 So much for the simplest monetary system, in which the unit of account is literally or in effect a definite weight of a certain metal. The system which can be most conveniently taken next is that in which the unit of account is still a coin, but a coin the value of which is not indeed wholly divorced, but is to some extent separated from the value of the bullion of which it is made.  The coinage of a particular metal may be "free," in the sense that any one may insist on having any amount of that metal coined for him by the Mint, without being gratuitous or done without charge. After all, we may reflect, coin is a manufactured article, and why should it alone be manufactured for nothing? Why should not people who want coin pay for the cost of making it up as well as for the raw material, just as they pay for the making of flour into bread and the making of white paper into a printed book? Where coinage is gratuitous, it is always paid for out of Government revenues, because Government is the only agency which will do it for nothing. The Government might act, and sometimes has acted, on the same principle, and make the same charge for coining that private enterprise might be supposed likely to make if under ordinary competition. Further, the manufacture is one very strictly monopolized: perhaps no other monopoly has ever been protected by such draconian penalties as the monopoly of coining. What is there to prevent governments from charging considerably more than the mere cost of coining? Something was exacted under the name of "seignorage" by the seigneurs or lords who exercised the right of coining in mediaeval times, and doubtless they would have made the percentage much higher if their monopoly had been secure from the introduction of foreign coins into their territory.
The effect of a charge for coining is to tend to raise the ordinary value of the coin above that of the uncoined metal by the amount of the charge, just as any charge for the manufacture of any other article ordinarily raises its price by a corresponding amount above the value of the raw material. It restricts the production until the manufactured article is sufficiently above the value of the raw material to make the manufacture pay.
It cannot be more than this for any appreciable time, because coinage is "free," i.e. any one can bring as much gold as he pleases to the Mint and have it coined on paying the charge. So if the demand for coin were to increase rapidly, it would be met by a greater supply. On the other hand, the value of the sovereign might easily fall below a hundred ninetyfifths of the gold in it for a period of some duration, owing to decrease of demand: new coinage would not take place in this period. The value could not in any case fall below that of the gold in the sovereign because of the possibility of turning the sovereign into uncoined gold by the simple process of melting. So the effect of seignorage is to keep the value of the coin always between the metallic value and that value plus the seignorage, and in progressive and even in stationary periods to keep it at the higher end of this limited space.
We must be careful not to be confused by changes in the mere form of the transaction. For a person to take raw material to a manufacturer to be made up for himself, and remunerate the manufacturer either by letting him keep a part of the product or by paying him money for the service rendered, was once a common method, but is now obsolete, surviving even at Government mints, if at all, only in name. Gold producers do not now bring or send their gold to a mint and receive back the same gold less seignorage and other charges, if any, but sell their gold to the mint (or a bank which acts as its agent) for money paid to them, and they regard themselves, like other producers, as receiving a price for their product. So there are "mint prices," prices given by the mint for gold, and when a seignorage is exacted, it appears in the form of a difference between the mint price of an ounce of gold and the amount of coin made out of an ounce.
On the value, measured in commodities in general, of the metal of which the coin is made, seignorage has no influence except in so far as it tends to reduce the demand for that metal by diminishing the quantity taken up by the currency, and this may be taken as a practically negligible effect when seignorage in only a single country is being considered. We need, therefore, scarcely encumber the exposition by making an allowance for the tendency of seignorage to depress the value of bullion: the matter is too trifling to be worth bringing into account.
As seignorage is seldom or never large, and as for the most part it simply raises the value of the coin once for all and then allows it to fluctuate very nearly with, though a little above, the value of the bullion contents of the coin, we may regard it as of little practical importance, but it may be of considerable use in enabling us to understand the effects of limitation in general.
When the fact is once grasped that it is limitation of supply, coupled of course with sufficiency of demand, which enables a seignorage to keep the value of the coin ordinarily above the value of the metal of which it is composed by the amount of the seignorage, the way is opened for comprehension of the fact that by a "closing of the mint to free coinage," and coining only suitable amounts, coins made of one metal may be made to circulate at some value fixed by reference to coins made of another metal.
This was first discovered in consequence of the very reasonable desire of every one to keep coins made of two different metals, gold and silver, both in circulation at the same time, gold being convenient for larger and silver for smaller payments, though not for the smallest of all. So long as they attempted to maintain free coinage of both metals, governments were in perpetual difficulties arising from the fact that the ratios which each of them prescribed between their gold coins and their silver coins always sooner or later led to one or the other metal being not supplied in sufficient quantities for the requirements of a convenient currency.
With regard to copper coins the principle was acted on long before it was recognized or understood, and long before it was acted on with regard to silver. Money of small denomination was demanded, Government did not supply the need, and, as usual, private enterprise stepped in. The story in this country is roughly that tradesmen took to issuing metal "tokens" for small fractions of the unit of account such as pennies or farthings when the Government did not coin them, these tokens entitling the holder to goods of that value at the shop of the tradesman. They were not always retained for further purchases by the customer who received them in change, but got into circulation, i.e. they were generally acceptable, so that things could be bought with them from other people as well as from the tradesman who issued them, although the metal of which they were made was not and did not profess to be of appreciable value. Abuses of course soon made their appearance, and the business of providing these "token coins" was taken over by the Government. They were manufactured by or for the Government and given in exchange for larger money paid by people who wanted the small for purposes of their business. There was no "free" coinage.
First, what would have happened if at some period the demand had fallen off, and that faster than the coin is consumed by abrasion and loss? Suppose a plague which carried off half the population, or an ingenious improvement which led to the substitution of some system of making small payments without the use of coin. In that case some persons or institutions, probably the banks, would have found themselves in possession of inconvenient amounts of silver and bronze coins--more than they could pay out without annoying the persons with whom they did business. The probability is that they would insist on the Mint taking back some of the coins at the ratio at which they were issued, but if the Government obdurately refused, and the falling off in demand was large and expected to continue, the coins would go to a discount, i.e. for the sake of exchanging them for more convenient money people would be willing to submit to some loss on their nominal value, and they would be exchanged for the more convenient gold coin or bank-notes at something below the official ratio.
The same results will follow as in case of a falling off of demand--there will be too much silver coin somewhere, and if the excess cannot be returned to the Mint at par the coin will eventually go to a discount. Additions to the supply made by illicit coinage will of course have exactly the same effects as additions made by the Mint, and where Government was very weak or inefficient, they might be on a sufficiently large scale to replace the usual Government supply and exceed the appropriate amount, with the same result of bringing down the value of the coin, and this would go on until the value became so low that it would not pay the illicit manufacturers to produce enough to bring it still lower. The actual danger from illicit coinage does not appear to be great, owing to the fact that coinage on a large scale cannot be concealed, and concealed coinage on a small scale is not a very remunerative manufacture, even when the cost of the raw material is very small compared with that of the finished article.
In fact the system has been perfectly successful, not only in this country, but wherever it has been tried. Some countries have made a slight improvement on the English system by making the silver coin redeemable or "convertible" at their mints or Government banks. This means that the Government is not only ready to sell the coin at the prescribed ratio, but is also ready to buy it back at that ratio. Thus the possibility of a falling off of demand is provided for, and no doubt that is desirable. In this country there is little doubt that in case of a considerable falling off of demand the Government would be compelled to take back enough of the coin to keep up its value, and the obligation might just as well be acknowledged at once. The case may occur at the end of the War, when soldiers are reunited with their families and less silver consequently will be required by them and their wives taken together.
If the value of the metallic contents of a coin of this kind is not originally very much below the value fixed for the coin, the particular arrangement made will perish in the event of a considerable rise in the market price of the metal of which the coin is made.
This will happen because the metallic contents of the coin will then be worth more than the value at which the coin is rated and circulates, and the cheapest source of supply to any one who wants the metal for industrial purposes will be the coinage. Thus if silver went up to more than 66s. the lb. troy, instead of buying silver in the bullion market manufacturers of silver goods in this country and elsewhere would as far as possible get what they wanted by melting English silver coins which as coins are only worth 66s. the lb. troy, and which they could therefore get at that price in small quantities, and at a very little more than that price in large quantities. The silver coinage would disappear, and every one would be inconvenienced till some substitute equally good was discovered: in some countries this inconvenience has actually occurred. The way to prevent it is for the Government to take time by the forelock and issue a lower weighted (or more alloyed) silver coinage before the depletion of the coinage begins, and to draw in as fast as possible the old heavier (or purer) coin. If this is done sufficiently promptly a balance of silver will remain in the hands of the Government and no one will be hurt.
There is no necessity for a whole series of coins of this character to contain the same proportion of metal to their coin value, and it is often convenient that they should not. This was recognized when to make them more portable our pennies were made less than double the weight of the half-pennies, and it might well be recognized still further by making the half-crowns and florins smaller in proportion to the sixpences. The convenience of this is suggested by the fact that the threepenny piece appears to be going out of circulation because it is too small to be conveniently handled, and the crown because it is too bulky.
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