peoples, and consequently, it is not possible

to attach to them new norms which are taken from a law foreign to

them, Roman law. The latter is of historical interest to present day so-

ciety and serves as a excellent school for the training of lawyers, but it

is impossible to find the answers in it to all questions, occurring in the

lives of other nations, at any time» 7.

1 Bartosek M. Roman law (notions, terms, definitions): Translated from Czech. Moscow, 1989. P. 274 ( Бартошек М. Римское право (понятия, термины, определения): Пер.

с чешск. М., 1989. С. 274).

2 A famous Roman lawyer, a recognised figure of authority in Ancient Roman law.

3 Roman private law: Textbook / Edited by Prof. Novitsky I.B. and Prof. Peretersky I.S.

Moscow, 1996. P. 148.

4 Gaius. Institutes. Books 1–4. Moscow, 1997.

5 Justinian Digests. Selected excerpts. Moscow: Nauka, 1984.

6 Baskakova M.A. Businessman’s Juridical Dictionary / Edited by Ryasentsev V.A. Mos-

cow, 1994. P. 77 ( Баскакова М.А. Толковый юридический словарь бизнесмена /

Научн. ред. В.А. Рясенцев. М., 1994. С. 77).

7 N.O. Nersesov. Representation and securities in civil law. Moscow, 1998. P. 18 ( Нерсесов

Н.О. Представительство и ценные бумаги в гражданском праве. М.: Статут, 1998.

С. 18).

the origin of mistakes

181

«The majority of lawyers, who are examining contemporary legal

phenomena chiefly from the point of view of Roman law, achieve un-

satisfactory results which are unrelated to the demands of real life»1.

N.O. Nersesov renders this statement concrete with the example of

the negative influence of Roman law on the development of commod-

ity circulation with the help of bearer securities in France.

«The convenience of the examined form of liability in relation to fa-

cilitating the concession of rights of demand became hindered by the

gradual development of theoretical jurisprudence. The history of the

development of juridical thought in France at that time without doubt

took place under the strong influence of Roman law.

In their explanations of the different institutions of civil law, lawyers

increasingly relied on Roman law. The latter, called droit commun as

early as in the 13th century by a lawyer Beaumenoir, as time passed,

became in the eyes of lawyers, educated under its exclusive influence,

the higher law, autorite.

The influence of Roman law unprofitably affected the theoretical

basis of imperfect bearer securities. As a product of the general law of

France, these liabilities did not suit the strict demands of Roman con-

tract law. Intricate analysis of juridical concepts was alien to the ju-

ridical genius of the 13th-century French; the common sense of the

people, having revealed itself in the fragmentary opinions of a small

number of professional lawyers of the time and also in juridical prac-

tices, considered the bearer (porteur de lettre) as an independent cred-

itor in relation to the promissory document.

Meanwhile, later lawyers, with a better theoretical training, came

to apply the Roman theory of mandate to the bearer, the owner of the

document. Such a transition, incidentally, was completed gradually.

Thus, a 15th-century lawyer Ioannes Gallus, although considering the

bearer (porteur) to be the mandatary, maintains that his right according

to the document did not end with the death of the trustee.

Someone who talks in particular detail about these liabilities is the

16th-century lawyer Rebuffus, who tries to reconcile the theory of man-

date with the independent juridical situation of the owner, by means of

supposition (presumption). In his opinion, the bearer always has the

1 Ibidem. P. 199.

182

Part IV. Mistakes in legislation and the role of economic theory

right to file a claim on the strength of the supposition that the document

came to him as a deed of trust; to this he attaches another basis, that

the debtor cannot raise any kind of objection since he has himself

promised to make a payment to any bearer.

As a result, triumphant once and for all was the point of view of

Roman law, i.e. that the bearer is only an implementer of the rights of

another party, the original creditor, and therefore he should have pre-

sented either a power of attorney, if he was acting in the name of the

principal, or a proof of a completed procedure of cessio bonorum, if he

was acting in his own name.

This point of view is reflected in the later versions of coutumes

( Translator’s note: bodies of law in force in France until the Revolution)

composed undoubtedly under the influence of lawyers educated in

theory. The coutumes of Orleans appear, to a certain extent, to be an

exception. In the first edition (1509), chapter XXI, Des executions faites

par vertu de letters obligatoires etc., art. 348, there is a mention of the

« porteur de letters obligatoires» (bearer) who can act in relation to the

debtor as if he were an independent creditor. This article remained

without alteration even in the revised edition of 1583, only in a differ-

ent part of the document, precisely in chapter XX, art. 432.

From the article mentioned it appears that the porteur (bearer) is

more independent than the ordinary commissioner. This particularly

stands out in the second half of the article, where it is said that the

bearer may continue the legal suit (of calling the debtor to account)

even after the death of the creditor.

We note here that one of the contemporary French lawyers, Amedée

Pétit, basing himself on the abovementioned article 432 of the coutumes

of Orleans (the 1583 edition), finds that, at that time, genuine bearer

securities have already been known. In this he refers to the authority of

Potier. In fact this academic explains the phrase in art. 432 « si a ce ledit

debteur est oblige» in the sense that the debtor pledged by agreement to

pay the bearer, and to this adds that in commercial dealings these bills

« sont encore autorises». The opinion of Potier is refuted by the second half

of the same phrase, « comme seroit (porteur) le creancier principal», from

which it is directly clear that an imperfect form of bearer liability is being

discussed, examples of which we included above, i.e. where the debtor is

liable to pay a defined, original creditor or a bearer of the document.

the origin of mistakes

183

The bearer of the document ( porteur de lettres obligatoires) had the

character of a legal representative, which is clear from comparison with

other similar statements of the coutumes. Thus, in the coutumes de

Montargis of 1531, in chapter XX, « d’executions de letters obligatoires»,

the content of art. 432 of the coutumes of Orleans is repeated and the

following 26th article states that « lettres obligatoires» cannot be brought

into use by the bearer after the death of the creditor and that heirs of

the latter may have a claim against the debtor.

From the fact, that the right of the bearer to pursue a claim against

the debtor is cut short by the death of the creditor, it is clear that such

a bearer is only regarded as an entrusted party, who is acting in the name

of the principal, original creditor.

In the coutumes de Blois of 1523, chapter XXIII, art. 250, the same

is repeated. In his notes on this article, the 16th-century lawyer Julien

Brodeau states that the «porteur de lettres obligatoires» is an ordinary

trustee ( procurer).

Thus, bearer liabilities, which, according to the development of

civil relations, should have turned out to be convenient because of fa-

cilitated transferral of rights of demand, on the contrary, lost their

original meaning in the 16th century under the influence of lawyers, in-

spired by Roman law, and, as a result, at that time they did not differ

substantially from simple nominal liabilities»1.

1 Nersesov N.O. Aforementioned work. P. 163–165.

184

Part IV. Mistakes in legislation and the role of economic theory

Proof of the inevitability

of mistakes in legislation

The theory of mistakes is the branch of mathematic statistics upon

the basis of which the methodology of the exposure and evaluation of

errors (mistakes) developed. As a completely developed, strong math-

ematic apparatus, it has inter-disciplinary significance and may be

applied to any conceptual apparatus and in any field: in physics, chem-

istry, biology, sociology, history and also in law.

In the theory of complex systems it is proved that any complex sys-

tem (a system consisting of a large number of complex, interlinking

elements with complex and diverse links) will definitely contain one or

more mistakes. In addition, knowing the approximate complexity of

the system and probability of mistakes, it is possible to calculate their

number with sufficient precision.

This rule is used particularly often in information technology and

its branch, i.e. programming, where it is well-known that any complex

program will necessarily contain a mistake(s). An example of this could

be the Windows 95 program, which, despite being issued by the huge

corporation Microsoft, still contains a large number of errors, which can

be discovered by almost any competent user. The presence of mistakes

in this program is normal, as the capacity of the hard disk is 80 MB,

which is equal to 640,000,000,000 elementary bytes.

Some of the indicators of a complex system are the complexity of the

conceptual apparatus and the complexity of relationships between con-

cepts. For example, in the binary code there are two concepts in total:

zero and one. There are also two relationships: addition and negation.

At the same time, in mathematical analysis, the concept of the variable

is even harder to define, and so is the complex relations of the integral

and factorial. In legislation the notions themselves are rather complex

(for example, gangsterism or contraband), and the same can be said of

the logical relations of inclusion, exclusion, complex equality etc. It is

therefore necessary to note the immensely large number of concepts,

used in law and the very large number of different types of interlinks

between the most varied norms, both within laws as well as between

them. Consequently it is possible to state with confidence that from the

point of view of mathematical statistics law is a complex system.

Proof of the inevitability of mistakes in legislation

185

Thus, knowing that:

• legislation is a complex system,

• a complex system necessarily contains mistakes,

we can conclude that legislation necessarily contains mistakes and

the more complex and ramified the law, the more mistakes will be

contained within it.

It thus follows that in many laws high in content and complexity,

the presence of mistakes is highly probable.

Following on from the theory of complex systems, it is possible to

reveal the following norm:

N ~ C,

Where N is the number of mistakes; C is the cybernetic (information)

complexity of the norm.

Accordingly, complexity is directly proportional to:

1) the volume of the norm ( V);

2) the number of legal links between concepts ( LC):

C ~ V × LC.

It is also well-known that the more «worn in» the law, the more

thought through, the more times it has been examined and debated,

then the less mistakes it will contain, i.e.

N ~ 1/ NE,

where NE is the number of examinations.

Equally the application of the law affects its «worn-in-ness». It is

obvious that the law on theft, applied by courts quite often, is better

thought through than, for example, the law on changes of citizenship,

which is applied extremely rarely.

N ~ 1/ NA,

Where NA is the number of applications.

Then we get the formula:

N ~ V × LC/ NA × NE.

From this formula it is possible to conclude that there are more

mistakes in laws which:

1) are complex in their wording;

2) are strongly interlinked;

3) are passed in haste;

186

Part IV. Mistakes in legislation and the role of economic theory

4) are formulated without considering the positive experience of

foreign legislators;

5) are borrowed from legislation of another country, but with an

inaccurate translation;

6) have not been applied before i.e. are being applied for the first

time.

The chapters of the Civil Code of the Russian Federation which deal

with money, securities, banking operations and entrusted administra-

tion can be described using all of the above-listed properties.

And although we are obliged to observe laws (even if they contain

mistakes), it should not follow that they are regarded as a dogma. It is

necessary to facilitate the removal of contradictions in the legislation

when they are revealed.

Why there are many mistakes in continental...

187

Why there are many mistakes in continental

(including Russian) legislation

Economic theory teaches us that the role of the basis is primary, and

the role of the superstructure secondary. Transferring this teaching to

the field of civil law, one can confirm that industrial strengths and in-

dustrial relations (basis) form the standard behaviour of a subject in

society, but the government, recognising this said norm, translates it

into a legal statute (superstructure).

With the development of industrial relations (basis), old norms of

behaviour are dying out and changing shape, new ones are arising,

which creates preconditions for the timely correction of legal super-

structure — legislation.

Such correcting is carried out much more simply in Anglo-American

law, than in continental law (including Russian law).

In the Anglo-American system it is recognised that at the beginning

a norm is formed by life itself, and then regulated by law. The principle

«Norm is primary, law is secondary» is realised by the principle «the

law of justice is higher than general law».

In Russia, like in the rest of continental Europe, German normative

theory has been put into practice using the principle «law above all».

When this happened, nobody seemed to notice that the legal super-

structure (legislation) sometimes does not relate to the altered basis and

sometimes laws simply impede the development of normal economic

relations.

In the USA and Great Britain, a correct and timely decision on a

concrete case may be made by courts, based on the principle «the law

of justice is higher than general law». In Russia, however, a long pro-

cedure is necessary in order to change or make an addition to a law,

which subjectively guarantees that mistakes in legislation have a longer

«shelf-life».

As long as economic relations in Russia depend on a legal standard

and not the other way round, we are doomed to be lead by legislation

which contains a large number of mistakes, wasting our strengths not

on fruitful activity, but on surmounting barriers standing in the way of

market relations.

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Contents

191

Contents

Introduction .......................................................................................................................5

Part I. WHY IS AN INSTITUTIONAL THEORY

OF MONEY NEEDED? ..........................................................................................9

on errors in the legal treatment of the concept of money

and securities and their consequences ..............................................................9

the ambivalence of the economic nature of money and its

legal definition .......................................................................................................................10

Methodological foundations of analysis: theories of money

and the institutional approach ................................................................................12

theories of money ...........................................................................................................12

neo-institutional theory and economic analysis of law ...............................14

analysis of law according to r. Posner ................................................................16

Historical school of law .................................................................................................18

Evolutionary institutionalism .....................................................................................19

Legal differences in the treatment of objects and liabilities ......................22

Part II. SECURITIES .............................................................................................31

definition of the problem ...............................................................................................31

definitions of securities in legislation outside russia ..............................35

Securities as an economic category and legislative

treatment of them .............................................................................................................37

n. o. nersesov on securities .....................................................................................41

Securities as unilateral contracts ..........................................................................45

the evolution of contracts into securities ..........................................................46

Bearer securities as complex legal relations ...................................................49

Inadequacy of economic nature and modern legislative

treatment of securities ................................................................................................52

the right to a document and the right from a document ...........................54

Part III. MONEY ......................................................................................................58

Money as an economic and value category ....................................................58

the evolution of money forms ...................................................................................73

natural money ..................................................................................................................77

192

Contents

natural commodity money ..................................................................................77

Precise-weight metal ingots ..............................................................................80

Full-bodied metal coins .........................................................................................83

credit money .....................................................................................................................87

commercial bills........................................................................................................87

Banknotes from private banks ..........................................................................91

currency .......................................................................................................................94

Public and legal origin .....................................................................................94

classification of money forms on the basis

of «cash — non-cash» ....................................................................................97

cash currency ....................................................................................................99

non-cash currency — deposited money

(checking accounts) ...................................................................................... 151

demand for currency ................................................................................... 158

Financial money ............................................................................................................. 160

Quasi-money ........................................................................................................... 160

Stocks and shares, partially fulfilling the functions of money ......... 161

object and liability components of money ..................................................... 166

analysis of the movement of money forms .................................................. 174

Part IV. MISTAKES IN LEGISLATION

AND THE ROLE OF ECONOMIC THEORY ..............................179

the origin of mistakes ..................................................................................................179

Proof of the inevitability of mistakes in legislation ................................... 184

Why there are many mistakes in continental (including russian)

legislation ..............................................................................................................................187

Bibliography ..................................................................................................................188