Electronic money legality

Hal 74076.1041 at CompuServe.COM
Thu Jan 14 23:19:06 PST 1993

The question came up here some time ago as to whether it would be
legal to issue electronic money, or regular money, for that matter.
I got a couple of books out of the library to try to learn something
of the history of private bank notes.

It seems that private bank notes were the rule rather than the exception
in the U.S. up until around the time of the Civil War.  However, the
notes were issued by banks which generally had a charter or license from
the state government.  I'm not sure whether a private individual could
have legally issued his own banknotes without state permission.

Around the time of the Civil War the Federal government levied a 10%
tax on all issues of banknotes.  This was intended to drive them out
of use, and it did.  Apparently this tax is still in effect today.

George Selgin's book, The Theory of Free Banking, is a call to return
to a situation of competitive note issue, where each bank would print
its own "money" and people would use all these different monies freely
according to their preferences.  Regardless of the pros and cons of this
idea, he does mention the legal situation briefly in footnote 7 of chapter

"Strictly speaking, issue of bank notes by commercial banks is not presently
illegal; however, such issue must still meet the bond-deposit requirements
established under the National Banking System or the 10 percent tax on state
bank notes.  Since all bonds eligible as security for circulating notes were
retired before 1935 (or had the circulation privilege conferred upon them
withdrawn), note issue, while not illegal, is nevertheless impossible under
existing law.  Restoration of commercial bank note-issuing privileges merely
requires repeal of the bond deposit provisions of the original National
Banking statutes and of the prohibitive tax on bank notes."

One other point I learned was about the nature of "legal tender" laws.
If a money is a legal tender, a creditor cannot turn down an offer by a
debtor to repay using that money.  If he does turn it down, the debt is
void (roughly).  So, legal tender laws don't forbid repayment of a debt
in some other form (I can give you a bike in place of the $100 I owe you),
(if we both agree), but they may specify that even if a debt is denominated
in some other units, I can repay using federal reserve notes.  This is
what happened when the U.S. stopped redeemin for gold during the 1930's -
long-term contracts had routinely been denominated in gold, but the courts
held that dollars could still be used to pay them off.

So, legal tender laws don't appear relevant to the use of digital money,
except that contracts based on digicash could still be paid off by dollar
bills if the debtor wants.

Hal Finney
74076.1041 at compuserve.com

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