2. The Peculiarities of Money-Substitutes

Economic discussion about money must be based solely on economic considerations and may take legal distinctions into account only insofar as they are significant from the economic point of view also. Such discussion consequently must proceed from a concept of money based, not on legal definitions and discriminations, but on the economic nature of things. It follows that our decision not to regard drafts and other claims to money as constituting money itself must not be interpreted merely in accordance with the narrow juristic concept of a claim to money. Besides strictly legal claims to money, we must also take into account such relationships as are not claims in the juristic sense, but are nevertheless treated as such in commercial practice because some concern or other deals with them as if they actually did constitute claims against itself.3

There can be no doubt that the German token coins minted in accordance with the Coinage Act of July 9, 1873, did not in law constitute claims to money. Perhaps there are some superficial critics who would be inclined to classify these coins actually as money because they consisted of stamped silver or nickel or copper discs that had every appearance of being money. But despite this, from the point of view of economics these token coins merely constituted drafts on the national Treasury. The second paragraph of section nine of the Coinage Act (in its form of June 1, 1909) obliged the Bundesrat to specify those centers that would pay out gold coins on demand in return for not less than 200 marks’ worth of silver coins or fifty marks’ worth of nickel and copper coins. Certain branches of the Reichsbank were entrusted with this function. Another section of the Coinage Act (sec. 8) provided that the Reich would always be in a position actually to maintain this convertibility. According to this section, the total value of the silver coins minted was never to exceed twenty marks per head of the population, nor that of the nickel and copper coins two and one-half marks per head. In the opinion of the legislature, these sums represented the demand for small coins, and there was consequently no danger that the total issue of token coinage would exceed the public demand for it. Admittedly, there was no statutory recognition of any right to conversion on the part of holders of token coins, and the limitation of legal tender (sec. 9, par 1) was only an inadequate substitute for this. Nevertheless, it is a matter of general knowledge that the token coins were in fact cashed without any demur at the branches of the Reichsbank specified by the Chancellor.

Exactly the same sort of significance was enjoyed by the Reich Treasury notes, of which not more than 120 million marks’ worth were allowed to be in circulation. These also (sec. 5 of the act of April 30, 1874) were always cashed for gold by the Reichsbank on behalf of the Treasury. It is beside the point that the Treasury notes were not legal tender in private transactions while everybody was obliged to accept silver coins in amounts up to twenty marks and nickel and copper coins in amounts up to one mark; for, although they were not legally bound to accept them in settlement of debts, people in fact accepted them readily.

Another example is afforded by the German thaler of the period from the introduction of the gold standard until the withdrawal of the thaler from circulation on October 1, 1907. During the whole of this period the thaler was undoubtedly legal tender. But if we seek to go behind this expression, whose juristic derivation makes it useless for our present purpose, and ask if the thaler was money during this period, the answer must be that it was not. It is true that it was employed in commerce as a medium of exchange; but it could be used in this way solely because it was a claim to something that really was money, that is, to the common medium of exchange. For although neither the Reichsbank nor the Reich nor its separate constituent kingdoms and duchies nor anybody else was obliged to cash them, the Reichsbank, acting on behalf of the government, always took pains to ensure that no more thalers were in circulation than were demanded by the public. It achieved this result by refusing to press thalers on its customers when paying out. This, together with the circumstance that thalers were legal tender both to the bank and to the Reich, was sufficient to turn them in effect into drafts that could always be converted into money, with the result that they circulated at home as perfectly satisfactory substitutes for money. It was repeatedly suggested to the directors of the Reichsbank that they should cash their own notes not in gold but in thalers (which would have been well within the letter of the law) and pay out gold only at a premium, with the object of hindering the export of it. But the bank steadily refused to adopt this or any proposal of a similar nature.

The exact nature of the token coinage in other countries has not always been so easy to understand as that of Germany, whose banking and currency system was fashioned under the influence of such men as Bamberger, Michaelis, and Soetbeer. In some legislation, the theoretical basis of modern token-coinage policy may not be so easy to discover or to demonstrate as in the examples already dealt with. Nevertheless, all such policy has ultimately the same intent. The universal legal peculiarity of token coinage is the limitation of its power of payment to a specified maximum sum; and as a rule this provision is supplemented by legislative restriction of the amount that may be minted.

There is no such thing as an economic concept of token coinage. All that economics can distinguish is a particular subgroup within the group of claims to money that are employed as substitutes for money, the members of this subgroup being intended for use in transactions where the amounts involved are small. The fact that the issue and circulation of token coins are subjected to special legal rules and regulations is to be explained by the special nature of the purpose that they serve. The general recognition of the right of the holder of a banknote to receive money in exchange for it while the conversion of token coins is in many countries left to administrative discretion is a result of the different lines of development that notes and token coinage have followed respectively. Token coins have arisen from the need for facilitating the exchange of small quantities of goods of little value. The historical details of their development have not yet been brought to light and, almost without exception, all that has been written on the subject is of purely numismatical or metrological importance.5  Nevertheless, one thing can safely be asserted: token coinage is always the result of attempts to remedy deficiencies in the existing monetary system. It is those technical difficulties, that hinder the subdivision of the monetary unit into small coins, that have led, after all sorts of unsuccessful attempts, to the solution of the problem that we adopt nowadays. In many countries, while this development has been going on, a kind of fiat money6  has sometimes been used in small transactions, with the very inconvenient consequence of having two independent kinds of money performing side by side the function of a common medium of exchange. To avoid the inconveniences of such a situation the small coins were brought into a fixed legal ratio with those used in larger transactions and the necessary precautions were taken to prevent the quantity of small coins from exceeding the requirements of commerce. The most important means to this end has always been the restriction of the quantity minted to that which seems likely to be needed for making small payments, whether this is fixed by law or strictly adhered to without such compulsion. Along with this has gone the limitation of legal tender in private dealings to a certain relatively small amount. The danger that these regulations would prove inadequate has never seemed very great, and consequently legislative provision for conversion of the token coins has been either entirely neglected or left incomplete by omission of a clear statement of the holder’s right to change them for money. But everywhere nowadays those token coins that are rejected from circulation are accepted without demur by the state, or some other body such as the central bank, and thus their nature as claims to money is established. Where this policy has been discontinued for a time and the attempt made by suspending effectual conversion of the token coins to force more of them into circulation than was required, they have become credit money, or even commodity money. Then they have no longer been regarded as claims to money, payable on demand, and therefore equivalent to money, but have been valued independently.

The banknote has followed quite a different line of development. It has always been regarded as a claim, even from the juristic point of view. The fact has never been lost sight of that if its value was to be kept equal to that of money, steps would have to be taken to ensure its permanent convertibility into money. That a cessation of cash payments would alter the economic character of banknotes could hardly escape notice; in the case of the quantitatively less important coins used in small transactions it could more easily be forgotten. Furthermore, the smaller quantitative importance of token coins means that it is possible to maintain their permanent convertibility without establishing special funds for the purpose. The absence of such special funds may also have helped to disguise the real nature of token coinage.7

Consideration of the monetary system of Austria-Hungary is particularly instructive. The currency reform that was inaugurated in 1892 was never formally completed, and until the disruption of the Hapsburg monarchy the standard remained legally what is usually called a paper standard, since the Austro-Hungarian Bank was not obliged to redeem its own notes, which were legal tender to any amount. Nevertheless, from 1900 to 1914 Austria-Hungary really possessed a gold standard or gold-exchange standard, for the bank did in fact readily provide gold for commercial requirements. Although according to the letter of the law it was not obliged to cash its notes, it offered bills of exchange and other claims payable abroad in gold (checks, notes, and the like), at a price below the upper theoretical gold point. Under such conditions, those who wanted gold for export naturally preferred to buy claims of this sort, which enabled them to achieve their purpose more cheaply than by the actual export of gold.

For internal commerce as well, in which the use of gold was exceptional since the population had many years before gone over to banknotes and token coins,8  the bank cashed its notes for gold without being legally bound to do so. And this policy was pursued, not accidentally or occasionally or without full recognition of its significance, but deliberately and systematically, with the object of permitting Austria and Hungary to enjoy the economic advantages of the gold standard. Both the Austrian and the Hungarian governments, to whose initiative this policy of the bank was due, cooperated as far as they were able. But in the first place it was the bank itself which had to ensure, by following an appropriate discount policy, that it would always be in a position to carry out with promptitude its voluntary undertaking to redeem its notes. The measures that it took with this purpose in view did not differ fundamentally in any way from those adopted by the banks-of-issue in other gold-standard countries.9  Thus the notes of the Austro-Hungarian Bank were in fact nothing but money substitutes. The money of the country, as of other European countries, was gold.

• 3See Laughlin, The Principles of Money (London, 1903), pp. 516 ff.
• 5See Kalkmann, Englands Übergang zur Goldwährung im 18. Jahrhundert (Strassburg, 1895), pp. 64 ff.; Schmoller, “Über die Ausbildung einer richtigen Scheidemünzpolitik vom 14. bis zum 19. Jahrhundert,” Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich 24 (1900): 1247-74; Helfferich, Studien über Geld und Bankwessen (Berlin, 1900), pp. 1-37.
• 6On the concepts of commodity money, credit money, and fiat money, see sec. 3 of this chap.
• 7On the nature of token coinage, see Say, Cours complet d’économie politique pratique, 3d ed. (Paris, 1852), vol, 1, p. 408; and Wagner, Theoretische Sozialökonomik (Leipzig, 1909), Part II pp. 504 ff. Very instructive discussions are to be found in the memoranda and debates that preceded the Belgian Token Coinage Act of 1860. In the memorandum of Pirmez, the nature of modern convertible token coins is characterized as follows: “With this property (of convertibility) the coins are no longer merely coins; they become claims, promises to pay. The holder no longer has a mere property right to the coin itself [jus in re]; he has a claim against the state to the amount of the nominal value of the coin [jus ad rem], a right which he can exercise at any moment by demanding its conversion. Token coins cease to be money and become a credit instrument [une institution de crédit], banknotes inscribed on pieces of metal ...” (see Loi décretant la fabrication d’une monnaie d’appoint ... précédee des notes sur la monnaie de billon en Belgique ainsi que la discussion de la loi à la Chambre des Représentants [Brussels, 1860], p. 50).
• 8The silver gulden in Austria-Hungary held the same position as the silver thaler in Germany from 1873 to 1907. It was legal tender, but economically a claim to money, since the bank-of-issue in fact always cashed it on demand.
• 9See my articles “Das Problem gesetzlicher Aufnahme der Barzahlungen in Österreich-Ungarn,” Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich 33 (1909): 985-1037; “Zum Problem gesetzlicher Aufnahme der Barzahlungen in Österreich-Ungarn,” ibid. 34 (1910): 1877-84; “The Foreign Exchange Policy of the Austro-Hungarian Bank,” Economic Journal 19 (1909): 202-11; “Das vierte Privilegium der Österreichisch-Ungarischen Bank,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 21 (1922): 611-24.