Legal Definitions of Money and Credit – AlasdairMacleod 11/10/22


At these times of growing confusion over the future of currencies’ purchasing power, it is time to remove all doubt in the definitions of the differences between money, currency, and credit. This article traces the history and legal background to these relationships.

Despite the failure of the Bretton Woods agreement in 1971 and the state propaganda that followed, the position is clear. Both historically and legally money is and remains metallic coin — principally gold — and the rest is credit. 

As a result of statist puffery of their fiat currencies, the public now wrongly believes it is fiat currencies that are money and that currencies have no price, except against each other. I show that this is factually incorrect. However, in financial markets legal money is always priced in legal tender, usually US dollar currency, when it should be the other way round. This inversion of the truth will turn out to be a costly error for those making this mistake.

In this article, I also show that the adverse consequences for prices from changes in the level of total commercial bank credit are significantly less than they are for changes in the level of central bank credit. Now that we are on the verge of a severe contraction of commercial bank credit, governments and their central banks are sure to respond by ramping up inflation of their currencies in a vain attempt to avoid deflation.

The consequences for fiat currencies are likely to be calamitous for them. 

That will be the penalty we all face for ignoring the wisdom and findings of the Roman jurors, thinking that we know better with our economic models, macroeconomic policies, and statist control of markets.

Over two millennia of their careful deliberations, it was the Roman jurors who thoroughly examined and properly defined the difference between money and credit, upon which all economics and modern banking depend. Current monetary and economic fashions are mere ephemera in that context.


That metallic money had superseded barter from the dawn of history is outlined in the initial chapters of every economics primer. By weight, and then coin, it was the reliable money adopted by civilising humanity for trade. As commodities gold, silver, and copper were used as the best mediums of exchange.

It wasn’t for several millennia before organising Man put money onto a legal footing. It became important to do so to differentiate between money itself and promises to pay with it. These promises, or rights of action matched by duties to pay were credit which gave birth to banking. Both money and credit between them became circulating media. Money remained the same, always coin. But credit evolved along with banking into different forms: bank notes were a promise by an issuing bank to pay gold to the bearer on demand, and a deposit-taking bank’s duty is to pay a depositor on demand or to novate his deposit to his order. Additionally, merchants and businesses would issue discounted bills in lieu of payment, which had themselves tradable value.

In this article, I trace the legal history of the relationship between money and its credit substitutes from antiquity to the current day. It is now fifty-one years since the last vestiges of the link between the two were broken, when the Bretton Woods agreement was suspended by President Nixon. Today, the topic is becoming increasingly important because in western society the consequences of the split between legal money and legal tender in the form of credit is becoming a subject for wider public debate. Priced in the most desired of the three metallic monies, which is gold, the chart below illustrates the gulf that has opened between legal money and credit represented by the worlds’ four major fiat currencies since the ending of Bretton Woods.

The gap has widened to the extent that the currencies whose claim to be circulating media now depends solely on the legal tender status in their domestic economies, and the acceptance of the value of that status on the foreign exchanges. But the gap between legal tender and legal money has the former virtually valueless measured in terms of the latter. For the record, since August 1971, when US President Nixon suspended the agreement, the Japanese yen has lost 95% of its value in gold, the US dollar 98%, the euro 98.7% (contributing currency values are used before 2000), and sterling 99%….

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