The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Chapter I: Barter
• Want of Coincidence In Barter.
• Want of a Measure of Value.
• Want of Means of Subdivision.
• Chapter II: Exchange
• Utility and Value Are Not Intrinsic.
• Value Expresses Patio of Exchange.
• Chapter III: The Functions of Money
• A Standard of Value.
• A Store of Value.
• Separation of Functions.
• Chapter IV: Early History of Money
• Currency In the Hunting State.
• Currency In the Pastoral State.
• Articles of Ornament As Currency.
• Currency In the Agricultural State.
• Manufactured and Miscellaneous Articles As Currency.
• Chapter V: Qualities of the Material of Money
• 1. Utility and Value.
• 2. Portability.
• 3. Indestructibility.
• 4. Homogeneity.
• 5. Divisibility.
• 6. Stability of Value.
• 7. Cognizability.
• Chapter VI: The Metals As Money
• Iron.
• Lead.
• Tin.
• Copper.
• Silver.
• Gold.
• Platinum.
• Nickel.
• Other Metals.
• Alloys of Metals.
• Chapter VII: Coins
• The Invention of Coining.
• What Is a Coin?
• Various Forms of Coins.
• The Best Form For Coins.
• Coins As Works of Art.
• Historical Coins.
• The Royal Attribute of Coining.
• Chapter VIII: The Principles of Circulation
• The Standard Unit of Value.
• Coin, Money of Account, and Unit of Value.
• Standard and Token Money.
• Metallic and Nominal Values of Coins.
• Legal Tender.
• The Force of Habit In the Circulation of Money.
• Gresham's Law.
• Extension of Gresham's Law.
• Chapter IX: Systems of Metallic Money
• Currency By Weight.
• Unrestricted Currency By Tale.
• Single Legal Tender System.
• Multiple Legal Tender System.
• Composite Legal Tender.
• Chapter X: The English System of Metallic Currency
• English Gold Coin.
• English Silver Coin.
• English Bronze Coinage.
• Deficiency of Weight of the English Gold Coin.
• Withdrawal of Light Gold Coin.
• Supply of Gold Coin.
• Supply of Silver Coin.
• The Royal Mint.
• Chapter XI: Fractional Currency
• Billon Coin.
• Composite Coin.
• Bronze Coin.
• English Bronze Coin.
• Weight of the Currency.
• Nickel, Manganese, Aluminium, and Other Metals and Alloys.
• Chapter XII: The Battle of the Standards
• The Double Standard.
• Compensatory Action.
• The Demonetization of Silver.
• Disadvantages of the Double Standard.
• The Monetary Systems of the World.
• Chapter XIII: Technical Matters Relating to Coinage
• The Alloys In Coin.
• The Size of Coins.
• The Wear of Coin.
• Methods of Counting Coins.
• Cost of the Metallic Currency.
• Chapter XIV: International Money
• Advantages of International Money.
• Disadvantages of International Money.
• Conflict of Monetary Systems.
• International Monetary Negotiations.
• Decimalization of English Money.
• The Future American Dollar.
• German Monetary Reform.
• Systems of Fractional Money.
• Final Selection of the Unit of International Money.
• Chapter XV: The Mechanism of Exchange
• Progressive Development of the Methods of Exchange.
• Representative Money.
• Cheque and Clearing System.
• Chapter XVI: Representative Money
• Early History of Representative Money.
• Reasons For the Use of Representative Money.
• Inconvenience of Metallic Money.
• The Weight of Currency.
• Saving of Interest.
• Chapter XVII: The Nature and Varieties of Promissory Notes
• Specific Deposit Warrant.
• General Deposit Warrant.
• Difference Between a Special and a General Promise.
• Pecuniary Promissory Notes.
• Principles of the Circulation of Representative Money.
• Chapter XVIII: Methods of Regulating a Paper Currency
• 1. Simple Deposit.
• 2. Partial Deposit.
• 3. Minimum Reserve.
• 4. Proportional Reserve.
• 5. Maximum Issue.
• 6. Elastic Limit.
• 7. Documentary Reserve.
• 8. Real Property Reserve.
• 9. Regulation By the Foreign Exchanges.
• 10. Free Issue System.
• 11. The Gold Par Method.
• 12. Convertibility By Revenue Payments.
• 13. Deferred Convertibility.
• 14. Inconvertible Paper Money.
• Over Issue of Paper Money.
• Want of Elasticity of Paper Money.
• Chapter XIX: Credit Documents
• Measurement of Credit.
• Bank-notes.
• Cheques.
• Bills of Exchange.
• Interest-bearing Documents.
• Definition of Money.
• Chapter XX: Book Credit and the Banking System
• Single Bank System.
• System of Two Banks.
• Complex Bank System.
• Branch Bank System.
• Bank Agency System.
• London Agency System.
• Country Clearing System.
• Chapter XXI: The Clearing-house System
• Transaction of Business At the London Clearing House.
• Manchester Clearing House.
• New York Clearing House.
• Extension of the Clearing System.
• Advantages of the Cheque and Clearing System.
• Proportion of Cash Payments.
• Cases to Which the Clearing System Is Inapplicable.
• Chapter XXII: The Cheque Bank
• Relation of the Cheque Bank to Other Banks.
• The Cheque Bank As a Monetary Agent.
• Payment of Wages By Cheques.
• The Cheque Bank As a Savings Bank.
• Results of the Cheque Bank System.
• Chapter XXIII: Foreign Bills of Exchange
• Origin and Nature of Bills of Exchange.
• Trade In Foreign Bills.
• The World's Clearing House.
• Centralization of Financial Transactions In London.
• Representation of Foreign Bankers In London.
• Chapter XXIV: The Bank of England and the Money Market
• Expansion of Trade.
• Competition of Bankers.
• The Bank Charter Act of 1844.
• The Free-banking School.
• Possibility of Over-issue.
• The Right of Coining Bank Notes.
• Scotch and English Banking.
• Cash Reserves of Bankers.
• Remedy For the Sensitiveness of the Money Market.
• Chapter XXV: A Tabular Standard of Value
• Corn Rents.
• A Multiple Legal Tender.
• Lowe's Proposed Table of Reference.
• Poulett Scrope's Tabular Standard of Value.
• Difficulties of the Scheme.
• Chapter XXVI: The Quantity of Money Needed By a Nation
• Quantity of Work to Be Done By Money.
• Efficiency of the Currency.
• Effects of the Cheque and Clearing System.
• Conclusion.

Composite Legal Tender.

We have seen that with a single metal currency there is inconvenience in making small or large payments, according as the metal chosen is dear or cheap. If two or more series of full-weight coins be issued in different metals, and allowed to vary in relation to each other, the difficulty of calculation intervenes. If they both be made legal tenders at a fixed ratio, the currency will tend to become composed alternately of one or the other metal, and money-changers will make a profit out of the conversion.

There yet remains another possible system, in which coins of one metal are adopted as the standard of value and principal legal tender, and subordinate token coins of other metals are furnished for the purpose of subdivision, being recognized as legal tender only for small amounts. The values of these token coins now depend upon that of the standard coins for which they are legally exchangeable, and care is taken to make their weights such that the metallic value will always be less than the legal value. No profit can ever be made by melting such coins, or removing them from the country, and their ratio of exchange with the principal coins is always a simple ratio fixed by law.

The composite legal tender rises naturally out of the double standard system; for, as we have seen, if, under the latter system, gold be overvalued at the legal rate, all full-weight silver coins will be withdrawn and exported by degrees, so that there will remain practically a token currency of light silver. Lord Liverpool, having in his thorough investigation of the subject of metallic money observed the superior convenience of the composite legal tender to the double legal tender, advocated its adoption in England in the most conclusive manner. His arguments will be found in his admirable "Treatise on the Coins of the Realm in a Letter to the King" (Oxford, 1805), and his recommendations, as carried into effect in 1816, are the foundation of our present monetary system.

A composite system of currency has frequently existed in one country or another without being specially designed or recognized. It comes into existence whenever coins of gold and silver are current at rates fixed by law or custom, but the silver coins are reduced by abrasion or clipping below the corresponding weight. From the year 1717, when the guinea was fixed at 21s., until the present system was instituted in 1816, the English currency was based theoretically upon the double standard system. Practically, however, the silver coins were so scarce and worn that they served but as tokens. The tradesmen's copper tokens, too, being always of light weight, and exchangeable by custom for a certain proportion of silver coins, formed the third term in the series. But Lord Liverpool appears to have been the first to apprehend and explain the principles on which such a composite system worked, and there can be no doubt that the system, as he expounded it, is the best adapted for supplying a convenient and economical currency.

Most of the leading nations have now adopted the composite legal tender in a more or less complete form. France, Belgium, Switzerland, and Italy still adhere to the double standard in theory, but have reduced all coins of less value than five francs to the footing of token money, by reducing the fineness of the silver from 900 parts to 835 parts in 1000, or by 7¼ per cent., and by limiting the amount for which they are legal tender. The copper money of France had previously been restricted as a legal tender to sums below five francs in any one payment. In the United States, when metallic currency was generally employed, the double standard system existed in theory, but was reduced to a composite standard by the excessive overvaluing of the gold money. Moreover, by a law of 21st February, 1853, the smaller silver coins were reduced in weight, and made legal tender only for sums not exceeding five dollars. The silver three-cent pieces, and the several copper, bronze, or nickel coins, issued from the United States' mints, were also token money with various limits as regard legal tender.

The new German monetary system is perfectly organized as a composite legal tender.

Chapter X

The English System of Metallic Currency

I now come to describe in more detail the system of metallic currency which has existed in England for more than half a century, and which seems to be the best of all as regards the principles on which coins of three different metals are combined into composite legal tender. The legal regulations under which the English coinage is issued and circulated, can be ascertained with ease and certainty, thanks to the Act of Parliament (33 Victoria, ch. 10), which Mr. Lowe caused to be passed to simplify and consolidate the statutes on the subject.