While under the Bland-Allison Act a fall in the price of silver resulted in the purchase of a larger amount to be coined into dollars, under the Sherman Act the fall in price meant that a smaller amount of money was required to purchase the stipulated amount of silver, and hence in the first instance the amount of notes was diminished. However, the Sherman Act contained a provision that the silver purchased could be coined into standard silver dollars. Tho silver purchases ceased in 1893, coinage of the bullion con tinued until it was exhausted in 1904. The small amount of Treasury notes now outstanding is there fore secured not by bullion but by dollars.
21. Paper money in the United our monetary circulation paper is represented by govern ment issues, issues of the Federal Reserve banks and issues of national banks. The United States notes are the "greenbacks" of Civil War fame. During the war their amount was not much larger than at present; but the population of the country was less and the demand for money, therefore, much smaller. When they were issued they were not redeemable in gold. Specie payments had been suspended both by the banks and the government. Hence their issue drove gold out of circulation.
When after the war Secretary AIcCulloch curtailed their amount by some forty millions of dollars, he was stopped by act of Congress, animated by the fear of the consequences which must come from reducing an inflated currency. In fact, little reduction took place, and the standard money in our currency has so grown since then that these paper issues have been overshad owed. With the resumption of specie payments in 1878 and the stationary amount of the issue, the have acquired respectability.
The national bank notes are another heritage of Civil War finance. The national banking system was established with the twofold purpose of furnishing a market for the bonds of the United States, and fur nishing a uniform and secure national currency in lieu of the varied and often dubious issues of the state banks. Neither effort succeeded very well until a law of 1865 placed a tax of 10 per cent upon all state bank notes issued. This tax killed the circula tion of state bank notes, and many banks which had been organized under state law secured charters as national banks. Bank notes are issued by the banks against a deposit of United States bonds with the government. The law makes the investment of some part of the banks' capithl in bonds of the United States obligatory, and permits a larger investment if desired. On the basis of these bonds, notes are issued to the bank which puts them into circulation.
Such money rests ultimately upon the promise of the United States to pay its bonds, and its value is therefore intimately bound up with the public credit. Of a similar nature are the Federal Reserve bank notes which must be carefully distinguished from the Federal Reserve notes. Like the national banks the
Federal Reserve banks may acquire bonds and issue notes upon them on the same basis. They must, moreover, purchase bonds up to a certain amount each year. if offered for sale by the national banks that desire to get rid of their bonds and the circulation based upon them, tho the Federal Reserve banks are not required to take this full amount from the national banks if they have already purchased some bonds in the quarket. The law thus contemplates a gradual retirement of the national bank notes, but -it is not compulsory. When the Federal Reserve banks acquire the two per cent bonds of the United States, they can change them into three per cent bonds with out the circulation privilege, or they may issue notes against them. They have followed thus far both plans, and hence the small amount of the Federal Reserve ba.nk notes outstanding has not increased in proportion to the bond purchases of these banks.
The final element in our circulation of paper money consists of the Federal Reserve notes.' These notes are in part pure credit money. They have been issued in part in the process of discounting coinmercial paper for member banks. Their circulation rests upon the faith which the community has in the issuing banks, and on the reserve of gold held against such notes. For notes so issued the banks hold a reserve in gold of 40 per cent of the amount issued.
But by far the greater part of the Federal Reserve notes outstanding are not of this character. They have been issued thru the rediscounting process, but as the commercial paper against which they were issued matured, the banks have deposited gold coin or certificates against the notes which remain in circula tion with security of equal value with the notes issued. Such an issue of notes serves to make the public familiar with notes of the new form, but does not in any sense change the currency conditions prevailing before their issue.
22. Ozimonetary system.—The monetary circula tion of the United States is so varied in character that it can hardly be called a system. It might rather be termed a collection of remnants. In it are em bodied the remains of abandoned policies. Yet taken as a whole it serves our purposes very- well. The "greenbacks" and the silver issues, which in times past have been deemed danger points, have thru the fact that they are stationary in amount become harm less. At present the only forms of currency that admit of expansion are gold, the Federal Reserve notes and the bank notes of the national and Federal Reserve banks.
Increase in the gold circulation and increase of the Federal Reserve notes depend upon trade movements and not upon government action. In thus securing a currency which is responsive to trade requirements we have placed business on a sounder basis than formerly.