Flat Money

Paper Money

The advantages of fiat money are that it enables a nation to increase its circulating medium rapidly, or temporarily, without increasing its stock of precious metals. The increase in the volume of coin must necessarily be made slowly, as the metal is mined and coined, but the demands of trade or the exigencies of war may require an increase in the volume of the money of the country to be made quickly. Now it has been found by experience that where public confidence in the government remains unshaken, a reserve of one dollar in coin is a sufficient deposit to maintain a circulation of three dollars in paper, on the principle that all the bills will not be presented for redemption at one time.

From the foregoing it must not be inferred that the government can create value or make as much money as it chooses. The government can no more create value than it can create gold or coin. It may say how many grains of gold shall constitute a dollar or how many pounds shall constitute a bushel of corn. It may decree that a quantity of gold coin or bullion shall be deposited in the national treasury and it can, within certain limits, issue its paper promises to pay, representing this real money, but this is the extent of its power. If it exceeds this limit, and at times there have been strong temptations to do so, the result is inflation. The money begins to depreciate and falls below par. It circulates only at a discount, and cannot be exchanged for real money except at a loss. The people lose faith in it. Gold is driven out of circulation by it, because, according to the law of values announced by Sir Thomas Gresham three centuries ago, called "Gresham's Law," the cheaper money always drives out the dearer, people preferring to pay their debts with the cheapest money which their creditors can be induced, or by law compelled, to accept.

As seen from the foregoing, flat money may be redeemable in coin, that is, it may be "convertible" into gold at the will of the holder, or it may be founded only on the faith of the people in the stability of their government, or "inconvertible." The former is a convenience and aid to commerce, because it increases the circulating medium without impairing its stability. The latter is inflation and brings in its train serious financial and industrial dangers. Representative money consists of certificates of deposit issued by the government for gold or silver deposited in the treasury. These certificates circulate as money instead of the coin which they represent. The coin can be had by the holder of the certificate upon demand. The representative money of the United States consists of gold certificates and silver certificates. The theoretical difference between these and greenbacks or treasury notes is that the latter is issued in excess of the redemption fund on which they are based, while gold and silver certificates can never exceed in amount the coin on deposit.