It is only by thus making some coins subsid iary to others which are standard that a rency consisting of coins made of different metals can be maintained. Otherwise, since the relative values of the different metals are con stantly changing it will always be found profit able to melt down certain of the coins for sale • as bullion or to ship them abroad, where they always pass at their bullion value. For example, suppose at the time a coinage system is estab lished 300 grains of silver is exactly equivalent in value on the bullion market to 20 grains of gold, and • that accordingly coins containing each 20 grains of gold and legal tender for one dol lar, and others each containing 150 grains of , silver and legal tender for half a dollar are freely coined at the mints for individuals bring ing metal of the proper standard. Soon the relative value of gold and silver on the bullion market changes so that 20 grains of gold are . equivalent in value to 400 grains of silver. Then it will be profitable to melt down the gold• coins for sale as bullion or to use them in for eign payments at their bullion value and at home to use two silver half dollars in making a dollar payment instead of a gold dollar. This condition is prevented by making the silver coins subsidiary. They can then only be ob tained by purchase from the government at the rate of two silver half dollars for a gold dollar.
Since the government at any time will give back a gold dollar for two silver half dollars, there will be no reason for anyone's refusing to take two silver half dollars for a dollar's worth of goods. The government protects itself from the danger and expense of an exces sive volume of redemptions of silver coins by itself monopolizing their manufacture and by limiting the amount strictly to the need for them as a circulating medium.
Certain coins, notably the silver dollar of the United States and the five-franc piece of the states of the Latin Monetary Union, occupy a somewhat anomalous position, being neither subsidiary in the strict sense of that term nor standard but midway between the two.
Paper Currency is distinguished by the element of credit which is its dominant charac teristic. It may be defined as a record of an obligation to pay made in a form suitable for monetary purposes. It may be the obligation of a government, of a bank or of some other kind of a private corporation or even of a private person. The obligation is always ex pressed in terms of the standard value of the nation in which it is issued. The form may be that of a promise to pay or that of an order to pay. If the former, the notes recording the promise are usually issued in denominations suitable for use as hand-to-hand money and are made payable to bearer on demand.
Paper currency will circulate wherever the credit of the party which issues it is known or believed to be good, provided its form is suit able for commercial purposes, and it may circu late at a discount even when the credit of the issuing party is not of the best. Within the territory in which it circulates the extent of its use, which is now greater than that of any other form of currency, is due to its superior convenience and safety and to the economy of its use. For large payments it is more con
venient and economical than coin and for pay ments between people located in different places and for the use of travelers and for nearly all payments by mail or express it is safer as well as more convenient and economical. The most widely used kinds of paper •money are circulated through the agency of governments and banks.
Government Currency, as the former kind may be called, consists of notes issued by gov ernments in denominations suitable for mone tary purposes, payable to bearer on demand and usually, though not always, non-interest-bearing. They may be convertible or inconvertible, that is, redeemable in coin on demand or not so redeemable. In the latter case the obligation of the government to redeem them is unques tioned, since it is usually expressly stated in the form of a promise, but the time of redemption is left for future determination. The form of the two kinds of notes may be identical, in which case the only difference between them is that in the one case the government actually re deems its promise to pay on demand and in the other it does not.
In order to aid in the circulation of incon vertible government notes they are usually made legal tender,— that is, their tender in the pay ment of debts is declared by law to constitute a legal fulfilment of the obligation ;— and they are made receivable for taxes and most, if not all, other public dues. The fact of their incon vertibility, however, renders them inferior to the metallic elements of the currency, all of which are freely interchangeable, and the stand ard coins of which have a market value as bullion, identical or identical less a small senior age charge, with their value as coin. They, therefore, depreciate, that is, they are exchange able on the money market for something less than the amount of coin which is indicated in the promise to pay which they record. The amount of depreciation depends upon subjective influences. It is a fairly accurate expression of the combined judgment of the people regarding the credit of the government and the time at which it is likely to redeem the promises it has expressed on the notes. It is, therefore, subject to wide, sudden and frequent fluctuations. On account of their depreciation inconvertible gov ernment notes take the place of coin in the circulating medium since the latter can more profitably be sold as bullion or exchanged for notes on the money market at their discounted value, and the former being legal tender may be used in all payments. Since everyone must receive and pay out these depreciated notes, they necessarily quote prices in terms of them, and consequently all prices rise to the extent of the depreciation of the notes and thereafter fluctuate in accordance with the amount of their depreciation. On account of the subjective and consequent erratic character of these fluctua tions all business becomes highly speculative, calculations based on a study of cost, demand and supply and the other factors upon which sound business depends become untrustworthy and everybody is forced to gamble in order to live. The circulation of such notes, therefore, constitutes a national calamity.