joined forces with those in favor of a cheaper metallic money in the hope of gaining the common end of a plentiful supply of currency. There have been numerous instances in this and other countries of the use of irredeemable paper money. While there have always been many who believe that irredeemable paper is the ideal money at all times, the actual issue of such currency has usually been the result of pressing financial needs on the part of the government; and as a general rule it has been regarded merely as a temporary expedient. In particular the financial exigencies of war have repeatedly led to the use of paper money. In our own history, in addition to the early Colonial and Revolutionary experiences, both the South and the North during the Civil War issued large quantities of paper with which to meet the immediate requirements of government; and in the present European struggle paper money issued through the medium of central banks largely controlled by the governments is apparently playing an important part in meeting the enormous financial requirements of the various nations involved. The striking feature of the history of paper money is that once an issue is started it becomes well-nigh impossible to check an almost indefinite increase. Let the first step be ever so hesitant, when once it is taken other issues are likely to follow in rapid succession until the entire monetary system is demoralized. It is only in rare instances that issues have been controlled and kept within limits of safety. The effects of an issue of irredeemable paper currency have practically always been disastrous in the long run, resulting not only in a derangement c financial relations and general disruption of business, but also in unsettling the customary morality which lies at the very basis of modern commercial life. Rather than serving as a real aid in meeting the financial requirements of wars, in the end paper money has always greatly increased the total cost, and in many cases it has proved the undoing of the nation quite as much as have the cannon of the enemy. However, there have always been plausible excuses for such issues, short-time necessities usually proving of more importance than long-time considerations. But the history of such issues should teach a lesson of vital importance in connection with financial preparedness. One of the most interesting aspects of war in general is its effect in coloring the views of the following generation, often serving to change the fundamental philosophy of national life. The "bloodstained and battle-scarred" greenback currency of the Civil War profoundly influenced the popular views on money in this country for decades; indeed we have not fully recovered from its spell even today. Moreover, the existence of $346,000,000 or more of this currency in our circulation continuously since the Civil War has given rise to an almost perpetual problem of regulation, and at times has seriously deranged the entire monetary and financial structure. It appears to be a serious obstacle even now to the success of the federal reserve system in giving us an elastic currency.'1 Numerous methods have been suggested for the regulation of government paper money, and there has been no end of argument as to the feasibility of its issue under any circumstances. Many students believe that a limited issue of irredeemable paper would be distinctly economical, but most of them hold that the dangers attending its use are still too great to warrant the risk; and they therefore urge that Congress should not be encouraged to play with the fire at all. A. Advantages of Paper Currency 84. TYPES OF GOVERNMENT PAPER MONEY There are three kinds or types of government paper currency: (1) mere representative paper, (2) convertible fiduciary paper, and (3) inconvertible or fiat money. Representative money is backed dollar for dollar by specie, and the paper certificates which circulate are nothing more or less than claim checks to an equivalent in coin; it gives rise to no problems of regulation. Convertible fiduciary paper is exchangeable for specie but is not covered by a coin reserve of 100 per cent. Unlike representative paper, it involves an element of trust or credit and affords a means of expanding the quantity of money beyond what is possible with the use of specie alone. Numerous devices have been developed by means of which redeemability may be insured without a full specie reserve, and there has been a long-continued discussion as to the most effective means for the purpose, resulting in the development of a fairly definite body of principles. Similarly there has been a prolonged controversy over the advantages and practicability of an irredeemable paper currency, or what may be called the "fiat" or paper standard of value. This controversy has disclosed some of the most interesting fallacies in the whole realm of political economy, and the experiences of mankind with irredeemable paper money have been among the most costly lessons that society has ever had to learn. 'See Reading No. 147, Part II. 85. THE ORIGIN OF REPRESENTATIVE MONEY' The origin of representative money is of much interest. Ancient nations were unacquainted with the use of paper money, simply because they had no paper. But it would be a mistake to suppose that they did not employ representative money. One of the very earliest mediums of exchange consisted of the skins of animals. The earliest form of representative money consisted of small pieces of leather, usually marked with an official seal. It is a very reasonable suggestion made by Storch, Bernardakis, and other writers, that when skins and furs began to be found an inconveniently bulky kind of money, small pieces were clipped off, and handed over as tokens of possession. By fitting into the place from which they were cut they would prove ownership, something in the same way as notched sticks, or tallies, were for many centuries used to record loans of money to the English Exchequer. We know by experience in the case of paper money that if a people had become thoroughly accustomed to the circulation of these small leather tallies they would in time forget their representative character, and continue to circulate them, when the government or other holders of the skins themselves had made away with the actual property. Such is no doubt the history of the leather money which long had currency in Russia. It is, however, in China that the use of paper money was most fully developed in early times. More than a century before the Christian era an emperor of China raised funds to prosecute his wars in a way which shows that the use of leather tokens was familiar to the people. The tokens having been made of the skins of white deer, he collected together into a park all deer of this color which he could find, and prohibited his subjects from possessing any animals of the same kind. Having thus obtained a monopoly of the material, reminding one of the monopoly of the Bank of England in water-marked paper, he issued pieces of white leather as money at a high rate. 86. GENERAL ADVANTAGES OF PAPER MONEY2 BY W. STANLEY JEVONS There are several purposes that may be detected in the use of paper currency. Perhaps the most obvious reason is that of avoiding Adapted from Money and the Mechanism of Exchange (1875), pp. 192–94. (D. Appleton & Co.) I Ibid., pp. 195–200. the trouble and risk of handling large amounts of the precious metals. In order to keep large sums of metallic money in safety a person must have strongholds and watchmen. At the present time in the United States silver and gold certificates have come to replace the actual silver and gold coins, in part for the reason just enumerated and in part for the one which follows. The weight of metallic currency is a second reason for the use of representative documents in large transactions. In proportion as the legal tender is more bulky and inconvenient to carry about is this motive more powerful. Thus, when the state of Virginia employed tobacco as the medium of exchange in the eighteenth century, the tobacco was placed in stores, and receipts on paper were handed about. Paper money was issued in Russia under Catherine II in 1768, on the ground that copper money, then forming the legal tender, was inconvenient. So much were these assignats, or notes, preferred that they at first circulated at a premium of per cent. In the present state of commerce even gold money would be far too heavy to form a convenient medium of making payments. M. Chevalier states that it would require forty men to carry the gold equal in value to the Regent Diamond. The average daily transactions in the London Banker's Clearing-House amount to twenty millions of pounds sterling which if paid in gold coin would weigh 157 tons, and would require nearly eighty horses for conveyance. If paid in silver the weight would be increased to more than 2,500 tons. I find that a Bank of England note weighs about 20 grains, whereas a single sovereign weighs about 123 grains, and a note may represent five, ten, fifty, a thousand, or ten thousand such sovereigns with slight differences in the printing. If we were obliged to handle a medium of exchange actually embodying value, it would, ere now, have been necessary to employ precious stones, or some metal much more rare and precious than gold. A further and very potent motive for employing representative tokens or notes consists in the saving of interest and capital, which is effected by substituting a comparatively valueless material in place of costly gold and silver. This may be accomplished in two ways. When in straits for want of revenue a government may issue paper currency as a means of paying its obligations, agreeing to receive back the paper at some future date in payment of obligations to it. It will be observed that this is a forced loan which enables a government to procure funds without interest. A saving of interest is also effected whenever a government has paper notes outstanding in excess of the gold held in readiness to redeem them. The greenback currency of the United States is a case in point. There are $346,000,000 outstanding with a specie reserve of only $150,000,000. 87. CHINESE PAPER MONEY IN THE THIRTEENTH CENTURY1 BY MARCO POLO Now that I have told you in detail of the splendour of this City of the Emperor's, I shall proceed to tell you of the Mint he hath in the same city, in which he hath his money coined and struck, as I shall relate to you. And in doing so I shall make manifest to you how it is that the Great Lord may well be able to accomplish even much more than I have told you, or am going to tell you, in this book. For, tell it how I might you never would be satisfied that I was keeping within truth and reason! The Emperor's Mint then is in this same City of Cambaluc, and the way it is wrought is such that you might say he hath the Secret of Alchemy in perfection, and you would be right! For he makes his money after this fashion. He makes them take of the bark of a certain tree, in fact, of the Mulberry Tree, the leaves of which are the food of the silkwormsthese trees being so numerous that whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes. The smallest of these sizes is worth a half tornesel; the next, a little larger, one tornesel; one, a little larger still, is worth half a silver groat of Venice; another a whole groat; others yet two groats, five groats, and ten groats. There is also a kind worth one Bezant of gold, and others of three Bezants, and so up to ten. All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names and to put their seals. And when all is prepared duly, the chief officer deputed by the Kaan smears the Seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the Seal remains printed upon it in red; the Money is then authentic. Any one forging it would be punished 'Henry Yule's edition of Travels of Marco Polo, pp. 423-26. (J. Murray, |