FIDUCIARY ISSUE. This term refers to that portion of a note issue, whether that of a Government or of a bank, which is not protected by a specific backing of metal or coin or assets capable of being converted into coin or bullion on demand. Thus, where no metallic reserve or other assets capable of automatic conversion into metal is kept, the whole issue is of a fiduciary character. The term does not imply that there are no assets of any kind maintained against the note, but only that such assets as are kept are of a non-metallic character—commercial bills of exchange, Government securities or floating debt due by Govern ment. In the modern world where many central banks keep part of their "metallic reserves" not in their own vaults, but in the shape of deposits with other central banks or in the shape of short-dated bills payable in other gold-using countries, it is no longer possible to draw a sharp line of distinction between the fiduciary and the non-fiduciary portion of the total circulation, and what is regarded as "gold cover" has in such cases to be defined carefully by the legislation governing the issue. Strictly, the fiduciary circulation consists of all that part of the total issue which is not directly covered by gold coin or bullion in vault or such metal "earmarked" (i.e., held specifically segregated) on account of the issue in some other institution.
It does not follow that the mere maintenance of a cash reserve adds to the safety of a note issue. To do so the whole of the note issue must be convertible ; i.e., the reserve against the notes must be used in case holders desire them to be redeemed. Unless the note is effectively convertible, an increase in the total note issue accompanied by an increase in the total reserve will not neces sarily prevent "over issue," i.e., a total of notes so large that its value falls in terms of the standard of value. A fiduciary issue may retain its full value provided it is limited in quantity, even without any metallic reserve at all.
The fiduciary amount may be fixed absolutely in amount : i.e., the issuer may be prohibited from issuing more than a certain volume of uncovered notes. This is the traditional British prin ciple. Or the note issue may be based upon the principle of a fixed absolute amount, the proportion of covered to uncovered notes being left to the discretion of the issuing authority, which is the traditional French principle. Or the note issue may be based upon the idea of a proportionate reserve without any absolute limit to the total, a minimum proportion of cash indirectly fixing the amount of the fiduciary issue. The system of proportional re serves and of a fixed fiduciary amount may be partly combined by providing that if the total issue exceeds the sum of the fully covered notes and the fixed fiduciary amount (the so-called tax free contingent) the excess shall be taxable. Lastly in the modern world the principle of the elastic reserve proportion is gaining ground rapidly: the reserve proportion is allowed to vary (thus varying the fiduciary portion), subject to provisions by which the tendency to over-issue is checked by a scale of taxation rising as the reserve proportion falls. (T. E. G.)