Government paper money is of three sorts, the classification being based on the proportionate reserve of standard money which the Treasury keeps on hand to redeem credit money, and to instil into the people's mind the government's intent and ability to redeem on demand. The longer the credit money stays in circulation, that is, the fewer the presentations for redemptions, the smaller may this reserve be; but the very size of this reserve may be a deciding factor in delaying such presentations.

Certificates. The first class of government paper has full face value in standard money in reserve. The silver dollar by reason of its size and weight is awkward and burdensome for commercial uses; except in limited areas of the country which have become thoroughly habituated to its use, it will not circulate, but drifts at once to bank reserves and the government Treasury. Nor is its circulation desirable, for the losses from erosion are heavy. A simple device used by the government to obviate these difficulties is to give to any depositor of silver dollars or silver bullion certificates of deposit certifying that the government holds on hand face value of silver which is payable upon demand.

As only a few of the certificates will be presented for redemption, it is not necessary that much of the silver be coined.

Certificates are really warehouse receipts and, like any receipt of this kind, their value takes into consideration the character of the warehouseman and his warehouse. Because the government and the Treasury stand in such high esteem, currency certificates are accepted generally and without equivocation, but that this form of paper money does not add to the total of existing currency is nevertheless evident.

Convertible Paper. The second class of paper money has a fraction of its face value held in reserve in standard money, to meet demands for redemption. It is spoken of as "convertible," that is, the Treasury stands ready to redeem it at any time. As long as this convertible money is faithfully and freely redeemed, the promises are worth their face value; any distrust, however, results in a run on the Treasury, which, if great and long continued, may exhaust the reserve fund. The government may also suffer reverses in revenue receipts, or expenditures may be extraordinary, and its ability to carry on conversion may be impaired. While a reserve of 100 per cent is at no time necessary, since there is no probability of a simultaneous demand on the part of all holders, it is nevertheless expedient to keep a considerable reserve; one of the best evidences of the intention and ability of the government to fulfil its promises to redeem is the creation and maintenance of a special fund for this purpose. The fund should be separate from the general funds of the Treasury and be used exclusively for redemption purposes; the size of the fund must vary with the probability of the demand for conversion, which must be determined from experience and from the contingencies of the government credit.

It is also important to note that ultimate redeemability is not equivalent to immediate convertibility. If the paper is immediately convertible it stays at par, but if redeemable only after a period of indefinite length it will be regarded as an investment or as a deferred payment, and its present value will differ from its face value by discount for interest and risk. In this case it does not matter whether the issuing government is rich in natural resources; it is the present means of payment that maintains the parity.

The reserve held may be determined in several ways, such as the following: It may be a minimum percentage required, the issue and the reserve bearing a predetermined minimum ratio; or it may be a certain fixed minimum quantity of specie whose ratio to the issue would vary inversely with the amount of issue; or the reserve may consist of securities and gold, the law fixing the maximum amount of the "uncovered" issue (the notes backed by the pledged securities) and requiring the excess above that amount to be "covered" by 100 per cent of gold.

Inconvertible Paper. The third class of government paper money is variously called "fiat" money, "political" money, and "inconvertible" paper money. This kind usually results from excessive issues of convertible paper money so large that the citizens doubt the government's ability or intention to redeem on demand, a doubt which is later justified by an actual suspension of specie payments. These inconvertible bills are promises of the government to pay on demand, though at the time of issue the government may have no intention of keeping its promise. Sometimes they are issued as orders on the Treasury to pay upon demand, the government well knowing the Treasury's inability to meet such demands; and sometimes they are simply printed statements proclaiming the bills to be the equivalent of such and such amounts of metallic money.