INSTITUTIONAL THEORY OF MONEY. THE ESSENCE AND LEGAL STATUS OF MONEY AND SECURITIES
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Academus Publishing 2015 INSTITUTIONAL THEORY OF MONEY THE ESSENCE AND LEGAL STATUS OF MONEY AND SECURITIES A. YU. GRIbOv
Academus Publishing, Inc. 1999 S, Bascom Avenue, Suite 700 Campbell CA 95008 Website: www.academuspublishing.com E-mail: email@example.com © Publisher, Academus Publishing, Inc., 2014 © 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: 1 4946 0000 5 ISBN 13: 978 1 4946 0000 6 DOI 10.12737/6433 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publisher. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners.
Introduction The aim of this study is to deduct and demonstrate current definitions (which are essential for the normal functioning of a country’s financial system) of a security, money, currency and, most importantly, 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 rightpossessing 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 rightpossessing 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 register (ordinary or computerised) is a registered security. In a case provided for by law or in accordance with it, for the realisation 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.
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 specifically 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 presentation in the bearer’s name with an endorsement, which must be accepted 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 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 divided 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 quasimoney; 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;
IntroductIon 5) shares and other stock valuables in the form of bearer securities. 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 considerable 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 remained 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 liability 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 Russian economy, to a reduction in the amount of non-cash monetary circulation in the country, and, consequently, to a fall in gross domestic 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.
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 contradictions 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, turnover of funds and financial turnover, which leads to a disparity of leading 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... 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 superstructure 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. Нерсесянца. 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).
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 examine property rights, transaction expenses, the essence of companies and the role of the State in the market economy. The problem of money is usually posed only from the point of view of defining money supply and demand for money. The provisions of neo-institutionalism, and especially the economics of law, which allowed interrelationships between economics and legislation to be revealed, became the methodological basis of analysis. I.P. Nikolaeva1 Theories of money Russian examiners of questions concerning the evolution of the essence 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».