From Legal Leverage to Scriptural Money Creation

I Definition:

What is leverage? Leverage is a term used to describe a mechanism that allows a company's profitability to be increased through borrowing, supposedly, because the debt must always be repaid.

Personally, I prefer to define leverage as any mechanism that allows one to increase their available funds immediately.

II Different Leverage Effects:

In the stock market: more specifically, for securities, we can say: A leverage of 1:1 means that the economic agent trades exclusively with their own funds; the ratio between the deposit and the volume of the open transaction is 1:1. Having $100, the economic agent also invests $100.

A leverage of 1:1000 means that the economic agent opens an order with 1,000 times more funds than they actually have. With $100, the economic agent invests 100 x 1,000 = $100,000.

In commerce: an entrepreneur, when creating their business, leverages their employees.

Indeed, they will produce assets that are immediately payable, while they are paid at the end of the month. A good example: internet companies doing business with consumers.

In banking: there are commercial transactions that have a leverage effect, such as factoring: a financing technique implemented by companies that consists of obtaining advance or immediate financing in exchange for the assignment of their receivables. Thus, an internet company that does business with client companies obtains the money from factored receivables immediately. The leverage effect lies in the fact that it pays its suppliers in thirty days or more.

In industry: leasing, a system allowing the acquisition or use of movable property (car, professional equipment) or real estate without borrowing. For example, a company acquiring a car or professional equipment on lease pays rent to use the acquired assets. Thus, a taxi company collecting its fares immediately increases, or rather, multiplies its available funds tenfold.

In reality, credit itself is a form of leverage depending on whether one increases one's debt to a greater or lesser extent. In all the examples I've given, there is a more or less formal credit transaction.

Finally, in law: there are also mechanisms that facilitate financial leverage: any right that immediately increases available cash but without debt. An exempli gratia: in the case of fraud,

A lends money to B. B becomes poorer for the benefit of C.

A has an immediate claim against B and C. Through damages, or even penalty clauses and other penalties, it creates value itself, and therefore money. This can be seen with Paulian and oblique action, but generally with any action that A brings against B and C, based on contractual liability for B and tort liability against C.

But in law, these are only a few ways to create monetary value through the use of written records. According to the Bank of France, there are only two methods for creating money:

1/ coins and banknotes: this is what is called fiat money (also known as printing money)

2/ entries in bank accounts: or written records

III. How leverage creates money:

As we have just seen, by increasing the immediately available monetary value base, certain transactions create added book value.

Exempli gratia: A lends 100 to B. B becomes poorer in favor of C.

A takes action against B and demonstrates fraud between B and C to his detriment. He then obtains 100 from B or C by virtue of full compensation plus damages equal to 20, for example, set by the court or the contract, plus any possible contractual penalty clauses, etc.

Based on the original loan contract, there is indeed a creation of value equal to at least 20. This is simply done through legal transactions. In the case of a consumer, the leverage is limited if B and C are consumers, but if B and C are companies or groups of companies, as is often the case, the leverage can be enormous.

This is on the A side; we are considering the case of the lender, which by law can only be a bank or credit institution.

What about the consumer: apart from debt, do they have other leverage or ideas?

IV. Leverage of the unaware consumer:

In reality, we have two hypotheses:

1/ The penalties created by the law for the benefit of the consumer should immediately turn into hard cash.

2/ The possibility for the consumer to negotiate penalty clauses or other compensation clauses in their favor, through grouping, not into a class action, but using the real-time negotiation tool (API).

It is clear from the explanations given that the creation of value is reserved above all for the lender, which in 99% of cases is a financial institution or bank, and the same applies in other cases where it is more often reserved for businesses. So, the legislator disregards the consumer, that is, the individual, the natural person, at least that's what the demonstration suggests.

So, through the real-time negotiation API, this tool made it possible to restore the balance that had been broken between companies in a dominant position, and in my opinion, it abuses it with adhesion contracts and consumers brought together in negotiation.

But the legislator also has a say because, when you look closely, banks and companies have a monopoly on enforcement against consumers, with the approval of the legislator. Let me explain: normally, enforcement is the prerogative of judges and the courts, hence the fact that consumers rarely go to court or seek litigation, especially for small sums of money. On the other hand, even for small amounts, the legislature has allowed them, and companies also allow themselves, thanks to adhesion contracts, forced execution clauses that the consumer is obliged to accept in fact and in law (litigation service, recourse to debt collection agencies, etc.). For me, it makes sense, given the glaring economic differences and the lack of redistribution of wealth captured by large, medium-sized, and small businesses, with the situation of individuals, consumers, and, moreover, voters and taxpayers, to restore a sense of commutativity in individual-business relationships.

Author

Vidal Bravo - Jandia Miguel

Engineer - Master II in Consumer Law and Competition Law

UFR of Montpellier I - Consumer Law Center

Paris II / Panthéon-Assas