The Gold And Silver Behind Paper Currency
( Originally Published Early 1900's )
BEFORE the currency-redemption problems are discussed, it is appropriate to describe the several classes of paper currency, the significance of each class, and how it occurs that each kind is regarded as of equal value to each of the others.
The Federal currency is the closest tie between the citizen and the Government. Every individual in our land has a definite personal interest in the strength of the national authority, for the money he has in his pocket represents his labor and his economy.
The strength of the Government that issues the money the citizen possesses—that stands back of the currency, guaranteeing that it will be honored on presentation—is clearly indicated by the willingness of the citizen to accept the currency. The fact that each of several kinds of paper currency passes from hand to hand at par without any distinction—without anyone's questioning whether one class is preferable to another—is the best evidence that everyone has complete faith in the Government.
Experience has taught that the United States Government keeps its promises. So far is that an accepted fact that the average citizen does no more than observe, when paper currency is tendered, that it is an obligation of the United States. It is accepted at par with no more than a casual glance at it.
Although there is a decided difference between one class of paper currency and each of the other classes, it is probably true that but a small percentage even of otherwise well-informed citizens could explain these differences. The following is a general explanation of the several classes.
CLASSES OF PAPER CURRENCY
There are five different kinds of paper money now in current circulation: gold certificates, silver certificates, United States notes (popularly known as "greenbacks"), national-bank notes, and Federal reserve notes. If examined critically and the inscriptions printed on each carefully read, it will be observed that each class differs from the others. The basis of each of the five classes is different, but, as a result of the Government's policy, one class is worth the same as each of the others. A description of each class and the security back of it will demonstrate the fact.
A gold certificate is a Government due bill for a stipulated sum in gold that the holder may procure from the Treasury whenever he sees fit to call for it. One that calls for $10 will be observed to read as follows : "This certifies that there have been deposited in the Treasury of the United States of America ten dollars in gold coin payable to bearer on demand."
The certificate means just what it discloses, viz., that $10 in gold has been deposited in the Treasury and that the holder of the certificate may procure the gold whenever he presents the certificate and demands the $10 gold coin. It will be paid to him on demand, without question. For every one of those certificates, the gold to pay the holder is in the Treasurer's possession, and every dollar of it can and would be paid on demand.
Although there are gold certificates amounting to about $1,700,000,000 outstanding in the hands of the public, the Treasurer has the gold to pay every dollar of it. It would not embarrass the Government at all for every holder to ask for the gold at the same time—it would simply mean a big job to count it out, for such a sum weighs over 2,900 tons. As the gold is in hand to meet every outstanding gold certificate, it is easy to see why the certificate is just as good as the gold itself. The Government simply holds the gold in trust for the owner.
The gold to meet the gold certificates is by no means all the gold in Uncle Sam's vaults. The total on hand June 1, 1931, was $3,666,752,325.31. Of that amount the Federal reserve banks' gold fund, owned by those banks but deposited with the Treasurer, amounted to about $1,760,000,000. In addition to that, $156,039,-088.03 was held as gold reserve to -protect the United States currency (the greenbacks) and $51,784,970.42 in the general balance free for use.
WHERE THE GOLD IS KEPT
It may be of interest to know where that vast amount of gold is. It is in vaults in eleven different United States mints and assay offices and in the Treasury Building, and a comparatively small amount, according to last reports, is on trains in transit. The following table gives the details:
San Francisco mint $1,009,405,687.19
That vast sum is in those places, dollar for dollar, safely kept, and is ready to be produced on demand whenever called for.
Only about one one-thousandth part of the Government's holdings in gold are in the Washington Treasury vaults. It serves the purpose just as well—even better—to have it in the mints and assay offices, for it would be a heavy expense to move it. The assay offices purchase the gold as it comes from the mines, and after it has been sent to the mint and is made into coin it might just as well remain at the mint until the certificate holder wants it and asks for it. The Treasury will give the holder an order for the gold whenever he asks for it.
The confidence felt by the citizen that the Treasury has the gold and will pay it if called for makes him better satisfied to have the certificate than he would be to have the gold itself. That is the reason the owner does not see gold coin—he prefers the paper certificate that calls for the coin.
The silver certificate is based upon the same plan. If the holder of a silver certificate ($1 in paper currency, for instance) will look at it carefully, he will see that it sets forth that "This certifies that there has been deposited in the Treasury of the United States of America one silver dollar payable to the bearer on demand," and also that it discloses that "This certificate is receivable for all public dues and when so received may be reissued."
Any sum due the Government—income tax, customs tax, etc.—may be paid in silver dollars. Although a silver dollar is a legal tender, a silver certificate that calls for that dollar, through an apparently strange contradiction in the law, is not a legal tender. That is, of course, a sort of distinction without any difference, because, as a matter of actual practice, the Government treats them interchangeably and the public does also. Those who wish to look up the distinction will find that the Supreme Court has declared that silver certificates are but warehouse receipts and are not legal tender.
On June 1, 1931, there were 498,497,989 standard silver dollars in the Government's possession. There were about $491,000,000 in silver certificates outstanding against them in the hands of the public, and there were Treasury notes payable in silver also outstanding to the extent of about $1,000,000. The remainder, which amounted to about $6,000,000, represented a balance in silver dollars in our Treasury, free for the Government's current use.
The silver certificates in the hands of the public, if presented for redemption, would withdraw the $491, 000,000 from the Treasurer's possession. Instead of having any regrets if it were called for, the Treasury would be pleased greatly if the certificate holders would call for it and use it instead of the paper currency. It would save Uncle Sam a heavy expense, because the silver certificate only lasts on an average of about eight months, and a silver dollar lasts indefinitely—many of them have been in circulation fifty years. Men of middle age in the Central West will recall that paper currency of denominations less than $5 used to be very seldom seen, whereas now paper dollars are more in use than silver dollars. In fact, it is rarely that a silver dollar is seen along the Atlantic coast. The farther west one travels the more one sees the silver dollar in use.
It is supposed that the use of silver in the West is attributable to the fact that silver came from the western mines and a prejudice existed in favor of the coin over paper money. Whatever the cause, the public is disinclined to use silver dollars, and they keep accumulating in the banks and in the Government offices. As a little more than one-half of the 890,000,000 pieces of our outstanding paper currency is in $1 silver certificates, and as it costs about a penny to manufacture one of them, it would be a great saving to the Government if the public would use the silver dollars instead.