5. When Full Amount Of Coin Is Kept To Pay Substitutes And When Not

Sometimes the full amount of coin represented by the notes in circulation is kept by the issuing authority to redeem them; more often a less amount is kept. The silver certificates, as they are called, which form a large portion of the notes in circulation, represent silver coin which is kept to redeem them ; and the amount is as great as the notes they represent. They are in every sense merely substitutes, representatives of, or orders for, coined silver.

On the other hand, the government issues and keeps in circulation another kind of note, popularly known as greenbacks, to the amount of about $350,000,000. To pay or redeem these it keeps only $150,000,000 of gold, because they are not presented very often for redemption, and this amount of gold proves to be quite enough. If the owners of these notes should for any reason begin to demand payment of them in large quantities, then the government would doubtless take steps at once to increase its store of gold. The experience of thirty years confirms the opinion that the $150,000,000 of gold kept to pay them is an ample reserve.

6. Economy Of Issuing Substitutes In Excess Of Coin Kept To Pay Them

It will be readily seen that the use of substitutes for, or representatives of, money which are conveniently and readily redeemable or payable in excess of the amount of money kept to redeem them, dispenses, to the extent of the excess, with the use of the precious metals as money. If the government can sustain or circulate $350,000,000 of notes on a foundation of $150,000,000.of gold, there is an economy to the extent of $200,000,000 in the use of gold. In other words, if the note did not exist, the people would need $350,000,0000 of gold instead of the $150,000,000 now held as a fund to pay the notes.

7. The Issue Of National Bank-Note Substitutes

Besides the notes above mentioned that are used as substitutes for money, another large quantity in circulation is issued by the national banks. These institutions are not required to keep any gold to redeem or pay their notes, but they must keep government notes for this purpose which in turn, as we shall learn, are redeemable in coin. In practice, though, a national bank always keeps some gold and will readily redeem its notes on presentation in gold at the holder's request.1

It may be added that every national bank which issues notes must deposit bonds corresponding in amount with the notes it proposes to issue. These bonds are the obligations of the government and must be deposited with the national treasurer; and if a bank should fail or retire from business, the government can, through its officers, sell these bonds for gold and use it to pay the notes of the bank. Thus the holders are perfectly secure, and knowing this, no one ever hesitates to take a genuine national bank note.

8. The Amount Of Money Needed Depends Partly On The Use Made Of Substitutes

We have now approached the question, how much money do the people of our country need for business purposes? A partial answer is that the quantity depends on the extent to which substitutes are used. This is obvious from what has already been said. The larger the excess of substitutes that pass readily from one to another, the smaller is the quantity of real money needed for business. Perhaps the idea can be more clearly apprehended by a negative form of statement. If the paper substitutes for money were all withdrawn, - all the notes in daily circulation issued by the government and the banks, which are now taken just as readily as money itself, because no one doubts the ability of the issuers to pay them on presentation, - it would be needful to fill their place with money, otherwise the business world would be wrecked. The quantity of real money would be so small compared with the uses or demands made of it, that the sufferings of all classes would be universal.

1See Chapter VII, Bank Circulation.