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232 THE PRINCIPLES OF ECONOMICS

Mexico—even China and other Oriental countries—are striving to attain it.

In all these countries other kinds of money are used side by side with gold and silver. The actual money consists of a wide and confusing variety: silver, nickel, copper, paper in various forms and issued by various authorities. But among all the kinds, either gold or silver is found standing preeminent and in a peculiar position. The difficulties of the money problem must be attacked at the point of standard money where it is nearest to ordinary value problems and is less complicated than when the various money substitutes are included. Most of the fallacies regarding money have arisen not about standard money, but about paper and lightweight silver.

3. Coinage is the act of shaping and marking a piece of metal to be used as money so as to indicate its weight and defined fineness. The precious metals can and do circulate as money without coinage. Any other mark equally plain and equally recognizable serves for many purposes just as well as the government stamp on the standard metal. The use of metals in antiquity was without coinage, by weight and test of fineness. In backward countries to-day most payments are made by weight. International payments are made by means of gold ingots that bear the mark of some well-known bankinghouse, and for tha t purpose gold bullion is money without the coiner’s stamp. But for most uses government coinage has marked advantages. It is far more convenient for the average citizen to handle coins uniform in size and design than the diverse coins that would be put out by private enterprisers.

An established rate of fineness insuring uniform quality is a great convenience. In the United States all gold and silver coins are nine tenths fine; in Great Britain, eleven twelfths. The established weight of the gold dollar in the (p. 434) United States is twenty-three and twenty-two hundredths grains of fine gold or twentyfive and eight tenths grains of standard gold. The limit of tolerance is the variation either above or below the standard weight or fineness that a coin is allowed to have when it leaves the mint. The par of exchange between standard coins of different countries is the expression of the ratio of fine gold in them. Thus the par of exchange between the American dollar and the English sovereign (the “pound”) is four and eighty-six and two third hundredths, that is, four and eighty-six and two third hundredths dollars contain the same amount of gold as an English gold sovereign. The embossed design, milled or lettered edges, and other similar devices are merely to make the coins easily recognizable and difficult to counterfeit.

4. Seigniorage is the right the ruler or state has to charge for coinage, or it is the charge made for coinage. Coinage as a function of great importance politically as well as economically was early exercised by governments or rulers. The prince, king, or emperor stamped his own device or portrait upon the coin; hence the term seigniorage from seignior (meaning lord or ruler). The right to issue money came to be one of the most essential prerogatives of sovereignty. Coinage is rarely without charge, and often has been a source of revenue to the ruler. In the Middle Ages this right was frequently exercised by princes for their selfish advantage to the injury and unsettling of trade.

When no charge is made for coinage, the coinage is said to be gratuitous. Coinage is said to be free if the subject or citizen can take bullion to the mint whenever he pleases, paying the usual seigniorage. Coinage is limited if the government or ruler determines when coinage is to take place. Thus, coinage may be both free and gratuitous, when citizens are allowed to bring bullion whenever they please and have it converted into coins without charge or deduction. But coinage is free without being gratuitous when any citizen (p. 435) may bring metal to the mint, whenever he chooses, to be coined subject to the seigniorage charge.

5. Where coinage is free and gratuitous the coin is worth the same as the bullion that is in it. This evidently and necessarily must be near the truth if the citizens exercise their right. They

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will not long keep metal uncoined in their possession when it is worth more in the form of money, nor will they long keep money from the melting-pot when it is worth more as bullion. Yet there may be a slight disparity between the bullion and the money values before the metal is converted into coin or the coin melted down into metal. A motive for action must exist before either change will be made; but a thing cannot have considerably different values in two different uses at the same moment.

There is here no special problem of value. The value of gold as bullion and money is fixed by marginal demand. The several uses of gold are constantly competing for it: its uses for rings, pens, ornaments, champio nship cups, pho tography, dentistry, delicate instruments, and as a circulating medium. If the metal becomes worth more in one use, its amount there is increased and correspondingly diminished in the others. The supply likewise is influenced by changes in price. Goldmining is one among various industries to which men may apply their labor and capital. Some mines are superior, others average, others marginal which it barely pays to work. There is, therefore, a rise and fall of the margin of production with change in price and change in cost of production. If at a given moment, when it barely pays to work a mine, gold becomes worth less, that mine will go out of use. As gold rises, some mines that did not pay before, come into use. A similar variation has been noted in the case of marginal land, marginal factories, marginal forges, and marginal agents of every kind.

The question was once asked in Parliament, “What is a pound?” and a good question to ask in beginning the study of money is, “What is a dollar?” The answer, so far as it (p. 436) refers to the standard money, is: a dollar is a convenient name applied to twenty-three and twenty-two hundredths grains of line gold or twentyfive and eight tenths grains of standard fineness. The exchange value of gold varies in different places and conditions, but the name remains the same. A dollar exchanges for more wheat in Dakota than in New York or for more iron in Pittsburg than in Oregon, yet it is sometimes asserted that the value is always the same because the name is always the same. The fallacy of this may be seen in the equivalent expression that twenty-three and twenty-two hundredths grains of gold have the same value always and under all circumstances.

The problem of the bullion value of money metal, under gratuitous coinage, presents no special difficulties. The ordinary theory of value applies to it. The difficulties of the money question begin at the point where the money value is seen to diverge from, and depend on, something else than the value of the bullion. Yet in the principles just discussed are found a firm foundation for any further study of the question.

§II. THE QUANTITY THEORY OF MONEY

1.The fundamental use that money serves is to apportion incomes of goods so as to make them yield the maximum gratification. Money first increases utility by increasing the ease with which exchange takes place. Like any tool or agent, it is valued for what it does or helps to do.

But further, it enhances the sum of enjoyments by the division of goods into proper quantities, making them available at the best time. It follows from the principle of diminishing utility that the particular time at which goods are available for wants has an essential bearing on their value. A hundred loaves of bread in the hands of a single individual would mold long before they could be consumed. Money enables men in society to acquire these hundred loaves in a series so that they (p. 437) can be used when most needed. Money is the most suc cessful device man has ever discovered for distributing the supplies of a journey along its course, and the goods of daily need

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over a period of time. The use of money as a storehouse of value is merely an extreme case of keeping things for the future when they will have a greater gratifying power.

The fact that money is essentially a valuable good kept on hand as the best possible provision against emergencies points to the essential nature of the money demand. Money is sought, in order to form a cash reserve, up to a point where the loss from keeping it balances the probable gain. The money use is subject to the law of diminishing utility; beyond a certain point its added convenience is purchased at too great cost. Every man may be thought of as having an average, or usual, money demand, which is that proportion of his income that gives him more utility retained in money form than if at once expended. A man with an income and expenditure of fifty dollars a month paid monthly has use ordinarily for no more than fifty dollars as his cash reserve. While under ordinary circumstances this is his maximum demand, various circumstances may diminish it. If his expenses are distributed in two equal parts (the one on pay-day, the other thirty days later) his average money demand is twentyfive dollars, not fifty dollars. If most of his purchasing is done at the beginning of the month, his average money demand may be perhaps ten dollars. Many a workman purchases on credit, spends his fifty dollars within an hour after he receives it and goes without money for the rest of the month. The average demand of a community for money required as a reserve is affected by the methods of doing business. With a given method of use a reduction in the supply of money results in loss of time and waste of effort; an increase in the supply results in a lowering of its value relative to other things. In either case the equilibrium of the marginal utilities of income must be restored. The (p. 438) thought of an average, rational, money demand relative to money income is the fundamental requisite for clear thinking on the question of money, but to grasp this thought there is needed a certain power of scientific imagination lacking in some minds.

2. The quantity theory of money is that, other things being equal, the value of money falls as its quantity increases, and vice versa. This is an abstract statement of a concrete and difficult problem. The phrase “other things being equal” betokens the statement of a tendency where there are several unknown factors. In recent discussion the quantity theory of money has been questioned by some critics; yet it is held by most economists to be merely the general law of value as applied to money. There are three sets of facts to be brought into relationship with each other in the quantity theory: (1) amount of business or exchanges to be effected; (2) the methods by which this is done; (3) the amount of money available to do it. According to the quantity theory we must expect that when conditions (1) and (2) remain fixed, the value of money will vary inversely as its quantity. This conclusion follows from the conception of the money demand as the value of circulating medium that bears an average proportion to the value of goods exchanged.

Let us consider various conditions. When a number of men, by reason of increasing gold supplies, get larger stocks of money than they have had, the former proportion between their money incomes and their money is altered. In reducing their stock of money by buying goods they bid up the prices of goods until the total value of goods exchanged again bears the same ratio as before to the total value of money. Taking an extreme case: if twice as many dollars get into circulation in a community, either some few men must have several times as many dollars as before, while others have the same; or every man will have his due proportion, just twice as much as before. The latter, “other (p. 439) things being equal,” must be the logical result after equilibrium has been restored. Is any other result thinkable? Now if prices of goods remained the same as before, there would be twice as great a value of money available to effect exchanges. There is no reason why each should tie up twice as large a proportion of his income in a supply

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of the medium of exchange. If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the exchange value of money, a general bidding up of prices of goods. At what point will this movement stop? The rational conclusion must be that “other things being equal” equilibrium will be reestablished only when the ratio between the value of money and the price of goods becomes the same as before. The money being doubled, prices must be double, and likewise for any other change in quantity.

3. The quantity theory is misunderstood, and is criticized on the ground that the facts oppose it. If but one kind of metal were used as money, and this were coined of uniform weight and fineness, the problem would be comparatively simple. But in fact gold and silver, fullweight and lightweight coins, circulate side by side. More mysterious still, the money in circulation is partly coin and partly paper. How can the quantity theory hold in these conditions? Several objections to the quantity theory are presented. It is said, first, that prices do not vary exactly with the per capita circulation of different countries at a given moment. The per capita circulation in Mexico may be five dollars and in the United States twentyfive dollars, while prices are much less than five times as great here as in Mexico. Secondly, it is said that prices do not vary directly with changes in the amount of money in a given country. There is now perhaps five times as much money per capita in the United States as fifty years ago and yet prices are not five times as high. Thirdly, it is said that credit methods change, and therefore that money does not fix prices. Fourthly, it is said that even if true of primary money the theory fails to apply to actual (p. 440) conditions with many forms of money in circulation side by side. Fifthly, it is said that there are too many unknown quantities to permit the rule to be used.

4. A reasonable interpretation of the quantity theory makes it a statement of the effect of a change in a single factor. The objections to the quantity theory assume that it is a statement of what occurs under all conditions, instead of what it is, an index to the working of one condition at a time. The foregoing objections need but to be further analyzed to show that in each of them it is not merely the quantity of money, but a number of other factors that differ in each of the propositions. We may note briefly in turn the defects in the arguments of the preceding paragraph.

First, the quantity theory does not remotely imply that prices in different countries differ at a given moment according to the per capita money. In the case of the United States and Mexico not only the amount of exchange per capita but the method of exchange, and the rapidity of the circulation of money differ quite as much, doubtless, as does the per capita circulation. The quantity theory would lead any fairly careful student to a conclusion the exact opposite of that which its critics have twisted from it.

Second, the quantity theory does not imply that during a period of years when a country is changing in a multitude of ways, as in population, methods of industry, modes of exchange and transportation, and in wealth and income, the prices will vary directly either as the absolute or per capita amount of money does. In the light of the quantity theory the inquirer must be led to just the opposite of the ridiculous conclusion imputed to it.

Third, the theory does not overlook the effect of an increased use of credit, for it fully implies that any such a change, by economizing the use of money, would enable the same amount of money to support a higher scale of prices.

Fourth, the theory does not overlook the variety of forms, and is not true merely of primary money. However great (p. 441) this variety, the money demand of individuals and of communities still represents a pretty definite ratio of the value of exchanges effected. If the primary money alone were doubled in quantity, while the various forms of substitute money (smaller

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coins, bank-notes, government notes, etc.) remained unchanged, the quantity of money as a whole would not be doubled, and according to the theory, prices would not be expected to double. Indeed, in such a case, the method of exchange would be very greatly altered, and the case is fully covered by the statement of the theory.

Fifth, despite the number of changing factors affecting the methods of exchange, the method of business, etc., the quantity theory is a rule usable at any moment. These various factors change slowly, and the quantity theory answers the question, What change occurs in prices as a result of an increase or decrease of the money in a given community at a given moment? Like the law of gravitation, the law of projectiles, and the statement of the chemical reaction to be expected when adding some substance to a given compound, the theory must be interpreted with practical limitations. When the quantity theory is thus stated and understood, its negation is unthinkable, as is evidenced by the involuntary use made of it constantly by every one of its few critics in explaining the simplest monetary phenomena.

5. The quantity theory makes intelligible the great and rapid changes in price that have followed sudden changes in the money supply. Inductive demonstration of broadly stated economic principles is difficult, but in no other economic problem is laboratory experiment so nearly possible as in that of money. Many inflations and contractions of the circulating medium have occurred, now in a single country, again in the entire world, and the local or general results have served to exemplify richly the working of the quantity principle. With the scanty yield of silverand goldmines in the Middle Ages, prices were low. After the discovery of America, especially in the sixteenth century, quantities of (p. 442) silver flowed into Europe. The great rise of prices that occurred was explained by the keenest thinkers of that day along the essential lines of the quantity theory, though there were many monetary fallacies current at the time. The experience in England during the Napoleonic wars, when the money of England was inflated and prices rose above those of the Continent, led to the modern formulation of the theory by Ricardo and others. The discovery of gold in California and Australia, in 1848–50, increased the gold supply marvelously, and gold prices rose throughout the world. Between 1870 and 1890 the production of gold fell off greatly while its use as money increased and prices fell. A great increase of gold production has occurred in the period since 1890. In part the rising prices from 1897 to 1902 are explicable as the periodic upswing of confidence and credit, but in part doubtless they are due to the stimulus of increasing gold supplies. These are but a few of many instances in monetary history which, taken together, make an argument of probability in favor of the quantity theory so strong as to constitute practically its inductive proof.

CHAPTER 46

TOKEN COINAGE AND GOVERNMENT PAPER

MONEY

§I. LIGHT-WEIGHT COINS

1.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. 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.e., 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 fullweight metal. If more than that amount gets into circulation it becomes worth less as money than as bullion, and it is melted or exported.

If this full supply of money at a given moment is 100,000 (p. 444) 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.e., 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.

Assuming that the volume of business, or sum of exchanges, remains unc hanged, 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 fullweight 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.

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, (p. 445) 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

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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.

2. Subsidiary coins of lighter weight than the standard, if property limited, will remain in circulation at par. 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.

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, (p. 446) circulate side by side with fullweight 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.

3. Gresham’s law of the circulation of coins of different bullion value is: bad money drives out good money. This so-called law was named of late for Sir Thomas Gresham who explained it to Queen Elizabeth when counseling her to recoin the debased money of the realm as was done in 1560. He showed that when worn and new coins were used together, the lighter ones remained as money, while the heavier ones were picked out by jewelers and by those needing to send money abroad. For like reasons it happens that when two metals, as gold and silver, may be legally coined at a fixed ratio in weight, and the market ratio of the two metals as bullion changes, the one rising in value goes out of circulation and ceases to be further coined.

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 go ld. 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 (p. 447) 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 savingsinstitutions 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 lightweight 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

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be a foreign country.

§II. PAPER MONEY EXPERIMENTS

1.Government paper money may be defined as money for which a seigniorage of one hundred per cent. is charged.

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 legaltender quality. The “legaltender” 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 (p. 448) 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.

2. The most notable examples of paper money in the eighteenth century were the American colonial currencies, the continental notes, and the French assignats. 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.

3. 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. There have been many other examples. During the Franco-Prussian (p. 449) 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

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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.

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-tend er 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.

4. Paper-money issues usually have had injurious effects on general industry. 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 incid ental 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. 450)

§III. THEORIES OF POLITTCAL MONEY

1.The commodity-money theorists declare that government is powerless to influence value, or to impart value to paper by law. 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 commoditymoney 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 ne gligibly 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 va lue of paper money.

2. 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. The meaning of fiat is “let there be,” and the fiatmoney advocates believe that the government has but to say, “let it be money,” to invest paper with value. The typical fiat advocates in the (p. 451) 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

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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 fiatmoney 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.

3. A sound theory of paper money makes it a special case of monopoly value. It has been seen that the power of almost of 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 fullvalue coins. Be cause 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. 452)

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.

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