Commodity-money theory.

1. The commodity-money theorists declare that govern-ment is powerless to influence value, or to impart value to paper by law. There are two extreme views regarding the nature of paper money, and a third which endeavors to find the truth between these two. First is that of the commodity-money theorists, or the cost-of-production theorists, who will not admit that there is any other basis for the value of money than the cost of the material that is in it. Money made of paper, on a printing press, has a cost almost negligibly small, and, therefore, they say it can have no value. The fact that it does circulate, and is treated as if it had value, is explained by the commodity theorists as follows: While the paper note is a mere promise to pay, with no value in itself, it is accepted because of the hope of its redemption, just as is any private note. Depreciation in this view is due to loss of confidence; the rise toward par measures the hope of repayment. Such a view overlooks the feature in which paper money differs from ordinary credit paper. The value of one's promise to pay depends on his reputation and his resources; the resources constitute the basis of value. Bonds have value because they yield interest and are payable at a definite time in standard money. But paper money, lacking this basis for its value, has another basis in its money use, in its power to buy goods. The money demand in connection with the monopoly power of government over the money supply, furnishes a satisfactory logical explanation of the value of paper money.

Flat-money theory.

2. The fiat-money advocates assert that government has unlimited power to maintain the value of paper money by conferring upon it the legal-tender quality. The meaning of fiat is "let there be," and the fiat-money advocates believe that the government has but to say, "let it be money," to invest paper with value. The typical fiat advocates in the United States were the "Greenbackers," those voters who wished to retain the paper money issued in the Civil War, and to increase its amount greatly. They saw in paper money an unlimited source of income to the government. They proposed the payment of the national debt, the support of the government without taxes, and the loan of unlimited money without interest to citizens. All might live in luxury if the extreme fiat-money theorists could realize their dream. There are still some survivors of this faith in the power of the government fiat. The depreciation that has taken place in every case where government notes have been issued, they declare to be due to a too mild enforcement of the law of legal tender. To them the fact that paper money may circulate for a time at par appears a reason why it always should. They do not admit that there is a saturation point in the use of money, and that its use is still further limited by the fear of larger issues. They do not see that the ultimate basis of the value of paper money is economic, - is in its money use, not in the fiat of the government.

3. A sound theory of paper money makes it a special case of monopoly value. It has been seen that the power of almost every monopoly over price is relative, not absolute. As the power of a great private corporation over the price of its product is limited, so is that of the government over the value of political money. The money use is the source of value to the paper notes. Business conditions remaining unchanged, the limit of possible issue without depreciation is the number of units in circulation before the paper money was issued, the saturation point of full-weight and full-value coins. Because governments generally have not stopped at that point, paper money has depreciated. Popular error and selfish interests force legislation beyond the reasonable limit. In a few cases only have there been public integrity and courage enough to retrace the steps before great harm resulted. It is principally this lack of control that prevents paper money from being a good circulating medium.

Theoretical possibility of a good paper money.

Influence of law on value.

It is sometimes said that government cannot affect value in any way, but it can do so in many ways. Certainly one of the most remarkable is by the use of its monopoly power over the medium of exchange, whereby it can, under certain conditions, cause a piece of paper to have the value of a piece of gold. Thereby at the same time it affects the interests of nearly every member of society, raising or lowering the value of many kinds of property, and of many incomes.

Questions On Chapter 46. Token Coinage And Government Paper Money

1. Define legal-tender as applied to money. What is meant by fiat money?

2. Show the difference between convertible and inconvertible money.

3. The government of the island of Guernsey having no money, issued paper-notes to pay for the building of a market. They circulated and were gradually taken up as the market earned its cost, during ten years. When they were all redeemed and burned, the island had the market free of cost. Explain how this could be done. (This is from Sumner's Problems in Political Economy.)