Having considered what fixes the value of metallic money, we are now ready for the ques tion what determines the value of paper money. Despite dil]'e•ences of detail, there are for the purpose of this discussion but two Masses of paper money—convertilile and inconvertilile. The first is secondary money, repres-enting metallic money. and deriving its value from the latter; the second is itself primary money, and, like all primary o• standard money, derives its value from the relation of supply and demand.
Paper money in the first instance was purely secondary or representative money. It was prac tically a storage receipt for gold and silver. Such receipts (-ailing for metallic money on de mand could and did serve in lieu of the latter in making, exchanges. Such money offers no theoretical difficulties. Its eirculation is that of metallic money in another form. The advantage of such money is that if forms a convenient mode of avoiding the emnbersomeness of metallic money. This is t he function 14 the gold and sil ver certificates issued by the United States Gov ernment, each of which represents a correspond ing quantity of metal in the United States Treas ury, and whose presence in Ilie monetary eireula lion does not in the slightest degree affect its volume.
But such certificates are not the only form of representative paper money, nor the most im portant. The history of banking, shows that the depositaries of metallic money soon learned that under normal conditions coin would not he do mantled at any one time for the full amount of the outstanding notes or certificates, and that a considerably larger sum could he kept in cir culation than the metallic reserve. They be gan, therefore. to issue notes in excess of the reserve without infringing upon the character istics of convertibility in coin on demand. Such money i.s called by the economists bank money. and it is immaterial whether it is issued by banks or by the Government. Such money derives its value from the metallic enrrcne•y upon which it is hosed, but, unlike the eertific•ates already de scribed, it enlarges the volume of the monetary circulation. The issue of such money economizes the use of the metals, and in so far as it substitutes an inexpensive for an expensive substance as money is a saving of wealth to the community.
If the principle of convertibility is not main tained, hank money paper money mare and simple. It has usually been by the failure of banks o• of governments to maintain the promise of redemption that such limey has arisen. When this takes place paper money falls in value, or. as it is usually expressed. Coin is at a premium. This would not of itself cause a disap pearance of coin. but it usually happens that paper money is so multiplied in volume that coin disappears and paper becomes the sole standard. This substitution takes place by virtue of Gresh am's law 1 q.v.). Such changes from a metallic to a paper currency are not effected without vio lent convulsions and much suffering: but there can he no doubt that, however ill it does the work. paper money under suet' cireunstanees per forms all the functions of a medium of exchange, a measure of value, and a standard of deferred paym•nts. Its value. like that of other money.
depends upon its quantity in relation to the de mand for money. As its quantity is likely to be increased without reference to the demands of trade in response to the fiscal necessities of the GoN-ernment, its value is unstable and uncertain. But this is not inherent in the nature of paper money: ?1141 there may he conditions. as in Aus tria during the greater part of the nineteenth century. under Avhivli paper money maintains a relative stability in value.
The adjustment of the monetary circulation to the needs of trade has given rise to money systems. in which. whatever may he the standard, gold. silver. and paper are usually com bined. Under a single gold standard paper is generally used for larger payments, while silver is used for the smaller. Both are representative money in such eases. Silver is issued as token coinage. A token coin is one whose bullion value is less than its face value and whose legal power to pay debts is limited. Such coins are issued by Government authority only. and pass current at their nominal values by virtue of legal enact ment. In a well-ordered system. provision is iv:witty made for the redemption of suet coins in standard money when presented in specified quantities. Of such nature are the fractional sil ver coins of the United States and the minor coinage.
1 Thder a single silver standard there is no theo retical reason why gold tokens should not be used for larger payments, but there is the prac tical reason that gold is expensive and that it is not absolutely necessary for such payments to be mad-. in nodal. Under such a standard as prevailed in Germany before 1 873. paper is used for larger payments, and it was one of the objec tions to such a silver standard that it afforded so wide a scope for the issue of paper money.
Before the introduction of token coin:: nations had for centuries endeavored to secure the con current circulation of gold and silver under a system of bimetallism. Under such a system. if the market ratio between the two metals diverged from the legal ratio one of the metals was certain to lie exported. When this oeeurred it always oc casioned much distress if the silver were the metal exported. for it robbed the people of the small change of daily life. Ilence we find among the nations which elung the longest to the bi metallic theory. that before it was abandoned measures had been taken to reduce the minor silver coins to the character of token,' in order that they might not be withdrawn from the country for export. With the introduction if token coinage and the adoption of the plan of issuing certificates to represent the larger eoins the discussion of bimetallism assumed quite a different aspect. The arguments drawn from the difficulty of insuring the circulation of silver were almost entirely excluded from the (H.44'11,441011. \aid' then centred upon the question whether gold alone o• gold and silver in combination. pro vided the combination could be kept intact. fur• niched the better standard of value. See BI METALLISM.