their bullion value as compared with that of the standard metal, they become worth more as bullion than as coin and begin to disappear from circulation. This happened often throughout the Middle Ages and until the nineteenth century. The attempt was frequently made to coin gold and silver at a ratio of weight corresponding exactly to their market values at the time and, every time the market conditions varied, the best full-weight coins of one of the two metals were taken out of circulation; whereas the worn coins might remain in cir Business thus often suffered for lack of the proper proportion of the various denominations of coins. At length, to remedy this difficulty, fractional silver coins, often called "token coins," were issued, in limited numbers, of less than full proportionate weight and bullion value, as compared with the standard commodity money.
This plan, having been partially tried, was generally adopted by the United States in 1853 at a time when the silver dollar of 371.25 fine grains was legally rated at the same value as the gold dollar of 23.22 grains, and was freely coined. The fractional coins were made a little more than six per cent lighter per dollar than the dollar coin; two half dollars or four quarters or ten dimes contained 93.52 cents' worth of silver. Later silver bullion became worth much less in terms of gold, and for years the bullion value of the silver in a dollar of silver small change was between forty and sixty cents. Yet the fact that fractional coinage continued to circulate and exchange freely at parity with standard money showed that it had a monetary value equal to the standard money, dollar for dollar. Why was this The answer is, because it is artificially limited in quan tity, so that it does not pass the point of saturation in the field of its use. Its value rests on its monetary use ; it is fiduciary money, not commodity money. It is limited simply by letting "the needs of the people" determine its amount.
This is done by issuing it only in exchange for other money 2 See next section on worn coins in connection with Gresham's law.
of the larger denominations, and by redeeming it in other money on demand. Mostly, fractional coins are issued by the mints on the request of banks. One needing "change" gets it at the bank; when the bank finds its supply falling short it gets more in exchange for other forms of money, as shown in the table of the monetary system. As business increases in a period of prosperity, the demand for nickels, dimes, and quarters rises, and the mints work night and day to supply the need. If these coins were made in great quantities and forced into circulation by the government through paying them out to creditors and officials, their quantity would be come excessive and they would fall in value (be at a discount) compared with standard money. But as this is not done, and as, moreover, they are redeemed on demand at the Treas ury (and practically at every bank and post-office) in other money, any slight tendency to depreciation in any locality is at once corrected. The fractional coinage is maintained at a parity with the standard money in accordance with the monopoly principle, expressed in the limitation of the amount. The government makes a seigniorage profit on the fiduciary coinage, as shown in the appended Net revenues from mint service 10,524,000 § 5. Gresham's law. Coins may be light weight as the result of another cause—namely, the abrasion (wearing off) of the coins in circulation. Nearly always when this has occurred the worn coins have still been accepted as money, and ordinarily without any depreciation. It makes no differ 3 Receipts and Expenditures of Mint Service in 1920.
ence what may be deemed the cause of their acceptance; whether it be habit, public opinion in business circles, or the act of law making them a legal tender ; the essential thing is that they continue to be accepted as money. They have a value as money greater than the value of the bullion that is in them. Yet everybody takes them without hesitation as readily as if they were full weight. If, however, at this point, new full-weight coins are put into circulation, these at once disappear while the old worn coins remain in circula tion—a fact that in medieval times was found both mystify ing and annoying.