The use of paper money as an element in the circulating medium is justified on the ground that it economizes the use of metallic money. The production of gold and silver requires the outlay of much labor and capital. If paper money can be safely utilized to take the place of gold and silver as a circulating medium, less of the precious metals will have to be mined and more labor and capital can be devoted to the production of other want-satisfying goods. Paper money is confined, of course, to the country issuing it, as gold alone enjoys such universal confidence as to make it available for the settlement of international balances.

As already noted, inconvertible government paper money has usually been issued to meet some fiscal emergency, when the Government could not meet its obligations by the usual methods of taxation or borrowing. By issuing irredeemable notes the Government virtually procures a forced loan without interest from the whole community using them. But as a rule this temporary fiscal advantage is followed by a train of evils. Experience shows that the cheapness and ease of putting out fiat money leads almost invariably to overissue, with resulting depreciation, expulsion of gold, and great disturbance of commodity prices and of business in general. Irredeemable notes are simply promises to pay a certain amount of money at some time in the future. The fact that this future payment is quite indefinite and uncertain and that the notes do not bear interest leads inevitably to depreciation. People will not knowingly give up present values for future uncertainties unless they are compensated in some way for the risk. In the case of fiat money this compensation is reflected in the discount at which people are willing to take it in exchange. As the discount on these notes varies greatly from time to time they are a most unsatisfactory medium of exchange.

Fiat money is issued usually to meet fiscal needs, and so in amount has no relation to the actual monetary needs of business. If this latter need does not increase at the time of, and in proportion to, the issue of fiat money, the metallic money of the country will disappear. Then, if further issues are put out, so that the total quantity is largely in excess of the metallic money displaced, prices will no longer be quoted in gold but in the depreciated notes, which become a secondary standard of value. As the notes fall in value, prices rise, but with wide and sometimes violent fluctuations. Inflated and fluctuating prices result in the derangement of all normal business transactions and the encouragement of speculation. The ordinarily conservative business man finds it impossible to forecast future costs and profits, and sound business methods give place to chance and speculation. The speculative fever spreads to all classes, creating fictitious values and standards of living and undermining the foundations of both personal and business integrity.

Strangely enough, the issue of fiat money commonly meets with popular approval, at least in its early stages. Rising prices appeal to producers and to the debtor class, who find it easier to pay their debts contracted when prices were low. The mass of people take the short view, seeing only the temporary benefits accruing from rising prices and the artificial stimulation to business due to fiat money; they do not see, until too late, that the issue of such money beyond the limit of absorption by ordinary business must be followed by contraction, falling prices and loss.