What gives different kinds of money its value

We now pass to the consideration of certain problems associated with the coinage of money. There is a widespread illusion that the essential characteristic of a coin is the government stamp, that it is the power and authority of the government which give the coin its value. This notion has done a vast amount of harm, and more than once it has been used by governments as an excuse for unsound monetary policies. On some peculiar kinds of coins, as we shall see, as well as on most kinds of paper money, it is the government’s stamp which, in a sense, gives money its value. But in precisely the same way, it is the solvent debtor’s name on his promissory note that gives the note its value. We must distinguish carefully between two wholly different kinds of coins: standard coins and subordinate coins.

Put a ten-dollar gold piece upon an anvil and deface it with a heavy sledgehammer. The shapeless lump of gold you will have left will not be a coin, but it will be worth precisely ten dollars. By defacing the coin, you will have removed merely a useful and convenient label. But treat a silver dollar in the same fashion, and you will have left sixty cents’ worth of silver or more, the exact value depending upon the price of silver at the time. In defacing the government stamp you will undoubtedly have destroyed some of the value the coin had.

The fact is that the coinage of standard coins, such as the gold eagle, is nothing but a dependable official certification of their weight and fineness. They are in reality nothing but pieces of precious metal.

Anyone can take gold to the United States mint, and if it is of the required standard of fineness, the government will pay him for it at the rate of one dollar for 23.22 grains of fine gold. Silver coins, however, are made from metal purchased by the government. There is less than a dollar’s worth of silver in the silver dollar and in a dollar lot of smaller silver coins, just as there is less then five cents’ worth of metal in the nickel and less than one cent’s worth of bronze in the cent. The details of the process by which these coins are kept at a parity with gold will be discussed in a later chapter. We may note here, however, that just so far as the government in its own transactions does not discriminate among these different types of coins and, in particular, just so far as it remains able and willing to exchange any one type of coin for any other sort, just so far will the business world accept these coins as of identical value per dollar. But it is important to observe that in foreign trade the subordinate coins are at a disadvantage. Save in exceptional cases, such as in border trade with neighboring countries, the general rule is that they will be taken only at the value of their bullion content. Gold also passes in foreign trade at its bullion value, but in its case, as we have seen, bullion value and coined value are identical. For this reason, gold, whether in coins or in bullion form, is the international monetary standard and the means of paying the final trade balances between different countries.

We have assumed thus far that the government makes no charge for the coinage of gold. Such, in fact, is the case in most modern countries. The United States, like most other countries, makes a necessary charge for assaying and refining the gold if it does not conform to the required standard. France and a few other countries make a very small additional charge called “brassage” to cover all or a part of the actual expense of coinage. The operations of the English mint, in principle, are gratuitous like those of the United States mint. There is the essential difference, however, that in England one who takes gold to the mint would supposedly be asked to wait until his bullion had been converted into coin. In practice, the Bank of England acts as intermediary between the mint and the public. An ounce of gold suffices to make £3 17s. 10 1/2d. in English gold coins. The Bank of England will at all times buy gold at the price of £3 17s. 9d. and it may give somewhat more than this price when it desires to strengthen its own gold reserves.