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.
3 Commodity Money, Credit Money, and Fiat Money
The economic theory of money is generally expressed in a terminology that is not economic but juristic. This terminology has been built up by writers, statesmen, merchants, judges, and others whose chief interests have been in the legal characteristics of the different kinds of money and their substitutes. It is useful for dealing with those aspects of the monetary system that are of importance from the legal point of view; but for purposes of economic investigation it is practically valueless. Sufficient attention has scarcely been devoted to this shortcoming, despite the fact that confusion of the respective provinces of the sciences of law and economics has nowhere been so frequent and so fraught with mischievous consequences as in this very sphere of monetary theory. It is a mistake to deal with economic problems according to legal criteria. The juristic phraseology, like the results of juristic research into monetary problems, must be regarded by economics as one of the objects of its investigations. It is not the task of economics to criticize it, although it is entitled to exploit it for its own purposes. There is nothing to be said against using juristic technical terms in economic argument where this leads to no undesirable consequences. But for its own special purposes, economics must construct its own special terminology.
There are two sorts of thing that may be used as money: on the one hand, physical commodities as such, like the metal gold or the metal silver; and, on the other hand, objects that do not differ technologically from other objects that are not money, the factor that decides whether they are money being not a physical but a legal characteristic. A piece of paper that is specially characterized as money by the imprint of some authority is in no way different, technologically considered, from another piece of paper that has received a similar imprint from an unauthorized person, just as a genuine five-franc piece does not differ technologically from a “genuine replica.” The only difference lies in the law that regulates the manufacture of such coins and makes it impossible without authority. (In order to avoid every possible misunderstanding, let it be expressly stated that all that the law can do is to regulate the issue of the coins and that it is beyond the power of the state to ensure in addition that they actually shall become money; that is, that they actually shall be employed as a common medium of exchange. All that the state can do by means of its official stamp is to single out certain pieces of metal or paper from all the other things of the same kind so that they can be subjected to a process of valuation independent of that of the rest. Thus it permits those objects possessing the special legal qualification to be used as a common medium of exchange while the other commodities of the same sort remain mere commodities. It can also take various steps with the object of encouraging the actual employment of the qualified commodities as common media of exchange. But these commodities can never become money just because the state commands it; money can be created only by the usage of those who take part in commercial transactions.)
We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them. In some way or other the maturity of these claims must be postponed to some future time. It can hardly be contested that fiat money in the strict sense of the word is theoretically conceivable. The theory of value proves the possibility of its existence. Whether fiat money has ever actually existed is, of course, another question, and one that cannot offhand be answered affirmatively. It can hardly be doubted that most of those kinds of money that are not commodity money must be classified as credit money. But only detailed historical investigation could clear this matter up.
Our terminology should prove more useful than that which is generally employed. It should express more clearly the peculiarities of the processes by which the different types of money are valued. It is certainly more correct than the usual distinction between metallic money and paper money. Metallic money comprises not only standard money but also token coins and such coins as the German thaler of the period 1873-1907; and paper money, as a rule, comprises not merely such fiat money and credit money as happen to be made of paper, but also convertible notes issued by banks or the state. This terminology is derived from popular usage. Previously, when more often than nowadays “metallic” money really was money and not a money substitute, perhaps the nomenclature was a little less in-appropriate than it is now. Furthermore, it corresponded—perhaps still corresponds—to the naive and confused popular conception of value that sees in the precious metals something “intrinsically” valuable and in paper credit money something necessarily anomalous. Scientifically, this terminology is perfectly useless and a source of endless misunderstanding and misrepresentation. The greatest mistake that can be made in economic investigation is to fix attention on mere appearances, and so to fail to perceive the fundamental difference between things whose externals alone are similar, or to discriminate between fundamentally similar things whose externals alone are different.
Admittedly, for the numismatist and the technologist and the historian of art there is very little difference between the five-franc piece before and after the cessation
