Chapter 5: Fiduciary Money, Metal and Paper

REFERENCES.

*_Jevons_, chs. VIII, XVII, XVIII.

*_Johnson_, chs. XIII-XVI.

_Kemmerer, E. W._, Modern currency reforms. 1916.

*_Phillips_, chs. IV, V, XII.

_United States Director of the Mint_, Annual reports.

_Walker_, chs. VIII-XII.

_White_, Bk. II, chs. III-VI.

QUESTIONS.

1. When 5160 grains of standard gold (i.e., by weight nine-tenths
fine, with the other tenth composed of the alloy used in gold coin of
the United States) sell in New York for $201.25 has the money
"saturation point" been reached or exceeded, and will bullion be taken
to the mint or coin melted down or exported?

2. Define legal-tender as applied to money. What is meant by fiat
money?

3. Is a United States standard silver dollar commodity or fiduciary
money? What determines its value? Of what importance is its legal
tender quality?

4. Is the provision of law whereby the fractional silver coins of the
United States are of less proportionate silver content than the
standard silver dollar necessary to-day? Is it useful? Give your
reasons.

5. Under what conditions will "bad money" fail to displace "good
money" from circulation?

6. Under what circumstances will money that is not in fact convertible
into other money have greater value than the material of which it (the
first mentioned money) is made? Give an example from the monetary
experience of the United States.

7. In a country which has hitherto had free and gratuitous coinage of
gold, the government institutes a seigniorage charge of five per cent.
by reducing to that extent the amount of gold put into each coin; the
gold withheld by the government is not coined. What will be the effect
of this seigniorage charge upon (a) prices in that country, (b) the
comparative value of the gold in a new coin and the same weight of
uncoined gold? Make your reasoning clear.

8. If a nation's entire money circulation consisting of 1,000,000
coins, all of them debased by a seigniorage charge of 50 per cent.,
were at once increased by the government's putting into circulation
300,000 pieces of inconvertible paper money, each piece of the same
denomination as each coin, what effects might be anticipated on the
basis of Gresham's law or otherwise, it being presupposed that the
full amount of full weight coin required to conduct the nation's
exchanges is only 900,000? Give your reasons.

9. A certain island has no silver mines and no foreign trade. It
effects all its exchanges by the actual use of silver coin whose
coinage is free and gratuitous. It has no banks, and does not resort
either to barter or to credit. Silver is also used in the shape of
plate in the island. Originally it had 100,000 silver coins in
circulation, each containing one ounce of pure silver. After a certain
date, as these coins were paid into the government treasury for taxes,
at the rate of 5,000 one-ounce coins per week, the one-ounce coins
were melted and the resulting bullion was recast, each new coin
weighing 2 ounces and bearing the same name as the original one-ounce
coins. Thereafter all coins struck at the island Mint contained two
ounces of silver, and at that standard coinage continued free and
gratuitous. When the government first pays out the new 2-ounce
pieces, will they remain in circulation with the old one-ounce coins
and have the same purchasing power? Give reasons.

10. If the above-described process of reminting 5,000 one-ounce coins
per week continues for twelve weeks and then stops, how many old and
how many new coins will at the end of the twelfth week be in
circulation? Reasons.

11. The government of the island of Guernsey having no money, issued
paper-notes to pay for the building of a market. They circulated and
were gradually taken up as the market earned its cost, during ten
years. When they were all redeemed and burned, the island had the
market free of cost. Explain how this could be done. (From Sumner's
Problems in political economy.)

12. Suppose a nation has 1,000,000,000 gold coins, each weighing one
ounce (Troy) as its only circulating medium. Suppose that the
government enacts that henceforth coins will be uttered containing
only 99 per cent. as much pure gold as heretofore, the government
taking one per cent. for its own use.

Suppose "other things remain the same." What effect will this action
have on the number of coins circulating?

Will prices be affected?

Now suppose the demand for money increases. Will bullion owners bring
their bullion to the mint for coinage?

Suppose this government had continued to utter coins of the same
weight and fineness as before, but had kept back one per cent. of the
bullion brought to the mint for its own use. Answer these three
questions in the light of this supposition.

13. Tabulate the index numbers, the greenback price of the gold
dollar, and the gold price of the greenback dollar, from 1861 to 1879.

14. Show the difference between convertible and inconvertible money.

15. Contrast the position of the commodity money theorists with that
of the fiat money theorists.

16. In a gold-standard country, one-half of whose monetary circulation
consists of silver dollars (which are unlimited legal tender) and of
silver certificates payable on demand in silver dollars (and supported
dollar for dollar by silver dollars in reserve), and whose mints are
closed to the free coinage of silver, how would the money value of the
silver dollars and silver certificates be affected if the gold price
of silver should fall (1) 10 per cent.? (2) 50 per cent? (3) 5 per
cent.? How would it be affected if the value of gold should fall 10
per cent? (Free coinage of gold is assumed). Explain the principles
involved in your answer.