The answer is, because it is artificially limited in quantity, so that it does not pass the point of saturation in the field of its use. Its value rests on its monetary use; it is fiduciary money, not commodity money. It is limited simply by letting "the needs of the people" determine its amount. This is done by issuing it only in exchange for other money of the larger denominations, and by redeeming it in other money on demand. Fractional coins are issued on the request of banks in exchange for standard money. One needing "change" gets it at the bank; when the bank finds its supply falling short it gets more from the government mints. As business increased in 1898, the demand for nickels, dimes, and quarters became unprecedented, and the mints worked night and day to supply them. If these coins were made in great quantities and forced into circulation by the government through paying them out to creditors and officials, their quantity would become excessive and they would fall in value (be at a discount) compared with standard money. But as this is not done, and as, moreover, they are redeemed on demand at the treasury (and practically at every bank and post office) in other money, any slight tendency to depreciation in any locality is at once corrected. As it is, the government makes a seigniorage profit on the fiduciary coinage, as shown in the following table. [5] The fractional coinage is maintained at a parity with the standard money in accordance with the monopoly principle, expressed in the limitation of the amount.
Receipts:
Earnings (charges for refining, assaying, manufacture
for other countries, etc.)……………………. $392,000
Bullion recovered, by-products, old materials, etc… 143,000
Profits on seigniorage, subsidiary silver………… 3,013,000
Profits on seigniorage minor coinage and recoinage… 2,387,000
—————
Total receipts…………………………………$5,935,000
Expenditures:
All kinds……………………………………..$1,138,000
—————
Net revenues from mint service…………………$4,797,000
§ 5. #Worn coins and Gresham's law.# Coins may be light-weight as the result of another cause—namely, the abrasion (wearing off) of the coins in circulation. Nearly always when this has occurred the worn coins have still been accepted as money,[6] and ordinarily without any depreciation. That is to say, they have a value as money greater than the value of the bullion that is in them. Everybody takes them without hesitation as readily as if they were full weight. If, however, at this point, new full-weight coins are put into circulation, these at once disappear while the old ones remain in circulation—a fact that has always been somewhat mystifying.
In explanation of the phenomenon was formulated "Gresham's law" of the circulation side by side of coins of different bullion value: bad money drives out good money. Sir Thomas Gresham (whose name has but recently been given to this so-called law), explained the principle to Queen Elizabeth when counseling her regarding the recoinage of the debased money of the realm as was done in 1560. He showed that when old, worn coins were in circulation and the mint began putting out full-weight coins, the old lighter ones remained as money, while the new ones, being heavier, were picked out by jewelers and by those needing to send money abroad.
Gresham's law has a paradoxical wording and is frequently misunderstood. "Bad" money means not counterfeit money, but merely money that has not as great a bullion value compared with its money value as some other kind of money then in circulation. But not every piece of such money will drive out every piece of good money. The law applies only under certain conditions, and within certain limitations. The "good" will be driven out only if the total amount of money in circulation is in excess of what would be needed if all were of full weight and of best quality. Paradoxically speaking, if there is not too much of the bad money, it is just as good as the good money. But even if good money is driven out, it may not leave the country. It may be hoarded, or be picked out by banks and savings-institutions to retain as their reserves, or be melted for use in the arts. Gresham's "law" becomes thus a practical precept. As applied to the plan of recoinage it is: Withdraw the worn coins as rapidly (in equal numbers) as you put new coins into circulation.
The continued circulation of "bad" money along side of "good" money (light-weight along side of full-weight coins), so long as the total number of coins is not in excess of the money demand for full-weight coins, is explained thus on just the same principle as is the circulation at parity of a light-weight fractional coinage, in the preceding section.
§ 6. #A general seigniorage charge on standard money.# The fiduciary coinage problem presents itself under a some-what different guise in case a seigniorage charge is made on all coinage, even of that metal used as the standard unit. In this case coinage is free but not gratuitous. In this case no bullion is brought to the mint unless the coined pieces the owners receive have a value equal to the bullion value plus the seigniorage charge. The power to impose a seigniorage charge is a monopoly power. Artificial limitation is present. Evidently, the number of coins that can be issued without depreciation is limited to that number which would circulate if they were made full weight without a seigniorage charge.[7] This number of pieces of full-weight metal is the saturation point of the money demand of the country. If more than that could in any way be put into circulation it would become worth less as money than as bullion, and would be melted or exported.
Assume that this full supply of money at a given moment is 100,000 pieces or dollars; then consider the effect of imposing a seigniorage charge of ten per cent on further coinage. The government alone having the right of coinage, the need of money would give the circulating medium a monopoly value. The value of the money would rise. When it had risen until the coin would buy any more than one-ninth more bullion than was in it, the citizens would begin to take metal to the mint. After the ten per cent charge was taken out they would receive a coin which, the containing one-tenth less bullion, would be worth very nearly the same as the metal taken to the mint. No considerable depreciation could take place unless the volume of business fell off so that less money was needed than before. In that case there would be no outlet for the excess of coins until they fell to their bullion value, i.e., till they lost the entire value of the seigniorage, the monopoly element in them. Melting or exporting them before that point was reached would cause to the owner the loss of whatever element of seigniorage value they contained. We thus have arrived at the general principle of seigniorage: when the number of coins issued is limited to the saturation point, a seigniorage charge does not reduce their money value; they are worth more as money than as bullion. And this holds good of a large seigniorage charge as well as of a small one, even up to the extreme limit of a charge of 100 per cent. In this last case the government would retain the whole of the bullion brought to it and would give in return a piece of money made of material (metal or paper) with a negligible value.