September 19, 2003

The Contract is the Keystone of Issuance

This perceptive remark was made by Hasan (Martin Bramwell) in a private document. Actually, he said that the keystone of the issuance is the contract! So I am toying around with the phrase to see what rings the loudest bell.

No matter, they are Hasan's words. And, it is a remarkable observation that is worthy of deep attention. Consider this - can you find another project that pays even lip service to the contract in its architecture?

I never have. We invented the Ricardian Contract back in 1995, and at the time, even though we announced its form and discussed it widely, we fell into the trap of assuming it was too obvious. Indeed, that's what people told us, lulling us into its obviousness!

We actually thought that there was no point in pressing the place and case of the contract in Financial Cryptography, because fairly soon, all and sundry would sweep up the obvious construct, and our "first" would become just another forgotten footnote in the rubble of FC history.

Yet, none of that came to pass. Even though every small fact in this construct is easily established, just like static physics, and every piece of logic stands strong, the resultant archway appears too tall to see.

Why is that? It's not as if the contract is hard to understand. You take some text, you shove in some parsable elements, you sign it with OpenPGP's cleartext signature, and you hash the document. Really basic crypto, as it should be.

That then becomes the starting point for ... everything!

Maybe, if it's not in the construct, it's in what we did with it, that the mystery lies. Like a keystone, we built an entire aquaduct of governance over it. We took that hash, and tied it into the servers and the transactions and the repudiability. We took the signature and tied that into the Issuer. We took the text and tied that as a contract into the reserves.

And, we took the hash again and showed how the user was now part and party to the contract.

And... And...

Maybe our emphasis is wrong. Instead of looking at the keystone, we should be looking at the arches. Or, maybe the topdown view of the edifice is preferred, and how we got to the top of the world should be covered with hand waving and press releases.

Whichever. The water of governance flows without pause because it rides over something built around the keystone of a contract. The Ricardian Contract supports a civilisation of Financial Cryptography in a way that makes one realise that these are words yet to be appreciated.

Posted by iang at September 19, 2003 06:00 PM

Hey Ian,

Thanks for taking me seriously :-)

It is probably important to mention that 'the contract' is, and always has been, the keystone in every money system all the way back to Croesus who basically said "Clear cut deal folks! Use this money or your head comes off."

The social contract by which the monetary authority keeps faith with the population is the most important contract of any kind. If you understand that money enables an exchange for wealth for paper in the marketplace, you will understand that the same must occur in the initial creation of the money stock. The contract is the definition of the right by which a monetary authority withdraws wealth from the marketplace and replaces it with paper. It is one thing when you have a money stock. It is another thing altogether when you have a money *supply*! Every supply system has a source and a sink. While the money stock is increased continuously from some source, there is a counterflow of wealth towards the sink.

The written contract is of no importance. It is the contract in the minds of the populace that matters. In the 1930s the German monetary authorities launched a large newspaper and radio campaign to assure Germans that their authorities would not break faith with them. They stated in full page print advertisements that Germans could rest assured that, in that agonizing time of hyperinflation, their monetary authority would not fail to print all the money necessary to ensure that the availability of money would keep pace with inflation and ensure commerce could continue!

So what is the contract by which the Federal Reserve System continuously receives wealth in exchange for paper? continuously acts as a source of money and sink of wealth? An excellent expose of that can be found in Dr. Edward E. Popp's "MONEY, BONA FIDE OR NON-BONA FIDE". Go to Chapter 3 "Money is a Document"


He shows step by step from 1914 to the present, the gradual and subtle erosion of the contract from "This note is receivable by all National and Member banks and Federal Reserve Banks and for all taxes, customs and other public dues. It is redeemable in gold on demand at the Treasury Department of the United States in the city of Washington, District of Columbia or in gold or Lawful Money at any Federal Reserve Bank." to the infamy of "This note is Legal Tender for all debts, public and private."

He concludes with a rather astonishing observation...
"(the above) ... is certainly interesting, but the most interesting fact about all of this is that the officials of the United States government used their official power to give value to those "notes" by agreeing to redeem them, first in gold, then in lawful money, and now by accepting them as payment for taxes. All of the time the United States government has been borrowing those "notes" for the purpose of using them as media of exchange. They could use their legal power to issue United States notes or tax credit certificates without borrowing and without going in debt. Interesting, is it not?"

If I may, I would like to arrogate to myself two further sweeping declarations ...
"No equitable society is possible while the money system is created by central authority or hierarchy. Money creation is a right and *duty* of every citizen."


Posted by: Hasan at September 21, 2003 10:47 AM