§ 1. Character of fiduciary money. § 2. Present monetary system of the United States. § 3. Saturation point of fractional money. § 4. Light-weight fractional coins. § 5. Gresham's law. § 6. Seigniorage on standard money. § 7. Fiduciary coinage on governmental account. § 8. Two stages of coinage debasement. § 9. The gold-exchange standard. § 10. Nature of governmental paper money. § 11. Irredeemable paper money in America. § 12. Irredeemable paper money in Europe. § 13. Theories of political money. § 14. Political money; theory and practice.

§ 1. Character of fiduciary money. The actual moneys in circulation in every modern country consist of a wide variety of pieces, differing in denomination, physical size, shape, and materials, mode of issue, source or authority of issue, and legal character. Among these kinds, one is usually the standard money and usually is a commodity. The exceptions indicated by the word "usually" are (a) that under the plan of bimetallism, two metals may be legally designated as the standard, making in fact an alternative standard, called, however, a double standard; and (b) that an irredeemable paper money may be, for the time, the standard money. The coinage of standard money often is free and gratuitous (or nearly so), and the value of the money is kept close to parity with its value as bullion by changing bullion into coin, or coin back into bullion, whenever there is an appreciable difference between the value in the two uses. This adjustment is brought about by the free action of the people. The government, having declared what is the standard money unit, and having provided a mint to make coins, leaves it to citizens, acting on the ordinary business motives, to decide when they will reduce or increase the number of coins in circulation.

The other kinds of money are not commodity money, and the materials of which they are made, whatever they may be, are not worth as much in any other uses as they are in their present monetary form. Their value is always referred to, and adjusted to, that of the commodity money, as long as any of it is in circulation. In contrast with commodity money, these other kinds may be called fiduciary money. By fiduciary money we mean money that has not a commodity value equal to its money value, but which is generally accepted because each receiver has faith that others in turn will take it in the same way. The faith (fides) is not always that the issuer of the money (whether it be a bank or the government) will redeem the money on demand at any future time; for fiduciary money may circulate while irredeemable, that is, either carrying no promise of redemption in the standard money or in fact not being redeemed. Yet often actual redemption on demand or a good prospect of future redemption is one of the circumstances stimulating the faith and the readiness of each person in turn to receive fiduciary money.

§ 2. Present monetary system of the United States. In the following table is given a summary of the main features marking the monetary system of the United States in 1920.

Not all this variety is essential to an efficient monetary system, and several of the kinds survive as the result of historical accidents (political and legislative). But all are now kept in accord with the value of the gold coin, which, it will be observed, is the only kind the amount of which is not artificially limited. Silver dollars are no longer coined, subsidiary silver and minor coins are issued only in exchange for other money, as are gold and silver certificates in exchange for gold or for silver, which they merely represent while in circulation.

a "Lawful money" includes gold coin, gold certificates, silver dollars, U. S. notes, and Treasury notes.

b Redeemable also in lawful money at bank of issue.

c Redeemable also at Federal Reserve banks in gold.

d Not usually included in the estimates of total money in circulation.

e  Represented dollar for dollar by gold kept in the U. S. Treasury.

f Represented dollar for dollar by silver kept in the U. S. Treasury.

g Besides, there were about $464,000,000 in gold and $22,000,000 in silver, in the U. S. Treasury, mints, and Federal Reserve banks, not offset by gold and silver certificates, respectively.

Monetary System Of The United States. 1920

§ 3. Saturation point of fractional money. Fiduciary money is that on which regularly the issuer makes a seigniorage charge.1 Let us consider now the effect of seigniorage on the value of money.

1 In the broad sense as before defined, ch. 3, § 1.

Fractional coins, called also subsidiary coins, are those of smaller denominations than the standard unit of money, as shillings and pence in England, and half dollars, quarter dollars, dimes, nickels, and cents in America. Money to serve well a variety of uses must be of different denominations, and "small change" is necessary to make small purchases and for exact settlement in larger payments that are not multiples of the standard unit. The amount required (or most convenient to use) in each denomination of fractional coins is thus a more or less certain portion of each person's monetary demand, shaped by experience and fixed by habit. For example, within certain elastic limits of convenience quarters may be used for halves, and dimes for nickles (and vice versa); but each person has a point of preference. The total demand for each kind of change is the sum of the individual demands. This point where the amount of coins of any denomination (in relation to the whole monetary system) is most convenient may be called the saturation point of that kind of small change, up to which point the people prefer a share of their money in that form, and beyond which they will, if free to choose, exchange that kind for other denominations (smaller or larger). Each kind of money, as the cent, nickel, dime, has its own peculiar demand and its saturation point.