Bankruptcy

What is money?

First off, for the sake of simplicity, let’s limit our discussion to 18th century America. Money is a store of value, and there are many kinds of money. In the colonial era, money was (arguably) much more complicated than it is now: each colony would issue their own bills of credit, which all had their own values. So, for example, a Pennsylvania pound might be worth less than a New York pound of the same denomination. Also worth noting about money in the colonial era is that the “stored value” of the bills of credit were redeemable for actual gold or silver. Money that is redeemable for gold or silver are known as specie (pronounced SPEE-sha). 

This led to many problems, chief among them being the difficulty in comparing different types of money. As a result, people often preferred to be paid with commodities, whether rice, other grains, or gold itself if possible. However, soldiers in the revolutionary war could not be paid in commodities and paying soldiers in different bills of credit was unfair on its face. So, soldiers were paid in what essentially were IOUs. Since they were seemingly worth nothing, many soldiers sold them to speculators for whatever they could get. 

Fast forward to past the revolutionary war: how is the new American government supposed to pay everyone back? Some advocated for “discrimination”: soldiers would get paid in full, and buyers of IOU notes would get reimbursed. Others advocated for “redemption”: just pay the buyer of the IOU based on its face value. So, the question becomes, should the government overburden itself with debt by paying more than it promised, or simply pay back holders of notes to honor the contract while not increasing national debt. 

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Redemption won out, unfortunately for consumers. There is a decent lesson to be learned: money is a store of value, but it is imperfect. Even the gold standard couldn’t perfectly alleviate the difficulty of comparing different moneys. If you are interested in the history and philosophy of the economy, bankruptcy, and debt, stay tuned for my blog posts. Next time we will discuss money which is not tied to the gold standard – also known as fiat currency. And, if you are thinking about filing, reach out to us at www.lifebacklaw.com.

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