Fiat currency

“ The public felt morally certain that the prosperity of the province was proportionate to the volume of currency in circulation. "Considering the demand of the Government as to their taxes and the great occasions of the People as to their trade" [45] more money of some kind was necessary to facilitate trade and commerce. But the one great principle of redemption for all paper currency in specie of intrinsic value was a conception they did not grasp. Hence every effort made to relieve the burden only tightened the ligatures of a cheaper fiat money. ”

“ Thus, whatever expedient you may resort to, gold will be and remain the standard of value as to the fiat dollar. Your fiat dollar will be brought up before that tribunal to have judgment pronounced as to its worth, and the idea that by introducing here a paper-money system of your own you can withdraw from the rules that govern the commerce of the world, and change the real standard of value in your business transactions, will appear as one of the most absurd and childish conceptions the human brain has ever been guilty of. ”

“ Whenever any nation intrusts to its legislators the issue of a currency not based on the idea of redemption in standard coin recognized in the commerce of civilized nations, it intrusts to them the power to raise or depress the value of every article in the possession of every citizen. ”

“ Clipped shillings, French assignats, and Continental and Confederate currency, were no more fiat money than are American double eagles or five-pound Bank of England notes. It is the stamp of the government, the fiat of its power, that turns the metal or the paper into money.”
“But do not all financiers consider inflation a disaster, Mr. Morning?”
“Inflation,” replied the gentleman, “whether of metallic or paper currency that is accepted by the world or by a great commercial nation as a legal tender, can do no harm except to those who loan money. A dollar is a mere term. ”

“ The year 1775 witnessed the revival of paper money as a legal tender by authority of the provincial congress. The nature of this currency was akin to the old bills of credit which seemed to have bequeathed to the new currency the destiny of fate. The whole system of fiat money fell by its own weight in 1778. Mr. Jonathan Amory, the great Boston merchant, says, December 16, 1780: "Everybody asks silver or gold or paper, as they please, paper having been for a considerable time at 75 per cent; goods bring three for one." ”

“ Now, while we are doing this immense business with the world abroad on the gold basis, must it not be evident to the dullest understanding that, although the last gold coin may have been banished from our domestic transactions, the value of the fiat dollar in comparison with gold will be quoted just as the greenback dollar was, and that this comparison will be a matter of daily concern and anxiety to every farmer, West and East, the price of whose products depends upon the foreign market? ”

“ People indulge in a good deal of loose talk about inflated currency, debased currency, and fiat money. In truth, all money is fiat money, for a bar of gold is not a legal tender, and inflation of values is the law of commercial growth. In the middle ages a penny was the price of a day’s wages or of a bushel of wheat. Money which has for its basis either precious metals or substantial property in lands or merchandise is good money, while money lacking such basis is bad money. ”

“ Of course, with such security, the fiat dollar ought to be worth its face in gold, and thus you may think of foreclosing that mortgage on the wealth of the country. Maybe you are a laboring man who have some money in a savings bank, which formerly was worth enough to buy a little house with, but in its fiat condition, money being plenty, appears just sufficient to pay for a jack-knife. You may go to the next best public building to see whether you can find any of the wealth of the country there, which is security for your fiat money, to lay your hands upon. ”

“ This private experiment at inflating the currency cost the people considerable money and virtually compelled the provincial authorities to issue more bills of credit to replace the exchange retired by the New London Society. Private schemes to enlarge the currency proved futile. The little matter of redemption was fixed for a time twelve years in the future when the price of silver was just twice as much as at the time of issue. Practically speaking, had the society continued business it might have redeemed its bills at 50 per cent on the face value—the result of an inflation of the currency. ”

“ Despite the efforts of the legislature to debase the currency, the precious coin found its way to foreign lands. The interests of trade and commerce, which had received an impetus for a time, very soon had to pay the cost of this novel experiment in finance. [13] It was the beginning of a mischief which proved an almost constant source of annoyance to the government and people, and which was increased as new enactments of the legislature and private banks sought to relieve the pinching wants of a people with a scanty and bedraggled medium of exchange. ”

“ Danger and toil have always attended the explorers in finance, and they always will. Nevertheless the path is the way of civilization. The greater the development of civilized life, the larger will be the values in paper and credit."
The pathway to our present monetary standard is lined with the wrecks of different forms of currency, country pay, debased coinage of the Boston mint, credit bills of the Colony of Massachusetts, fiat money of the Province of Massachusetts Bay, legalized fiat money, inflated currency, land bank bills, silver notes, treasury notes, continental currency. ”

“ This observation made by a leading citizen of the time when fiat money was forced upon the people with no provision for redemption in specie, illustrates a condition which, in the very nature of things, must ever exist when an unknown quantity is offered in exchange for a fixed value. ”

“ The aggregate of the issues amounted to no less than the enormous and unthinkable sum of $9,500,000,000, and in the middle of 1797 when public repudiation took place, there was no less than $4,200,000,000 in face value of assignats and mandats outstanding; the loss, as always, falling mostly upon the poor and the ignorant.
(2) In the attempt to maintain fixed values for the paper currency the Government became involved in an equally futile attempt to maintain a tariff of legal prices for commodities. ”

“ The seigniorage could never be reduced to less than zero. Money can never be materially cheaper than the metal composing it, since the slightest tendency in this direction will result in coin being exported or melted into bullion. In a period of rising prices, regulation would be easy; in a period of falling prices, regulation might be quite impossible.*41
XIII.24 Another plan is a convertible paper currency, the paper to be redeemable on demand,—not in any required weight or coin of gold, but in a required purchasing power thereof. ”

“ XIII.21 But sad experience teaches that irredeemable paper money, while theoretically capable of steadying prices, is apt in practice to be so manipulated as to produce instability. In nearly every country there exists a party, consisting of debtors and debtor-like classes, which favors depreciation. A movement is therefore at any time possible, tending to pervert any scheme for maintaining stability into a scheme for simple inflation. As soon as any particular government controls a paper currency bearing no relation to gold or silver, excuses for its over-issue are to be feared. ”

“ On this occasion I addressed a letter to a noble Lord, who was then Chancellor of the Exchequer, suggesting what appeared to me the proper remedy for this evil. I proposed that, with a view to the general [Pg 234] reform of the coins of the realm, all the deficient gold coins should in the first place be called in and recoined, and that in future the currency of the gold coin should be regulated by weight as well as by tale, and that the several pieces should not be legal tender if diminished below a certain weight. ”

“ If, after the restoration of specie payments, my opinion could be made to prevail, no bank in the United States, nor the Government itself, should be permitted to issue a note of a denomination less than five dollars. "What!" I hear the inflationists exclaim, "you would take the convenience of small notes from the people?" Yes, I would let them have something better. They should handle gold and silver. It is the small currency that most circulates among the people of small means, and it is of vital importance to them that that small currency be most secure in its value. ”

“ It has uniformly recognized in its fiscal affairs the distinction in value between paper currency and coin. Some of its loans are made payable specifically in coin, whilst others are payable generally in lawful money. It goes frequently into the money market, and at one time buys coin with currency, and at another time sells coin for currency. In its transactions it every day issues its checks, bills, and obligations, some of which are payable in gold, while others are payable simply in dollars. And it keeps its accounts of coin and currency distinct and separate. ”

“ XIII.34 The successful operation of the system is not only compatible with, but actually requires, an overvaluation of the metallic content of the silver currency. In fact, in the Philippines it was found necessary to reduce the silver pesos from 374 grains to 247 grains, to prevent their disappearance. Without a margin between the coin-value and the bullion-value of the peso, the power to regulate its circulation would exist only in one direction—contraction; with such a margin, the power exists to expand as well as to contract. ”

“ The general conclusion reached was that a "rise of the market price of gold above its mint price will take place," if the local currency of any particular country, "being no longer convertible into gold, should at any time be issued to excess. That excess cannot be exported to other countries, and, not being convertible into specie, it is not necessarily returned upon those who issued it; it remains in the channel of circulation, and is gradually absorbed by increasing the prices of all commodities. ”

“ Not only within the country had we a local and general currency perfectly sound, but in whatever quarter of the globe American commerce had penetrated, there also did the bills of the United States bank command unbounded credit and confidence. Now we are in danger of having fixed upon us, indefinitely as to time, that medium, an irredeemable paper currency, which, by the universal consent of the commercial world, is regarded as the worst. ”

“ A depreciation of money is not an accumulation of national wealth, and therefore a nation may both abound in currency, and also become poor and wretched. This is, invariably, effected by the system for increasing currency, combined with regulations by which its occupation of exchanging property is contracted, and that of transferring it, is extended. The supreme law of commerce governs currencies both local and universal. ”

“ He is compelled to pay, when prices have fallen, on the same basis in terms of money, and a much higher value in terms of goods, than when prices ranged higher. Hence failure often results, credit currency contracts still further because of the general distrust, and depression becomes more severe. With payment in terms of purchasing power, the situation would be altogether different. Falling prices would neither injure borrowers nor benefit lenders. ”

“ We do not comprehend the wisdom of fixing and limiting the amount of currency the country may have for a circulating medium, and empowering one man to decide, how, when, and where it shall be distributed. Conceding to the general government the power to charter banks and issue treasury notes, the power is not exclusive. There is no limit to the volume of gold and silver, and if government should attempt to limit the amount of coin, it could not do it. ”

“ It thus appears, that a depreciation of the currency does not affect the foreign trade of the country: this is carried on precisely as if the currency maintained its value. But though the trade is not affected, the exchanges are. When the imports and exports are in equilibrium, the exchange, in a metallic currency, would be at par; a bill on France for the equivalent of five sovereigns, would be worth five sovereigns. But five sovereigns, or the quantity of gold contained in them, having come to be worth in England 6l., it follows that a bill on France for 5l. ”

“ It is only thus that a general rise of prices can be a source of benefit to producers and dealers; by diminishing the pressure of their fixed burthens. And this might be accounted an advantage, if integrity and good faith were of no importance to the world, and to industry and commerce in particular. Not many, however, have been found to say that the currency ought to be depreciated on the simple ground of its being desirable to rob the national creditor and private creditors of a part of what is in their bond. ”

“ There is not indeed the self-acting check which convertibility brings with it. But there is a clear and unequivocal indication by which to judge whether the currency is depreciated, and to what extent. That indication is, the price of the precious metals. When holders of paper cannot demand coin to be converted into bullion, and when there is none left in circulation, bullion rises and falls in price like other things; and if it is above the Mint price, if an ounce of gold, which would be coined into the equivalent of 3l. ”