Conclusions:

Once obligations are established as a practice, the contracting parties had to – and successfully did – nominalise them by using money-of-account standards. Creditors and debtors strove for bank-issued money proper, which was invented twice, once in antiquity and again in modern times in Amsterdam. With merely nominal contractual obligations and nominal money proper available, creditors and debtors could protect themselves from damages through inappropriate commodity money proper, whose arbitrary supply may be too plentiful or too scarce due to natural effects (lucky findings, good harvests)as can be the case with inappropriate commodity money proper. Thus the economy gained one more degree of freedom. Debtors could always free themselves of their debts by earning proceeds – from which business so ever, intended or luckily improvised – realised in bank-issued nominal money proper, whose supply is determined by creditors and debtors in co-operation with the bank of issue.

Creditors and debtors withdrew the network of their creditor-debtor relations from its exposure to the insecurity of nature. Enterprises owing good bills or covered bonds bind themselves for the maturity, thereby imposing onto the enterprises the task to stabilise their proceeds in nominal terms. This has a general stabilising effect on the economy – on revenues, servicing and incomes, as Stadermann pointed out, a major achievement not realised by tribal, feudal or socialist production systems. The insuperable risk of natural and cyclical impacts, affecting debtors’ production, was charged on them, thus privatised. Every debtor-entrepreneur has to hold equity or own capital, sufficient to meet the unforeseeable risk typical for his business, in order to create nominal security within the network of contractual obligations. Shareholders pay money to constitute a company altogether by providing its equity. Without sufficient equity an enterprise cannot become legally competent. The legal opportunity provided to establish companies of very low or negligible equity, such as a SPVs, definitely indicates a lack of understanding of the essence of equity or own capital. 92 Many misconceive equity as indicating a claim of the shareholders. Shareholders do not hold a claim to a secured, let alone a covered nominal asset with fixed nominal returns! They hold the right to appoint the management of a company, thus influencing its return situation, and the right to decide – after fulfilling all liabilities – to distribute by way of dividends the eventual residual surplus. The equity is that surplus of an enterprise’s assets over its fixed liabilities, which allows it to meet eventual unforeseen liabilities. Providing collateral appropriate to cover the debt and holding equity adequate to meet unforeseeable losses are the two forms of security overcoming insecurity. Inappropriate commodity money proper bears the risk of being too plentiful or too scarce due to natural circumstances, creating an inflation or deflation. Nominal obligations impend to degenerate by an asset price inflation, which is at the core of the ongoing crisis. Modern central banks of issue restricted their view to consumer prices, regarding their changes as inflation or deflation, while assets price changes were accounted for as a deteriorated or improved current or expected profit outlook. So the central banks made themselves believe that their lending at ultralow interest, caused sustainable growth reflected by rising asset prices, whereas assets in reality inflated a bubble, as Stadermann and G. Heinsohn described. The erroneous interest policies of the Fed and the Bank of Japan and of the Eurosystem in some of its member countries opened the floodgates for a money tsunami inflating the prices of assets including real estate. Commercial banks, borrowing at the ultra-low interest rate from their central bank, then spent the credits taken buying every asset offering a higher real yield than the official rate, until the asset prices were bid up to levels, that their real yield fell to levels close to the official rate. This brought the generally expected real return and effectively realisable real yields into disequilibrium. The economy thus degenerated, fulfilling due obligations incurred earlier by current bubble-driven proceeds, a merely nominal process without ever creating sustainable revenues and income. Steiger described such merely nominal growth in 1979 (5). While money tsunamis are to be prevented by complying with Steuart’s and Bagehot’s principles of central banking, one should not underestimate regulation. Proper regulation can shield a country’s banks from being blown away by erroneous interest policies by foreign central banks.