Paper Money

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Paper Money


nominal notes of value with a compulsory rate, issued by the state to cover its expenditures. Unlike credit money (bank notes, which are also paper notes of value), paper money arose directly from the circulation of coins. As coins lose their fixed content, they cease to correspond to their nominal value, that is, to their designated weight. With the transition to gold circulation, copper and silver money becomes change with a metallic content arbitrarily set by law.

Excessive issue of paper money (especially during wartime) leads to flooding the channels of circulation with money, which therefore becomes depreciated. The law of the real value of monetary notes goes into effect. No matter what scale the emission of paper money may reach, its real value will correspond to that quantity of actual money essential for circulation. Therefore the more paper money issued, the smaller (where other conditions are unchanged) its actual value will be.

State authorities began to resort to issuing paper money in North America as early as the end of the 17th century, earlier than this step was taken in Europe. During the American struggle for independence, the issue of “continentals” led to their almost complete devaluation. The report by the commander of the army, G. Washington, to Congress stated that a cartload of money was hardly enough to buy a cartload of provisions. In Europe the issue of paper money first reached large dimensions during the Great French Revolution, when the issue of such money under the name “assignats” rose from 120 million livres (before the revolution) to 45.6 billion livres (in 1796), and their real value dropped to 0.5 percent of the nominal value. This experience with paper money circulation was very important for the theory and policy of monetary circulation, because it clearly showed the specific rules governing paper money circulation, the ruinous effect of inflation on the national economy, the resulting sharp aggravation of the antagonistic contradictions between the toiling masses and the exploiting class.

Instead of the direct issue of paper money, authorities frequently used the issue of bank notes which turned into paper money. For example, in connection with its substantial expenditures during the war against France between 1793 and 1815, the government of Great Britain resorted to borrowing from the private Bank of England, the bank of issue, and to issuing bank notes not backed by gold. Because this threatened bankruptcy for the bank, the Bank Restriction Act was issued, which temporarily released the bank from the obligation of exchanging its bank notes for gold. This act also essentially converted the notes into paper money, although they retained the form of bank notes. Later this type of transformation of bank notes into paper money began to be employed extensively as a camouflaged method of issuing paper money.

Even before World War I, Germany, Austria-Hungary, Italy, and other countries were resorting to the issue of paper money in concealed and open form. In Russia the first paper money was issued for 1 million rubles under Catherine II (1769) and was called assignaty. From 1769 to 1775 the Russian government used the issue of assignaty to finance the war against Turkey. Later, with the war against Napoleon, assignaty were issued in large numbers: their emission increased from 212 million rubles (1800) to 836 million rubles (in 1817). In later years the tsarist government also resorted to the emission of paper money.

In the age of imperialism and the general crisis of capitalism, the issuing of paper money has become more frequent and has assumed an extraordinary scale, because this money was used to finance colossal expenditures to prepare for, wage, and recover after the world wars. After the end of World War I the issue of paper money, especially in the defeated countries, increased significantly. For example, during 1922-23, Germany suffered an inflation of paper money on an astronomical scale (the so-called hyperinflation): the amount of paper money in Germany increased from 50 billion marks (1919) to 496,585,000,000 billion marks (1922), and the index of wholesale price’s rose during these years from 415 (1913 = 100) to 16,620,000,000. The German mark was turned into a worthless scrap of paper. This hyperinflation greatly aggravated international and intraclass contradictions in Germany and promoted, just as it had in Russia, the advent of a revolutionary situation. Under these conditions international finance capital considered it essential to give urgent help to Germany and eliminate the chaos created in the economy and finances of Germany and other countries; the Dawes Plan was the result. The issuing of paper money was used during World War II and in the immediate postwar years, with a resulting depreciation of the currencies of many countries (including imperialist countries); in some countries (such as China and Greece) the issue of paper money reached the level of hyperinflation.

As the colonial system crumbles, the issue of paper money is used on a significant scale to finance the expenditures necessary to wage anti-imperialist wars of national liberation and to establish independent economies in the colonial countries and provide for their further development.

In the socialist countries the socioeconomic nature of paper money is fundamentally changed. The working-class state uses the issue of paper money to carry out socialist transformations in the sphere of production and circulation. The Soviet state resorted to large-scale paper money issue under the conditions of the Civil War of 1918-20. But during the Great Patriotic War of 1941-45 against German fascism, the issue of paper money was done on a relatively small scale despite expenditures and losses unprecedented in world history. By the end of the war the volume of money in circulation had increased only 280 percent, and in 1947, very soon after the war ended, paper money circulation was normalized. The other socialist countries also resorted to the issue of paper money on a temporary basis, but they subsequently introduced monetary reforms and took steps to straighten out their monetary circulation.


References in periodicals archive ?
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Printing new banknotes comes in light of a studied plan put in 2005 to replace the old and bad paper money and put new ones into circulation with more complicated security specifications to prevent them from counterfeit," The Central Bank said in a statement.
Money as a concept, the development of coinage and paper money, international currencies, trade, taxation, charitable giving and the spending of money, and ways to earn it, all are touched upon in this simple introduction to economics.