CHAPTER 5

FIDUCIARY MONEY, METAL AND PAPER

Sec. 1.  Commodity and fiduciary defined.  Sec. 2.  Present monetary system of the United States.  Sec. 3.  Saturation point of fractional money.  Sec. 4.  Light-weight fractional coins.  Sec. 5.  Worn coins and Gresham’s law.  Sec. 6.  A general seigniorage charge on standard money.  Sec. 7.  Coinage on governmental account.  Sec. 8.  The gold-exchange standard.  Sec. 9.  Nature of governmental paper money.  Sec. 10.  Irredeemable paper money.  Sec. 11.  Theories of political money.

Sec. 1. #Commodity and fiduciary defined#.  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 the standard and is a commodity-money.[1] In such cases the coinage is free and nearly gratuitous, 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 values 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 from the ordinary competitive 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 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, so 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.[2]

Sec. 2. #Present monetary system of the United States.# Here is given a summary of the main features marking the present monetary system of the United States (in 1915).

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.

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