Currency Stability and a Country’s Prosperity: "Does a Mandatory Currency Stability Law Determine the Stability and or Prosperity of a Country?"

Copyright © 2021 by John E. Baiden.

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Rev. date: 02/05/2021

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CONTENTS

Preface

Abstract

Chapter One

Introduction

Organization of Study

Objectives of the Study

Delimitation of the Study

Significance of Study

Chapter Two

Literature Review

Money and Currency

Evolution of Money In A Nutshell

Early History of Banking in Europe

Private Banks

Scotch Banks

Law System of Banking – Land Banks

The Mississippi System

History of the Bank of England: Stoppage and Resumption of Specie Payment

History of English Private Banks: Joint Stock Banks

Government Paper Money

History of Banking in the United States Before the 20th Century

History of Banking in the United States in the 20th Century

The Balance of Payments Argument

The Relation between Exchange Rate and Balance of Payments

Effective Exchange Rate

Currency Crisis

Flexible Exchange Rates in the 1970s

Floating Exchange Rates in the 1980s

The Snake in the Tunnel

The European Currency Crisis

The Exchange Rate Experience of Developing Countries

The Asian Financial Crisis

The Orgins of Central Banking and Money Monopoly

The Bank of England

Free Banking In Scotland

The Peelite Crackdown, 1844-1845

Issues With Fiat Money and Legal Tender

Warehouse Receipt Credit and Gold Standard

The Functions of Money

History of Money In The United States

The Framers’ Idea of Money

Legal Tender Act (Feb. 25, 1862)

The Legal Tender Cases

Money In The Great Depression (1929-1939)

The Gold Reserve Act of 1934

International Agreements and Laws on Exchange Arrangements and Exchange Rates After August 15, 1971

United Nations Charter of Economic Rights and Duties of States

Revised Article Iv of Imf Articles of Agreement

The Structuring of International Trading Rules

Inflation

How is the CPI Calculated

Foreign Exchange Market

Chapter Three

Research Methodology

Overview of Prosperity and Fragile States Indexes

Chapter Four

Data Analysis and Interpretation

Research Questions

Chapter Five

Summary of Findings, Conclusion and Recommendations

Conclusion of Study

Thesis and Recommendations

Area For Future Research

Preface

THIS book is based on a doctoral thesis submitted at the Thomas Jefferson School of Law, San Diego, California. I wish to acknowledge my great indebtedness to Dr. Fritz Gockel. I learnt much from his published literature, lectures, and most of all from his very patient and detailed criticism of previous drafts of this study. I am also very grateful to him for his constant encouragement, guidance and supervision

I am also greatly indebted to Dr. Robert Munro and Dr. Richard S. Gendler who were my Program Directors. I thank them for all their directions making this project a success.

I respectfully say a very big thank you to Dr. Peter Wiredu and Dr. Josiah De-Graft Johnson who acted as my outside evaluators; but for their involvement some errors wouldn’t have been detected.

Abstract

The intent of this study or research is to test or verify the author’s hypothesis, thus unstable currencies equals an unstable country by understudying currencies in top ten countries and bottom ten countries ranked in the 2016 World Prosperity Index and Fragile States Index 2016 to determine whether there is a co-relationship between stable or unstable currencies and a country’s prosperity or failure/ misery.

The study is organized into five chapters: Chapter 1 presents a brief background on the intended research topic, research objectives, questions, and the authors’ hypothesis, as well as the significance of the research. The main research question is whether or not a mandatory currency stability law determines the stability and or prosperity of a country. In order to however achieve the objectives of this study and to maintain a perfect course on the research topic, the following questions are answered: What is a stable currency? What is an unstable/fragile country? What are currency crises and depreciations? Are countries with laws promoting stable currencies more prosperous than those without? Are there any remarkable differences in the currency laws of prosperous and or stable countries and that of countries not prosperous and fragile? Whether or not Central bank Independence matters; Whether or not currencies must be actively traded as a commodity, thus subjecting currencies to the vagaries’ of market forces of supply and demand; Why the United States Dollar enjoys exorbitant privilege, and whether such is fair; and whether currency trading for profit is an intrusion of individual’s proprietary interest, as trading of currencies puts the value of currencies in perpetual flux. The study also intends to specifically enlighten countries who have not realized the value of having laws to compel currency authorities to by all means provide a stable currency for their people if the care for prosperity, sustainable security and national stability; to ignite a global debate on whether currencies should be actively traded as a commodity.

Chapter 2 reviews the rather extensive anthologies on money and its related issues. Here, views of key theorists are explored, and where necessary the author’s views or comments. The study’s literature review is organized around themes related to money and banking, including the difference between money and currency, history of money and banking, fixed and floating currency regimes, currency wars/trade wars, depreciation and devaluation, the balance of payment debate, effects of currency depreciation, the morality of currency speculation, impact of devaluation, currency crisis, central banking monopoly of currency issues and independence, currency boards and others. Also discussed in this chapter are legal cases as laws associated with money and International Currency Exchange Arrangements, such as legal tender cases in the United States in the 19th century, Foreign Exchange Scandals from the 20th Century to present, lawsuit instituted by the author against Bank of Ghana, Property Jurisprudence vis-a-vis currency in our possession and immediate possession, Smithsonian Agreement, Rambouillet Declaration, Louvre & Plaza Accords, United Nations Charter of Economic Rights and Duties of States, General Agreement on Trade and Tariff (GATT) through IMF Articles of Agreement (Art. IV. 4)). Here, secondary data is used for the review and the approach is mostly analytical

Chapter 3 provides information on research methodology, and the underlying principles for the chosen methodologies. The author utilized a mixed method research, thus both Qualitative and Quantitative legal research. Concerning the qualitative approach, the author was both doctrinal and non-doctrinal. Doctrinally, the author intended to research what the law is in the respective countries relative to laws establishing their respective currencies. These would center on laws governing their currencies, mandates/monetary policy of the currency authority or Central Bank, stability targets, and relative independence of the currency/monetary authority/Central Bank. The quantitative approach to the study is derived from the World Prosperity Index and the Fragile States Index computation and selection criteria. The indices are used to rank countries globally with respect to socioeconomic prosperity. In a bid for the author to test or verify his hypothesis, the author did not generate any primary data but utilized secondary data generated in the World Prosperity Index, produced by Legatum Institute, a London based think tank and educational charity focused on promoting prosperity; and Fragile States Index, produced by The Fund for Peace, a Washington D.C. based independent, non-partisan, 501(c)(3) non-profit research and educational organization that works to prevent conflict and promote sustainable security. As the study is largely qualitative in nature, data was collected using the interview guide in text form. The responses to the interview questions (8 questions) and the web references received from the central banks were carefully considered and analyzed in line with the study objectives. Specifically, major themes, patterns and concepts were drawn from the text data collected to suit the purpose of study. After identifying themes from the data, other sub-themes were drawn and also generalized statements in the context of the study. The analysis utilized firstly the descriptive approach to describe trends identified in the data. The second was the comparative method to explore the similarities and differences between prosperous/stable and fragile/unstable states relative to their currency laws and their enforcement. The author’s hypothesis was verified on majority basis, for example if majority of the top ten prosperous countries and ten least fragile countries have strong laws to promote stable currency then laws to promote stable currency is a virtue and for that matter the author’s hypothesis holds, therefore true. The Chapter ends with an overview of Prosperity and Fragile indexes.

Chapter 4 presents data analysis and the findings from the study. This chapter focuses on presenting and discussion of the research data. This was done with the help of the research questions sent to the selected central banks considered as samples for the study. There are two categories of the study samples using two indexes – these are the 2016 World Prosperity Index and 2016 Fragile States Index. The research findings and discussions are divided into two parts. Part one examines the countries categorized using the world prosperity index, while part two delves into the category of countries predicated on the fragile states index.

Lastly, Chapter 5 provides a summary of the main findings in relation to the original objectives of the study. This chapter also proffers the authors thesis and appropriate recommendations/suggestions and arguments based upon the results obtained. The study revealed that between the top ten prosperous countries and bottom ten fragile countries, the latter doesn’t have laws to commit their Central Banks to low and stable consumer price inflation. This lack of currency stability law by and large brings about the fragilities characterized by inflation, unemployment, and other social pathologies like armed robbery, prostitution, poverty, violence, and social unrest; here the author posits that his hypothesis unstable currency equals unstable country is verified and upheld.

The study also revealed that Property Law, and or jurisprudence, fails to address the ownerships of currency in our possession and respective accounts in financial institutions. It is the author’s thesis that currencies people have earned that is in either their possession or in financial institutions are their private property, and thus must be accorded with all the bundle of rights property law accords to private property, including freedom from interference. The author posits that with the Sovereign through central banks and international monetary agreements allowing currencies to be traded for profit thereby affecting their value constitutes interference to private property; therefore currency trading for profit must be abolished. The Smithsonian Agreement, Rambouillet Declaration, Louvre & Plaza Accords, United Nations Charter of Economic Rights and Duties of States, General Agreement on Trade and Tariff (GATT) through IMF Articles of Agreement (Art. IV. 4)), allowing currencies to free float against each other truly disregards currencies in our possession or immediate possession as private property. It appears the Sovereign thinks currencies that it issues are its property and that it can allow anything (including trading for profit) to happen to it at any time. This is wrong. Currency trading for profit is privileged taking or legal Plunder for only the elite few who trade currencies for profit. This trading activity affects people’s proprietary interest without any justification, consent, or due process. Currency traders may only charge a service fee and exchange at a fixed exchange rate.

Chapter One

INTRODUCTION

Background of Dissertation

A currency is a legal tender thus Notes and Coins that is in current use, or are a current medium of exchange. It is a legal tender because it is backed by law for acceptance in the payment of goods and services. A currency can also be viewed as money; however money can be more than a currency, otherwise termed fiat money. There is commodity money as well as bank money.

Fiat money or currency is payment instruments whose intrinsic value is less than the value it represents. Commodity money is a good whose value serves as the value of money e.g. Gold Coins. Bank money on the other hand are bank credits which are viewed as book credits that banks extend to their account holders.

Economists posit that money must serve as a store of value making saving convenient; a measure of value (or unit of account); and as a standard of deferred payments that facilitates the granting of credit. For the purposes of this dissertation, currencies are used interchangeably with money.

Currencies are usually complimentary to the sovereignty of states; therefore different countries have different currencies. The issue affecting different countries with different currencies is the issue of exchange rates among the respective currencies. Prior to 1971, even though different countries had different currencies, each currency was defined as a certain weight of a certain purity of gold or silver. Exchange rates really became a problem for international borrowing and lending in 1971. Before the Second World War, most countries used some kind of money based on gold or silver, and after the Second World War most of the world was on an indirect gold standard known as the Bretton Woods System, named after the resort in New Hampshire where the system was devised. The system was an indirect gold standard because only one country in the world was formally on the gold standard-the United States. The rest of the world was on a U.S dollar standard.

Under Bretton Woods, foreign holders of U.S dollars could redeem them for gold at the rate of 35 dollars per ounce. Every other country that joined the system agreed to fix their currency’s exchange rate with the U.S dollar, which effectively tied every other currency to gold as well, but indirectly, through the dollar. More importantly, it created a system of fixed exchange rates. The system came under increasing stress during the 1960s and finally broke apart in 1971, when U.S President Richard Nixon formally severed the tie between the U.S dollar and gold by halting the international redemptions of U.S dollar for gold. After that time, most of the world’s major currencies have had floating exchange rates that move up and down in response to economic and market forces.

So far Economist do not know for certain whether this change from fixed exchange rates and an effective gold standard to a world of floating exchange rates has been beneficial or harmful to the world economy. What can be said is that the two have had big practical impacts on global trade, borrowing and lending. The reality however from the author’s standpoint is that since 1971 various nations have experienced either currency crisis and or various degrees of currency depreciation.

Currency crisis or currency depreciations from the author’s stand point brings about untold hardships and misery to a polity, as it exacerbates Inflation. Inflation destroys purchasing power of currencies; causes persistent or frequent price increments; prevents prices from falling (Lucas critique); destroys families; corrupts people; makes people envious and egotistical; depresses people; leads to waste; breaks down general confidence (uncertainties) of the people to the extent of affecting consumption and investments adversely; increases crime; and ultimately unemployment, low standard of living and social unrest/anarchy.

With all the aforesaid about currency crisis and or depreciations and its link to inflation, it appears global laws have hardly done much to pre-empt or address currency crisis/depreciations. There is also hardly much legal literature on laws to stabilize currencies around the globe. Few countries do have laws to address currency stability but most do not, hence this dissertation.

Currently countries like Nigeria, Russia and Venezuela are in serious currency crises bringing about misery to the totality of its citizens. Countries like Argentina, Indonesia, Bolivia have lost their shine due to past currency crisis.

Currency Crisis is a speculative attack on the foreign exchange value of a currency, resulting in a sharp depreciation or forcing the authorities to sell foreign exchange reserves and raise domestic interest rates to defend the currency whereas Currency Depreciation is the fall in the exchange rate of one currency relative to other currencies.¹

The issue here is where is the law to protect the innocent civic body who are not part of the currency trade bringing about the volatilities? Isn’t the law supposed to offer people protection from harm and adversities? Whereas currency traders are profiting, the masses are suffering from inflation and its social pathologies as a result of a few individuals manipulating currency values for their own profits, absent any public utility. I hereby posit that ‘active currency trading’ is not Utilitarian and therefore must be abhorred and discouraged.

The debate as to what constitutes a Stable Currency is very evolutionary and on-going. The debate on Stable Currency or Stable Money dates back to John Law in the 17th Century. Since then the Currency School, Banking School, Ludwig von Misses, Irving Fischer, Keynesian School, Neo-Keynesian School, Chicago School, Financial Stability Forum (now Financial Stability Board) have all influenced respective jurisdictions as to what is Stable Currency. Currently most of the industrial economies are utilizing Irving Fisher’s Index Number Standard. Index targeting is widely viewed as a state of the art concept, and criticism has largely been confined to the issue of the choice of the actual index.

Nathan Lewis an International Economist writing for the Forbes Magazine on the topic What is Stable Money on 6/30/2011 indicated that Stable Money means money with Stable Value. ²The European Central Bank informs that a currency is stable when the general level of prices, measured by the Consumer Price index, does not vary too much. In the Euro area, price stability has been defined as a rise in the index of less than but close to 2% per year. In the United States Price levels must not exceed 3% per year; in New Zealand not more than 3% per year;³ in Sweden not more than 2%; in Australia between 2 and 3%; in Canada not more than 2% and the U.K not more than 2%.⁴

In fact, it is reported by Robert Bridge of FT.com on December 23rd 2013 in his article ‘100 years of economic turmoil: Is it time to end the Fed?’ that U. S. Dollar has depreciated by 95% over the U.S. Central Bank’s 100 years of existence averaging a depreciation of 0.95% per year for the last 100 years.⁵ Many Americans are however up in arms over this relative meager depreciation to the extent that a former Republican Presidential contestant and Texas congressman in the person of Ron Paul is asking Americans to abolish their central bank for such a poor performance or record. This is captured in Ron Paul’s book titled ‘Ending the Fed’. In a rather big contrast to Ghana as an example; the Ghana currency called Cedi has depreciated against the U. S. Dollar since July 2007 (when Ghana re-denominated its currency for near parity to the U.S. dollar) to January 2014 by as much as 136% over a 7 year span; averaging 19.3% per year. The Daily Graphic (Ghana Newspaper) in its article entitled Cedi in a free fall on January 30th 2014, reports the following: In 2013, the local currency suffered 17 per cent depreciation. The year on year depreciation shows a 21:96 depreciation of the Cedi against the Dollar; 28.88 per cent against the Pound Sterling; 23.98 per cent against the Euro and 25.54 per cent against the Swiss Franc.⁶

Currency depreciation is Procyclical, thus fuels inflation. Inflation is an economic condition characterized by a rise in the level of prices for all goods and services and declining purchasing power as measured against some baseline of Purchasing Power. Inflation for workers is a sustained increase in the general level of prices when workers salaries or remuneration are not rising by the same rate.⁷ The effect of this is diminished purchasing power. The effect of high inflation is diminished purchasing Power, relative high cost of living, low savings and investments, which can lead to unemployment, low standard of living and social unrest. These adverse consequences of inflation have made inflation fighting a predominant focus for some governments and Central Banks.

In New Zealand, the Governor of the Reserve Bank of New Zealand must sign a Policy Target Agreement with the Minister of Finance agreeing not to get inflation over 3% in the medium term.⁸ The governor has inflation target range of 1-3% annually. The governor could be technically prosecuted or removed from office if the inflation target is not achieved.

According to Arthur Okun, an economist credited with Okun’s Law a significant real cost of inflation is what it does to morale, to social coherence, and to people’s attitude towards each other. He adds that the U.S society is built on implicit and explicit contracts that are linked to the idea that the dollar means, something. If one cannot depend on the value of the dollar, the system is undermined. People will constantly feel they’ve been fooled and cheated.⁹

Psychotherapists inform that inflation stress leads to more frequent marital spats, pessimism, diminished self-confidence, and even sexual insecurity. Some people turn to crime as a way of solving the problem. Even those people whose nominal incomes keep up with inflation often feel oppressed by rising prices. People feel that they deserve many increases in wages they receive. When they later discover that their higher (nominal) wages don’t buy any additional goods, they feel cheated. They feel worse off, even though they haven’t suffered any actual loss of real income.¹⁰

One of the most immediate consequences of inflation is uncertainty. When the average price level is significantly changing in either direction, economic decisions become more difficult and rather uninformed. Price uncertainties affect production decisions as well. Imagine a firm that’s considering building a new factory. Typically, the construction of a factory takes two years or more, including planning, site selection, and actual construction. If construction costs are rapidly changing, the firm may find that it’s unable to complete the factory or to operate it profitably. Confronted with the added uncertainty, the firm may decide to abandon or not to build a new plant in the first place.

When market participants thus consumers and suppliers, become less certain about the future, the economy is likely to suffer in the end. In general, participants shorten their time horizons in the face of inflation uncertainties. If consumers and producers postpone or cancel their expenditure plans, the demand for goods and services will fall. Eventually a country’s production of goods and services or gross domestic output will fall as well, and the country will end up somewhere inside its production possibilities curve, with rather increased unemployment.

The effect of rising price levels on time horizons was dramatically illustrated during Germany’s hyperinflation of the early 1920s. With prices doubling every week, German workers couldn’t afford to wait until the end of the week to do their shopping. Instead, they were paid twice daily and given brief shopping breaks to make their essential purchases. In this case, the rate of expenditure on goods and services actually increased as a result of inflation, but the rate of producing fell. The same kind of frenzy occurred in China during 1948 and 1949. The Nationalist Chinese Yuan declined precipitously in value, and market participants rushed to spend their incomes as fast as they could. No one saved income or even tried to.¹¹

Hyperinflation also crippled the Russian economy during the period 1990-92. Prices rose by 200 percent in 1991 and by another 1,000 percent in 1992. These price increases rendered the Russian Ruble nearly worthless. No one wanted to hold Rubles or trade for them. Farmers preferred to hold potatoes rather than sell them. Producers of shoes and clothes likewise decided to hold rather than sell their products. The resulting contraction in supply caused a severe decline in Russian output.¹²

Inflation threatens not only to reduce the level of economic activity but to change its very nature. If one really expects prices to rise, it makes sense to buy goods and resources now for resale later. If prices rise fast enough, one can make a handsome profit. These are the kinds of thoughts that motivate people to buy houses, precious metals, commodities and other assets. But such speculation, if carried too far, can detract from the production process. If speculative profits become too easy, few people will engage in production; instead, everyone will be buying and selling existing goods. People may even be encouraged to withhold resources from the production process, hoping to sell them later at higher prices, which is what Russian farmers were doing in 1991 when they withheld potatoes from the market. As such behavior becomes widespread, production declines and unemployment rises.¹³

Another reason that savings, investment, and work effort decline when prices rise is that taxes go up, too. Frederic S. Mishkin, an Alfred Lerner Professor of Banking and a former Governor of the Federal Reserve Bank made the following remarks on inflation and the need for price stability- "there is now a broad consensus among policymakers, academic economists, and the general public in support of the principle that maintaining a low and stable inflation rate provides lasting benefits to the economy. In particular, low and predictable inflation promotes social welfare by simplifying the savings and retirement planning of individual households and by facilitating firms’ production and investment decisions. Furthermore, an environment of overall price stability contributes to economic efficiency by reducing the variability of relative prices and by minimizing the distortions that arise because the tax system is not completely indexed to inflation’’¹⁴.

John Maynard Keynes, a celebrated economist and one of the brains behind the establishment of the International Monetary Fund also made the following observation relative to currency and inflation: There is no record of a prolonged war or a great social upheaval which has not been accompanied by a change in the legal tender, but an almost unbroken chronicle in every country which has a history, back to the earliest dawn of economic record, of a progressive deterioration in the real value of the successive legal tenders which have represented money.¹⁵

Since December 1971, when U.S. President Nixon abandoned the Bretton Woods fixed exchange rate system per the Smithsonian Agreement between the Group of Ten of the International Monetary Fund, global currencies have been free floating against each other as a function of market supply and demand, and as a result the global market place has seen horror effects of currency volatilities and its attending nation instabilities. It is author’s position that anything that floats is inherently unstable, and that currency instability will equal an unstable country. Countries that have done well currency wise in the Smithsonian regime are the wealthy countries (G10). They have stuck to and or relied on Law, Reciprocal Currency Agreements, Exchange Rate Stabilization Funds and Trade Deals. Here, unfortunately most countries are either precluded or haven’t realized the value and mechanisms of a stable currency.

A strong form of stable currency regime is a fixed Exchange Rate regime which is a situation where a government or central bank ties the official exchange rate to another country’s currency (or the price of gold). The purpose of a fixed exchange rate system is to stabilize the value of a currency or maintain a country’s currency within a very narrow band. Fixed Exchange Rate Regime provides greater certainty for Exporters and Importers. This also helps a government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment.¹⁶

Fixed Exchange Rate Regimes have been recommended by the International Monetary Fund (IMF) to the following countries Argentina, Bolivia, Brazil, Chile and many more, when these countries went into currency crisis. It appears the IMF only recommends a Fixed Exchange Rate after a country has already been harmed by a free float exchange rate system which is the IMF’s standard prescription- a prescription that typically works well for the G10 countries and global institutional currency traders. A fixed exchange rate is after all very much regarded in the central banking anthology as being part of a Central Bank’s ‘Trinity’-Capital Mobility, Fixed Exchange Rate and Independent Monetary Policy.

A country’s currency is its sole link to the international economy, and that anything adverse that happens to a country’s currency affects the happiness and survival of its people. Money is said to be a store of value and this value must be stable at all time.

The critical path for any modern central bank is to save its people from Inflation and its harsh effects. The Bank of Canada for example greets visitors to its website with the following: We are Canada’s Central bank. We work to preserve the value of money by keeping inflation low and stable.¹⁷

An eminent Yale Scholar in the person of Samuel Mermin, in his book titled Law and the Legal System (1982), posits the following as functions of law through the courts and public policies: dispute settling; enforcement role; maintaining order; providing society with predictability and certainty through Stare Decisis and upholding contracts; providing efficiency, harmony and balance in the functioning of the government and its governed; protecting citizens against excessive and unfair government power; enforcing due process and freedom from arbitrariness; protecting people against excessive unfair private power and assuring people an opportunity to enjoy minimum decencies of life by protecting peoples economic and health interests.¹⁸

With the aforesaid, it can be asked where then are the laws to make currencies secure people’s economic interests, survival, and prosperity?

This study is motivated by the author once upon a time in 1998 losing One Hundred Thousand Dollars ($100,000.00) in two weeks due to what some call Exchange Rate Losses, At the time of the loss, the Ghana Cedi depreciated from Two Thousand Five Hundred Cedis (¢2,500) to Seven Thousand Three Hundred (¢7,300.00) Cedis to one U.S. dollar ($1.00) within two weeks, thus a depreciation of about 192%. The author, as a result of the aforesaid lost his commodity business, terminated workers, and became heavily indebted to his creditors and or suppliers. The author therefore believes that not only has he suffered from the effects of unstable currency but have also seen the large impact of unstable currency on a country- inflation, business failures, unemployment, apathy, crime and consternations.

The author has since his exchange rate losses been unrelenting, and looking for answers and ways to stop exchange rate volatilities to the extent of suing the Bank of Ghana over its inability to maintain a stable currency for Ghana, and also to undertake this research project hopefully to know more and recommend solutions.

This study intends to test the author’s hypothesis which posits unstable currencies equals an unstable country by understudying currencies in the top ten countries and bottom ten countries ranked on the 2016 World Prosperity Index and Fragile States Index 2016 to determine whether there is a co-relationship between stable or unstable currencies and a country’s prosperity or failure/misery.

It is also the hope that the findings of this study will influence International legal reform and or public policy to make or reform existing laws to pre-empt currency volatilities or advance exchange rate parities. The author believes the law must be in the forefront of global currency management to abate human suffering.

This outline is to serve as a guide to anyone wanting to research "Does a mandatory currency stability law determine the stability and or prosperity of a country?"

I.    ORGANIZATION OF STUDY

The dissertation will be divided into five chapters as listed below.

Chapter 1: Introduction

This chapter presents a brief background of the intended research topic, research objectives and questions. In this chapter, the author’s hypothesis is introduced, as well as the significance of the research.

Chapter 2: Literature Review

This chapter starts with an introduction on the general research and further discussions on the topics that relate to the topic of the research. It also outlines the views of key theorists.

Chapter 3: Research Methodology

This chapter provides information on research methodology, and the underlying principles for the chosen methodologies.

Chapter 4: Data Analysis and Findings

This chapter presents the data analysis and the findings from research conducted during the study.

Chapter 5: Conclusion and Recommendation

This chapter provides a summary of the main findings in relation to the original objectives of the study, and also proffers the appropriate recommendations/suggestions and arguments based on the results obtained.

II.    OBJECTIVES OF THE STUDY

This research has as its overall objective to contribute to the general body of scholarship on the legal environment of global currencies and how they affect national prosperity and or misery. The study also intends the following specific objectives:

i. To enlighten countries who have not realized the value of having laws to compel currency authorities to by all means provide a stable currency for their people if the care for prosperity, sustainable security and national stability.

ii. To ignite a global debate on whether currencies should be actively traded as a commodity.

iii. To test or prove my hypothesis thus Unstable currency equals an unstable country.

Research Questions

The main research question is whether or not a mandatory currency stability law determines the stability and or prosperity of a country, however in order to achieve the objectives of this study and to maintain a perfect course on the research topic, the following questions would answered:

i. What is a stable currency?

ii. What is an unstable country?

iii. What are currency crises and depreciations?

iv. Are countries with laws promoting stable currencies more prosperous than those without?

v. Are there any remarkable differences in the currency laws of prosperous and or stable countries and that of countries not prosperous and fragile?

vi. Whether or not Central bank Independence matters.

vii. Whether or not currencies must be actively traded as a commodity, thus subjecting currencies to the vagaries’ of market forces-supply and demand.

viii. Why the United States Dollar enjoys exorbitant privilege and whether such is fair.

ix. Whether currency trading for profit is an intrusion of individual’s proprietary interest, as trading of currencies puts the value of currencies in perpetual flux.

III.    DELIMITATION OF THE STUDY

The study is specifically delimited to currencies in the top ten countries and bottom ten countries ranked on the 2015 World Property Index and ten most fragile and ten least fragile states ranked in the Fragile States Index 2015 to determine whether there is a co-relationship between stable or unstable currencies and prosperity or failure/misery.

IV.    SIGNIFICANCE OF STUDY

Authors who have made pronouncements on stable currency and economic prosperity are usually only economist, and not lawyers or both, such as this author. This author is both an economist and a lawyer. The preceding authors who have made pronouncements on this topic generally defer to the gold standard instead of fiat money where the central bank has free hand in money supply without controls, all in the name of Central Bank Independence or the so called ‘Banker’s Privilege’. My position on the topic is what I believe is what most third world countries haven’t realized or simply are ignorant. It is my hope that my conclusions will enlighten, add new knowledge to Central Banking (Monetary Policy Formulation) relative to economic prosperity and stability of nations. This research hopefully will add on to the theories that explain why some nations prosper while others fail from a legal lens.

Chapter Two

LITERATURE REVIEW

Introduction

The study literature review is organized around themes related to money and banking, including the difference between money and currency, history of banking, floating currency trading, currency wars/trade wars, depreciation and devaluation, the balance of payment debate, effects of currency depreciation, the morality of currency speculation, impact of devaluation, currency crisis and others. Secondary data is used for the review and the approach is mostly analytical.

The purpose of this chapter is to report on previous work that others have done in the subject matter under study. Literature review contains the review of related literature as carried out by different authors and experts. Their opinions would guide the course of this study and reveal the trend of research. Besides, the review is meant to provide a foundation for the present research project and serve as a literature for additional or future research.

MONEY AND CURRENCY

Economists posit that Money is what fulfills three specific functions: serving as medium of exchange; store of value; and unit of account. The medium of exchange means that money can be traded for everything. A store of value means that money can be held for a time without losing (much of) its purchasing power. The unit of account means that the price of different items is measured with the units of money; thus, money is a yardstick of value across the economy. Money avoids the need for barter, which can be an inefficient way of organizing exchange in the economy because it requires a double coincidence of wants. Thus, money helps the economy to function more smoothly.¹⁹ A currency is a legal tender thus notes and coins that are in current use, or are a current medium of exchange. It is a legal tender because it is backed by law for acceptance in the payment of goods and services. A currency can also be viewed as money; however Money can be more than a currency or otherwise termed fiat money. There is commodity money as well as bank money.

Money is whatever is generally accepted in exchange for goods and services— accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.²⁰ A leading treatise on the legal history of money broadly describes it as follows:

Money is an instrument for helping men create and manage some of their relationships. Money has no substantial meaning unless men will use it. That a design of money units is available for communication facilitates use. But a system of symbols, by itself arbitrary and abstract, offers only the minimum inducement of convenience to energize will and persuade individuals to commit themselves to action. To make a system of money have working effect, men must be willing to accept the money tokens and have confidence that others will accept them in effecting immediate exchanges, or as conferring future command over other assets, or as dependably measuring some deferred performance. So a central concern of public policy was how law could promote the practical acceptability of a given system of money. ²¹

Money may be said to be one of humanity’s greatest inventions. In his seminal treatise on money, William Stanley Jevons (1875, 3) declared, Modern society could not exist in its present complex form without the means which money constitutes of valuing, distributing, and contracting for commodities of various kinds. Before money, trade and employment were conducted through barter. Bartering requires each person in a transaction to possess a commodity or labor skill that the other desires, a condition described by Jevons (1875, 5) as the double coincidence of wants. Money greatly increases the opportunities for trade because it breaks the need for a double coincidence: A person can buy what he or she wants even if the seller does not want the buyer’s skills or products. Widespread adoption of money enabled the specialization of labor, which is the fundamental building block of modern economies. The invention of money was no less important to economic development than the invention of agriculture, fire, or the wheel²².

The use of barter-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter.²³ Instead, non-monetary societies operated largely along the principles of gift economy and debt.²⁴ When barter did in fact occur, it was usually between either complete strangers or potential enemies.²⁵

Many cultures around the world eventually developed the use of commodity money. The Mesopotamian shekel was a unit of weight, and relied on the mass of something like 160 grains of barley.²⁶ The first usage of the term came from Mesopotamia circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used shell money – often, the shells of the cowry (Cypraeamoneta L. or C. annulus L.). According to Herodotus, the Lydians were the first people to introduce the use of gold and silver coins.²⁷ It is thought by modern scholars that these first stamped coins were minted around 650–600 BC.²⁸

The system of commodity money eventually evolved into a system of representative money. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the commodity money deposited. Eventually, these receipts became generally accepted as a means of payment and were used as money. Paper money or banknotes were first used in China during the Song Dynasty. These banknotes, known as jiaozi, evolved from promissory notes that had been used since the 7th century. However, they did not displace commodity money, and were used alongside coins. In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck.²⁹ Marco Polo’s account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled How the Great KaanCauseth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country.³⁰ Banknotes were first issued in Europe by Stockholm’s Banco in 1661, and were again also used alongside coins. The gold standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th-19th centuries in Europe. These gold standard notes were made legal tender, and redemption into gold coins was discouraged. By the beginning of the 20th century almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold.

After World War II and the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the US dollar. The US dollar was in turn fixed to gold. In 1971 the US government suspended the convertibility of the US dollar to gold. After this, many countries de-pegged their currencies from the US dollar, and most of the world’s currencies became unbacked by anything except the governments’ fiat of legal tender and the ability to convert the money into goods via payment. According to proponents of modern money theory, fiat money is also backed by taxes. By imposing taxes, states create demand for the currency they issue.³¹

Fiat money or currency is payment instruments that intrinsic value is less than the value it represents. Commodity money is a good whose value serves as the value of money e.g. Gold Coins. Bank money on the other hand are bank credits which are viewed as book credits that banks extend to their account holders.

Fiat money has been defined variously as any money declared by a government to be legal tender;³² State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard;³³ Intrinsically valueless money used as money because of government decree.³⁴

While gold- or silver-backed representative money entails the legal requirement that the bank issue redeem it in fixed weights of gold or silver, fiat money’s value is unrelated to the value of any physical quantity. A coin is fiat currency to the extent that its face value, value defined in law, is greater than its market value as metal.³⁵ It is said that the Chinese issued the world’s first paper money called Kua. This early paper money was in use when Marco Polo visited Kublai Khan in the 13th century.³⁶ The Kua was the equivalent of 100 coins and dates from the Ming Dynasty, A.D. 1368-99. History also has it that America’s first paper money was issued in 1690 as the Massachusetts Bay Colony Notes.³⁷ In 1661, the Swedish Paper Note replaced copper plate money, thus in 1661, the Stockholm’s Banco began to issue paper notes to replace heavy copper plate money which had been in use since 1650.³⁸

EVOLUTION OF MONEY IN A NUTSHELL

Money is believed by many economists to have evolved through five stages: barter, commodity money, coined money, paper money backed by coins, and fiat money, which has since 1973 been the global standard form of money. Throughout money’s evolution, money has always operated as a social contract to the extent that members of society agree to accept money in exchange for goods and services. This contract has developed as it has because members of society have constantly sought to meet two competing goals: to lower the cost of trade while ensuring that money retains its value. When the value of money becomes unstable it tends to get rejected by its users or confidence is lost in that money that the users defer to currencies of different origin with perceived stability.

Barter

Barter, is an exchange without money. This is the first stage in the evolutionary history of money. In Money and the Mechanism of Exchange, the economist William Jevons stated, The first difficulty in barter is to find 2 persons whose disposable possessions mutually suit each other’s wants… there must be a double coincidence, which will rarely happen. ³⁹The search for a narrowly defined trading partner is costly because it takes time and the costs of locating trading partners and negotiating trades are disincentives to specialization. Primitive societies faced tremendous incentives to lower the cost of barter and often settled on successful schemes, including credit arrangements.

Commodity Money

Commodity money is the next state in the evolution of money. A society uses commodity money when individuals typically buy and sell goods by exchanging a particular commodity that is agreed upon in the society to be acceptable for exchange. Examples of commodity money used include salt, cowry shell, large stones, and bricks of tea. Stone Money is said to have been used in the Pacific Island of Yap and in the Yap Archipelago. The Yap money were large solid thick stone wheels ranging in diameter from a foot to twelve feet, having in the center a hole varying in size with the diameter of stone, wherein a pole may be inserted sufficiently large and strong to bear the weight and facilitate transportation. The value of the Yap money depended principally on their size and fineness of the grain and whiteness of the limestone.⁴⁰ Governments then often played a role in deciding which commodity would function as money. For example, if a ruler or a king favored a certain kind of shell or feather, it might become money, although the commodity chosen as money must be scarce.

Coined Money

As primitive peoples traveled beyond the borders of their homelands, they frequently found that their local money was not accepted and sought alternative ways to facilitate trade. Metals, especially gold, silver, bronze, and copper, were found to be valued in many societies, leading to the next stage in the evolution of money: the use of metals in particular, metal coins. Several forces favored the use of metal rather than other commodities as money. Metal could be used to make a variety of goods, such as knives; it was durable; and it was typically more valuable (per unit of weight) than other commodities, which lowers the cost of transporting money. There were, however, 2 disadvantages to using lumps of metal as money: It was costly to verify the true metallic content and purity of a lump of metal, and it was costly to weigh the lump. ⁴¹By creating coin from metal, governments lowered the costs of using metal as money. The mint owner could also raise revenue by lowering the metal content of its coins. The word seigniorage denotes the revenue that a government obtains by deflating the value of its money. Seigniorage could be as simple as shaving metal from the edges of the coin or as complex as changing the price that the mint offers for metal to be coined.⁴²

Paper Money Backed by Coins

The transition from coins to paper money is rooted in the practice of allowing citizens to deposit their goods in temples and palaces, which were relatively secure, well-guarded structures and were able to protect the citizens wealth. The origins of paper money are the warehouse receipts" received for deposits of precious metals and other commodities.⁴³ The receipts themselves began to function as money when third parties traded them for commodities, rather than withdrawing their deposits. This practice represents the next step in the evolution of money: using money backed by a metal money, such a gold or silver. The use of this paper money lowered exchange costs because it was easier to exchange warehouse receipts than deposits. The managers of depositories soon realized that they could make loans to new parties by issuing new warehouse receipts. The scheme worked because on any given day, only a small fraction of deposits were withdrawn from the depository.⁴⁴

Fiat Money

Fiat money is the final phase in the evolution of money. Fiat money is money that is valuable in exchange because a government declares it is. The English Parliament in 1844 passed the Bank Charter Act which made the Bank of England established a rigid link between the amount of paper money in circulation and the gold reserves of the Bank of England. This meant that the supply of money in England would fluctuate with the gold reserves of the bank and with the availability of gold in general. Discoveries of gold in the New World led to rising prices of goods in terms of gold. For the next 130 years, it was typical for Western economies to back their paper money with gold. In most cases, paper money was convertible; that is, holders of paper money could demand gold in exchange at a rate set by the government. In times of national emergencies, for example, in World War I and World War II, nations abandoned the gold standard and suspended the convertibility of their currencies. Suspending convertibility allowed nations to finance some of the costs of War by issuing more currency than their gold stocks would have previously permitted. At the end of World War II, nations returned to the gold standard through the Bretton Woods Agreement, but quickly experienced problems. The supply of gold grew too slowly and erratically to allow the supply of money to keep pace with growth. For a time, the International Monetary Fund supplemented the supply of gold with paper gold called special drawing rights. But the gold standard ended with President Nixon’s decision in 1971 to permanently suspend the convertibility of the U.S. dollar into gold through the Smithsonian Agreement. This agreement changed the nature of money globally and since then the global marketplace has witnessed currency crisis in some economies from time to time, and in some economies almost perpetual. Fiat monies are backed by no commodity. The money is valued partly because governments declare it to be legal tender for all debts public and private.⁴⁵ Ultimately, however, money is valued because people agree it is valuable; people agree to accept money in exchange because they believe they can use money to purchase useful things whenever they wish.

History of Banking

This section examines the history of banking. It starts by highlighting early financial structures resembling banking mostly found in cities across Europe. This is followed by history of banking in United States and to some extent England before the 20th century and then post 20th century epoch.

One of the earliest institutions resembling a bank was found in Venice around the 13th century. It happened in an intended way. The nation was engaged in war at the time and required more money to fund the war. It decided to take loans from individuals, which was to be repaid with an interest of 4 percent⁴⁶ . The nation set aside part of public revenue for the lenders and appointed a corporation called Chamber of Loans to ensure prompt repayment of the debts. In the course of time, the Chamber purchased and sold bills of exchange given its good reputation. The business of buying and selling bills of exchange soon became a regular part of the Chamber’s functions. Thus lending money or business of discount was a major function of the Chamber of Loans in Venice⁴⁷ . Lending money is known to be an essential function of modern banking. Merchants in Venice also resolved to keep money deposits with the Chamber. And it was found that money deposited with the Chamber by a merchant can be transferred to the account of another merchant who required loan. Later on, it became legally obligatory for all merchants to open an account with the Chamber and all payments involving bills of exchange were made through it. Similar financial institutions as found in Venice were found also in Barcelona and Genoa in about the 15th century⁴⁸.

Amsterdam was the central place of European commerce at the onset of 17th century. The city’s currency therefore not only served the city, but also all the neighboring countries. One problem with the currency at the time was that it was characterized by a high degree of depreciation. This was caused by the manner in which the coins used as currency in the city and neighboring countries were handled. They were most of the time worn out and mutilated⁴⁹. To solve this problem, the City of Amsterdam decided to copy the Venice model, marking the birth of Bank of Amsterdam. After its introduction, individuals could now keep money deposit with the bank and received a record of credit equivalent to the amount of money lodged with the bank. This was known as bank money and it became lawful that all payments exceeding 600 guilders were to be transacted through the bank. This way the guilder became a uniform currency for commerce. The profits of the bank came by means of commission and premium. When coin and bullion was deposited with the bank, the depositor was charged a small commission or fee for keeping the money with the bank. The depositor was also given a receipt entitling the one to withdraw the money within 6 months, after which the money was confiscated⁵⁰. The bank also sold bank money to any individual who was willing to buy at a premium. The financial practices of the Bank of Amsterdam differed from modern banking in a certain way; it did not provide loans to the public. The reason being that it sought to make sure that the coins and bullions in its vault was equivalent to total bank money at any time⁵¹. The Amsterdam banking model was later copied by Hamburg and other German cities.

EARLY HISTORY OF BANKING IN EUROPE

The Bank of England

The Bank of England is considered the prototype of modern banking. It was first chartered in 1694 with an initial capital of 1.2 million sterling government securities instead of physical money. For the bank to receive authorization from the government for operation, its clients had to lend the initial capital to the government at a yearly interest rate of 8 percent and an annuity of 4000 sterling. The bank was thus offered the permission to operate for 12 years subject to renewal. The business of the bank upon incorporation was defined to be the purchase and sale of bills of exchange⁵². By lending its entire capital to the government, the bank had no coins to transact business. To circumvent the problem, the Bank of England invented its own bank notes. This was used to do business with the bank and widely circulated among merchants as legal tender.

As the bank notes were convenient for business, they spread throughout the kingdom in a very short time. Before 1796, the total bank notes in circulation were about equal to the total amount of capital kept at the bank. However, as time passed the proportion of money at the bank was smaller than the amount in circulation, and the bank made profit on money in circulation (money lent out for business purposes). The bank renewed its charter at regular intervals and one took place in 1781. At this time the bank’s capital had increased to about 11.6 million sterling all of which was lent to the government⁵³. The bank’s key functions were four. First, the bank managed the public debt and accompanying interest. Second, it was the lender to government and this money was repaid using tax levy with an interest to the bank. Third, the bank supervised circulation and discount of treasury bills and received an interest on the bills. Fourth, the bank had oversight responsibility to discount short-term bills of exchange with three guarantors.

PRIVATE BANKS

As wealth and business increased in Europe, many private banks sprung up in cities and towns. These banks managed finances of individuals and governments; they provided loans, purchased and sold bills of exchange, bullion and coin. The Banks in England having realized the profits made by Bank of England decided to compete with it by issuing private bank notes in their localities⁵⁴. The Bank of England alarmed at competition from private banks secured legislation from Parliament undercutting the capacity of private banks to create credit. The legislation however failed to stop private banks from circulating own bank notes.

SCOTCH BANKS

By the King’s charter, two banks were set up in Scotland: Bank of Scotland in 1695 and the Royal Bank in 1727. These two principal banks soon faced competition from many private banks for profit. It was this intense competition among Scott banks that led to the invention of cash accounts. Cash accounts meant that individuals were allowed to open an account with the bank with the support of three guarantors. Bank loans could be advanced to clients for a period of time with a rate of interest payable to the bank⁵⁵. The loan and interest were nullified when the debt was repaid by the client. The