66 with gold and that it should be the duty of the Secretary of the Treasury to maintain such parity. Though the act did not provide adequate machinery for maintaining this parity, it corrected several of the defects of the old system. It provided for the redemption of the legal tender notes in gold on demand, for which purpose a reserve of $150,000,000 in gold must be kept in the Treasury. If this fund should at any time fall below $100,000,000, the Secretary of the Treasury is required to restore it to $150,000,000 by the sale of bonds. This gold reserve cannot be used to meet a deficit in revenue. To prevent a repetition of the 'endless chain" operations of the period following the crisis of 1893, the act provided that legal tender or treasury notes once redeemed should not be reissued except in exchange for gold. It also provided for the gradual retirement of the treasury notes by directing the Secretary of the Treasury to cancel them as fast as silver dollars could be coined and silver certificates issued under the terms of the Sherman Act of 1890 and the act of 1898. The Federal Reserve Act passed December 23, 1913, specifically reaffirmed the parity provisions of the act of 1900, and provided that the Secretary of the Treasury, in order to maintain such parity and to strengthen the gold reserve, may borrow gold on the security of bonds as authorized by the act of 1900, or on one-year gold notes, or to sell the same if necessary to obtain gold. Summarizing the evolution of our standard, the monetary history of the United States may be divided into five periods: (1) 1792-1834, the period of bimetallism with silver overvalued at the mint; (2) 1834-1862, bimetallism with gold overvalued; (3) 1862-1879, the greenback period; (4) 1879-1900, the period of the limping standard; (5) 1900 to date, the period of the unequivocal gold standard. READING REFERENCES Bullock: Essays on the Monetary History of the United States, Ch. III. : Dewey Financial History of the United States, Ch. X. Hepburn: History of Currency in the United States, Chs. V-XVI, XX, XXI. Johnson: Money and Currency, Chs. X, XI, XVI. : Laughlin History of Bimetallism in the United States. Moulton: Principles of Money and Banking, Pt. I, Ch. VI. Mitchell: A History of the Greenbacks. Noyes: Forty Years of American Finance, Chs. I-X. Phillips: Readings in Money and Banking, Chs. V-VII. White Money and Banking, Bk. I, Chs. III, VI; Bk. II Chs. III-VI. CHAPTER IV PAPER MONEY 29. Early paper money.-Among the devices which commercial nations have developed to facilitate the processes of exchange, representative money in the form of paper has come to have a very large importance. In early times people did not use paper money for the simple reason that they did not know how to make paper, but they used other forms of representative money in much the same way as some forms of paper money are used to-day. Small pieces of leather stamped with an official seal were among the earliest forms of representative money. When the increase in trading made skins inconvenient as a medium of exchange, small pieces were cut from them and presented as evidence of possession.1 Proof of ownership could be shown if necessary by fitting these pieces into the places from which they were cut. When people got accustomed to these leather tokens they continued to use them long after the use of the actual skins as a medium of exchange had been abandoned. A form of paper money was used in China and in other ancient civilizations at a very early time. In the thirteenth century Marco Polo found paper notes circulating in China which were legal tender and of different denominations. The introduction of paper money in Europe grew out of the difficulty and danger of carrying or storing large quantities of metal coins. In England, for example, mer1 Jevons: Money and the Mechanism of Exchange, p. 192. chants, finding it unsafe to keep money in their own houses or places of business, deposited it with goldsmiths, who had better means of safeguarding it. The goldsmiths gave receipts for these deposits of money in much the same way that warehouse receipts are used to-day. After a time the practice arose of transferring these receipts or "goldsmiths' notes," instead of withdrawing and transferring the money when payments had to be made. It was but a short step to the circulation of notes which were general promises to deliver a sum of money on demand without reference to specific deposits of coin. When people became accustomed to the use of paper promises to pay in specie, governments found it possible to issue paper which was only nominally payable in coin but which circulated as freely as the coin itself. But the use of paper money on a large scale did not begin until public banks were established. 30. Systems of paper money.-Paper money may be grouped under three general heads-representative, convertible or fiduciary, and inconvertible or fiat money. From the standpoint of the authority issuing it, paper money is divided into government currency and bank currency. In the leading European countries all paper money is issued by the banks1; in the United States it is issued both by banks and by the Government. Our national bank notes and the Federal reserve notes are in effect obligations of the Government. Sometimes corporations and even individuals have issued notes intended to serve as money, and in some instances these have gained a considerable range and volume of circulation, but such cases are exceptional. Representative paper money is issued against the specific deposit of an equal sum of gold or silver held in trust in a public depository for its redemption. Our gold and silver certificates are of this nature; they are really receipts, not unlike warehouse receipts, certifying that a certain sum of money in gold or silver, as the case may be, has been deposited in the United States Treasury, payable on de 1 During the war several of the European governments issued paper money. mand to the bearer of the certificate. These notes are more convenient to handle than the coin; they take up less room for storing; they are less expensive to ship; and they save the wear and tear on the coins. This latter saving is offset to some extent by the expense of printing new notes to replace those worn out. Gold certificates were first authorized in 1863 against deposits of gold coin and bullion. It was not intended that they should be used as "pocket money" and the smallest denomination was $20. In 1907 provision was made for the issue of $10 gold certificates. When the coinage of standard silver dollars was resumed in 1878, it was found that, owing to their inconvenient size and weight, these coins would not circulate freely, and so the plan of issuing certificates against them was tried. After the passage of the act of 1886 authorizing the issue of the smaller denominations of $1, $2, and $5, silver certificates largely displaced the silver dollars which they represent. Some authorities question the wisdom of retaining the silver dollars in our monetary system, but as long as they are retained it is clearly an advantage to substitute the certificates for them.1 31. Convertible or credit paper money.-Convertible paper money, otherwise known as redeemable, fiduciary, or credit paper money, consists of notes promising to pay in coin on presentation the amount expressed on the paper. Strictly speaking, such paper is redeemable in standard legal tender coin and in that alone. Gold and silver certificates were grouped in the preceding section under the heading of representative money, but it would be entirely proper to class them as convertible paper money, since they are government promises to pay in coin. They differ from credit money proper, however, in that they represent dollar for dollar the specie against which they are issued and that they simply facilitate the use of specie, while convertible government paper is only partially covered by a specie reserve and is not intended to serve as a substitute for coin but to supple1 See Pittman Act, p. 56. |