The gold standard act of 1900 made it the duty of the Secretary of the Treasury to maintain all forms of money coined or issued by the United States at a parity of value with gold. In fact, since the resumption of specie payments by the Government in 1879, all forms of money have been kept at a parity with gold, though gold has formed but a small part of the total money supply.
Gold coins always remain at a parity with the gold of which they are made because of the free convertibility of one into the other. The value of gold coin does not rise above the value of its gold content because anyone may take gold to the mint and have it made into coin free of charge. Any tendency for gold coin to become more valuable than gold bullion is checked by the withdrawal of gold from industrial uses and an increase in the amount sent to the mints to be coined. On the other hand, gold coin is prevented from becoming less valuable than the gold it contains because of the steady demand for it for non-monetary purposes. If the bullion value of gold coin should exceed its coin value it can readily be melted and sold as bullion.
Gold certificates are kept at par with gold by the fact that they are always redeemable in the gold coin against which they are issued and which is held as a trust fund in the Treasury. Silver dollars and the silver certificates issued against them are kept at par with gold because in practice they are freely exchangeable at the Treasury for gold. Though the law does not specifically require the redemption of silver dollars in gold, it has long been the settled policy of the Government to preserve a parity between its silver coins and gold, and experience has shown that this can be accomplished only by the prompt redemption of one in the other. The success of this policy depends, of course, upon limiting the amount of silver issued.
The minor coins are kept at a parity with gold because they are redeemable in lawful money and because there is a steady demand in the retail business of the country for the limited amount issued.
Both United States notes and treasury notes are now redeemable in gold. Treasury notes have so nearly disappeared from circulation that they have ceased to be a factor in our monetary system. Their place has been taken by silver certificates under the retirement provision of the law of 1900. The United States notes which, because of their excessive issue during the Civil War, depreciated greatly in value, returned to a parity with gold when specie payments were resumed in 1879. Reference has been made in a previous chapter to the embarrassment of the Government in the years following the passage of the Sherman Act of 1890 when the excessive issue of silver threatened to deplete the country of its gold. Greenbacks, being redeemable in gold, were returned for redemption as rapidly as reissued until complete exhaustion of the Treasury reserve was anticipated. To prevent a recurrence of a similar situation, the law of 1900 provided that when these notes were redeemed they should be reissued only in exchange for gold. It also provided for a special gold reserve of $150,000,000 to be set aside in the Treasury for the sole purpose of redeeming United Slates notes and treasury notes. If the gold reserve should fall below $100,000,000 and cannot be increased by exchanges of greenbacks for gold in the general fund of the Treasury, the Secretary must restore it to $150,000,000 by the sale of bonds. The Federal Reserve Act of 1913 reaffirmed the parity provisions of the law of 1900 and provided that in order to maintain such parity the Secretary of the Treasury may borrow gold on the security of bonds or one-year gold notes.
National bank notes are kept at a parity with gold by being made redeemable in lawful money both at the Treasury and by the banks issuing them. Every national bank is required to keep on deposit with the Treasury a sum of lawful money, equal to 5 per cent of its outstanding circulation for the redemption of its notes. The new reserve bank notes are issued and redeemed under the same terms and conditions as national bank notes, except that the amount to be issued is limited only to the face value of the bonds deposited. The Federal reserve notes which are obligations of the Government are redeemable in gold on demand at the Treasury or in gold or lawful money at any of the Federal reserve banks. They are secured by reserves in gold of not less than 40 per cent of the notes in circulation and collateral security consisting of notes and bills accepted for rediscount in an amount equal to the notes in actual circulation. Furthermore, each reserve bank to which these notes are issued must keep in the Treasury a 5 per cent gold deposit to redeem them, though this deposit may be counted as part of the 40 per cent reserve required.
In the several ways here outlined, all kinds of money in the United States are kept at a parity with the standard, gold. Despite the defects in our monetary system, there is no longer serious doubt as to the ability of the Government to maintain the gold standard. Some writers regard the greenbacks as a possible menace to the Treasury gold reserve and urge their gradual retirement by the application of surplus revenues of the Government or by a bond issue. The idle hoard of silver dollars in the Treasury is not in itself dangerous, but it involves an unnecessary waste of capital. The silver dollar is credit money in all essential respects like the greenback, its value being due not to the silver it contains, but to the Government's pledge to keep it equal to gold. Silver dollars and silver certificates are indirectly redeemable in gold. One serious objection to this large volume of government credit money, which together with bank notes serves as hand-to-hand money, is that it keeps out of circulation an equal amount of gold. If this credit money were retired, and gold certificates were authorized in the small denominations needed, a corresponding amount of gold in the form of gold certificates would come into circulation. Such an addition to the volume of gold actually used in the circulating medium would greatly strengthen our currency and credit system.1
In the natural course of events, however, our monetary situation tends to become more secure. While the amount of government credit money remains fixed, gold is steadily being added to the monetary stock, thus increasing the proportion of gold and diminishing the proportion of credit money. Furthermore, as the population grows, the existing supply of credit money becomes more widely diffused among the people, and a smaller proportion is held by the banks, thus lessening the probability of presentation for redemption in gold.
Fisher: Purchasing Power of Money, Ch. VII. Johnson: Money and Currency, Chs. XVI, XVII. Seager: Principles of Economics, Ch. XIX. United States Treasury Department, Circular No. 52.
1 Scott: Money, p. 119.