Today's debts and tomorrow's money

G.M. Lewis

By 'nominalism' is meant that if in 1975 a man undertakes to pay £100 in 1985, he can fulfil his obligation only by paying notes, coin or whatever else is legal tender in 1985, to a nominal value of E100. It matters not whether MOO in 1985 will have only half the purchasing power it had in 1975, or -less likely — twice the purchasing power.

The idea and principle of nominalism are deeply embedded in English law — and so far assumed to be a fixed principle that it has only rarely been challenged. It was once said of sterling that it is a currency "of whose true fix'd and resting quality there is no fellow in the firmament," and no doubt the stability of sterling until recent times has added strength to nominalism. The principle was described particularly clearly by Lord Denning in 1956:

But in England we have always looked upon a pound as a pound, whatever its international value. We have dealt in pounds for more than a thousand years — long before there were gold coins or paper notes. In all our dealings we have disregarded alike the debase-' ment of the currency by kings and rulers or the depreciation of it by the march of time or events. This is well shown by the Case of Mixed Moneys. Creditors and debtors have arranged for payment in our sterling currency in the sure knowledge that the sum they fix will be upheld by the law. A man who stipulates for a pound must take a pound when payment is made, whatever the pound is worth at that time. Sterling is the constant unit of value by which in the eye of the law everything else is measured. Prices of commodities may go up or down, other currencies may go up and down, but sterling remains the same.

The 'Case of Mixed Moneys' of 1604 to which Lord Denning refers is the leading authority on the subject. Gilbert, a Londoner, had sold goods to Brett, an Irishman, for "£100 sterling current and lawful money of England," payable in Dublin. Before the price had become payable, Queen Elizabeth issued a new debased coinage in Ireland (the Mixed Moneys) in place of the then existing currency. The new money was described in the Royal Proclamation as "le loyall and currant money de cest realme de Ireland." Brett tendered the new debased coinage and Gilbert refused it. The Privy Council of Ireland asked the Chief Judges to rule whether Brett had made a good tender. It was decided that the new money must be taken and accepted as "sterling current and lawful money." The principle thus settled has never been successfully contested in England. Perhaps the most celebrated challenge was made in 1811 by Lord King, who stated publicly that in view of the fall in value of sterling, he proposed to demand rent from his tenants calculated on a gold basis. Much excitement followed the announcement and, lest there should have been any legal foundation for the proposal, an Act of Parliament (Lord Stanhope's Act) was quickly passed making bank notes legal tender and providing that no one should pay or receive for them less than their face value.

Not only is nominalism accepted almost without question as part of English law, but it is hardly discussed at all in the text books. The only work which contains a full discussion, both of the principle and its consequences in English law and, by the way of comparison, in many other systems of law as well, is The Legal Aspect of Money by Dr F. A. Mann, a work of very great general interest on all questions concerning the impact of law on money.

It needs little imagination in times of severe inflation to appreciate that nominalism can have harsh or even unjust consequences. A simple case is that of the creditor who lends for a long period. Unless he stipulates for an abnormally high rate of interest or a premium, he will receive only a fraction of the value of the original loan when the time comes for repayment. For this reason, there has been some public demand for a gilt-edged issue which would in some way be linked to a cost of living index. But successive Governments have so far shown no sign of sympathy. Another case is the long lease without a clause entitling the landlord to revise the rent at periodic intervals. Such clauses represent quite a recent innovation and there must be many long leases now in existence without them. Annuitants and pensioners are others who may suffer from the effects of inflation unless they have had the foresight and bargaining strength to be able to stipulate for payment which reflects the decreasing intrinsic value of money. Dr Mann points out in his book that nowhere is the injustice resulting from nominalism more striking than in the field of taxation. An investor may have to increase the monetary value of his investment several times over in order merely to preserve its intrinsic worth; and yet on the sale of the investment or the death of the investor, tax will be charged by reference to the nominal monetary value or its increase. On the capital gains tax Dr Mann writes: "preservation of wealth is treated as gain, while loss of wealth is treated as preservation." Or again, (although some limited relief is now proposed in the latest Finance Bill) tax may be charged on the amount by which stock-in-trade held in a business has appreciated in value during an accounting period solely as a consequence of inflation. In both these instances, tax is charged on quite illusory profits or gains because the nominal amount of the gain reflects no more than a depreciation in the purchasing power of the currency.

It is a peculiar feature of English law that it has no mechanism by which nominalism could be modified or suspended except by Act of Parliament. When courts in other countries have been faced with a sudden and catastrophic fall in the value of money, some means of mitigating the injustice caused by economic collapse seems to have been available.

The experience of Germany in the years following the first world war is the most instructive of the many cases provided by history. Between December 1921 and the spring of 1923 the number of German marks needed to purchase one US dollar rose from 192 to nearly 100 million. Shortly afterwards the currency became worthless and was replaced by the new Reichsmark on the basis of 1 million million marks to 1 Reichsmark. In that period, when a suitcase full of paper currency was needed to buy a loaf of bread, the courts had to grapple with the problem of how to do justice between creditor and debtor who had contracted for the payment of a currency the value of which was diminishing literally hour by hour.

The German Code contained provisions releasing parties to transactions which had become impossible of performance, and for requiring contracts to be carried out "in the manner required by good faith, commercial usage being taken into account." On the other hand, the framers of the Code had deliberately rejected the mediaeval doctrine implying into every contract a release of obligations in the event of a supervening change of circumstances, the so-called "clausula rebus sic stantibus." In the event, the German courts chose to rely on the 'good faith' clause in the Code as the instrument to enable them to 'revalorise' the obligations of debtors. As inflation became more and more violent, the courts felt themselves correspondingly freer to substitute their own determination of what was a fair price for the debtor to pay, in place of the nominal amount of his obligation expressed in depreciated marks. Ultimately legislation was inevitable and in 1925 the 'Revalorisation Act' became law.

The English courts have not yet had to deal with the problems thrown up by a collapsing currency, but the rate of inflation which is now being experienced in this country is such that the question is no longer academic. One cannot be certain that in a crisis the judges would not find some means of revalorising obligations in order to prevent injustice. There are already some indications that the courts are prepared to legislate in the field of currency. In a recent decision which surprised the legal profession the Court of Appeal held (contrary to a rule which had stood for at least eighty years) that judgements of the English courts may be given in a currency other than sterling if the contract in question provides for payment in that other currency. One member of the Court observed that if a foreign trader who had agreed in his own country to sell goods here and to be paid in his own currency found that by suing in the English courts he had to accept "the modern equivalent of clipped coins, now called devalued currency," the law and courts of England would earn a poor reputation in the market places of the world.

Nonetheless there is no suggestion in the cases that an obligation which has become less burdensome in real terms because of a decline in the purchasing power of currency could on existing principles of English law, be revalorised so as to redress the disadvantage sustained by the creditor. it seems unlikely that the judges could find a way pointed out by the common law, and the remedy would probably have to be provided by Parliament.

What form might legislation take? There are two possibilities. Either the statute could empower judges (or juries) to revalorise monetary obligations as they thought just in the circumstances of each case; or the statute itself could lay down rules or sliding scales to be applied.by the courts. After the collapse of the

Confederate currency during the latter years of the American Civil War the courts of the Southern States were given a more or less free hand by the so-called 'Scaling Acts' to fix a fair price for a debtor to pay his creditor. Similarly, until legislation was enacted in 1925 the German courts assumed a wide authority to revalue money obligations in whatever way they felt to be just. It must be questionable whether such a far-ranging judicial discretion is ever desirable. No one could conduct his business affairs with any certainty against such a background. Moreover, the experience in both -Germany and the Southern States of America was that the courts became congested with hopeful creditors seeking to revise the amounts due to them from their debtors.

The second alternative — a statutory scale — is in practice only possible in a period of reconstruction following violent inflation. No sliding scale is capable of doing justice or achieving certainty unless there is in existence a stable currency which can be used as a measure. For this reason no scale could be laid down in Germany until 1924 when the new Reichsmark had been issued and inflation effectively stemmed.

When the German legislation was being prepared it was recognised from the outset that a sliding stale would be necessary to measure against the original value of the obligation at each successive stage of the inflationary Process. It was also recognised that a general price index for all types of transactions could not be appropriate because of the disparate Price movements affecting those different transactions. The first attempt at legislation took the foreign exchange value of the mark as the standard value. But there had been a gulf between the external and the internal purchasing power of the currency until the very last stages of the inflation, and this too was an unreliable guide. Ultimately, the legislation provided for a fixed percentage of the value of the currency at the date the money obligation was incurred, ascertained by reference to a complex sliding scale striking a middle course between the dollar-price of the mark and an index of internal wholesale prices.

Problems of a similar nature would present themselves to Parliament if it were intended to try to revalorise by statute in this country. The foreign exchange value of the pound would not be an appropriate measure because the internal and external 'values of sterling bear little relation to each other. There is no gold value for the pound and so that could not be considered. Cost of living or price indices would provide only the roughest guides if used as general instruments of revalorisation: subsidies, controls and other selective forms of government intervention have done much to distort the movement of prices in various commodities during a period of general inflation.

In addition to the problem, of selecting the appropriate scale for revalorisation there are Other difficulties. What sorts of transactions Should be affected? In Germany the legislation was limited to mortgages of land and negotiable instruments. It could also have applied — but did not — for example to long-term contracts of sale, leases, gifts under wills, annuities and pensions. Nor, did it apply to governmental obligations which would in any case raise special' problems. And then there is another group of questions relating to the time transactions are entered into, and the time for the performance of the obligation. Should completed transactions ever be re-opened? What point of time should be chosen for the start of the sliding scale? Should the base date for applying the sliding scale be the date the Obligation was entered into (date of contract) or the date when the monetary obligation fell due?

There does not seem to be any case where a court has re-opened a transaction which is already completed; and yet the interests of Justice might indicate that that too should be Possible in a very hard case. On the other hand, if the legislation were drawn narrowly, it could be provided that revalorisation should only be applicable where the debtor fails to pay on the due date — a possible extension of the law of damages.

The catalogue of difficulties makes it certain that an attempt to pursue the ends of justice by revalorising monetary obligations is perilous and problematical. It must be doubtful whether it could be practicable at all while inflation is in progress. But in a situation in which a currency

has collapsed and society is• engaged in a general programme of reconstruction, the contribution of the legal system might fairly include the abandonment of nominalism and a more flexible attitude to monetary obligations.

G. M. Lewis is a London solicitoi-. The book, The Legal Aspect of Money by Dr F. A. Mann. to which he refers in this article, is published by Macmillan at £9.50.