On Money and Kinyan Kesef (Column 524)

In the previous columns I defined the concept of a loan, mainly by contrasting it with a deposit. I showed that, in halakhah, there are three types of obligations a person (Shimon) can owe another (Reuven):

1. Debt by virtue of a deposit: an envelope with Reuven’s money deposited with Shimon. This is a concrete “debt” (in fact, it isn’t a debt at all).
2. Debt by virtue of a loan: Shimon holds nothing of Reuven’s. Shimon received a gift from him, and he bears a personal obligation (a mitzvah; chovat gavra) to give him a gift in return.
3. Debt by virtue of purchase price, wages, and the money of kiddushin stipulated “after thirty days” during the interim period: Shimon holds a sum of money, in unspecified coins, that belongs to Reuven.

We observed differences among these three types of debt: in (1) one can effect kiddushin/acquire only if the coins exist in specie. In (2) one cannot effect kiddushin/acquire. And in (3) one can effect kiddushin/acquire even if the coins are no longer present.

The main chiddush in this picture is the distinction between (2) and (3). If in type (3) the debt is not for particular coins, this would seem identical to a personal obligation (type 2). In both cases, nothing of the other person’s cheftza (object) is in my possession; what remains is merely my personal obligation to pay him. It seems, therefore, that many Rishonim and Acharonim do not acknowledge this difference—certainly not explicitly—and at times they run into difficulties because of it. In the Rambam we saw, quite consistently, that such a distinction must be made; and in the Gemara in Nedarim we see that this is the meaning of a loan (type 2). Likewise, in Kiddushin (regarding kiddushin “after thirty days” when the money has already been consumed) we saw that this intermediate state (type 3) is stated almost explicitly.

To clarify this distinction further, we must analyze the concept of “money,” and, following that, define kinyan kesef (primarily vis-à-vis chalifin/barter) in halakhah. This calls for touching on a few fundamentals of economics and a bit of the world’s economic history. I should say at the outset that I make no claim to describe historical facts, and I am no economist. The “history” I will describe here is imagined history—what should or could have been, but not necessarily what was. For my purposes the facts are unimportant, since the historical sketch is only a tool to clarify our current situation.

The Tale of Three Nuts

Leah Goldberg wrote a wonderful children’s story, titled in Hebrew, “The Tale of Three Nuts” (had R. Nachman copied it too, it would no doubt have been called “The Tale of Three Nuts”). A squirrel gave the forest gnome three nuts full of secrets and mysteries, so that he would allow him to live in his tree-home in the forest. When the king’s servants came to cut down the tree, the gnome gave them his three magic nuts, and they passed the nuts on and on. Thus the nuts continued rolling from one person to another, until at the end of the story the prince forgot them somewhere, and their role was over. Along the way, the three nuts managed to settle disputes, prevent troubles, save lives, resolve conflicts, and each recipient in one deal passed them along in another. In the end it turned out the nuts had no intrinsic value. There was nothing to do with them, and nothing was done with them. What they contained was the trust and esteem accorded to them by those who used them. The interesting fact is that these three valueless objects succeeded in changing the world, though they had nothing in themselves.

Leah Goldberg probably wished to teach our children about the subjective dimension of our world, namely that much of it is not forced upon us but depends on us. The value of things is often determined by what we see in them. There is room for values and creativity; not everything is imposed upon us. Yet, unwittingly (apparently), she produced a fundamental lesson about the meaning of money. Incidentally, I now discover I’m not so original. See Nahum Avniel’s article here.

A “Historical” Prologue

Our economic story begins with a community of people living together and maintaining reciprocal relations. One person is a skilled carpenter who makes chairs; a second grows tomatoes; a third weaves clothes; a fourth teaches reading and writing; a fifth is a builder, and so on. Now the chair-maker wants his son to learn to read and write; he approaches the teacher and offers a deal: teach my son in exchange for a chair. Unfortunately for the carpenter, the teacher did not need chairs but tomatoes. In his predicament, the carpenter turns to the tomato-grower and asks whether he happens to need chairs so they can exchange chairs for tomatoes. If the tomato-grower indeed needed a chair, the deal would be done, and the carpenter could return to the teacher, give him tomatoes, and close the circle. If not, the “chair-ologist” would have to approach the weaver or other functionaries in the community to manage to close the circle. There could also be circles that cannot be closed at all (I suppose in such cases the “invisible hand”—may it be blessed—would ensure the emergence of more trades and tradespeople to close circles left open in the current structure).

At this stage, transactions were based on the barter of goods and services, and every such transaction was essentially barter. How did they know how many tomatoes one gives for a chair, or how many months of lessons one gives for a ton of tomatoes? There was presumably a mechanism of supply and demand that arranged relative values in a way that brought the market to equilibrium. If it took a year of work to grow tomatoes sufficient to pay for a week of tuition, then more teachers would enter the market, the price of tomatoes would rise and the price of lessons would fall, until reaching an equilibrium in which a month of work yields goods and services needed for a month (very roughly, of course).

I assume that at that point commerce did not include particularly sophisticated transactions. Barter is very intuitive and simple, and it organizes itself. A person didn’t ask himself whether and when he was the owner of something, nor did they define legal modes of acquisition such as meshichah (drawing), money, chazakah (possession), and the like. Money did not yet exist, but even meshichah and chazakah, which are natural acquisitions, were not perceived as legal acts but as natural acts. When one wanted to acquire an item, one simply paid and drew it to oneself. So too with chazakah, which is use of a field: the use defined ownership, without land-registry records. The notion of ownership was also “natural,” not an abstract legal concept. The exchange of goods and services transferred my ownership of the tomatoes to the teacher, and his service was rendered to my son (there, ownership does not apply). There were no abstract legal definitions; acquisitions were entirely natural and not legally regulated. Life was strawberries—no lawyers, no judges, none of those troubles. But of course there were issues of control and protection, and, more relevant to us, economic problems. As described above, there were transactions that could not be closed; people got stuck with goods and could not trade them with those who needed them. People needed services they could not obtain unless there was a cycle that enabled it. Even what did succeed was very cumbersome.

The Idea of Value: Money as a Unit of Worth

At the next stage, someone came up with a revolutionary idea and said he had a way to streamline the commercial circles I described: money. It’s important to understand that the invention of money rests on a prior abstraction that created the concept of “worth” or “value.” People apparently noticed that the value of a tomato differs from that of a chair. If a chair is exchanged for a kilo of tomatoes, that means the tomato’s value differs from that of a chair. In principle, one can attach to every object or service in the market a number indicating its value.

But that by itself doesn’t really change the situation. It only fixes the market’s exchange ratios and makes it more predictable. Still, to get a teacher for your son, you must find a tomato-producer who wants chairs, and so on. What has now been created is an abstract concept representing the value of each good or service for each side of a transaction. If I gave you a kilo of tomatoes, I can, in principle, already say how much you owe me. But that is merely a theoretical possibility, for as long as we lack a language that expresses value and something that represents it, how exactly can I tell you that I owe you the value of a kilo of tomatoes? How is that said in the language available at the barter stage?

Hence the next step was called for, paradoxically in the opposite direction: first we abstracted (we extracted the concept “value” from the market’s exchange relations), and now we concretize (turn the abstract into the tangible). We can set a unit of worth that measures all goods and services. Such a unit is represented by some object; for our purposes this will be a coin, like a shekel, yen, or dollar, and with it we will measure the value of every good or service in the market. Now, instead of telling you that I owe you a kilo of tomatoes, or the value of a kilo of tomatoes, I can tell you that I owe you 20 shekels or 5 dollars. Each person can translate that into chairs, clothes, or lessons.

Incidentally, there were places where the unit of worth was realized in a common commodity, like salt. But of course in those transactions the salt did not function as a commodity but as money, i.e., as a unit of worth. The recipient did not necessarily need salt for direct use (to salt food), but used it to conduct other transactions (to buy services and goods he needed). This is the nature of coinage generally. It has no use and no intrinsic value (I ignore the stage when a coin had intrinsic, not conventional, value by virtue of the metal’s worth), apart from the convention that it represents a unit of worth—very much like Leah Goldberg’s nuts.

The advantage of the new invention is obvious. It’s not only a language to state how much I owe someone. Now the chair-maker who wants a teacher for his son can pay him directly with money, and the teacher will use the money to buy the tomatoes he wants. One who seeks a teacher need not find a teacher who needs chairs, nor find an intermediary to close the commercial circle with a teacher who wants tomatoes. With money, the commercial market becomes more sophisticated and well-oiled. If the squirrel wanted to persuade the forest gnome to let him live in his tree-home, he would have had to commit to preventing the house’s demolition if workers came to fell it. But what if they don’t come? Or one doesn’t know in advance that they will come? We’re stuck. The nuts, however, are the unit of worth that serves them to execute the transaction immediately, and their future use could be in different directions. If no workers came to cut the tree, the forest gnome could have used them, say, to betroth a woman.

Thus, the invention of money was bound up with a process of abstraction followed by a process of concretization: abstraction from barter and the creation of the abstract concept “value,” which lay in the background but was not conceptualized; and then the concretization of that abstract value by coins/banknotes. These are concrete, tangible objects, but their entire point is merely to represent the abstract concept “value.” This is the way to define value and transfer it from one person to another.

What Is Value?

Here there is a very subtle and crucial point. One might wonder whether value is nothing but a useful fiction, or whether we should view value as a kind of abstract entity—an Platonic idea, if you will. At first I assume it was perceived as a fiction whose merit lay in its practical efficiency; but later the situation changes radically. After value is represented by concrete objects, like coins or banknotes, it is easier to understand that there is such a thing as value. It is not just a convenient fiction we use to streamline commerce; rather, value is an abstract concept, and we trade in it. When we transfer coins from hand to hand, we have transferred value, except that this abstract act requires concretization for legal purposes.

What Is Money?

It is important to understand that, just like value, money has no use in and of itself; therefore, anything arbitrary can function as money. It depends on the value society accords it. Remember Leah Goldberg’s nuts? Or the salt that functioned as money could, in principle, be tossed into the sea at the end, and still it brought much benefit along the way. At no point need it be used to salt food.

Note that a hammer or a foodstuff has a value, but it also has a use. The hammer serves to drive nails; the tomato is for eating; the chair is for sitting. All of these have a value derived from their use (their market value is exactly as determined back in the barter stage). A coin or a banknote is exceptional in that it has value, but an arbitrary one. It has no use, and thus its value is not determined by use. What determines it is social agreement (the king, the government, or simply the council of citizens). At this stage it doesn’t really matter, since we are speaking of an arbitrary unit of worth; what matters is that it efficiently measures all goods and services in the market. I think the objective value of a currency begins to matter only in international economics, that is, in relations among different currencies. Within a single autarkic market, the currency’s value can be entirely arbitrary.

The Need for Legal Regulation

But the invention of money begins to raise legal and economic issues that require regulation. If we no longer exchange goods and services for one another but pay money for a good or service, we must define how and whether one acquires the good, the money, and when a deal is finalized. Now the determination that you are the owner of something is no longer purely “natural”; it requires legal regulation. First of all, the value of money must be set, and that must be done by a central authority (a king). Unlike with a commodity, a citizen cannot set the money’s value for himself. It is a communal determination. Likewise, one must determine whether one who paid money thereby acquired the good, or vice versa. One must determine the status of a person who received a good and owes money (i.e., define the concept of “debt”). There is the matter of buying on credit, and so on.

It seems to me that only at this stage does the concept of a loan arise, since a loan is the transfer of money to someone else for his use. But when money passes to someone else, we must define who owns it (a loan is “given for spending”). If the borrower is the owner, then it is a gift. If the lender is the owner, then the borrower is forbidden to use the money. This is not like a hammer, which can be borrowed for use and returned to its owner with no conceptual problem. The use of money is to expend it, not to perform an act that leaves it intact. In this sense, money is like fruit, as opposed to utensils (see more below). So how can we define a loan as giving money for the borrower’s use, and at the same time preserve the lender’s rights (who did not intend to give gifts)? This is a legal problem, and its solution belongs to legal regulation. It is no longer something we can leave to nature to sort out.

The two principal concepts that now arise are loan (versus deposit) and kinyan kesef (versus barter). A deposit is a natural act and likely existed even in the primitive stage. Deposit for safekeeping or even lending for use are acts that do not demand significant regulation (only if damage occurs). A loan, by contrast, is far more complex legally. The same is true for acquisitions. Barter is a natural matter: I want tomatoes and you want chairs, so we exchange. But when money is involved in a transaction, it requires legal regulation and definitions of different states. This is already an act that requires theoretical conceptualization. Note that in kinyan kesef, as distinct from barter, there is built-in asymmetry: barter is the transfer of good for good, whereas kinyan kesef is constructed as giving money for a good. But we saw that money is unlike a good, since it has no use and its use is its consumption (expenditure). Therefore, this is not a simple exchange and it demands definition and regulation.

“Equivalent to Money” as Money

Once we define the concept “money,” a commodity can also function as the equivalent of money, and that is essentially what it becomes. If once the goal was the goods and money was a means to streamline market trade, at a certain stage the situation flipped: the goal is money, and in many cases goods function as money’s equivalent. Thus, people buy goods not intended for use but for investment (goods purchased for trading—stores—probably existed already in the past). In such a case, the goods function as an equivalent of money, not as goods. These expansions give rise to difficulties, since the legal regulation of loans and property acts presupposes different treatment of goods and money, but goods sometimes function as money.

Accordingly, after defining kinyan kesef as distinct from barter, the question arises whether one can exchange goods by means of kinyan kesef. That is, I give you tomatoes and you give me, in return, chairs—but the chairs here serve only as the equivalent of money, not as goods. The chairs are the “money” in this transaction (like the salt in the example above). Such a transaction is definable, but it requires further analysis (see below). When one exchanges money-equivalent for goods, it is very much like barter. How shall we know whether this is barter or kinyan kesef? Does it even matter? Legal regulation requires conceptualization, definition, and differentiation among transaction types.

Likewise, there are loans of food or objects; but in my view these arose only after the loan in money was defined. A “se’ah for a se’ah” loan (I lend you a se’ah of wheat, and after a set time you return to me a se’ah of other wheat) is, seemingly, only a derivative of a money-loan, with the food here serving as money-equivalent. Just as one lends money, one can lend goods (with repayment defined in goods or in money). But perhaps we indeed lent the goods themselves and not as money-equivalent? Is a loan, in its essence, always a money-loan (and if it is a loan of goods, must they necessarily be functioning here as money-equivalent)? This has implications for the laws of interest, when the value of a se’ah of wheat changes between the loan and repayment. The question is essentially whether I lent you wheat, or money (and the wheat served only as money-equivalent)?

We saw above that after defining money as the tangible representation of value, value itself began to be perceived as something existent. We essentially trade in value; sometimes it is realized in money and sometimes in goods or services. But in essence, the economic world became the transfer of value from side to side. The money we invented to streamline barter in goods suddenly took center stage and became the “real thing.”

Another Abstraction

But after understanding that we really trade in value—that is, transferring funds is only a tangible way to express the transfer of value from one to another—we can return and dispense with money as the tangible representation of value. Instead, we can simply record how much value each person has, and those records can replace the need to transfer money. We return to a market that has only goods, and money disappears from it. At this stage, commerce can be conducted through bank accounts, and transactions can occur without moving anything from place to place. There are only bottom-line entries in Reuven’s account against Shimon’s, or vice versa. This applies both to money and to goods (purchased for investment; use, of course, requires physical transfer). Such commerce can proceed without Shimon transferring anything tangible to Reuven, such as coins. From here emerge credit cards, digital cards, and today virtual money and currencies, and thus money’s star began to fade. It did its work, making us understand that we actually trade in value, and now it is superfluous (of course, without computers and the internet this would not have been practically possible, though the conceptual possibility existed without them).

So value led to the definition of money; but after we used money we realized it is merely the concretization of an abstract concept—value—in which we trade and which we transfer. Therefore, there is no real need to use that concretization. We used a ladder to climb the tree; now that we’re up there, we can toss it away. That, to me, is the end of the road as of today. What will the future bring? I don’t know.

Back to the Distinction Between Two Halakhic Types of Debt

We can now better understand the difference between debt type (2) and debt type (3). In a loan (type 2), Shimon borrowed money from Reuven. This is not a deposit, and the money as such has no importance. It’s only a symbol—a tangible representation of the fact that I possess some value. But as we saw, that isn’t essential. One can, instead, have a record somewhere stating that I have such value without giving me concrete coins, and I would still have it all the same.

In the legal world, a loan is seen as a state in which a certain quantity of the lender’s value is in the borrower’s hands. Therefore, if the borrower does not repay, there is a monetary claim against him. In fact, we wouldn’t need to sue at all—we would simply re-enter that amount back under Reuven, and the loan would be “repaid.” The borrower would not need to do anything to repay the loan, since the physical transfer of money is not essential.

But the Torah conceives of a loan differently (at least according to the Rambam). For it, this is an act of kindness (gemilut chesed) by the lender toward the borrower; that is, the lender gives a gift to the borrower. Yet it’s not entirely a gift, so the Torah imposes upon the borrower a mitzvah to give a gift in return. In the meantime, the lender truly has nothing in the borrower’s possession. There is a personal obligation on the borrower (a mitzvah), though as I explained, halakhah translates it into a lien (shi’abud). In purchase price or wages, however, halakhah sees the debt the way other legal systems see a loan. There, a certain value belonging to Reuven is in Shimon’s hands. The fact that there are no concrete coins here does not necessarily translate into a debt of non-concrete coins. There is Reuven’s value. Its embodiment in coins is unimportant, and there is not even a need to speak of non-concrete coins. If we were speaking of non-concrete coins, I would expect that the debtor (the employer) would be unable to spend his money completely; rather, he would need to leave in his possession the amount he owes. Legally and halakhically there is no such requirement. He may spend everything, because the coins are not essential. What Reuven truly has with him is value, not coins (not even non-concrete coins).

There is no impediment to betrothing a woman with value, even if it is not embodied in a coin. The transfer of a coin is only a symbol for the transfer of value, and if one transfers value via a bank entry it is exactly the same. Therefore, there is no impediment to effecting kiddushin with purchase price or with wages. What prevents kiddushin in a loan is only that, in a loan, there is not even that: Reuven has nothing with Shimon—not even value. Nothing. There is only a personal obligation on Shimon to give a gift in return. But if he has nothing of his with him, one cannot effect kiddushin or acquisition, for kiddushin or kinyan must be done with money—that is, with the value that money expresses and concretizes. If there is no transferable value, there is no kinyan and no kiddushin.

A Proposal for Another Look at Defining a Loan

Until now I assumed that the difference between the halakhic definition and the conventional definition of loans derives from the fact that halakhah sees a loan as an act of chesed, i.e., a gift. But on further thought, if we defined a loan as is common in the world, then the meaning of a loan would be unclear, and it would, in fact, be meaningless. Suppose I borrow 100 shekels to buy at the grocery. If that 100 shekels does not express value that really resides with me, but rather the lender’s value that is in my possession, then when I reach the grocery I don’t truly have anything with which to pay. When I hand the shopkeeper the 100-shekel note, I am paying him with someone else’s money. After all, my value has not changed as a result of the loan, so the note’s being in my hand is meaningless. It is sleight of hand—as if I possess more value than I actually do.

According to halakhah, the money given to me is now mine. The lender takes the risk that I may have no money and then he will not receive a gift in return for his funds. But in the meantime, the value in my possession truly increased due to the loan; therefore, I can use that note to buy at the grocery. I am genuinely paying from my own property. In this sense, for a loan to have real meaning it must be defined as in halakhah and not as in other economic-legal systems; otherwise it is a fiction.

It would seem that they assume physical money has intrinsic meaning and is not merely the representation and concretization of value in my possession. Therefore, if I hold a 100-shekel note that I borrowed from you—even if my value has not actually changed (since I owe an equal value to the lender)—they assume that my money has, nonetheless, increased and I can buy with it at the grocery. I think that, in this respect, the halakhic definition actually represents reality more accurately than the standard definitions elsewhere; it is not just a matter of defining the loan as an act of kindness. The arguments are connected: because of this definition one can buy at the grocery, and thus it can indeed be considered gemilut chesed.

This idea just occurred to me, and it raises a big question mark over the conventional definitions. The matter still requires further analysis.

So far I have tried to clarify the meaning of debt by virtue of purchase price (type 3) versus a loan (type 2). We saw that this entails understanding the concept of value and its relation to money. With that, I close the circle of the recent columns; yet, since we have come this far, I will devote another column to this topic, in which I will discuss additional halakhic ramifications of this picture.