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notes, in the form of their promises to pay specie money on demand. A bank's promise to pay circulates in ordinary times as freely as a Government's promise. In case of panic, any kind of promise to pay is likely to lose the public confidence. If it does, there occurs a run on the banks and on the Treasury in the effort to get specie. At such a time, the general acceptability of the paper promises disappears and for the time being, the money characteristic of the paper disappears. That situation is chiefly a thing of the past in the United States, owing to progress in banking regulation and control. Under all normal circumstances, bank notes meet the test of money. (4) Fiat money is any money whose supply is regulated artificially by government decree. In some cases, fiat money may be simply a piece of paper stating, “This is so much money. " It is then simply a printed certificate, without any pretense at having a backing in any commodity such as gold or silver. More often, as a matter of historical occurrence, fiat money has been in the form of a promise to pay money, which could not be made good. It has been a promise in name but

not in fact. Inconvertible promises to pay are money, and even though the experience of history has not found them satisfactory forms of money, they are money nevertheless. If Government notes or bank notes become inconvertible, they are then to be considered fiat money until such time as convertibility may be resumed.

Having defined what money is, we need further to clarify our notion of the subject by observing what money is not. It is not personal checks, promissory notes, drafts, bills of exchange, trade or bankers' acceptances, book credits, or. bank deposits subject to check. The reason why these are not considered as money is the fact that they have only limited acceptability in exchange. A check will be accepted only by those people who have reason to believe that the drawer of the check is good for the amount. These credit instruments have circulation only within those limited circles where there is some personal knowledge of the drawers of the instruments. They are a substitute for money within those limited circles, but lacking universal acceptability they lack the distinguishing characteristic of money itself.

Although for purposes of economic analysis this technical distinction between money and credit is essential, nevertheless we must recognize that in common business parlance money is used loosely and broadly to include all kinds of credit. When business refers to the “money market,” and explains that “money is easy” or money is tight,” what is really meant is that credit is “easy” or “tight” as the case may be. Nine-tenths, roughly speaking, of all trade is carried on with credit, and without the direct intervention of money itself. But in the financial columns of the newspapers and in the reports of banks, "money” is used often to refer to all forms of borrowing. According to this vocabulary, money includes any kind of borrowed purchasing power. There is no objection to this use of the term, even from the standpoint of economics, provided the distinction is clearly made between universal accepta, ility of some kinds of purchasing power and limited acceptability

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of others. Business men often make this distinction by referring to specie money and to Government and bank notes as "currency." These forms of payment have universal acceptability. We have no quarrel with business usage, but for purposes of economic analysis believe it is clearer and more useful to'limit the use of the word money to media of exchange of universal acceptability. When we have occasion to refer to all forms of media of exchange, we can best use the combined phrase, “money and credit." Money, technically speaking, is that which has universal acceptability; credit is that which has limited acceptability. The two combined give the total medium of exchange.

Evolution of the Acceptability of Money.-General acceptability is a product of growth and evolution. Man in the stone ages had no medium of exchange. His trade was barter. Money was a gradual invention, aimed at overcoming the difficulties of barter. The first articles that were discovered as usable for medium of exchange purposes were commodities of beauty or of physical necessity. Shells were an early form of money. They were used as ornaments because of their beauty, and they were used as money because their beauty gave them general acceptability as a means of payment. Salt and skins were at times used as money. Their necessity for purposes of food or clothing created for them general acceptability as a means of payment. Ridgeway has shown that for some thousands of years, the money unit of chief importance in the whole Mediterranean region was the ox. Even after gold came into active circulation, the gold unit was simply that weight of gold which was considered to have a value equal to one ox. Before gold and silver came into common use as money, other metals, as iron and copper, had been used. In the American colonies, many different articles served the purpose of money. Wampum in trade with the Indians, rice in South Carolina, tobacco in Virginia, beaver skins and corn in Massachusetts and New York, are examples of the colonial currency. When gold came into common use as money in the United States, the unit of measurement was at first a pinch of gold dust, and later a slug or nugget of gold. Gold coin of standard weight and fineness was the result of government authorization, and today the bulk of the gold money supply is in the form of bullion reserves which are backing for paper money and bank credit.

In the leading industrial countries, gold has come to be the preferred form of specie money. The reason is that gold combines in the best proportion the various qualities required of a good money. But at the same time that gold is the best money, it serves its money purpose indirectly. Gold itself is in actual circulation to only a trivial amount. It is backing for silver, nickel, and copper coin; for paper money; and for bank credit. Gold for the most part supports the active circulation of these forms of medium of exchange, but is not itself in active circulation.

The Qualities of a Good Money.—The requisite qualities of a good money may be listed as follows:

(1) Utility. A money commodity has value for its own inherent qualities. Gold has the quality of beauty, which makes the metal universally desirable for ornament. It also has qualities which make it useful in the industrial arts.

(2) Portability. A money commodity should be easy to handle and to carry from place to place. In this respect, gold is much superior to iron, oxen, and other commodities which preceded it. In proportion to its value in exchange, an ounce of gold is lighter than almost any other metal. Gold has great value in small bulk. A dollar in gold coin is so small that it is highly inconvenient to handle, and gold coin of smaller dimensions would have to be as thin as tissue paper. But for larger transactions, gold is too heavy for convenience. To settle a debt of $10,000, a man would be obliged to lug a sack of gold weighing about thirty pounds. Paper money or checks will settle the same debt with perfect ease.

(3) Indestructibility. A money commodity must be durable, and beyond the power of moth or rust to corrupt. In active circulation, a gold coin would not wear out until several thousand years of service had passed. In the form of bullion reserves, the deterioration of gold is practically negligible. Paper money is highly destructible, but is also replaceable at small cost. This replaceability of paper and indestructibility of its gold backing has proved to be an effective money combination.

(4) Uniformity. A money commodity should be of the same quality in all its parts, so that equal weights will always have a uniform value. Gold is reducible to a standard fineness, and then possesses ideal uniformity. Paper money is printed by a standard design and is convertible into a standard unit of gold.

(5) Divisibility. A money commodity should be capable of being cut up into small portions without thereby destroying its value. To cut up beaver skins or oxen would be to destroy their value for trade, or for the other purposes for which they are normally desired. Gold may be divided into portions large or small, without impairing in the least the value of the metal. In actual practice, the bulk of the gold supply is not divided into small bits for coins, but is divided into bars of bullion, of standard fineness. Alloys of other metals meet the purpose of small coins because of their more convenient size. Divisibility is attained in paper money without change of size, but merely by change of the amount stamped upon the face of the note.

(6) Cognizability. A money commodity should be difficult to counterfeit, deface, or mutilate, and easy to recognize by any one at its exact value. Gold and subsidiary coin meet this test by having the edges of the coin milled and the faces of the coin stamped. Any doubt as to the fineness of gold can be quickly resolved by any jeweler's test. Paper money is made with a distinct texture and pattern, and imitations are usually detected quickly as soon as the bills pass through skilled fingers. Even with this precaution, however, the alert effort of the Secret Service is necessary in order to suppress counterfeiting.

(7) Stability of Supply. A money commodity should not be subject to violent fluctuations in supply, because these in turn cause violent fluctuations of value or purchasing power. Gold mining cannot turn out a new supply at the most that will alter the total supply of gold in any one year by more than about three to five per cent. Over a period of decades, however, gold mining causes fluctuations of supply which produce wide changes in the value of the dollar. In this respect, gold is an imperfect money commodity, but comparatively speaking, it is less imperfect than any other metal that might be used. The supply of paper money is determined by the will of the government to run its printing presses and by the determination of the banks to expand their note issues. The temptation, as shown by history, is to over-issue, and over-issue in turn produces inflation.

(8) Elasticity. A money commodity should expand and contract in volume in proportion to the expansion and contraction of the volume of business. Stability and elasticity are not contradictory money qualities. They are closely inter-related. The money supply should be elastic enough to change in order to meet the changing needs of business, but should not be so unstable as to undergo violent fluctuations in value. Elasticity is best secured by regulation of note issue by government and banks with regard to the need of business. The visible sign that elasticity and stability are being attained is that the price level remains fairly stable and constant.

Reasons for the General Acceptability of Paper Money.-Convertible paper money has general acceptability for three main reasons. First, and most important, such paper money is a promise to pay a ! universally acceptable commodity, namely, specie. Confidence in the power to redeem these paper notes on demand in gold underlies everybody's willingness to accept the paper notes in payment for goods and services. But this confidence in the gold backing of paper money is not the only factor in securing its general circulation. A second factor is confidence that the paper money will itself have general purchasing power over goods and services. This confidence that the paper money will command goods and services in exchange is the outgrowth of habit

and custom. In passing paper money freely from hand to hand, people • do not reason back to the fact that they can convert the paper into gold,

but merely act upon the assumption confirmed by custom that the paper money will itself buy whatever goods and services they want. Command over goods plus convertibility into gold leads to the general acceptability of paper money. There is a third factor, which can be described as confidence in the authority issuing the paper money. Confidence in the government and confidence in the banks is essential for the general acceptability of paper money. This confidence is chiefly a product of the general state of public opinion and of the stability of government and business. It is reinforced by the specific edict of government that certain forms of paper money shall be legal tender, that is, shall be accepted by debtors in payment of debts. But the legal tender edict cannot create confidence, it can merely reinforce confidence which

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already exists. In the United States non-legal tender forms of paper are just as acceptable in all ordinary events as legal tender forms. Confidence in government and banks plus confidence in the power to command goods plus confidence in the convertibility of paper gives the threefold basis for the general acceptability of convertible paper money.

The acceptability of inconvertible paper rests upon two of these supports, namely, confidence in command over goods and services and confidence in government and the banking system. The Greenbacks during and immediately following the Civil War were inconvertible paper. They possessed general acceptability, though at a depreciated value, and were the active currency of the time. Although inconvertible for a number of years, there was public confidence that in the course of time they would be made convertible. There was confidence in ultimate convertibility. However, it is possible for pure fiat money to circulate when there is no promise of even ultimate convertibility. It is possible, but the experience of the world indicates that it is unwise until we know more perfectly how to regulate the issue of such paper and how to control its value. Money can be made to circulate without gold backing and without convertibility or the hope of convertibility, but the effect of its circulation has always tended to be violent fluctuations in value, excessive inflation, and ruinous uncertainty about the business future.

Coinage.- A precious metal used as the money standard is given free coinage. The word “free" in this case does not mean without cost to those who bring the metal to be coined but means without limit as to the quantity that will be accepted for coinage. If coinage is carried on without any charge for the minting process, it is said to be gratuitous coinage. If, however, a person brings to the government gold which is not of standard fineness, he must pay the expense of the alloy and of the refining process to make the metal nine-tenths fine. This charge is known as brassage. In the United States, coinage of gold is both free and gratuitous, but getting the gold ready for coinage is subject to the brassage charge. If the holder of bullion takes to the mint gold of standard fineness, he is entitled to receive without charge the same weight of gold in the form of coin. In many countries, coinage is made a source of government revenue by imposing what is known as a seignorage charge. The revenue is collected by retaining in the hands of the government a certain fraction of the bullion presented for coinage. The coins returned to the person who presented the bullion contain less specie than he turned over to the government. The difference represents revenue to the government, just as any form of taxation. Seignorage is a tax. Seignorage is not applied in the United States to gold coins, but is applied to the subsidiary coins of other metals. Silver, nickel and copper coins contain a quantity of specie which is less in value than the face value of the coin in circulation. As a means of keeping the specie value less than the currency value, such coins have to be limited in quantity. In modern countries, the major portion of gold bullion is not coined at all, but is held in bank reserves and Treasury vaults as

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