by David Fox, Professor of Common Law, University of Edinburgh
- Introduction
Lawyers are wary of providing universal definitions even of their most fundamental concepts. Money is a prime example. There is no authoritative definition of money that allows us to identify with certainty all those things that serve as money in the law and those that do not. If lawyers have any view of the range of things they treat as money, then it is one informed by its commonly-stated economic functions.[1] Economists often take the view that “money is what money does”.[2] Thus the textbook economic definitions generally say that money is a medium of exchange and a unit of account. From these follow other secondary functions, such as to serve as a store of value and a standard of deferred payment.[3]
The purpose of this blog entry is to suggest that the economists’ functional approach to understanding money is also the right one for lawyers to take. Money in the law is an aggregation of legally recognised functions. It is a kind of composite entity. Its most important functions are to serve as the notional bearer of a certain number of units of monetary value and to discharge debts. While those functions are attributed by law to certain things (such as coins, banknotes or liquid bank balances), these things are subsumed by the larger legal functions attributed to them. The functions become more important than the thing itself.
The rest of this blog entry develops this idea of money as a composite entity. I begin with some opening observations that have prompted me to explain money in composite terms. (section 2). Next, I draw on the writings of John Searle, a philosopher of social ontology who developed a theory to explain how certain “institutional facts”, including money, can be created by the collective intentionality of human beings (section 3). In conclusion, I set out some implications of analysing money as a composite entity (section 4).
- Opening observations
When we survey the range of things that are used as money in legal transactions, we find that, considered as things, they are all very different in their characteristics, and are categorised in different parts of the law of property. For instance, coins are metal discs struck with standard impressions: they are categorised as corporeal moveables in property law. Banknotes are negotiable instruments that embody a transferable right to payment from their issuing bank. In property terms, they are something of a hybrid: the holder’s title to the corporeal document represents his or her incorporeal right to payment.[4] Bank money consists in the customer’s right to enforce a contractual debt to payment of money and to authorise the bank to make payments from the account on the customer’s behalf. The customer’s right to payment of some corporeal form of money becomes, for all practical purposes, money itself. In property terms, bank money is categorised as a pure incorporeal.
This makes money a remarkable kind of fungible. No fungible thing in the natural world could show such a variety of forms but still belong to the same general type of which the unit in question was one representative. There may be many hybridised varieties of wheat, and various grades of oil, and nowadays at least Ford motor cars come painted in any number of colours. But whatever their variety, the natural properties of all these things still limit and determine how we type them. They are still classed as wheat, oil and Ford cars. In contrast, the natural properties of those things that the law recognises as money tell us very little of why, for example, 100 £1 coins, two £50 notes and a single credit balance of £100 should all be treated as money in the law. Their status as things in property law seems almost coincidental to the law’s recognition of them as money. All that connects them as items of a single type is their legally recognised functions of carrying a certain number of monetary units and of serving as means of discharging monetary debts.
This view which characterises money things in terms of their legally ascribed functions has been challenged. The Swedish legal theorist Karl Olivecrona began his inquiry into the legal nature of the monetary unit by directly confronting the idea that money could be sufficiently explained in terms of its functions: “For how can we talk of the functions of an object without having a definite object with certain properties in view?”[5] Things in the natural world, such as “a pencil, an automobile, a needle, or a parachute”, could all be identified as objects of a certain type prior to, and separately from, the functions for which people used them.[6] He added that any attempt to define money by its functions could only lead to circularity:
In order to know what are the specific functions of money, one must already know what money is. The concept of money is therefore presupposed in the definition of money.[7]
One problem with Olivecrona’s argument may be that it confuses the practical functions to which human beings apply the objects they find or make in the natural world with the very different processes that attribute legal functions to objects. The law creates and enforces its own abstract networks of jural relationships. A variety of different things can perform monetary functions precisely because those functions are conferred upon them by law. They do not depend on the natural properties of the things themselves, which means they can straddle different categories of thing in the law of property. The sharp point of a needle enables it to draw a thread through woven cloth but only a rule of legal attribution can define the kinds of thing that discharge a monetary debt. The reason is that both the debt and the juridical act of discharging it are constructs of the law.
Seen in this way, money becomes a network of legally recognised functions. Granted, some corporeal or incorporeal thing sits at the core of the composite but that thing should not be confused with the whole composite entity. Just as it would be incomplete to explain a needle as a slender metal object with a point at one end so it would be incomplete to explain money as a stamped metal disc or a printed sheet of polymer. Indeed, the inadequacy of the explanation would be even greater for the money than it would be for the needle. The processes that attribute legal functions to objects are more likely to subsume the objects within their own functions than is possible even with material objects, like needles, that are designed for human use as tools.
- Institutional facts and attributing functions to objects
This composite view of money is a legal application of the more general theory of institutional facts proposed by John Searle in his Construction of Social Reality (1995).[8] Searle demonstrated how many facts in the social world are produced by collective human intentionality. Some examples of these social facts were human institutions, such as property and marriage, and money was probably his favourite instance.[9] Specifically, Searle demonstrated how material objects in the natural world can take on a new status as a consequence of human agreement. For example, a pile of stones can mark a boundary between lands controlled by hostile neighbours even if it no longer presents any physical barrier between them.[10] Printed bank notes can become money because people choose to treat them as money (and in this Searle admits the very circularity that Olivecrona questions.) In each case, the objects are then enabled to perform certain functions that would not have been possible simply in virtue of their intrinsic properties as objects in the natural world. Some of those functions take on legal significance. They become more than what Searle calls “brute facts”. So it is that not every printed sheet of polymer can discharge a monetary debt – it must be produced by an authoritative issuer and still be current for payments. A valid bank note includes non-material attributes in addition to the object at its core.
Searle recognised the special relevance of the law to the creation of institutional facts. Some institutional facts were, he said, “codified”:[11] they become matters of specific legal recognition rather than more general social recognition. From this perspective, Searle’s theory of institutional facts aligns well with longstanding “chartal” theories about the status and function of money in the law. These find their strongest expression in the works of the early twentieth-century monetary theorist, Georg Knapp. Knapp’s State Theory of Money (1905, 1924) affirmed the role of the law in ascribing the status of a means of payment to token objects.[12] He wrote: “The soul of currency is not in the material of the pieces, but in the legal ordinances which regulate their use.”[13] All means of payment were “chartal” to some degree. Knapp borrowed this term from the Latin carta which means a ticket or token. All money was a token to which the law attributed the function of discharging monetary debts. From this attribution it followed that the material composition of the money tokens could no longer be determinative of their functions, as might have been supposed in times when coins were struck from intrinsically valuable metals. Money no longer needed to be made from any particular substance or to be made from any particular kind of object. Once the status as a means of payment was attributed to an object, all that mattered was that the object itself was in the form prescribed or recognised by the law.
- Implications
What follows from treating money as a composite entity where the law ascribes functions to an object, such as a coin or banknote, or to a prior jural relationship, such as a debt owed by a bank to its customer?
First, this analysis affirms Knapp’s observation that the material substance of the object has only a contingent relationship to its legal functions as a means of payment. In principle, any kind of object, whether material or immaterial, could have monetary functions ascribed to it once the law recognises the collective human intention to treat it as money. The range of objects that might serve as money is potentially open-ended. The decision to recognise the monetary status of purely ideational entities, such as cryptotokens, would be an easy next step to take in the development of new kinds of money. The logic of Searle’s and Knapp’s arguments would apply as much to a tokenised central bank digital currency as it would to a coin or a banknote.
Secondly, this analysis reminds us of the reasons why certain kinds of property (but not others) are selected as the things to which monetary functions are attributed. While any kind of object could, in principle, have monetary functions ascribed to it, experience shows that this is not the case. Nowadays people at large (or the legislature) will not indiscriminately select individual cattle, iron bars, laptop computers, or paperback copies of Searle’s Construction of Social Reality as the things to which they ascribe the power to discharge monetary debts. We instead select objects whose natural, legal or digital properties best enable them to perform the specialised monetary functions applied to them. There is a strong social preference to select kinds of property that are homogeneous, divisible, and readily transferable.[14]
This explains why the path of evolution in monetary objects has been towards fungible, dematerialised entities. Bank credits represent abstract claims that are as divisible as the fractions of the monetary unit of account in which they are denominated. Every £1 unit in the bank account can be split into sub-units of 1p. In combination with a technically efficient payment network, the units represented by these claims become readily transferable. Capital adequacy and solvency regulations ensure that an account at Bank A is as liquid and valuable as a different account at Bank B.
Digitised tokens offer the same prospect of homogeneity and divisibility since they have no material properties that might make one unit of them distinguishable from another. They are by their very nature freed from limitations of material substance. In principle, the quantity units associated with a single token are as divisible as the technical design of the system enables them to be. A single bitcoin unit, for example, is divisible into one million fractional sub-units (each called a “satoshi”). Digital design can now achieve what was metallurgically difficult when coins were struck from intrinsically valuable metals. It used to be hard to make silver coins small enough to correspond to the very small monetary values ascribed to them – the coins were either so thin that they broke or so small that they were easily lost. All that said, it remains to be seen whether the blockchain systems on which digital currencies are located can be designed to work as fast and inexpensively as the conventional bank payment systems that they now compete with. This may be one of the main obstacles to their use and recognition as money.
Thirdly, and in conclusion, this functional analysis of money brings us full circle to the relevance or irrelevance of property law to the things or rights that are used as means of payment. While the proprietary categorisation of the things or rights may, as I mentioned above, be subsidiary to the functions attributed to them, there are still good reasons for recognising money as a kind of property. Property law links the main monetary functions ascribed to those things or rights to a particular person. Whoever has title to them benefits from the usual regime of exclusionary protection which is the characteristic of a property regime.[15] Without that proprietary link, the legal power to discharge debts would be a kind of valuable resource that fell outside the regime of exclusive allocation made possible by property law. Money is too important for us to permit that. So, however dematerialised money may become, there needs to be a legally recognised thing or right at its core.
This recognition of proprietary status is one of private law’s distinctive contributions to the general functions of money. True, the functions of money may be essentially economic in nature but property law has its own allocative and protective functions beyond those recognised by the economists. They are also parts of the composite whole.
[1] Charles Proctor, Mann on the Legal Aspect of Money (8th edn, OUP 2022) paras 1.07-1.17.
[2] See the quotations gathered in Karl Olivecrona, The Problem of the Monetary Unit (Macmillan 1957) 11.
[3] Eg, N Gregory Mankiw and Mark P Taylor, Economics (6th edn, Cengage 2023) 538-39.
[4] Hence Professor Goode’s telling name for them: “documentary intangibles”. See Ewan McKendrick, Goode and McKendrick on Commercial Law (6th ed, Penguin) para 2.16.
[5] Karl Olivecrona, The Problem of the Monetary Unit (Macmillan 1957) 9.
[6] Ibid 9.
[7] Ibid 11.
[8] John R Searle, The Construction of Social Reality (Penguin 1995) chs 1-2; 4 (Searle). The germ of Searle’s thinking has been developed in Neil MacCormick’s institutional theories of law. See Neil MacCormick Institutions of Law: An Essay in Legal Theory (OUP 2007), especially chs 1-2.
[9] Searle 37-43.
[10] Ibid 39.
[11] Ibid 87-90.
[12] Georg Knapp, The State Theory of Money (trans by J Bonar and H M Lucas, Macmillan 1924).
[13] Ibid 2.
[14] This view is emphasised in the societary theories of money developed by the Austrian economic school: eg, Carl Menger, “On the Origin of Money” (1892) 2 Economic Journal 239, 252-55.
[15] Eg, Thomas Merrill, “Property and the Right to Exclude” (1998) 77 Nebraska LR 730.
