Sec. 8. #The gold-exchange standard.# In a number of silver-using countries and colonial dependencies near the end of the nineteenth century, the fluctuations of the value of silver in terms of gold was a constant source of difficulty in the payment of foreign obligations to gold standard countries.  Yet there were strong reasons in the habits of the people and in the industrial conditions of the country to forbid the adoption of gold and the disuse of silver as the actual money in circulation.  The method adopted, that of the gold-exchange standard, involved these features.

(1) Closing the mints of the country to the free coinage of silver, as was done most notably in India in 1893 and in Mexico in 1904.

(2) Adoption of a fixed ratio of exchange between the silver coins in circulation and some gold coin which is made the standard of value in all transactions (as the dollar or the pound sterling), the money in circulation thus being all or nearly all of a fiduciary nature.

(3) Regulation and limitation of the amount of money in circulation so that a fixed parity between it and gold may be maintained (a) by the limited issue of coins only on governmental account, (b) by the sale, at a fixed rate, of foreign exchange bills payable abroad in the standard unit, the money paid for the bills being withheld from circulation in a special reserve, (c) by the purchase of foreign bills of exchange at a fixed rate, thus paying out and putting again into circulation some of the fiduciary money in the special reserve.

These monetary changes furnish numerous illustrations and demonstrations of the quantity theory of money as applied to the entire circulating medium of a country.[8]

Sec.9. #Nature of governmental paper money.# The problem of seigniorage presents itself in its most extreme form when money is made of paper.  Paper money is issued either by a government or by a bank.  We will consider governmental notes here, reserving until Chapter 7 the case of bank notes.

The issue of paper money in some cases grew out of the practice of debasing metal.  However this may have been, governmental paper money may be looked upon as money for which a seigniorage of one hundred per cent is charged.  The gain of seigniorage from paper money is greater and is just as easily secured as that from coinage of metals.  Governmental paper money is called “political money,” in contrast with commodity money.  However, all coins that contain an element of seigniorage, or monopoly value, are to that degree “political money.”  The typical paper money is irredeemable; that is, it cannot be turned into bullion money on demand.  It is simply put into circulation, usually with the “legal-tender” quality.  Money has the legal-tender quality (as the term is used in the United States) when, according to law, it must be accepted by citizens as a legal discharge for debts due them, unless otherwise provided in the contract.