The United States, under the Constitution, did not try legal-tender paper money till 1862, when paper notes (called greenbacks, because of the color of ink with which the re verse side was printed) were first issued, later increased to a total of about $450,000,000. Other interest-bearing notes were issued with the legal-tender quality and circulated as money to some extent. Greenbacks depreciated in terms of gold, and gold rose in price in terms of greenbacks until, in June, 1864, it sold at 280 a hundred. Fourteen years elapsed after the war before these notes rose to par in terms of gold (in December, 1878), and they became legally redeemable in gold January 1, 1879. This was called the "resumption of specie payments." Ever since that time the United States has maintained the gold standard.
§ 12. Irredeemable paper money in Europe. The leaders of the French Revolution, failing to learn the lesson of the American revolutionary experience, issued, on the security of land, notes called assignats in such enormous quantities that they became worth no more than the paper on which they were printed. The paper money issued by the Bank of England under the restriction act of 1797-1820 is especially notable because it gave rise to the controversy which did much to develop the modern theory of the subject. Parliament for bade the Bank of England to redeem its notes in coin because the government wished to borrow the coin the bank held. The result was the issue of a large amount of bank money not subject to the ordinary rule of redemption on demand. It was virtually governmental paper money. The notes de preciated and drove gold out of circulation, and it was not until 1821 that specie payments were definitely resumed. Essentially the method of the restriction act was applied by each of the belligerent nations to its state bank in the period of the World War.
Almost every nation has at some time issued political money. During the Franco-Prussian War in 1870., France, through the medium of its great state bank, made forced issues of notes of a political nature, which only slightly depreciated. Many countries—Russia, Austria, Portugal, Italy, and most of the South and Central American republics—have had or still have depreciated paper currencies.
At once, at the outbreak of the Great War in 1914, the gov ernments of the warring nations began to exercise a strict control over the issue of paper money, sought in every way possible to gather into the public treasury all the precious metals in the form of coins or ornaments, and to give paper (either governmental notes or bank-notes) a forced circula tion, making it the sole circulating medium. In such cases the money partakes somewhat of the characters both of bank notes and of political money. Even in Great Britain the
paper money (mostly notes of the Bank of England) depre ciated 20 per cent or more, compared with gold ; in France and in Belgium, at the worst, nearly 60 per cent ; whereas in many of the other continental countries (notably Germany and Austria) it fell nearly 99 per cent. In Russia the paper seems to have become quite worthless. The return to the gold standard is one of the most difficult tasks these countries have to perform.
§ 13. Theories of political money. There are two extreme views regarding the nature of paper money, and a third which endeavors to find the truth between these two. First is that of the cost-of-production theorists, who declare that govern ment is powerless to influence value or to impart value to paper by law. They deny that there is any other basis for the value of money than the cost of the material that is in it. Money made of paper, on a printing-press, has a cost almost negligibly small, and therefore, they say, it can have no value. The facts that it does circulate and that it is treated as if it had value are explained by the cost-of-production theorists as follows: while the paper note is a mere promise to pay, with ho value in itself, it is accepted because of the hope of its re demption, just as is any private note. Depreciation, accord ing to this view, is due to loss of confidence; the rise toward par measures the hope of repayment.
Taking a very different view, the extreme fiat theorists as sert that the government has unlimited power to maintain the value of paper money by conferring upon it the legal-tender quality. The meaning of fiat is "let there be," and the fiat money advocates believe that the government has but to say, "Let it be money" to impart value to a piece of paper. The typical fiat-money advocates in the United States were the "Greenbackers," who wished to retain the greenbacks issued in the Civil War and to increase the amount greatly. They saw in paper money an unlimited source of income to the government. They proposed the payment of the national debt, the support of the government without taxes, and the loan of money without interest to citizens. All might live in luxury if the extreme fiat-money theorists could realize their dream. The depreciation that has taken place in nearly every case where government notes have been issued, the fiat theorists declare to be due to a mild enforcement of the law of legal tender. To them the fact that paper money may cir culate for a time at par appears a reason why it always should. They do not recognize that there is a saturation point in the use of money.