sive issue of promises to pay gold on demand. The gold market may be rigged as well as the iron or any other special market. One difference is that the gold market is the most extensive of all markets, so that a great many individuals or companies, each acting under the separate impulse of self-interest, must over-issue notes in order to produce any appreciable effect. A further difference is that gold, being itself the measure of value, the rise or fall in its price cannot be apparent except in the average fall or rise in the price of many commodities. This subject must be pursued in Chapter XXIV.

Principles of the Circulation of Representative Money.

In the last two sections of Chapter VIII. (pp. 80-85), we found that by analyzing the motives of individuals in receiving, holding, or paying away metallic money, we could arrive at certain laws of circulation, which were amply confirmed by experience. It was also pointed out that the same laws might be extended mutatis mutandis, to the mixed circulation of metallic and paper money. Habit is almost as powerful in supporting the use of representative money as of real metallic coins. Persons who have long been accustomed to pay away certain pieces of paper without loss, will continue to regard them as good currency until some rude shock is given to their confidence. This may go so far that a dirty bit of paper, containing a promise to pay a sovereign, will be actually preferred to the beautiful gold coin which it promises. The currency of Scotland is a standing proof of this

assertion; and the same may be said of Norway, where, until 1874, no gold at all was in circulation, and notes. for one, five, or ten dollars formed the principal part of the currency.

There is one all-important point in which representative differs from metallic money; it will not circulate beyond the boundaries of the district or country where it is legally current or habitually employed. No doubt Bank of England notes are frequently carried abroad by travellers, and are in most places readily exchanged for the money of the locality; but they never circulate, and are treated as bills upon London, forming a convenient mode of remittance. They do not satisfy a debt from this to another country, but rather create it, an English bank-note, in the hands of a Paris banker, representing a claim which he has upon the Bank of England. The only money which can really be exported in payment of debts due to foreign merchants is standard metallic money. Hence paper money has exactly the same capacity for driving out standard money that light or depreciated coins possess.

In the case of inconvertible notes this has always been most obvious. As the quantity of such notes issued progressively increases, as almost always happens, coin must be exported, otherwise the currency would become excessive. But when most of the coin is gone, need of it begins to be felt for making foreign payments, and then the value of the paper falls below that of the coin which it is supposed to correspond to. Many persons begin to hoard the coins for the sake

of anticipated profit, and nothing but paper is soon to be found in circulation. This effect of paper in driving coin out of use has been manifested over and over again, as in the time of the assignats of the French Revolution, the suspension of specie payments at the Bank of England between 1797 and 1819, and the late American war. One of the most recent and striking instances is to be found in Italy, where large quantities of beautiful gold and silver coins had been struck in the years 1862 to 1865, but all disappeared very rapidly from circulation as soon as the cours force of paper money was proclaimed.

CHAPTER XVIII.

METHODS OF REGULATING A PAPER CURRENCY.

WE may now proceed with advantage to consider the various methods on which the issue of paper money may be conducted. This question is perhaps the most vexed and debatable one in the whole sphere of political economy; but, by carefully adhering to the analysis of facts, we may perhaps get a view of the subject free from the great perplexities in which it is commonly involved. The elementary principles of the subject are not of a complex character; and if we hold tenaciously to those principles, we may perhaps be saved from that dangerous kind of intellectual vertigo which often attacks writers on the currency.

The state may either take the issue of representative money into its own hands, as it takes the coining of money, or it may allow private individuals, or semipublic companies and corporations, to undertake the work under more or less strict legislative control. We will afterwards briefly consider the relative advantages of government and private issues, but in either case we may lay down the following series of methods according

to which the amount of issue may be regulated, and the performance of the promises guaranteed.

1. The Simple Deposit Method. The issuer of promissory notes may be obliged to keep a stock of coin and bullion constantly on hand, equal in amount to the aggregate of the uncancelled notes, each of which, being instantly paid on presentation, will produce a corresponding decrease of the reserve.

2. The Partial Deposit Method. Instead of being obliged to keep the whole of the precious metals deposited in his vaults, the issuer may be allowed to invest a fixed amount in government funds, or other safe profitable securities.

3. The Minimum Reserve Method. The issuer may be bound to have on hand under all circumstances a fixed minimum amount of coin and bullion.

4. The Proportional Reserve Method. The reserve may be made to vary with the amount of outstanding notes, being, say, at least one-third or one-fourth of the total.

5. The Maximum Issue Method. Permission may be given to issue notes not exceeding in the aggregate a fixed amount, prohibitory penalties being imposed upon any breach of this restriction.

6. The Elastic Limit Method. A limit may be assigned to the aggregate amount of notes, as in the last method, but the penalties on the excessive issue may be intentionally made so light, that the issuer will under some circumstances prefer to pay the penalty rather than restrict his issues.