gold bullion. The holder of bullion sells the metal outright to the government and receives in return the proper amount of certificates or notes redeemable in gold.

In the United States, all coins other than gold, and in denominations less than $1, are subsidiary. Their metal content is worth less as specie than as currency. The quantity permitted in circulation is limited so as to prevent their depreciation in value. They are legal tender in limited amounts. And directly or indirectly, they are redeemable in gold. Consequently they have a value as money on a par with gold coin itself. The subsidiary coins of the United States are the silver halfdollar, quarter-dollar and dime, the nickel and the cent. The silver dollar is not subsidiary coin, but resembles it in every respect except that the silver dollar is legal tender in unlimited amounts. Subsidiary silver coin is legal tender for amounts not exceeding $10 in one payment. Subsidiary nickels and cents are legal tender only for twenty-five cents in one payment.

Token money is a term often loosely applied to all forms of subsidiary money. It is used, however, in the more strict monetary sense, to apply only to those coins made from the baser metals, as nickel, copper, and bronze. In the United States, token money in this strict sense includes the nickel and the cent.

Kinds of Money in the United States.-The table on page 500 shows the stock of money in the United States, the portion of this stock in the hands of the banks and the Treasury, the portion in active circulation, and the per capita amount of money in circulation on March 1, 1924.

In 1914, more than 90 per cent of the stock of money was in circulation, whereas in 1924 only about 50 per cent of the stock was in circulation. The great decrease in proportion of circulation to stock of money was due chiefly to the heavy imports of gold. The inflow of gold expanded reserves much more than active circulation. The Federal Reserve banks tried to keep the circulation within restraint in order to avoid further inflation of the dollar. Under this policy, although the total stock of money more than doubled, the amount in circulation per capita increased only from $34 to $42. All kinds of money in the total stock are kept on a parity of value with gold because of the fact that they are directly or indirectly exchangeable for gold coin or bullion at their face value.

The table indicates seven different kinds of paper money in circulation at the date specified:

(1) Gold certificates represent less than 15 per cent of the per capita circulation. They are backed dollar for dollar by gold coin or bullion held in the United States Treasury. They are, in effect, warehouse receipts for gold. They are used for relatively large payments, being issued in denominations ranging from $10 to $10,000.

(2) Silver certificates represent less than 10 per cent of the per capita circulation. They are backed by an amount of silver which if coined would be equivalent dollar for dollar to the certificates. They

are practically warehouse receipts for silver. The inconvenience of using heavy silver dollar coins leads people to prefer silver certificates instead. They are used for relatively small payments, being issued for the most part in denominations of $1, $2, $5, and $10.

STOCK OF MONEY AND CIRCULATION OF MONEY IN THE UNITED STATES
AS OF MARCH 1, 1924

(Source: United States Treasury Department circulation statement)

Federal Reserve Bulletin, April, 1924, p. 318.

1 Includes United States paper currency in circulation in foreign countries and the amount held by the Cuban agencies of the Federal Reserve banks.

2 Includes money held by the Cuban agencies of the Federal Reserve banks of Boston and Atlanta.

3 Does not include gold bullion or foreign coin outside of vaults of the Treasury, Federal Reserve banks, and Federal Reserve agents.

4 These amounts are not included in the total since the money held in trust against gold and silver certificates and Treasury notes of 1890 is included under gold coin and bullion and standard silver dollars, respectively.

5 Includes gold held in trust against gold certificates and standard silver dollars held in trust against silver certificates and Treasury notes of 1890, the aggregate of which should be deducted from the sum of money held by the United States Treasury and the Federal Reserve System and money in circulation to arrive at the stock of money in the United States. The amounts of such gold and silver held in trust as of the date of this statement are shown in parentheses in the first column.

(3) Treasury notes of 1890 have almost entirely disappeared from circulation. They were originally issued under the Sherman Act of 1890, and have been gradually retired since 1900 by the substitution of

silver certificates. Of an original issue of $155,900,000, there remain outstanding less than $1,500,000.

(4) United States notes, or the Greenbacks as they are commonly known, are a legacy of the Civil War issue of fiat paper money. They were not redeemable in gold from 1862 to 1879, but in the latter year gold redemption was established. They make up only about 6 per cent. of the present per capita circulation. The quantity in existence is fixed and inelastic, and in the interests of sound money, it would be advantageous to discard them and substitute Federal Reserve notes. A reserve fund of $150,000,000 in gold is set aside as a normal backing for the $346,000,000 of Greenbacks in existence.

(5) The Federal Reserve notes make up nearly one-half of the per capita circulation. They are the largest single form of money in circulation. They may be backed either by gold alone, or by a combined reserve of gold and commercial paper. These notes are the chief form of money which expands and contracts in harmony with the expansion and contraction of the general business of the country.

(6) Federal Reserve Bank notes were intended gradually to displace National Bank notes. This effect has not, however, resulted to any material extent, and the outstanding issue of National Bank notes remains practically the same today as when the Federal Reserve Act was passed. The amount of Federal Reserve Bank notes in circulation is a fraction of 1 per cent of the total per capita circulation. The backing for such notes is a 5 per cent gold redemption fund in the Treasury and a deposit of 100 per cent of the note issue in eligible government bonds.

(7) The National Bank notes have persisted in circulation without substantial decrease in volume, and make up more than 15 per cent of the per capita circulation. Their backing is the same in form as that of the Federal Reserve Bank notes. They are an inelastic form of note issue, and because of their inelasticity, it has been the purpose of the Federal Reserve System gradually and ultimately to retire the bulk of such notes from circulation.

Legal Tender.-Those forms of money are called "legal tender" which all creditors are required to accept as settlement of debts owing to them. Legal tender in the United States includes gold coin, silver dollars, treasury notes of 1890, United States notes and gold certificates. Subsidiary silver coins are legal tender up to ten dollars and token. coins are legal tender up to twenty-five cents. Legal tender does not include silver certificates, although the fact that the silver coin back of them is full legal tender makes the certificates themselves equivalent to legal tender. Federal Reserve notes, Federal Reserve bank notes, and National bank notes are not legal tender, but these money forms are receivable by the government for public dues. The legal tender quality of money is often assumed to be the cause of its value. People are prone to believe that money has value because the government is back of it. The government backing helps to maintain the general acceptability of

the money in circulation but does not determine the value at which it shall be accepted. Its value is determined by the scarcity of the amount of money issue, not by the government backing. This distinction was brought out clearly by the inflation of the World War. Paper marks and franes were legal tender notes, and had government backing, but this did not prevent at all their depreciation when they were issued to excess. Nor did government backing of the Greenbacks in the Civil War period prevent their depreciation in value when they were issued to excess. The lesson of experience is clear that fiat money cannot be made to have a certain value or purchasing power by declaring it legal tender. If the fiat money is over-issued it will depreciate in value, whether it is legal tender or not. What is true of fiat money is equally true of gold money. The legal tender quality aids the acceptability of money but does not sustain its value.

The Functions of Money.-The primary function of money is to maintain the continuous maximum production of the kinds of goods consumers want and the continuous flow of those goods into consumers' hands. All other services of money are contributory to this function. The end all and be all of money is to keep the machinery of production going at full capacity and in proper balance. The money function is fundamentally a production function. Unless it sustains the maximum output of the commodities serviceable for human use, it fails to fulfill the duty which rests upon it. When factories are idle, when millions of men are out of work, when production is cut to a fraction of capacity, then money is one of the governing factors which has failed to do its work. It is the work of money to insure the steady making of goods for human use. The function of money is to maintain continuous, maximum, balanced production.

In present-day life, money does not by any means fulfill this function completely. It falls short of the work cut out for it. As stated by Wesley C. Mitchell, "With all its efficiency the money economy has a fundamental defect-it warps the aim of our economic activity. What we want as human beings is to make serviceable goods. What we are compelled to do as citizens of the money economy is to make money. And when for any reason it is not profitable to make goods, we are forced to sacrifice our will as human beings to our will as money makers. That is the heart of the paradox." At present, the profit aim of business is to make as many dollars as possible. Sometimes we can make more dollars by making more goods. Then money is doing its work well. Sometimes we can make more dollars by making fewer goods. Then money is doing its work badly. Money forbids the production of goods beyond the point where they can be sold for a present profit. The money problem is how to minimize this defect in the money system, and how to insure that the making of dollars of profit shall be synonymous with the making of the largest possible quantity of goods for human The function of money is to maintain maximum production, and 1 Wesley C. Mitchell, Stabilization of Business, p. 53.

use.

the defect of money in meeting that function is that often the making of more money profits demands the making of fewer goods than human need and want requires.

The other functions of money are here listed as contributory functions, since their only significance arises from the fact that they contribute to the productive function of money. These functions are to serve as a medium of exchange, as a measure of values, as a stabilizer of value, as a store of value, and as a standard of deferred payment.

(1) A Medium of Exchange. When a medium of exchange was introduced into the system of barter, the result was something much more complex than merely a system of barter plus a medium of exchange. The new medium of exchange not only facilitated the exchange of goods for goods under certain conditions, but under other conditions unbalanced and obstructed the exchange of goods for goods. It is nowadays a commonplace to have warehouses bulging with quantities of goods which cannot be exchanged for money or for goods. Earlier writers often stressed the obsolete notion that "money is in reality nothing more than a medium of exchanging one kind of goods for another kind, and, after all, the fundamental form of exchange is barter. The final outcome is nothing more than the exchange of goods for goods."2 The modern money economy is quite different from a mere system of barter in which money serves as a term of comparison. The money economy rests upon the exchange of goods for money. That is the end of the transaction. A new transaction begins when the money is later exchanged for other goods. Between these two separate and complete transactions lies a sea of hazards and uncertainties. After the goods have been exchanged for money, who knows how soon the money will in turn be exchanged for new goods? Where will the second exchange take place? What kinds of goods will be demanded in exchange for the money? The when, the where, and the what for are the great unknowns. And because they are unknown, there occurs an unbalancing of supply and demand. There arises an over-supply of one kind of goods and an under-supply of another kind of goods, maladjustment and miscalculation, obstruction and stagnation of goods. This use of a medium of exchange "is always a means of deferring and sometimes a means of defeating the completion of an exchange of goods for goods." The medium of exchange per se is no guarantee that production and exchange of goods will continue at a continuous maximum. There is no automatic response of that kind. Only as the medium of exchange itself comes under control and guidance, under analysis and understanding, can it be made to contribute to the maximum production and exchange of goods for goods. The medium of exchange is essential to that end, but it does not guarantee that end. The function of a medium of exchange is not achieved by letting money run a haphazard course guided only by uncharted laws of its own supply and demand, but by ordering and organ2 H. Bilgram and L. E. Levy, The Causes of Business Depressions, p. 38. 3 W. T. Foster and W. Catchings, Money, p. 222.