Royal monetary legerdemain

One who had thus been forced to turn his money into the mint was repaid the same number of coins, and the coins were of the same denomination, but they were of lighter weight. The bullion taken out of the coins of the people was made into money for the sovereign. It is probable that in purpose and principle these transactions were not thought to be the barefaced robbery which to us they seem to have been. Kings, like other men, were misled by the notion that it was the royal stamp that gave value to the coin. They believed and were often told by their advisors that the new light-weight coins would be worth as much as the old, and that they could thus reap profits without imposing any real burdens upon their peoples. Of course such doctrines were and are no better than pernicious nonsense. By no sort of monetary legerdemain can wealth be created, as it were, out of thin air. The recoining operations, it will be noted, resulted in an increase in the number of coins in the country, just as when seigniorage was charged, a given volume of metal was made ultimately into a larger number of coins than would otherwise have been minted. The sovereign obtained purchasing power that he otherwise would not have had. It is absurd to suppose that he could have expended this purchasing power for goods and services without correspondingly reducing the purchasing power remaining in the hands of his subjects. The king’s shillings, or florins, or whatever the coins might be, came into the market, we may say, as new competitors of the coins of the king’s subjects. Prices rose to a level which they otherwise would not have reached. Seigniorage, like the debasement of the currency, thus operated as a tax upon the people. Coins subjected to a seigniorage charge always fell in value. Their purchasing power was determined, in the long run, not by what they cost at the mint, but by the amount of bullion they actually contained. Under such conditions, bullion was not brought to the mint except under compulsion.

The fact is that a seigniorage charge of any magnitude is not practicable. The point is important, not so much because seigniorage is today a live issue, but because precisely the same principles are involved in various proposals to substitute for gold another type of standard money consisting of irredeemable paper currency, that is, paper currency which involves no promise to pay on the part of the government, nor any governmental responsibility for maintaining its value. Such paper money, sometimes called “fiat money,” is very much like metallic money subjected to a 100 per cent seigniorage charge, if such a thing can be imagined. Precisely the same considerations which counted so heavily against the policy of charging seigniorage on the coinage of standard metal hold with really fatal force against any proposal for a standard money of irredeemable paper.