Page "Currency" Paragraph 17

However, these advantages held within them disadvantages.

First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with.

Second, because it increased the money supply, it increased inflationary pressures, a fact observed by David Hume in the 18th century.

The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero.

The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a standing army.

For these reasons, paper currency was held in suspicion and hostility in Europe and America.

It was also addictive, since the speculative profits of trade and capital creation were quite large.

Major nations established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.