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Money And Economics

( Originally Published Early 1900's )



1. Mechanism of exchange.—The first form of exchange was that of goods or services for goods, which is termed barter. Such a clumsy and unwieldy procedure could be used only in a primitive community where wants were few and goods were not of great variety. The inconvenience of applying this method is well illustrated by the attempts which have sometimes been undertaken to revive it. Under such headings as "Mart and Exchange" there have been journals which fostered such an effort.

When we read in such columns the advertisement of a boy who has a collection of postage stamps which he would like to exchange for a tennis racket we see at once the difficulties of the situation. The boy can perhaps readily find another who wants the postage stamps, but he may not have a racket to exchange for them. Nor is it likely that the estimate of the value would be alike on the part of the two owners if finally they should be brought together. Swapping involves the time-honored usage of "something to boot."

A very different state of affairs results after money has come into general use. Trades can now be made in terms of money with far greater ease, since everyone wants money. But many exchanges are made without the use of money. The seller is content with a promise to pay money, which serves in many respects the same purposes.

Thus three stages of exchanges appear, based respectively on barter, money and credit. Money and the services which it renders in the world of affairs will be considered in some detail in this chapter, while a subsequent chapter will treat of credit. Price is shown in the preceding chapters to be related to value. It is also definitely related to money and credit, and after these terms have been explained it will be necessary to go back and take up the mutual relations of' money, credit and prices.

2. What is money?-To some it might seem almost superfluous to ask, What is money? The word is used so frequently in daily speech that its significance might well be deemed a matter of course, but in fact the word money is used so loosely that it means many things. To the banker money is the medium of ex-change that serves as the basis of commercial obligations. To the workingman the word means anything which buys products, and to such a person a check is money. Another person may include in the phrase every device that does money work, and again some-one may say that it is only the gold coin of the monetary standard. A rather careful answer to the question, What is money? is necessary if confusion is to be avoided.

It is impossible to frame a definition on the basis of the material of which the money is made. Money may be either gold or silver; the material of which money is made is a secondary matter. President Had-ley, Yale University, says, "Money is best defined as a thing which by common consent of the business community is used as a basis of commercial obligations." Horace White declares, "Money is anything that serves as 'a common medium of exchange and measure of value." Professor David Kinley, University of Illinois, says, money is "that part of the medium of exchange which passes generally current in exchange and settlement of debts, without making the discharge of obligations contingent upon the action of a third party." Money is the valuable thing or economic good which possesses in any country or community universal acceptability as a medium of exchange or means of payment.

The distinguishing of money from the main body of wealth has the advantage of clearing up some of the common erroneous ideas about it. It is to be observed first, that money is one form of wealth among many others; second, that it is always used, not for its own sake, but for what can be secured with it—consequently, we may have too little or too much of it, according to the amount of money work there is to do; third, that to hoard money is to misuse it, for by nature it is expected to circulate; and, fourth, money is not taken away from a country by trade, but is rather retained thru trading.

The definition of money is inevitably modified by the point of view from which the author writes. Thus, money may be discussed in the scientific sense with special reference to its work as a standard of value, or from the popular view as a means of purchasing. The enumeration might well extend thru the figurative, financial, legal and national banking senses of the term. The approach taken in this chap-ter will be the analytical. What does money do?

3. Functions of money.—As a matter of convenience the functions performed by money may be divided into: (1) those which are essential, (2) those derived from the essential functions, and (3) those which are contingent. The use of money brings out its essential functions as a medium of exchange and a standard of value. The derived functions are found in the fact that money acting in the capacities just cited must, as a matter of course, be a standard of deferred payments, transfer values from one person to another, and act also as a store of value. Now and then you hear of a man's buying a diamond in order that he may possess a permanent value that can be re-lied upon in time of need. So money, when well established in a scientific way, acts as a store of value. But beyond this, money is constantly doing other things. It acts as a means of distributing social in-come, as a basis of the credit system, and as a means of giving capital a mobile form.

4. Medium of exchange.—The simplest duty which money performs is to act as a medium of ex-change, the go-between in trade, making it possible for seller and buyer to obtain what they desire. This it accomplishes by virtue of its universal acceptability. Were there no legally recognized medium of exchange the needs of trade would create one which would by common consent serve its purpose. Many objects have in times past served this purpose. Some, it would appear, had a purely conventional value; but for the greater part they were objects possessing some inherent utility which made them generally prized. Therefore, as soon as they become the recognized means of making payments this general acceptability is universal.

Of all the substances which have served as money none has given greater satisfaction than gold and silver. This is due to certain physical qualities, and to certain conditions of their production. They are for the most part easily divisible into parts of uniform quality, and when so divided the sum of the parts is equal to the value of the whole before division took place. They wear well and keep their qualities intact for long periods. Moreover, they possess a stability which comes from the regularity of their production. From year to year the product of gold, for example, varies but little. The new product is added to the stock already in existence and the changes in this stock from year to year are very insignificant.

5. How money effects exchanges.—It is evident that to be an effective instrument of exchange money must be capable of making any payment however small or however large. The wide variety of exchanges which are made in daily life, from the purchase of a newspaper to the purchase of a railroad, require an instrument nicely adjusted to these various needs.

Many exchanges are not, as we know, made with money but with credit, but money must be of such a nature that it forms a satisfactory reserve for such credits. Money therefore effects exchanges directly and indirectly. These indirect exchanges belong in part to the subject of credit and will be more fully discussed under that head. They are mentioned here to make it clear that while all money is a medium of exchange, all media of exchange are not money.

The part played by media of limited acceptability, such as checks, notes, drafts and other credit instruments is of the first importance in the modern business world. It does not, however, conduce to clearness of thought to designate them currency or money of limited circulation, as has been done from time to time. In so far as the function of a medium of exchange is concerned, they are important and useful substitutes for money, but they are not money.

6. Money as a measure or standard of value.—The

commodity used as the medium of exchange becomes naturally the measure or standard of value. Whether goods are exchanged or not, they are instinctively valued in terms of money. It is the language which everybody understands; and while it might be quite true that a certain piece of land is worth so many bushels of wheat, it would be absurd to express its value in the United States otherwise than in terms of dollars and cents.

As a standard of value the chief characteristic which is desired of money is stability. Violent changes in value from day to day or year to year would make money a poor instrument for this purpose. Even changes in the value of the standard which are gradually wrought are of far-reaching effect in business relations. The desire for a stable standard has found frequent expression. The mercantile world has agreed to use gold as such a standard, and so far as its freedom from fluctuation from day to day or year to year is concerned it meets the situation admirably. Tho gold is the best standard that mankind has yet been able,to attain, it is far from perfect; and its changes in value over longer periods of time constitute one of the distinguishing marks of economic development.

If the value of the standard fluctuates, prices vary, labor is materially affected in its purchasing power, and the business man finds himself unable to tell whether his cost of production is changing or the standard of prices varying. No more important matter confronts the people than that of a stable standard of value as the basis of their monetary system; yet any reason is apt to be given for a rise or a fall in prices rather than that a change has taken place in the standard of value.

In the fall of 1896 every village and town in the United States witnessed the gathering of interested groups on the street corners. With wonderful volubility and no little heat all discussed the same subject, the standard of value. By one side it was asserted that the standard would be changed by free silver legislation, and by the other it was declared that a continuance of the gold standard would mean a de-crease in prices and a lowering of wages. The pocket-books of all were concerned and the matter became a national question.

7. The dollar.-How does money serve as a measure of value? In any measuring process the first thing necessary is to establish a unit. In Washing-ton, the Bureau of Standards has the real units of yard, foot, quart, etc. The British government keeps such standards in the Tower of London. These standards are reproduced and used by men in the business of buying and selling. The same thing must be done for money if it is to serve its fundamental purpose. Acting upon the recommendations of Alexander Hamilton, Congress declared in 1791 that the unit of measurement should be called a dollar and provided that the gold dollar should consist of 24.75 grains of pure gold. In 1834 the amount of pure gold was reduced to 23.22 grains, the present standard.

The use of the dollar as a measure comes into full practice when men say that things are worth so much in dollars. They are then expressing value in terms of something else, and that something else is, when universally accepted, money. For many years prior to the establishment of a legal monetary unit, the people of the United States carried on their business in terms of the old Spanish dollar which was very similar to the one adopted by Congress.

8. Standard of deferred payments.—If into the consideration of money as a standard we inject the time element, money may be designated as the standard of deferred payments. When men agree to make payments at some time in the distant future the creditor looks more carefully into the character of the money in circulation than if the transaction involved a short-term credit only. If the money of circulation is unquestioned men will not hesitate to make such con-tracts in terms of dollars. But if the solidity of the monetary circulation is in any way doubtful they seek to secure themselves as far as possible against any contingencies.

During the period of the suspension of specie payments in the United States, from 1861 to 1878, con-tracts and other obligations, especially bonds, were often expressed not in dollars but in gold dollars of a specified weight and fineness. Under these circumstances the currency in general circulation failed to fill all the functions of money. It was not a standard of deferred payments, a special form of money being singled out for this purpose.

It is unnecessary to dwell at length upon the fact that money may serve as a store of value. The hoard of the miser, the accumulations of coin which the French peasant proverbially does up in a stocking and conceals in some out-of-the-way place, are reservoirs of value. Such a use of money is not to be commended, but it cannot be doubted that it is one of the uses to which money may be put.

To recapitulate: money acts first as a medium of exchange, and second as a measure of value. From these two functions are derived the facts that money also acts as a standard of deferred payments, and as a store of value.

9. Incidental functions of money.—The fact that money performs a number of essential functions carries with it other activities that are of great importance. Just as money meets the needs of trade by obviating the necessity of barter, so does it act as a capital distributor. The savings of one group may thru the use of money be transferred to another group by transmitting money. The second group can then. engage laborers, buy products. already made, and be-gin the erection of a building. Thru money, this second group was given power over capital goods.

Such a process goes on everywhere. In modern times the movement of capital is made thru the banks and by the use of credit instruments; but the balance.. against the community, when all the bank transactions have been marshalled against one another, must be paid in money.

We are much given to thinking of the social income as a matter of money, but in reality it consists of the products created in such vast amounts and in so many varied forms. Every community produces somethin in larger quantities than others. The city of New York is a great clothing center; in it are made thou-sands of suits, dresses and cloaks. Pittsburg produces iron and steel commodities; Minneapolis makes among other things quantities of flour; Maine produces many bushels of potatoes, and North Dakota harvests millions of bushels of small grains.

These goods, with many others of all sorts and kinds, constitute the social income. The problem of distributing them calls into existence many wonderful marketing, transporting and selling devices. In the present organization of society money is the great medium thru which the distributing process goes on. Men everywhere secure money for their services and this they use to buy what they need. Going from store to store and person to person the owner of money exchanges it for what he wants and so comes into the possession of a share of the social income. This method of dividing the products of the earth has not always been in vogue; and even now in the South among some of the negroes, labor is paid for in kind. As Professor DuBois in a speech at the University of Minnesota in 1906 declared, the negro emerges into better things when he receives money wages for his work and when as a renter he can pay a fixed money rent.

10. Metallic money.—Metallic money is the coined money. The money of the standard is gold in the United States, as well as in most highly developed commercial lands. In the United States gold is coined in denominations of 2%, 5, 10 and 20 dollars. In this coinage the chief role is that of the twenty-dollar gold piece, which in value has formed over two-thirds of the coinage of the United States ever since its mints were established. In contrast, the coins of the smallest denomination now coined ($2.50) represent only one per cent of the total coinage.

Silver is coined into half-dollars, quarter-dollars and dimes; and in addition the monetary stock contains a large number of silver dollars, which have not been coined since 1904. For the smaller coins nickel and copper are used. The various experiments made, and they are numerous, show that the nations have hit upon a satisfactory selection of the metals for coin use. Durability, homogeneity, ductility and di-visibility are the qualities required in the metals. Gold, silver, nickel and copper mixed with alloy fill these requirements and make satisfactory coins.

The governments have assumed the function of coining not so much for the profit involved as for the purpose of maintaining at all times the accuracy of weight and design of coins. Gold coins are made from the gold purchased at assay offices. The phrase, free coinage, applies to the coinage of gold, since the gold coins are issued for a similar weight and fineness of gold. In some countries a fee is charged for coin-age. This is called brassage. The owner of bullion in the United States does not wait for coinage, but receives payment at once, tho required to pay for the alloy in the coins.

11. The silver dollar.—In the monetary system of the United States the silver dollar, and in that of France and the Latin Union countries the rive-franc piece, occupy peculiar positions. They are in law, but not in fact, standard money. They are legally a full tender for the payment of debt in any amount. They are not expressly convertible on demand into gold coin, tho they could not maintain their place in the monetary circulation if this convertibility were not obtainable indirectly. At the present time in neither of the countries named can this coinage grow in amount.

12. Bimetalism.—The attempt to keep gold and silver coins in circulation at the same time, both legal tender for obligations, and exchangeable for each other at par, with free coinage for both metals at the ratio fixed by law, is called bimetalism. For centuries governments have tried to keep the two metals in a fixed ratio to-each other. But whatever the legal procedure developed by them to do this, the commercial ratio has been one of constant oscillation.

In the United States the earlier standard was by law bimetallic; but in 1873 Congress suspended the free coinage of silver dollars, thereby making the gold dollar the sole standard of value. The Latin Union, a league of France, Belgium, Italy, Switzerland and Greece, was organized for the purpose of maintaining bimetalism. India, long on a silver basis, went to the gold basis in 1893, Japan in 1895 and other countries since that date. The whole commercial world has come to recognize the fact that it is an impossibility to hold a ratio against the results of economic forces working in the market.

The purpose of bimetalism—to establish two standards—is faced with the stubborn fact that there is but one standard of money possible at one time,. The government cannot fix values by legislative act, nor have the attempts to maintain two standards by international agreements been sufficiently successful to demonstrate the desirability of such action. Despite these principles of monometalism, the advocates of government-control by agreement have been sanguine that it was possible by controlling the money demand to keep the ratio prevailing in the market uniform with the mint standard.

13. Token money.—When the bullion value of the coins is not equal to the nominal value they are called tokens or token coins. Such coins circulate because there is a big demand for them in order to meet the ordinary trade requirements. This offsets the fact that their value is less than the amount for which they circulate. The government does not permit free coin-age, nor does it make such money an unlimited legal tender. In fact the silver coins, except the dollar, are a legal tender to $10 only and the copper and nickel coins to twenty-five cents.

On the other hand, the government redeems its token coins in the standard money. Consequently a street-car company or a nickel picture show that receives a great deal of change can take its money to the bank for deposit, with the full knowledge that the bank will accept the deposit since the small coins can be re-deemed at the government treasury.

14. Paper money.—Paper money has been the cause of many financial heresies, but there is nothing mysterious about it. The wear and tear upon gold coin suggested the use, of a representative money that would circulate while the gold rested in the vaults of the government. To -that end a kind of warehouse receipt has been issued by the United States government, which declares that there has been deposited a given sum in gold which would be paid upon presentation of the certificates. Of a similar nature are the silver certificates representing silver dollars on deposit in the treasury and the rapidly disappearing treasury notes of 1890 indicating that the government held silver bullion.

The real interest in paper money centers in fiat money whose value rests wholly upon the fact that the government declares it to be money of a certain de-nomination. Why, it has been asked, could not the government issue a paper money based upon its own authority and required to be taken in payment of debts and obligations, public and private? Is there, in essence, much difference between the problem involved in an attempt to maintain a bimetallic system and that of maintaining a paper money at par value? There is this difference, that in the case of the bimetallic system there is an economic value in the metals, while the paper money is an implied promise to pay money whose final value depends upon the redemption of the paper in metallic money. During the Civil War the United States issued large sums of paper money popularly known as greenbacks. Until 1879 these circulated below par; but the treasury then accumulated a large sum in gold, offering to redeem all notes with it. Since that date the notes have been limited in amount, and redemption of them has been a possibility at all times.

There is a third class of paper money that can be designated as credit money. Such money is a promise to pay coin and is issued by governments and banks. Usually the law requires the banks to maintain a reserve equal to a given percentage of the issue. In the final analysis such money depends upon the keeping of the promise to pay. Some of the bank money issued in the United States before the Civil War was of this character. It has a more recent illustration in the Federal Reserve notes.

15. Credit and standard money.—While the term credit money is in its narrower sense applicable to certain forms of paper money, more especially to bank notes issued under government authority, it will be seen that many kinds of money, apart from the standard, partake of the credit character.

Credit money exists in the form of metallic money as well as in paper money, in so far as the value of any metallic money rests upon the good faith of the government and the ability to convert it into standard money. In this sense the silver dollars and the token coins of the United States constitute credit money. When government paper money like the "green-backs" attains convertibility it passes from the realm of fiat money into that of credit money. The notes of banks like those of the national banks of the United States, which have universal acceptability and which are redeemable in standard money, are a form of credit money even tho they may not be a legal tender in the payment of debt.

16. Legal tender.—Standard money of all countries is a legal tender which the law compels creditors to accept. Such legal tender runs no further than the authority of the government which confers it. It is not of course the legal tender quality which makes the double eagles of the United States so much de-sired in foreign trade.

If legal tender is not necessary for money in its international use, neither is it necessary for all kinds of money in internal use. Any form of money readily convertible directly or indirectly into standard money circulates freely, irrespective of whether it is endowed by law with legal tender quality. The essence of such money is its convertibility.

When, however, legislation gives a legal tender quality to money which is not convertible, the seed of trouble is sown. In the history of the United States the legislative authority has made fiat money legal tender. The Revolutionary War was financed by legal tender fiat money, and this was also true in part of the Civil War. In both cases the government was a buyer in a market demoralized by its own acts. Before redemption of the notes took place the dollar was not worth 100 cents; yet the law forced the creditor to accept such money for past debts. Much loss of property thus resulted to the creditor class.

The government's intention regarding such money, when issued on a large scale, is to force its use and so relieve the financial needs of the government. The business world begins to guess the amount of money likely to be issued and the possibility of redemption. Thus an adjustment of prices begins at once. The result, of course, is a derangement of business and a kaleidoscopic variation in prices.

Despite this invariable outcome so often noted in our own history there are those who hold that the government has unlimited power to maintain the value of paper money by conferring the legal tender quality upon it. But for every community there is a point beyond which it will not take any money. This is reached very quickly in the case of excessive legal tender issues. Depreciation follows, with baneful effects upon the business man and the wage-earner.

17. Gresham's Law.—One of the interesting phenomena which may be noted when two metals or two types of coins, or for that matter two different forms of any kind of money of the same kind of metal, are placed in circulation, is the withdrawal of the heavier coins or the more valuable money from circulation and the continuance of the lighter or less valuable money in the marts of trade. Sir Thomas Gresham reformulated this idea in the sixteenth century during Queen Elizabeth's reign, when he gave utterance to what has since been known as Gresham's Law.

The law has been tersely put in this way: "Bad money drives out good money." Thus stated it applies to paper money as well as to metallic money. When competition works freely there is an effort to do the economic work at the least expense and with the largest results. On that basis a fiat paper money ought to circulate and do the money work, but the difficulty with such a suggestion is that the holders of the paper money want in the ultimate analysis something that can be converted into value. Hence there must be a value basis for money of any kind.

It is to be understood that Gresham's Law begins to work when there is more than enough of the two types of money to do the work. The circulation consists of the cheaper money while that condition exists. When business conditions are such as to demand both kinds of coins and require all the circulating media at hand, the more valuable money circulates side by side with the less valuable money. Just as soon, however, as the demand slackens, the more valuable money is withdrawn from circulation for use in the arts or for export for the settlement of trade balances.

To summarize the workings of Gresham's Law, it appears that the tenacity with which a money continues in circulation varies inversely with its capacity to do the different kinds of money work. Hence, if a money is worth less for other purposes than as money there will be no attempt to withdraw it. The more valuable money drifts into the reserves maintained by banks and the government. In this connection it is important to note that trade in itself does not lead to money movement.

This is particularly evident in the case of international trade, where the payments made are for the differences in the trade balances established by the nations. The foreigner wants money with which to buy things, and so long as he can buy with drafts based upon the credits established by the sales of his country's products in foreign lands his purchasing power is established. A balance one way or the other must be settled in the international money, gold.

Here we have one important explanation for the withdrawal of gold from circulation and its hoarding for reserve purposes in the banks. The banks in their turn protect their gold reserves by raising the rate of discount, and if this reaches too high a point the gold moves into the country from other lands and reestablishes the equilibrium. It is evident from this brief comment that a country cannot lose its money stock.

18. Monetary circulation of the United States.—On the first of each month the Secretary of the Treasury issues a statement of the monetary stock and monetary circulation of the United States. The following is a condensed statement in million dollars for December 1, 1918.

While this table reveals three main forms of money in the general stock, gold, silver and paper, it presents a somewhat bewildering variety of money issues in actual circulation. One form, moreover, is not accounted for, namely, the minor coinage, which for some reason is always omitted from the Treasury statements.

19. United States gold money.—It appears from our table that somewhat less than half of the monetary stock of the United States consists of gold or full-standard money. This favorable condition of affairs has been reached only gradually since the resumption of specie payments in 1878. Of this gold only a comparatively small part circulates in the form of coin, the great mass of it coming into use in the form of certificates. The gold coin held in the Treasury

as the reserve against such certificates does not appear in the table as a Treasury holding. While the table tells us that in the form of coin or certificates there is over one and one-half billion dollars in circulation it is not to be understood that any considerable portion of this amount is the pocket money of the people. Some is perhaps hoarded, but the largest amount which is traceable is locked in vaults of banks.

The reason for preferring the certificate to coin lies not only in the greater ease of handling notes and the smaller storage space required, but also in the denominations. Approximately two-fifths of the value represented by the certificates is in the de-nomination of $10,000; one-fourth in the denomination of $50 up to $5,000. The remainder of the value of such certificates is represented by denominations no larger than the coins themselves.

20. United States silver money.—Apart from the silver token coins, which are designated as subsidiary silver in the table and require no further comment, the silver money of the United States appears to consist of silver dollars, silver certificates and treasury notes. The small amount of the last named now out-standing is practically silver certificates as they are represented in the Treasury by standard silver dollars and not by bullion as was originally the case. The preference in the case of silver for the certificates rests upon their more convenient form.

When the bulky silver dollars were first coined in 1878 it was found impossible to force their use upon a people accustomed for years to a currency composed exclusively of paper money. No sooner did they leave the Treasury than the channels of trade brought them back. At no time does it appear to have been possible to circulate more than eighty millions of these dollars in metallic form. The silver certificate solved the problem of circulation. At the present time these certificates do a large part of the work for issues of $5 and less. Of the total value outstanding less than one-fifth is represented by certificates of a larger denomination than $5.

We owe the presence of this money in our circulation to the attempt of our government to bolster up the price of silver with a view to reestablishing, if possible, the ratio to gold of 16 to 1 which had prevailed in our legislation prior to the Civil War. Under the Bland-Allison Act of February 28, 1878, the government was directed to purchase from $2,000,000 to $4,000,000 worth of silver each month and coin it into standard silver dollars. The government never bought more than the minimum, but as silver was declining in price it added considerably more than $24,000,000 annually to our circulation. This act was superseded by the Sherman Act of 1890 under which the government bought monthly 4,500,000 ounces of silver and issued the Treasury notes of 1890 for the purchase price.

While under the Bland-Allison Act a fall in the price of silver resulted in the purchase of a larger amount to be coined into dollars, under the Sherman Act the fall in price meant that a smaller amount of money was required to purchase the stipulated amount of silver, and hence in the first instance the amount of notes was diminished. However, the Sherman Act contained a provision that the silver purchased could be coined into standard silver dollars. Tho silver purchases ceased in 1893, coinage of the bullion continued until it was exhausted in 1904. The small amount of Treasury notes now outstanding is there-fore secured not by bullion but by dollars.

21. Paper money in the United States: In our monetary circulation paper is represented by government issues, issues of the Federal Reserve banks and issues of national banks. The United States notes are the "greenbacks" of Civil War fame. During the war their amount was not much larger than at present; but the population of the country was less and the demand for money, therefore, much smaller. When they were issued they were not redeemable in gold. Specie payments had been suspended both by the banks and the government. Hence their issue drove gold out of circulation.

When after the war Secretary McCulloch curtailed their amount by some forty millions of dollars, he was stopped by act of Congress, animated by the fear of the consequences which must come from reducing an inflated currency. In fact, little reduction took place, and the standard money in our currency has so grown since then that these paper issues have been overshadowed. With the resumption of specie payments in 1878 and the stationary amount of the issue, the "greenbacks" have acquired respectability.

The national bank notes are another heritage of Civil War finance. The national banking system was established with the twofold purpose of furnishing a market for the bonds of the United States, and furnishing a uniform and secure national currency in lieu of the varied and often dubious issues of the state banks. Neither effort succeeded very well until a law of 1865 placed a tax of 10 per cent upon all state bank notes issued. This tax killed the circulation of state bank notes, and many banks which had been organized under state law secured charters as national banks. Bank notes are issued by the banks against a deposit of United States bonds with the government. The law makes the investment of some part of the banks' capital in bonds of the United States obligatory, and permits a larger investment if desired. On the basis of these bonds, notes are issued to the bank which puts them into circulation.

Such money rests ultimately upon the promise of the United States to pay its bonds, and its value is therefore intimately bound up with the public credit. Of a similar nature are the Federal Reserve bank notes which must be carefully distinguished from the Federal Reserve notes. Like the national banks the Federal Reserve banks may acquire bonds and issue notes upon them on the same basis. They must, moreover, purchase bonds up to a certain amount each year, if offered for sale by the national banks that desire to get rid of their bonds and the circulation based upon them, tho the Federal Reserve banks are not required to take this full amount from the national banks if they have already purchased some bonds in the market. The law thus contemplates a gradual retirement of the national bank notes, but it is not compulsory. When the Federal Reserve banks acquire the two per cent bonds of the United States, they can change them into three per cent bonds with-out the circulation privilege, or they may issue notes against them. They have followed thus far both plans, and hence the small amount of the Federal Reserve bank notes outstanding has not increased in proportion to the bond purchases of these banks.

The final element in our circulation of paper money consists of the Federal Reserve notes.' These notes are in part pure credit money. They have been issued in part in the process of discounting commercial paper for member banks. Their circulation rests upon the faith which the community has in the issuing banks, and on the reserve of gold held against such notes. For notes so issued the banks hold a reserve in gold of 40 per cent of the amount issued.

However, the greater part of the Federal Reserve notes outstanding were not of this character. They were issued thru the rediscounting process, but as the commercial paper against which they were issued matured, the banks deposited gold coin or certificates against the notes which remained in circulation with security of equal value with the notes issued. Such an issue of notes served to make the public familiar with notes of the new form, but did not in any sense change the currency conditions prevailing before their issue. But by far the greater part of the Federal Reserve notes now outstanding have been issued against de-posits of Liberty Bonds made by member banks. Many business men have used their bonds as collateral for large credits from their banks. These banks in turn have deposited the Liberty Bonds with the Federal Reserve banks and accepted large issues as Federal Reserve notes.

22. Our monetary system.—The monetary circulation of the United States is so varied in character that it can hardly be called a system. It might rather be termed a collection of remnants. In it are em-bodied the remains of abandoned policies. Yet taken as a whole it serves our purposes very well. The "greenbacks" and the silver issues, which in times past have been deemed danger points, have thru the fact that they are stationary in amount become harm-less. At present the only forms of currency that admit of expansion are gold, the Federal Reserve notes and the bank notes of the national and Federal Reserve banks.

Increase in the gold circulation and increase of the Federal Reserve notes depend upon trade movements and not upon government action. In thus securing a currency which is responsive to trade requirements we have placed business on a sounder basis than formerly.

REVIEW

What service does money render in effecting exchanges?

How does money act as a standard of value and what is the

chief requirement of the substance used as such standard? How does paper money get and maintain its value?

What is credit money?

How is Gresham's Law usually stated and when does it operate?

How is the presence of so much silver in the monetary circulation of the United States accounted for?

How many forms of paper money have we in the United States and how do they differ?

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