§ 13. Theories of political money. 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 cost-of-production theorists, who declare that government is powerless to influence value or to impart value to paper by law. They deny 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 facts that it does circulate and that it is treated as if it had value are explained by the cost-of-production 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, according to this view, is due to loss of confidence; the rise toward par measures the hope of repayment.

Taking a very different view, the extreme fiat theorists assert that the 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 fiat-money advocates believe that the government has but to say, "Let it be money" to impart value to a piece of paper. The typical fiat-money advocates in the United States were the " Greenbackers," who wished to retain the greenbacks issued in the Civil War and to increase the 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 money without interest to citizens. All might live in luxury if the extreme fiat-money theorists could realize their dream. The depreciation that has taken place in nearly every case where government notes have been issued, the fiat theorists declare to be due to a 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 recognize that there is a saturation point in the use of money.

The almost universally accepted opinion among economists rejects both of these views, while recognizing in each a certain limited aspect of the truth. The cost-of-production view overlooks the features in which paper money differs from ordinary credit paper. The value of a man's promises 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.

§ 14. Political money; theory and practice. The theory of paper money here outlined explains the value of paper money as a special case of political monopoly. As the power of any private monopoly over price is relative, not absolute, so is that of the government over the value of political money. The money use is the source of value of the paper notes. It is this that gives the economic condition for value in paper money and strictly limits the power of the government—a fact overlooked by the fiat theorists. Business conditions remaining unchanged, the limit of possible issue with out depreciation is the number of units in circulation before the paper money was issued, the saturation point of full-weight and full-value coins. Under wise and honest control and regulation, political paper money might serve the monetary function very effectively. Since the end of the World War, from various quarters has been advanced the plan of an international paper money, to be issued by some organization like a world federal reserve bank. The amount and value of the notes would be regulated in conformity with the gold standard. To monetary students this plan is not new and is theoretically sound except for the political difficulties likely to arise.

Resorted to in desperate extremities, political money has usually proved to be a costly experiment. Once the issue of political money begins to be excessive, its further limitation proves to be most difficult. 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 injure legitimate business. This incidental effect on debts and industry offers the main motive to some citizens for advocating the issue of paper money. It is peculiarly liable to be the subject of political intrigue and of popular misunderstanding. It is this danger, more than anything else, that makes political money in general a poor kind of money.

References

Jevons, W. 8., Money and the mechanism of exchange. N. Y. Appleton. 1875. Chs. VIII, XVII, XVIII. Johnson, J. F., Money and currency. Bost. Ginn. 1905. Chs.

XIII-XVI. Kemmerer, E. W., Modern currency reforms. N. Y. Macmillan.

1916. P. 541. Phillips, C. A. N. Y. Macmillan. 1916. Chs. IV, V, XII. United States Director of the Mint, Annual reports. Walker, F. A., Money. N. Y. Holt. Chs. VIII-XII. White, Horace, Money and banking illustrated by American History.

Bost. Ginn & Co. 1914. Bk. II, chs. III-VI.