early English and French currencies was too large. Quite distinct from both the actual coins and the unit of value is the money of account, though in practice it is usually identical with one of them. In Russia in early times the rouble was an imaginary money of account not coined, while the copper copeck was the unit of value. Connected with the distinction between the coins and the unit is the highly important one between standard and token money, the former being of full power for discharging debts, and in the case of most systems only of equal value to the metal out of which it is made, while the latter is rated at a nominal value higher than that of its material. The silver and copper coinage in England and the smaller coins in the Latin union are only tokens; in the case of English silver coins, the cost value is less than 40% of the nominal one. The French tokens are made of inferior fineness (835 per 1000) to the full tender silver. Two restrictions are applied to token issues: (1) they are only legally available to discharge small debts—in England silver is limited to the payment of 40s.; (2) they can be coined only by the permission of the state. Thus in England the Bank of England is the state agent for the silver coinage. The limitations are evidently required to prevent the expulsion of standard money, and to avoid the flooding of the circulation with coinage that is not needed for the purpose of the limited exchanges to which it is confined. Intermediate between standard and token currency are those forms of coinage that are free from the first limitation, but restricted by the second. They have this further point of resemblance to tokens in that their nominal value is higher than that of their material—the French 5-franc pieces and the Indian rupees are prominent examples. Similarly, the analogy between representative money and token money is deserving of attention, and suggests the desirability of the latter being regarded as in some respects a fiduciary issue, for which the issuing authority incurs responsibility.
A class of considerations already referred to (§ 5) requires explicit notice here, viz. the influence of popular sentiment on the character and forms of a country’s currency. The fact that money has to circulate amongst all classes of society makes it indispensable that it should be suited to the wants and even the prejudices of the users. Many curious instances of preferences for particular coins or special forms of paper money can be given. The Austrian Maria Theresa dollar of 1780 is a favourite on the African coasts and has been frequently reissued for use there. Reasons of convenience and of security combine with sentiment; as in the determined rejection of the U.S. “greenbacks” by the inhabitants of California during the inconvertibility of that currency. Recognition of the desires and tastes of the community is almost essential in carrying out any monetary reform. It is only by building on the habits and customs that have become established that improvements in the monetary system can be effectively completed. Not only is this careful observance of the disposition of the mass of society expedient; there is still greater need for taking account of the methods and interests of those sections of the business world that deal specially with money. A currency change that was bitterly opposed by the banking interest would certainly be difficult to introduce in either England or the United States; traders have great influence as to the forms of money that they will accept and facilitate the use of. In another aspect the study of the interest of dealers in the arrangement of the monetary system presents itself. One of the features that caused much surprise in the infancy of economic study was the disappearance of good coins from the circulation, while inferior ones remained in use indefinitely. To the first observers there seemed to be something perverse in the preference apparently shown towards debased or worn coins. In business transactions inferior articles are taken only at a lower price. The explanation is easily understood, when furnished; it consists in stating the difference between a commodity which is sought for its use, and money which is taken as merely a medium of exchange. Provided that coin is not too bad for further circulation it will be accepted without difficulty. Still less will there be any trouble if the difference is only in the relative value of two metals, such as silver and gold. The great majority of any population will give and take money without particularly observing it. It is enough if the coin conforms to the usual type. There exists, however, in all mercantile communities a class of dealers in money, who make a profit by selecting the best coins for exportation, or if two metals are in concurrent use, the coins of that metal which is undervalued in the proportion fixed. In the case of inconvertible paper issues the withdrawal is also for the purpose of hoarding to secure the profit expected when there is a high premium on bullion. The action of self-interest under these conditions produces an effect which has been briefly formulated in the statement “that bad money tends to drive out good money.” The proposition has been styled “Gresham’s Law” q.v.). Abundant illustrations of its working are available. The establishment of the English gold currency and the French silver one in the 18th century, already mentioned (§ 8), is an effective one. Quite as good is the transition of France from the silver to the gold currency form after the great gold discoveries of the middle of the 19th century. In truth it may be said that most of the monetary transitions have been due to the operation of the force indicated in Gresham’s Law. The importance of the law lies in the warning that it gives against the attempt to reform a degraded currency by the issue of better money. Such “operations of the mint are,” in Adam Smith’s judgment, “somewhat like the web of Penelope.” The caution holds equally in respect to the reform of a depreciated paper currency or to an effort to force an undervalued metal into circulation. The success of so many monetary reforms in the last forty years has been in great measure due to the better appreciation of the working of the principle. Its aid can also be obtained by setting up the suitable conditions; while it can be counteracted through the use of the principle of limitation, so clearly expounded by Ricardo. Some of the constituent parts of the French and American currencies rest altogether on the maintenance of an overvalued coinage, along with one of higher value by the limitation of the quantity of the former to the amount that can be employed without expelling the remaining part of the circulating medium from monetary use.
Another part of the structure of any currency is the scale on which its accounts, and by consequence the degrees of its coins, are arranged. The pound, the shilling, and the penny in the older English system represented so many grades in the subdivision of value. All other currencies have the same need for divisions. The simplest scale would be what is called the “binary”; in which each coin is the half of the next higher, and double the one immediately below it. Most actual systems have series of coins on the binary scale. The penny, the halfpenny, the farthing; the 4s. piece, the florin, the shilling, the sixpence, the threepenny; at a higher level the sovereign, the half-sovereign, the crown, the half-crown, are English examples. The Latin and Scandinavian unions, as also Germany and the United States, have several binary coinage series. But no country adopts a purely binary scale. England in part retains the old “duodecimal” division in the relation of the shilling and the penny. Nearly all civilized nations have come to accept the system of Decimal Coinage (q.v.), though in their actual currencies they admit certain divergences from the strict decimal system. The convenience of having the monetary scale of accounts in accordance with the arithmetical scale will probably secure the ultimate victory of the decimal system everywhere, in spite of the objections to it on the ground of its having only two factors—2 and 5—as against the larger number of the duodecimal scale (2, 3, 4 and 6). The immense trouble involved in altering accounts and the difficulty of overcoming the hostility to change felt by the ordinary members of the community are the obstacles that prevent the adoption of the decimal system in England.
Connected with the composition of a currency and the scale on which it is based is the question of its relation to other currencies. From a very early time the conception of a money that should not be confined by a political limit appears to have existed. In fact until the state took over the control of money its more important forms had a wide diffusion. The talent, equated to the ox, is a prominent instance. Even when the city-state provided its particular coinage we can still perceive the circulation of the better coinages outside their legal area. The effect on the Greek currencies has been noted above (§ 8). Under the Roman hegemony and the empire that arose out of it there was the equivalent of an international currency in the wide circulation of the coinages adopted from the conquered states. Such coins as the drachma and the denarius were of general use in the then civilized world. In later times the Carolingian silver currency for a short period supplied an international medium, which vanished in the confusion of the middle ages. Owing to the rise of national governments money became a national distinction peculiar to each state. It is only in the last sixty years that the idea of international money has been revived in a practical form. Unfortunately the revival was speedily checked by the reaction in favour of nationalism that followed the Franco-German War (1870–71) and by the controversies as to the proper standard. (See Bimetallism and Monetary Conferences for further discussion of this topic.)
10. Typical Currency Systems: their Evolution and Governing Principles.—At first sight it appears that the systems of currency are almost infinite in their variety. They have grown up in different nations under the influence of local conditions and reflect the customs of the particular society. But, underlying these superficial differences, there are certain general principles that permit of a grouping into a small number of clearly marked types. The classification, though resting on logical grounds, is very largely in conformity with the course of historical development.
