From Max-EuP 2012

by Caroline Kleiner

1. Concept, objective and goal

Although currency is used in many different areas of law, no legal definition of this concept exists. Currency is a specific legal object that should not be confused with bank notes. Legal scholars often mention the relativity of this concept. It is indeed an abstract concept.

Currency, as a legal concept, should be distinguished from the notion of money. From an economic point of view, money is a medium of exchange, a unit of account and a measure of value. Conversely, currency is a legal concept: a specific monetary unit of a monetary system within a state or monetary zone. Currency is the backbone of a monetary system, which is itself the foundation of an economic order. Although both words exist in German (Geld and Währung) as well as in French (argent and monnaie), the distinction in English law is not exactly the same as the difference between Währung and Geld in German (for instance, the statute introducing the new Deutsche Mark in 1948 bore the title Währungsgesetz and not Geldgesetz). The concept of ‘money’ (Geld) is therefore broader than the concept of ‘currency’ (Währung), which refers to the specific money of a state, and yet is the basis of its definition.

A precise definition of the legal concept of currency is nonetheless hard to find. Currency is a wide-ranging concept that relates to many different legal areas, hence the elaboration of a general definition is challenging. The easiest approach consists in analysing the roles assumed by the concept of currency. In the context of legal relationships, currency has both an abstract and an actual function. The currency of account (Rechnungswährung, monnaie de compte) determines the value of the monetary obligation. It fulfils the abstract function of money. The currency of account also corresponds to the ‘institutional notion of money’. The currency of payment (die Zahlungswährung, monnaie de paiement) performs and discharges monetary obligations. It represents the actual function of money. Both functions, assuming respectively the role of a unit of account and a means of exchange, are intrinsically linked, yet they should be clearly distinguished from each other.

For a currency to fulfil both functions, it should contain different elements. The concept of currency can be restricted to three monetary components. All are necessary for the existence of a currency. First, the monetary unit, expressing a unit of value, plays the main role. A monetary unit is a unit of measure whose value is based on a convention. In the past, the value of a monetary unit used to be determined by a specific weight of noble metal. Today, its value is determined in accordance with the market demand. The second essential element composing a currency is located in its abstract purchasing power. Friedrich Carl von Savigny identified the notion of abstract purchasing power. It means that the currency implies a specific and subjective right that performs all types of obligations, even future ones. Thirdly, the unit of account reflecting a purchasing power needs an embodiment or a ‘bearer’ in order to materialize. These two last components are the core elements which enable a currency to serve as a medium of exchange. Moreover, the purchasing power can be embodied in different ‘bearers’. These embodiments or ‘bearers’ are the external aspect of the currency.

It is common to distinguish (at least in continental Europe) between coins, banknotes, bank money (also called credit money, Buchgeld) and electronic money. But from a legal point of view, these bearers of purchasing power should be differentiated into only two categories. Coins and notes are monetary signs. Monetary signs are ‘commodities, which are divided into units of account, which serve as a medium of exchange to their nominal value according to the law, and which as such are recognized by the laws and cannot be refused by any creditor’ (Karsten Schmidt). Since the abrogation of the duty of the Central Bank to exchange notes against gold, bank notes can no longer be compared with bills of exchange. Coins and bank notes are therefore governed by the same legal regime as the one applied to commodities, but with some exceptions, such as their capacity to serve as a legal means of payment and the provisions against counterfeiting. Conversely, bank or credit money, as well as electronic money, are not commodities, but are credits towards private institutions. They are mostly bank deposits. The appellation bank money or credit money comes from the fact that the circulation of money is operated only under book transfers, without any manual exchange of any monetary commodities. In that perspective, no distinction should be made between bank money and e-money. The only difference is that nowadays all transfers are made electronically. Regardless of this fact, coins and banknotes (token money) and bank money merely represent different external forms of purchasing power which are divided into units of account and form, all together, money. These three monetary elements are closely linked with one another, but they are still regulated by different norms. This tripartite composition of a currency explains why, irrespective of its function in monetary obligations, different types of legal norms find application.

In private law and in private international law (PIL), money raises a large number of questions. The answers to such questions depend on the functions money fulfils. In the context of monetary obligations, the first question to be answered is the determination of the money of account. According to the majority of scholars, the determination of which money is due is governed by the law of the obligation. This is the Swiss (Art 147 § 2 of the Swiss Private International Law Act (SPILA)) as well as the German view. In French law, the case law shows an inclination to analyse the question as an issue relating to the interpretation of contract. Secondly, one should consider the question of the value of the unit of account. Where the parties have foreseen a monetary clause, this clause is governed by the law applicable to the contract in which it is enshrined (lex contractus). German law and English law follow this approach. French case law has drawn another method and invented a new substantive rule, upon which monetary clauses in international contracts are always valid (Cour de Cassation, Cass. civ. 1re, 21 June 1950, Messageries maritimes, Rev. crit 1950, 609). If the parties have not foreseen such a clause, then the question arises as to which legal order decides upon the value of the currency of account, that is to say, whether the nominalism principle should apply. The application of the so-called lex monetae (Währungsstatut) was widespread up until the end of World War II. Today, the prominent position is to apply the law of the contract. One of the questions raised in relation to the currency of payment is precisely the determination of the currency of payment. More particularly, the question is whether an obligation providing for a foreign currency of payment can be discharged in local money. If German law is applicable, § 244 Bürgerliches Gesetzbuch (BGB) provides that if a money debt stated in a currency other than the euro is payable within the country, then payment may be made in euros unless payment in the other currency has been expressly agreed to. In the context of conflict of laws, in Swiss law the determination of the currency of payment is governed by the law of payment, that is to say, the law of the place of payment or the lex loci solutionis (Art 147 § 3 SPILA). This is also the solution enshrined in Art 10(2) of the Rome Convention and Art 12(2) of Rome I Regulation (Reg 593/2008), insofar as the currency of payment is seen as a manner of performance. This solution is linked to the fact that the overriding mandatory provisions (lois de police) of the state where the payment takes place are often applied.

2. Evolving tendencies of the law

The theories aimed at explaining the origin of money were uncontested for a long time. According to the state theory of money developed by the economist Georg Friedrich Knapp, ‘[m]oney is a creature of law’. This theory constrains the concept because according to it, only monetary commodities issued by a state could be seen as money, thus excluding bank money. However, what can be concluded from this theory is that the state monopoly over money and its monopoly over the issuance of coins and notes are a component part of state sovereignty. It is beyond doubt that the state—or a supranational organization whose sovereignty has been granted by states—alone has the privilege to confer to commodities the status of legal tender and to authorize their circulation. As a consequence, only the state which issued a currency can define and regulate it. This principle was first set forth in 1929 by the Permanent Court of International Justice (PCIJ 12 July 1929, Serbian Loans and Brazilian Loans).

In contrast to the state theory of money, Arthur Nussbaum developed the sociological theory of money. According to Nussbaum, money is whatever is considered as such in the economic community or in the market. His theory explains particularly the phenomenon of emergency currency. The power of the state to create and circulate money is a privilege of the state, but is not a requirement for a currency to exist. However, the controversy on whether money is a creature of the law or a result of social activities is no longer relevant. As a legal institution, currency is based on its recognition by the state and is, in this sense, the product of legal orders. But it is absolutely not contradictory that money is the product of economic activities and in the meantime a product of the rule of law.

The debate has now shifted from the origin of money to its future. Two tendencies in the evolution of the private law of currency can be assessed. The first one concerns the ‘bearer’ or the manifestation of money (how the purchasing power is incorporated): it is related to the dematerialization of the circulation of money. The second tendency focuses on the monetary unit.

The abstract nature of money was brought to light because of the dematerialization of its external forms. In the past, many authors argued that only token money (coins and notes), which were dealt with as chattels, corresponded to the notion of money. An amount of units registered on a bank account was a credit and not money. But with the exponential increase of cashless payments, the definition of money has obviously changed. Bank deposits are henceforth seen as money because they assume the function of money. E-money merely represents a step forward to the dematerialization of money. Only the manner of book entries has evolved; the so-called e-money remains money, since it is still evaluated through accounting units and embodies an abstract purchasing power.

In the meantime, the unification of currencies, for which the euro currency is the most representative example, is worth noticing. But this is not the unique example. In Africa, the Franc CFA is still shared by some former French colonies. A regional monetary union can also be achieved by means other than international conventions. The so-called dollarization that has emerged in Latin America, as well as the unilateral introduction of the euro in some European countries not part of the euro zone (Monaco, Andorra), illustrate this tendency. The states of the Mercosur are currently dealing with the issue of whether they should introduce a common currency or not. This tendency raises different questions: how the competence relating to money should be exercised and how to react to the unilateral adoption of the money by third states. As far as the euro is concerned, the Member States of the European Monetary Union have transferred their sovereign power. The German Federal Constitutional Court asserted that the transfer of competence was compatible with the German Constitution (Grundgesetz) in the Maastricht Judgment of 12 October 1993 (BVerfGE 89, 155). The European Central Bank (ECB) only has competence over monetary policy and the competence to decide on monetary issues. The European legislature also provided for the principle of continuity of legal instruments in order to ensure the recognition of the euro by third states (Art 3 Reg 1103/97).

3. Features of the unification of law

The term ‘unification of law’ is understood in this context as the unification of monetary law, not the unification of money. The unification of monetary law started at the end of World War II. The Agreement on the International Monetary Fund (IMF) was concluded during the United Nations Monetary and Financial Conference, held from 1 July to 22 July 1944 in Bretton Woods. The IMF Agreement (or Bretton Woods Agreement) entered into force on 27 December 1945 and established a new international monetary organization and partly unified the foreign exchange law of the contracting states. The International Monetary Fund founded a new international monetary system. The Special Drawing Rights (SDR), whose legal nature is uncertain, were created for that purpose. The SDR are sometimes qualified as international money and sometimes considered to be mere units of account. Article VIII(2)(b)(1) of the IMF Agreement is of particular importance for the unification of law. Under this provision, courts and administrative authorities of the IMF shall declare unenforceable any exchange contracts that involve the currency of any member state and which are contrary to the exchange control regulations of that member state. This provision was originally aimed at overcoming the unilateral aspect of international foreign exchange law. The Geneva Convention providing a Uniform Law of Bills of Exchange and Promissory Notes of 7 June 1930 and the Geneva Convention providing a Uniform Law for Cheques of 19 March 1930, both still in force, are also noteworthy. In relation to monetary obligations, two international agreements have been signed: the European Convention on Foreign Money Liabilities of 11 December 1967, signed in Paris, and the European Convention on the Place of Payment of Money Liabilities of 16 May 1972, signed in Basel. However, neither has entered into force. Since the 1990s, the efforts towards unification of law have focused on credit transfer. The increase of cross-border fund transfer has prompted UNCITRAL to work on a Model Law on International Credit Transfer. The 1992 Model Law’s purpose is to achieve a common definition of credit transfer and to dismantle the hurdles relating to international fund transfers. Directive 2007/64 on payment services in the internal market is also based on the Model Law.

Regarding soft law, the UNIDROIT Principles of International Commercial Contracts (PICC) are of particular relevance. Articles 6.1.9 and 6.1.10 rule on the currency of payment, the latter in case the parties fail to designate a currency of payment, and Art 7.4.12 determines the currency in which to assess damages, as does Art 7:108 PECL. In regard to the increasing importance of bank money and, consequently, the increasing role of the banks in international fund transfers, the recommendations of the Committee on Payment and Settlement System of the Bank for International Settlements (BIS) should be mentioned. This Committee contributes to the unification of norms, principles and practice of payment systems, contributions which are necessary to strengthen the widespread international financial architecture.

4. Europeanization of currency and currency law

The ‘certificate of birth’ of the common European currency is enshrined in the Maastricht Treaty (Arts 127–144 TFEU/105–124 EC). However, the origin of the euro is far more remote. As early as 1970, the report of the Werner Group had already proposed a three-step process for the construction of a fully developed economic and monetary union. The process took longer than expected but a common currency of the European Union has become reality. After the establishment of the European Monetary System (EMS) and the determination of the convergence criteria setting the conditions for the entry of the Member States into the Eurozone, the third step of the process began on 1 January 1999. The Eurozone has grown from the original 11 states to 17 states. The introduction of the euro was achieved by the use of Regulations. The first piece of legislation concerns the first monetary element, ie the unit of account. The unit of account is regulated by Reg 1103/97 on certain provisions relating to the introduction of the euro, which provided for different measures: the conversion of 1 ECU (which was a basket money) to €1; the principle of the continuity of legal instruments and the rounding rules after the conversion into euros. The ECU, which was solely a unit of account without monetary character, has hence been replaced by the euro. The gaps in this first regulation were then filled by Reg 974/98 on the introduction of the euro. From 1 January 1999, the euro has become the common currency of the Member States participating in the Eurozone and has replaced their national currencies at a predetermined conversion rate. In addition, Reg 975/98 dealt with the issue of denomination and technical specifications of euro coins intended for circulation. The conversion rates between the euro and the currencies of the participating Member States were determined on the eve of the introduction of the euro on 1 January 1999 through Reg 2866/98. Token money was introduced into circulation on 1 January 2002. Concerning the monetary signs, Reg 1338/2001 laying down measures necessary for the protection of the euro against counterfeiting was adopted. Since the euro exists as monetary unit and token money, the European legislature has concentrated its efforts on encouraging the circulation of bank money. This purpose has been achieved through the already mentioned Dir 2007/64 on payment services in the internal market; Dir 2009/44 on settlement finality in payment and securities settlement systems; Reg 924/2009 on cross-border payments in Euro; and Dir 2009/110 on the taking up, pursuit and prudential supervision of the business of electronic money institutions.


Philippe Kahn (ed), Droit et monnaie: Etats et espace monétaire transnational (1988); Hugo J Hahn, Währungsrecht (1990); Rémy Libchaber, Recherches sur la monnaie en droit privé (1992); Frederick A Mann, The Legal Aspect of Money (5th edn, 1992; new edn, 2005 by Charles Proctor); Andreas Blaschczok and Karsten Schmidt, ‘§§ 244–248 (Geldrecht)’ in von Staudingers Kommentar zum Bürgerlichen Gesetzbuch (13th edn, 1997); Helmut Grothe, Fremdwährungsverbindlichkeiten (1999); Mario Giovanoli (ed), International Monetary Law: Issues for the New Millenium (2000); John Anthony Usher, The Law of Money and Financial Services in the European Community (2000); Caroline Kleiner, “Money in Private International Law: what are the problems, what are the solutions?” (2009) 11 Yearbook of Private International Law 565; Vaughan Black, Foreign Currency Claims in the Conflict of Laws (2010); Caroline Kleiner, La monnaie dans les relations privées internationales (2010).

Retrieved from Currency – Max-EuP 2012 on 28 May 2024.

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