<h2>CHAPTER 46</h2>
<h3>TOKEN COINAGE AND GOVERNMENT PAPER MONEY</h3>
<h4>§ I. LIGHT-WEIGHT COINS</h4>
<div class="sidenote">Seigniorage and the value of coins</div>
<div class="sidenote">Saturation point for coinage</div>
<p>1. <i>When the number of coins issued is limited properly, a seigniorage
charge does not reduce their money value; they are worth more as money
than as bullion.</i> The coinage thus far considered has been that of
full-weight coins without seigniorage. The question now is, What is the
effect of a seigniorage charge on the value of the coin as compared with
the bullion that is in it? This is one of the most difficult phases of
monetary theory. Two values must be thought of: one the value of the
coin as money, the other the value of the bullion in it. When coinage is
free and gratuitous, these two values are the same. How can they ever be
different? The answer to the question is found in the theory of monopoly
value. If the supply of coin is limited by the sole agency of issue, the
value can be kept above the cost of production (<i>i.e.</i>, in this case the
bullion value), the seigniorage being the profit of the government. The
limit within which the coinage must be kept is the number of coins that
would circulate freely if they were made full weight without a
seigniorage charge. This is the "saturation point" of the money demand
of the country; it is a certain number of pieces of full-weight metal.
If more than that amount gets into circulation it becomes worth less as
money than as bullion, and it is melted or exported.</p>
<div class="sidenote">Example of seigniorage value in coins</div>
<p>If this full supply of money at a given moment is 100,000<span class="pagenum"><SPAN name="Page_444" id="Page_444">[Pg 444]</SPAN></span> pieces or
dollars, a seigniorage charge of ten per cent. could be made if the
number of pieces were not increased above 100,000. The government alone
having the right of coinage, the need of money would give the
circulating medium a monopoly value. The value of the money would rise
until the coin would buy one ninth more bullion than was in it, but if
there were any further rise the citizens would begin to take coins to
the mint. After the ten per cent. charge was taken out they would
receive a coin which, though containing one tenth less bullion, would be
worth very nearly the same as the metal taken to the mint. No
considerable depreciation could take place unless the volume of business
fell off so that less money was needed than at the old standard. In that
case there would be no outlet for the excess of coins until they fell to
their bullion value, <i>i.e.</i>, till they lost the entire value of the
seigniorage, the monopoly element in them. Melting or exporting them
before that point was reached would cause the loss of whatever element
of seigniorage value they contained.</p>
<div class="sidenote">Example of excess and depreciation of coins</div>
<p>Assuming that the volume of business, or sum of exchanges, remains
unchanged, let us consider what will result if the government begins to
issue "on its own account." The number of coins might be increased until
at the bullion price the total money value were equal to the original
100,000 full-weight coins, at which point exportation would take place.
There being nine tenths as much precious metal as before, it would
require ten ninths as many pieces, or 111,111 pieces, to have as great a
value as the 100,000 had before. At this point there is no further
profit to the government in issuing coins of that weight. To make a
further profit it must again reduce the amount of pure metal in the
coin.</p>
<div class="sidenote">Medieval examples of depreciation</div>
<p>This is essentially what occurred often throughout the Middle Ages. A
ruler debased the quality or reduced the weight of money, but for a time
the new coin, having the same money use, circulated as freely as the old
coin. If,<span class="pagenum"><SPAN name="Page_445" id="Page_445">[Pg 445]</SPAN></span> as so often happened, the ruler yielded to the temptation to
issue more in order to get the profit, the older, heavier coins at once
began to go abroad or into the melting-pot. Then occurred a fall in
value, mystifying alike to the prince and the people. The reason is now
perfectly plain: the number of pieces issued had not been kept within
the proper limits, and the coins went down to their bullion value.</p>
<div class="sidenote">Difficulties with full-weight subsidiary coins</div>
<p>2. <i>Subsidiary coins of lighter weight than the standard, if properly
limited, will remain in circulation at par.</i> Money to serve all of its
purposes must be of different denominations. The amount required of each
denomination is determined by the volume of exchanges for which each is
most convenient. Each kind of money, as the penny, nickel, dime, has its
own peculiar demand and its saturation point. For the smaller
denominations the standard metal is not suitable. A gold dollar cannot
well be cut into twenty or a hundred pieces. Thus copper, nickel, silver
remain in restricted use. When these are issued at their bullion value,
difficulties arise; not only are they too heavy, but as they vary in
bullion value, some of them become worth more as bullion than as coin,
and suddenly disappear from circulation.</p>
<div class="sidenote">Adoption of light-weight minor coins</div>
<div class="sidenote">Theory of light-weight coins</div>
<p>This happened often throughout the Middle Ages and until the nineteenth
century. Gold and silver generally were coined at a ratio of weight
corresponding exactly to their market ratio at a given moment, and every
time the market conditions varied, one kind of the money went out of
circulation, and the country was left either without the larger gold
coins, or without subsidiary coin, or "small change." At length the plan
was hit upon of issuing a limited number of subsidiary coins of less
than full bullion value, that is, as "token coins." By this plan there
is given to the minor coins a value greater than that of the bullion in
them. The small profit made by the government on every penny, nickel, or
dime issued, is a seigniorage charge. These minor coins, in somewhat
confusing variety,<span class="pagenum"><SPAN name="Page_446" id="Page_446">[Pg 446]</SPAN></span> circulate side by side with full-weight money, their
value depending on the monopoly principle. The result of a large issue
of any one denomination would be a lowering of its value. In practice
their issue is determined by the needs of business and by the requests
of citizens for small coins in exchange for standard money. One needing
"change" gets it at the bank; when the bank finds its supply falling
short it gets more from the government mints. As business increased in
1898, the demand for nickels, dimes, and quarters became unprecedented,
and the mints worked night and day to supply them.</p>
<div class="sidenote">Gresham's law</div>
<p>3. <i>Gresham's law of the circulation of coins of different bullion value
is: bad money drives out good money.</i> This so-called "law" was stated in
these circumstances: England had two kinds of metal money, silver and
gold, which were coined at a fixed ratio in weight; and as the market
value of the bullion changed, the new full-weight coins of the metal
rising in value went out of circulation. The coining of the cheaper
metal caused the melting or exporting of the one becoming dearer, and
for those purposes the coins containing the most bullion were picked.
Likewise full-weight coins disappear whenever money of less bullion
value (either because containing more alloy, or because made of a
cheaper metal or of paper) is poured into the circulation in large
quantities.</p>
<div class="sidenote">Proper interpretation of Gresham's law</div>
<p>Gresham's law needs some explanation, for it is frequently
misunderstood. "Bad" money means money that has not the bullion value
equal to its money value, money that is either debased in quality or
light in weight. But not every piece of bad money will drive out every
piece of good money. If that were so, a single bad penny would drive out
of circulation all the gold. The law applies only under certain
conditions. The "good" will leave the country only if the total amount
of money in circulation is in excess of what would be needed if all were
of full weight or best quality. Paradoxically speaking, if there is not
too much of the bad<span class="pagenum"><SPAN name="Page_447" id="Page_447">[Pg 447]</SPAN></span> money, it is just as good as the good money. The
good money may not leave the country. It may be hoarded, or be picked
out by banks and savings-institutions to retain as their reserve, or it
may be melted for use in the arts. Gresham's "law" is thus a practical
precept: keep the amount of token or light-weight coin limited to the
field of its peculiar use, or it will cause the other forms, the fuller
weight money, to leave for a better market. That better market may be
the melting-pot or it may be a foreign country.</p>
<h4>§ II. PAPER MONEY EXPERIMENTS</h4>
<div class="sidenote">Nature of paper money</div>
<div class="sidenote">The legal-tender quality</div>
<p>1. <i>Government paper money may be defined as money for which a
seigniorage of one hundred per cent. is charged.</i> The order in the study
of the money question is from seigniorage to paper money, because paper
money embodies the principle of seigniorage in its extremest form. The
issue of paper money grew out of the practice of debasing metal. The
gain of seigniorage from paper money is greater and is just as easily
secured. Government paper money is sometimes called "political money,"
in contrast with money whose value rests on the value of its material.
In this sense, however, all coins containing an element of seigniorage,
or monopoly value, are to that degree "political" money. The typical
paper money is irredeemable, that is, it cannot be turned into bullion
money on demand. It was simply put into circulation with the
legal-tender quality. The "legal-tender" quality is the declaration of
the government that the paper money must be accepted by citizens as a
legal discharge for debts due them. The object of this is to compel
people to use it as money whether they will or not. The purpose of the
government in thus employing its power over the circulating medium is
usually to profit, that is, to secure the value of the seigniorage for
public purposes. Paper money differs from bank-notes in that it does not
depend for its redemption on the credit of the issuer. It<span class="pagenum"><SPAN name="Page_448" id="Page_448">[Pg 448]</SPAN></span> differs from
bonds in that its value is not based on the interest it yields, but
solely on its money uses. The issue of paper money may save the
government the payment of interest on an equal amount of bonds. The
promise to receive paper money in payment for taxes or for public lands,
may help to maintain the value of the notes by reducing their quantity,
but nothing short of prompt exchange for standard coins makes them truly
redeemable.</p>
<div class="sidenote">Examples of paper money in the eighteenth century</div>
<p>2. <i>The most notable examples of paper money in the eighteenth century
were the American colonial currencies, the continental notes, and the
French assignats.</i> In all the American colonies before the Revolution
notes or bills of credit were issued which were in most cases legal
tender. Without exception they were issued in large amounts and without
exception they depreciated. Parliament forbade the issues, but to no
effect. The continental notes were issued by the Continental Congress in
the first year of the war (1775), and for the next five years. The
object at first was to anticipate taxes, and it was expected that the
states would redeem and destroy the notes, but this was not done. The
notes passed at par for a time, but depreciated rapidly as their number
increased. The country had less than $10,000,000 of coin before the war,
and when, in 1780, over $200,000,000 of notes were in circulation they
were completely discredited; hence the phrase "not worth a continental."
Specie quickly came back into use. A few years later the leaders of the
French Revolution, failing to learn the lesson of the American
experience, issued, on the security of land, notes called assignats in
such enormous quantities that they became worth no more than the paper
on which they were printed. In a figurative sense they may be said to
have fallen to their "bullion" value.</p>
<div class="sidenote">More recent examples of paper money</div>
<p>3. <i>Notable examples of paper money in the nineteenth century were the
English bank-notes in the years 1797-1820, and the American greenbacks,
1862-79.</i> There have been many other examples. During the
Franco-Prussian<span class="pagenum"><SPAN name="Page_449" id="Page_449">[Pg 449]</SPAN></span> War, France, through the medium of its great state
bank, issued notes which only slightly depreciated. At the present time
many countries—Russia, Austria, Portugal, Italy, all the South American
republics—have depreciated paper currencies. But the English bank
restriction of 1797-1820 is notable because it gave rise to the
controversy which did most to develop the modern theory of the subject.
The Bank of England was forbidden to redeem its notes in coin because
the government wished to borrow all the coin the bank had. The result
was the issue of a large amount of bank money not subject to the
ordinary rule of redemption on demand. It was virtually government paper
money. The notes depreciated and drove gold out of circulation, and not
until 1820 was there a return to specie payments.</p>
<div class="sidenote">The greenbacks</div>
<p>The United States under the constitution did not try paper money till
1862 when paper notes (called greenbacks, because of the color of ink
with which the reverse side was printed) were issued as a war measure to
the amount of about $450,000,000. Other interest-bearing notes were
issued with legal-tender quality and circulated as money to some extent.
Greenbacks depreciated in terms of gold, and gold rose in price until,
in June, 1864, it sold at two hundred and eighty a hundred. Fourteen
years elapsed after the war before these notes rose to par, in terms of
gold.</p>
<div class="sidenote">Evil effects of political money</div>
<p>4. <i>Paper-money issues usually have had injurious effects on general
industry.</i> The purpose of the issue of paper money is generally to
relieve the financial necessities of the government. It is a costly
expedient, resorted to only in desperate extremities. A result usually
unintended is the derangement of business and of the existing
distribution of incomes. The rapid and unpredictable changes in prices
give opportunity for speculative profits, but most legitimate business
is injured. This incidental effect on debts and industry becomes the
main motive of some citizens in advocating the issue. It is peculiarly
liable to be the subject of political intrigue and of popular
misunderstanding.</p>
<p><span class="pagenum"><SPAN name="Page_450" id="Page_450">[Pg 450]</SPAN></span></p>
<h4>§ III. THEORIES OF POLITICAL MONEY</h4>
<div class="sidenote">Commodity-money theory</div>
<p>1. <i>The commodity-money theorists declare that government is powerless
to influence value, or to impart value to paper by law.</i> There are two
extreme views regarding the nature of paper money, and a third which
endeavors to find the truth between these two. First is that of the
commodity-money theorists, or the cost-of-production theorists, who will
not admit that there is any other basis for the value of money than the
cost of the material that is in it. Money made of paper, on a printing
press, has a cost almost negligibly small, and, therefore, they say it
can have no value. The fact that it does circulate, and is treated as if
it had value, is explained by the commodity theorists as follows: While
the paper note is a mere promise to pay, with no value in itself, it is
accepted because of the hope of its redemption, just as is any private
note. Depreciation in this view is due to loss of confidence; the rise
toward par measures the hope of repayment. Such a view overlooks the
feature in which paper money differs from ordinary credit paper. The
value of one's promise to pay depends on his reputation and his
resources; the resources constitute the basis of value. Bonds have value
because they yield interest and are payable at a definite time in
standard money. But paper money, lacking this basis for its value, has
another basis in its money use, in its power to buy goods. The money
demand in connection with the monopoly power of government over the
money supply, furnishes a satisfactory logical explanation of the value
of paper money.</p>
<div class="sidenote">Fiat-money theory</div>
<p>2. <i>The fiat-money advocates assert that government has unlimited power
to maintain the value of paper money by conferring upon it the
legal-tender quality.</i> The meaning of fiat is "let there be," and the
fiat-money advocates believe that the government has but to say, "let it
be money," to invest paper with value. The typical fiat advocates in
the<span class="pagenum"><SPAN name="Page_451" id="Page_451">[Pg 451]</SPAN></span> United States were the "Greenbackers," those voters who wished to
retain the paper money issued in the Civil War, and to increase its
amount greatly. They saw in paper money an unlimited source of income to
the government. They proposed the payment of the national debt, the
support of the government without taxes, and the loan of unlimited money
without interest to citizens. All might live in luxury if the extreme
fiat-money theorists could realize their dream. There are still some
survivors of this faith in the power of the government fiat. The
depreciation that has taken place in every case where government notes
have been issued, they declare to be due to a too mild enforcement of
the law of legal tender. To them the fact that paper money may circulate
for a time at par appears a reason why it always should. They do not
admit that there is a saturation point in the use of money, and that its
use is still further limited by the fear of larger issues. They do not
see that the ultimate basis of the value of paper money is economic,—is
in its money use, not in the fiat of the government.</p>
<div class="sidenote">Theoretical possibility of a good paper money</div>
<p>3. <i>A sound theory of paper money makes it a special case of monopoly
value.</i> It has been seen that the power of almost every monopoly over
price is relative, not absolute. As the power of a great private
corporation over the price of its product is limited, so is that of the
government over the value of political money. The money use is the
source of value to the paper notes. Business conditions remaining
unchanged, the limit of possible issue without depreciation is the
number of units in circulation before the paper money was issued, the
saturation point of full-weight and full-value coins. Because
governments generally have not stopped at that point, paper money has
depreciated. Popular error and selfish interests force legislation
beyond the reasonable limit. In a few cases only have there been public
integrity and courage enough to retrace the steps before great harm
resulted. It is principally this lack of control that prevents paper
money from being a good circulating medium.</p>
<p><span class="pagenum"><SPAN name="Page_452" id="Page_452">[Pg 452]</SPAN></span></p>
<div class="sidenote">Influence of law on value</div>
<p>It is sometimes said that government cannot affect value in any way, but
it can do so in many ways. Certainly one of the most remarkable is by
the use of its monopoly power over the medium of exchange, whereby it
can, under certain conditions, cause a piece of paper to have the value
of a piece of gold. Thereby at the same time it affects the interests of
nearly every member of society, raising or lowering the value of many
kinds of property, and of many incomes.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_453" id="Page_453">[Pg 453]</SPAN></span></p>
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