gold from industrial uses and an increase in the amount sent to the mints to be coined. On the other hand, gold coin is prevented from becoming less valuable than the gold it contains because of the steady demand for it for non-monetary purposes. If the bullion value of gold coin should exceed its coin value it can readily be melted and sold as bullion. Gold certificates are kept at par with gold by the fact that they are always redeemable in the gold coin against which they are issued and which is held as a trust fund in the Treasury. Silver dollars and the silver certificates issued against them are kept at par with gold because in practice they are freely exchangeable at the Treasury for gold. Though the law does not specifically require the redemption of silver dollars in gold, it has long been the settled policy of the Government to preserve a parity between its silver coins and gold, and experience has shown that this can be accomplished only by the prompt redemption of one in the other. The success of this policy depends, of course, upon limiting the amount of silver issued. The minor coins are kept at a parity with gold because they are redeemable in lawful money and because there is a steady demand in the retail business of the country for the limited amount issued. Both United States notes and treasury notes are now redeemable in gold. Treasury notes have so nearly disappeared from circulation that they have ceased to be a factor in our monetary system. Their place has been taken by silver certificates under the retirement provision of the law of 1900.1 The United States notes which, because of their excessive issue during the Civil War, depreciated greatly in value, returned to a parity with gold when specie payments were resumed in 1879. Reference has been made in a previous chapter to the embarrassment of the Government in the years following the passage of the Sherman Act of 1890 when the excessive issue of silver threatened to deplete the country of its gold. Greenbacks, being re1 See Pittman Act, p. 57. deemable in gold, were returned for redemption as rapidly as reissued until complete exhaustion of the Treasury reserve was anticipated. To prevent a recurrence of a similar situation, the law of 1900 provided that when these notes were redeemed they should be reissued only in exchange for gold. It also provided for a special gold reserve of $150,000,000 to be set aside in the Treasury for the redemption of United States notes and treasury notes. If the gold reserves should fall below $100,000,000 and cannot be increased by exchanges of greenbacks for gold in the general fund of the Treasury, the Secretary must restore it to $150,000,000 by the sale of bonds. The Federal Reserve Act of 1913 reaffirmed the parity provisions of the law of 1900 and provided that in order to maintain such parity the Secretary of the Treasury may borrow gold on the security of bonds or one-year gold notes. National bank notes are kept at a parity with gold by being made redeemable in lawful money both at the Treasury and by the banks issuing them. Every national bank is required to keep on deposit with the Treasury a sum of lawful money equal to 5 per cent of its outstanding circulation for the redemption of its notes. Federal reserve bank notes are issued and redeemed under the same terms and conditions as national bank notes, except that the amount to be issued is limited only to the face value of the bonds deposited. The Federal reserve notes which are obligations of the Government are redeemable in gold on demand at the Treasury or in gold or lawful money at any of the Federal reserve banks. They are secured by reserves in gold of not less than 40 per cent of the notes in circulation and collateral security consisting of notes and bills accepted for rediscount or purchased in an amount equal to the notes in actual circulation, or they may be secured dollar for dollar by gold. Furthermore, each reserve bank to which these notes are issued must keep in the Treasury a 5 per cent gold deposit to redeem them, though this deposit may be counted as part of the 40 per cent reserve required. In the several ways here outlined, all kinds of money in the United States are kept at a parity with the standard, gold. Despite some defects in our monetary system, there is no longer serious doubt as to the ability of the Government to maintain the gold standard. Some writers regard the greenbacks as a possible menace to the Treasury gold reserve and have urged their gradual retirement by the application of surplus revenues of the Government or by a bond issue. The immense hoard of silver dollars which, prior to the heavy export in 1919, lay idle in the Treasury was not in itself dangerous, but it involved an unnecessary waste of capital. The silver dollar is credit money in all essential respects like the greenback, its value being due not to the silver it contains, but to the Government's pledge to keep it equal to gold. Silver dollars and silver certificates are indirectly redeemable in gold. One objection offered to this large volume of government credit money, which together with bank notes serves as hand-tohand money, is that it keeps out of circulation an equal amount of gold. If this credit money were retired, and gold certificates were authorized in the small denominations needed, a corresponding amount of gold in the form of gold certificates would come into circulation, and so add strength to our currency and credit system. The issue of Federal reserve notes against the deposit of gold, legalized under the Federal Reserve Act by the amendments of June, 1917, has accomplished this in part. While the volume of credit money has been vastly expanded as a result of the war, the gold stock of the country has also greatly increased. A considerable amount of the gold which flowed into the United States during the war and after will probably flow out again as foreign trade and exchange return to normal. But in large part this gold has found its way into the Federal reserve banks where it can most effectively be conserved and whence its release and distribution can be intelligently controlled. The conclusion of the great war found Europe's currency and monetary systems in chaos; it will be years before they can be restored to a gold basis. The United States emerged from the contest with a sound monetary system based solidly upon gold. READING REFERENCES Johnson: Money and Currency, Chs. XVI, XVII. Seager: Principles of Economics, Ch. XIX. United States Treasury Department, Information Respecting United States Bonds, Paper Currency and Coin, etc. CHAPTER VI VALUE OF MONEY AND PRICES 42. Value and price.-Before entering upon the discussion of the important question of the value of money and its relation to prices and profits, it will be helpful to get clearly before us the precise meaning of the terms, “value” and "price." In economics value means exchange power or purchasing power, the exchange relation of a commodity to other commodities. Price is value expressed in terms of money. The value of a bushel of wheat can be determined only by comparing it with other commodities for which it may be exchanged. To make this comparison as simple and easy as possible, it is necessary to have some convenient unit of value. In the United States the unit of value is the dollar composed of 23.22 grains of pure gold, and prices are expressed or registered in terms of dollars and cents. Now, since price is value expressed in terms of money and value is simply exchange power, the exchange relation of one commodity to another, money itself cannot have any price; a thing cannot be exchanged for itself. Under our coinage laws an ounce of pure gold is worth or is coined into $20.67, and this is sometimes referred to as the price of money (gold). More properly, this is the 1 Our gold coins are only nine-tenths fine and so their gold content is worth $18.60 per ounce. The "price" of gold is always $18.60 because the Government fixes its price by fixing the weight of the dollar. As an ounce of gold contains 480 grains and a dollar contains by government decree 25.8 grains of gold, an ounce of gold is 18.6 times as heavy as a dollar. Thus gold is always worth $18.60. |