Danger of Overissue of Government Paper Money The danger or likelihood of overissue is the greatest objection to government paper money. Overissue brings about inflation, rising prices, bigger profits, business boom, and a demand for more and more issues; the cycle once begun is intoxicating and in democracies the legislatures are likely to yield to the popular clamor for new issues. Every issue, however, means an inflation of prices, a scaling of debts and contracts. The train of attendant evils is dire, and ultimate catastrophe is inevitable. Credit thus defeats itself. Moreover, a paper money party invariably arises which preaches the doctrine that paper money, being cheap and easily created and performing the functions of money satisfactor ily, is the best kind of money, and a better means of finance indeed than taxes—which directly affect pocketbooks—or than bond sales—which must later be repaid with interest. Paper issues work out their results so insidiously and indirectly through infla tion that for a time only their virtues are perceived, while their evils work unhindered.
The issuing government is not without guides to determine when an issue is excessive. One indication is a premium on gold; paper will be accepted only at a discount, the premium varying with the issues and with the government credit. Since foreign payments must be settled in gold, foreign exchange rates in a paper money country will rise and fall as the price of gold in terms of paper fluctuates. Metallic money, first the standard money and then subsidiary forms, will be withdrawn from circulation and go into hiding, into the melting pot, or abroad. Prices payable in paper will rise largely and rapidly, but a holder of specie can really buy on approximately the old basis by exchanging his gold for paper and buying at the paper prices. The premium on gold is thus a rough index to the appreciation of prices of goods.
Advantages and Disadvantages of Paper Money The advantages of the issue of government paper money are: i. It is economical, since it substitutes a less expensive terial than metal for money and conserves the metal for the arts.
2. It is easily and quickly increased; the printing press is more expeditious than the mine, smelter, and mint.
3. It has fiscal advantages; in emergencies, before taxes can be laid or bonds sold, paper money may be run off in anticipation of taxes or receipts from sales of bonds; it can be used to pay the ob ligations of the state, and amounts to a forced loan without interest.
4. It is more convenient than metallic money; it is light in weight and the weight does not increase with the amount; it is easy to conceal and to ship by mail or express.
5. If properly issued, it provides a certain elasticity to the currency.
Paper money has also many disadvantages and attendant evils: i. The greatest has been pointed out—the high probability of overissue, with consequent disturbance of contracts, business morale and relationships, and foreign exchanges.
2. The government may also suffer; it is a heavy purchaser, especially at such times as free resort is likely to be made to inconvertible issues, and it pays, like individuals, the higher prices due to inflation; the government expenditures are increased and the purchasing power of its receipts decreased, and as a net result the public debt is expanded.
3. The area of circulation of paper money is very limited; gold will be accepted internationally but paper only in the coun try issuing it; it cannot be used in international settlements. Its value, therefore, depends on the accidents of a limited area, and is more subject to fluctuation than that of gold, which is steadied by the equalizing tendencies of parts of a broad area.
4. Paper money has less stability of value, also, for the reason that it has only one use, namely, its monetary use. The metals, on the other hand have an equal or greater use in the arts, for which the demand is relatively constant, inasmuch as social usages change slowly and the demand for silver or gold utensils shifts but little. The total demand for the metal is, therefore, on a wider basis than the demand for paper money, and its value is thereby stabilized.
Government Paper Money Issued by the 'United States The issues of paper money of the United States government now current for which the government is direct debtor embrace the United States notes, the treasury notes of 189o, the gold and silver certificates, the gold order certificates, and the federal reserve notes. Our history is replete with experiments in govern ment money. The colonies issued such money to finance wars or the ordinary expenses of government, and to make loans to in dividuals. The various colonial issues differed in the degrees to which they were made legal tender and bore interest; but over issue characterized practically every lot. During the Revolution the "continentals" were used to finance the war, and excessive issues so depreciated their value that they became worthless. In the period 1812-1815 successive issues of legal tenders were made, with the result that specie payments were suspended and gold commanded a premium. Later issues were made during the distress following the panic of 1837, which extended over the years 1837-1842, and in connection with the financing of the Mexican War, and again after the panic of 1857. These issues were in moderate amounts and were not objectionable. During the Civil War, however, the real disaster came with the issue of United States notes, popularly called "legal tenders," or "greenbacks." The Confederacy also, as well as many of the Confederate States, issued overwhelming quantities of notes.