Paper Money

a sheet of paper, silk, linen, or similar material stamped with an official value and designed for use as money. Any article passing from hand to hand in payment is money--currency--but bankers find it convenient to designate metal money and paper money as coin and currency respectively. A gold ten-dollar piece beaten into a nugget is still worth within a fraction of a cent as much as it was before. The owner may exchange any number of such misshapen pieces at a United States mint for as many ten-dollar gold pieces, less the actual cost of melting and coining anew. Silver money may be hammered into silver bars of cash value the world over, but paper money pounded to a pulp is not worth hauling to market. This distinction is expressed by saying that coin has intrinsic value, and that paper currency has no intrinsic value.

If backed by value, as silver or gold in a vault, paper currency is representative money. It has no value in itself, but it represents value. If issued because the coin of the realm has run out and the government is in need, paper currency is called flat money. Representative money is a convenience. A roll of bills is handled with less effort by far than a bag of coin. Representative money is legitimate, and is growing in favor. Fiat money is a delusion and a snare. The one objection to paper money is the possibility of setting printing presses at work at any time and converting sound representative currency into a volume of worthless fiat money that nobody would accept. Sound finance requires that every bank note, or government note, that is to say, that every piece of paper currency be convertible into a corresponding coin if the holder should so demand. When paper is convertible nobody wants to convert it, nobody wants to be bothered with the coin; when currency is not convertible nobody wants to touch a dollar of it. If the United States government were to set its printing offices in operation and give away enough ten-dollar bills to make every man, woman, and child a nominal millionaire, making this currency legal tender for all private and public debts, the total issue being so large that redemption in coin was out of the question, a crash would follow. Those to whom money was owing would be obliged to take the paper or nothing. This would be a virtual confiscation or wiping out of all debts. Otherwise, the currency would be worthless. A baker would not give a loaf of bread for a sackful of it. Gold and silver coin would disappear like rats into their holes, the country would be without money, and business would be brought to a standstill.

Representative money is not of recent origin. The Chinese, now so far behind in many respects, are thought to have been the first, not only to invent paper, but the first to issue paper money. The Carthaginians are credited with using stamped bits of leather. Iron money was issued by the Byzantine emperors. In 1768 Catherine II of Russia issued paper money to take the place of the clumsy, bulky copper kopeck of her realm. One of the most famous instances of an over issue of paper money is that of the French assignats. These were issued to defray war expenses and were based on the recently confiscated property of the church. The first issue in 1790 was for the modest sum of $80,000,000, and really saved the day for the young republic. This method proved too easy. The government was confiscating the property of wealthy runaways daily. Why not issue more assignats? The issue rose to a total of over $8,000,000,000 by 1796. A gold piece was worth three hundred times its face in assignats. Attempts were made to bolster the issue, but in 1797, seven short years from the start, the scheme collapsed. The total issue, the $8 with nine ciphers after it, was worth less than a penny, save that the bills were sought as financial curiosities.

Representative money has been issued by the banks of the world we may say for centuries. The practice of issuing bank notes not guaranteed by the government is believed to have been general in Germany and England during the seventeenth century. In 1858 the Bank of Sweden, now the Riks Bank, began the issue of notes payable at sight. This is considered the beginning of modern convertible paper money. The Bank of England has standing authority from Parliament to issue notes to the extent of $70,000,000. The German banks and the state issue together about $125,000,000 worth of notes. The Bank of France, a monopoly, has notes to the value of $1,000,000 in circulation. The Austro-Hungarian Bank, likewise the only bank authorized to issue paper money, had $500,000 outstanding in 1907. Nippon Ginko notes, or notes of the official bank of Japan, were issued to the limit to defray war expenses. They were in circulation to the extent of $150,000,000. Canadian banks under government supervision had in 1909 $76,000,000 outstanding in the form of paper money. These notes are in denominations of five dollars or greater. The Dominion government issues, in addition, four-dollar, two-dollar, one-dollar, and twenty-five-cent notes.

The use of paper money was introduced into the colonies from England. Virginia placed tobacco in storage and used the receipts for currency. The earliest issue of paper currency in the colonies was that of Massachusetts in 1690. The notes were used to pay soldiers. No less than twelve subsequent issues were made by Massachusetts. The practice of issuing paper money, once started, was taken up by all the colonies and was continued up to the formation of the general government. A very interesting treatment of colonial paper may be found in the article on paper money in the Americana.

Several issues of American paper are of note. Money was authorized by the Continental Congress in May, 1775. The issue was a war measure and was resorted to frequently. The notes sank in value until a silver dollar would buy 225 or even 400 paper dollars. The value ran so low that "not worth a continental" became a popular expression. Nevertheless, the continental money circulated in a way until 1781. Confederate paper money was issued during the Civil War to the amount of nobody knows how much, but up into the millions. The first note was a five-dollar bill issued July, 1861; the last issue appeared in February, 1864.

The paper money now in circulation in the United States is representative--strictly so; and may be converted into coin on demand. There are two general classes--notes and certificates issued by the national treasury, and notes of national banks. The latter are secured by bonds deposited in the United States treasury, and are guaranteed, dollar for dollar, by the government. For a further discussion of currency, see BANKING; GREENBACKS; COUNTERFEITING.