2. Subsidiary coins of lighter weight than the standard, if properly limited, will remain in circulation at par. Money to serve all of its purposes must be of different denominations. The amount required of each denomination is determined by the volume of exchanges for which each is most convenient. Each kind of money, as the penny, nickel, dime, has its own peculiar demand and its saturation point. For the smaller denominations the standard metal is not suitable. A gold dollar cannot well be cut into twenty or a hundred pieces. Thus copper, nickel, silver remain in restricted use. When these are issued at their bullion value, difficulties arise; not only are they too heavy, but as they vary in bullion value, some of them become worth more as bullion than as coin, and suddenly disappear from circulation.
Adoption of light-weight minor coins
Theory of light-weight coins
This happened often throughout the Middle Ages and until the nineteenth century. Gold and silver generally were coined at a ratio of weight corresponding exactly to their market ratio at a given moment, and every time the market conditions varied, one kind of the money went out of circulation, and the country was left either without the larger gold coins, or without subsidiary coin, or "small change." At length the plan was hit upon of issuing a limited number of subsidiary coins of less than full bullion value, that is, as "token coins." By this plan there is given to the minor coins a value greater than that of the bullion in them. The small profit made by the government on every penny, nickel, or dime issued, is a seigniorage charge. These minor coins, in somewhat confusing variety, circulate side by side with full-weight money, their value depending on the monopoly principle. The result of a large issue of any one denomination would be a lowering of its value. In practice their issue is determined by the needs of business and by the requests of citizens for small coins 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.
Gresham's law
3. Gresham's law of the circulation of coins of different bullion value is: bad money drives out good money. This so-called "law" was stated in these circumstances: England had two kinds of metal money, silver and gold, which were coined at a fixed ratio in weight; and as the market value of the bullion changed, the new full-weight coins of the metal rising in value went out of circulation. The coining of the cheaper metal caused the melting or exporting of the one becoming dearer, and for those purposes the coins containing the most bullion were picked. Likewise full-weight coins disappear whenever money of less bullion value (either because containing more alloy, or because made of a cheaper metal or of paper) is poured into the circulation in large quantities.
Proper interpretation of Gresham's law
Gresham's law needs some explanation, for it is frequently misunderstood. "Bad" money means money that has not the bullion value equal to its money value, money that is either debased in quality or light in weight. But not every piece of bad money will drive out every piece of good money. If that were so, a single bad penny would drive out of circulation all the gold. The law applies only under certain conditions. The "good" will leave the country only if the total amount of money in circulation is in excess of what would be needed if all were of full weight or best quality. Paradoxically speaking, if there is not too much of the bad money, it is just as good as the good money. The good money may not leave the country. It may be hoarded, or be picked out by banks and savings-institutions to retain as their reserve, or it may be melted for use in the arts. Gresham's "law" is thus a practical precept: keep the amount of token or light-weight coin limited to the field of its peculiar use, or it will cause the other forms, the fuller weight money, to leave for a better market. That better market may be the melting-pot or it may be a foreign country.
§ II. PAPER MONEY EXPERIMENTS
Nature of paper money