Taking a very different view, the extreme fiat-theorists assert that the 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 there be money,” to impart value to a piece of paper.  The typical fiat-money advocates in the United States were the “Greenbackers,” who wished to retain the greenbacks issued in the Civil War and to increase the 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 money without interest to citizens.  All might live in luxury if the extreme fiat-money theorists could realize their dreams.  The depreciation that has taken place in nearly every case where government notes have been issued, the fiat-theorists declare to be due to a 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 recognize 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.

The almost universally accepted opinion among economists rejects both of these views, tho recognizing in each a certain limited aspect of the truth.  The cost-of-production view quite overlooks the features in which paper money differs from ordinary credit paper.  The value of one’s promises 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 theory of paper money here outlined makes the value of paper money a special case of monopoly value.  As the power of any private monopoly over price is relative, not absolute, so is that of the government over the value of political money.  The money use is the source of value of the paper notes.  It is this which gives the economic condition for value in paper money and strictly limits the power of the government—­a fact overlooked by the fiat-theorists.  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.  Whenever governments have failed to stop at that point, paper money has depreciated.  But under wise and honest control and regulation political paper money might serve the monetary function very effectively.

[Footnote 1:  The problem of a legally authorized double standard, bimetallism, is treated in the next chapter.  An irredeemable paper money may be, for a time, the standard money.]