Currency means originally the capacity of being current, or, as Johnson defines it, 'the power of passing from hand to hand.' It is applied in practice to the thing that is so current, and generally to whatever, by being current among any nation or class of persons, serves as the money with which they buy commodities or pay their debts. It is necessary to be content with a practical explanation, without venturing on a scientific definition of the term, because, among the many disputed points in political economy, there is none productive of more exciting controversy than the proper regulation of the currency; and the advocate of each theory is apt to define the term according to the view he takes of the functions of government regarding currency. Whether correctly or not, it is applied in practice to everything that is received for payment. It differs from the word money, in its popular acceptance, in as far as it includes various substitutes for the metallic money of a country, especially bank-notes. The leading question among political economists regarding currency is, how far it should be restrained. The most effectual method of restraining it is by confining it to the precious metals. If it were law that none but a gold currency should be used in any country, and if, at the same time, there were no effort to tamper with this gold currency, and give it an artificial value, the currency of that country would always be adjusted to the general level of prices throughout the commercial world, and if it were redundant would be at once exported, and if deficient at once imported in exchange for commodities.
A country which does not produce gold must pay for its gold with commodities, and consequently it is a very expensive currency, and therefore, ever since man's ingenuity was turned to trade, methods have been devised for superseding gold or the other precious metals by something cheaper. Unless, however, law or custom intervenes to give it efficiency, this cheaper material will only be worth its own (so-called) intrinsic value. A five-pound Bank of England note is worth so little in its intrinsic value as a picture upon thin paper, that such a value can hardly be expressed. It derives its power as currency from the obligation it fixes on a great rich corporation to make good its professed amount to the holder. We thus pass from a purely bullion currency to the next step of restraint, which is generally called a mixed currency. Here some maintain that no note should be issued unless the banker or other person issuing it has in his possession as much bullion as will pay it. Others say it is sufficient that he is bound to pay its amount in bullion on demand without his actually possessing the bullion throughout the whole period of the currency of the note. A third party, again, are for a currency entirely free of a metallic basis; they hold that naturally paper money, passing from hand to hand, will represent transactions, and will therefore come in the end to be made good in some shape or other; and they further hold, that if some losses should thus occur, these will be more than compensated by the rapid increase of trade and enterprise, caused by a free trade in currency, as it is termed—that is to say, by every man issuing his own notes or promises to pay to whoever will take them. As a matter of fact, every nation beyond the first stage of civilisation has always regulated its currency, and Adam Smith carefully points out that this is no real infringement of natural liberty and free trade. Through a succession of practical measures, reached with considerable caution, the English have come to a mixed currency, resting on a compromise between the two classes of mixed currency above referred to. In the theory of the measures brought to completion under Sir Robert Peel in 1844, it is admitted that, to a certain extent, a currency can be based on transactions and the property of those concerned in them, but that a limit must be drawn, to prevent the power of creating such a currency from running to excess, by the issue of notes which cannot be immediately made good by those who issue them. Accordingly, the several banks in existence were allowed to continue their note circulation, but they were permitted to increase it only on the condition of having bullion in their coffers to pay the additional notes issued by them.
A currency which is not worth its nominal value in bullion is called a 'depreciated currency.' During the period of the restriction of cash payments (1797-1821), the notes of the Bank of England were at one time (1816) depreciated 16 per cent. Before the resumption of cash payments, the notes of the Bank of England had sunk to be worth but 16s. in the pound, as compared with gold. During the civil war in the United States, the paper dollar sank in 1864 to 38 cents; it did not reach par (100 cents) till 1879. A depreciated currency may be created by a government calling notes or any other form of money a legal standard, and issuing a greater quantity of it than the real transactions of the country and the property passing from hand to hand require; or it may be created by private persons acting under laws by which the right of issuing a currency is not duly limited. This faculty which a currency has of becoming depreciated without being repudiated, is the real source of danger in all proposals for an unfettered currency, or a free trade in the issue of money. If the bank-notes for which bullion cannot be immediately obtained were repudiated, there might be a natural check on over-issues; but it is their nature, on account of the difficulty of getting bullion for them, or the chance that it may never be got, that they pass at a discount or reduction of their value. Hence such a currency would be ever shifting; there would be no permanent standard, and the person incurring a debt before a depreciation which he pays afterwards would, in reality, be paying his creditor a dividend only. A 'token' currency, the material of which is avowedly overvalued, and which is issued in limited quantities for use in small payments, must be distinguished from a depreciated currency. In the silver currency of Britain, a pound is worth little more than four-fifths of a sovereign, even at the old valuation of silver, at about 60d. per oz. If a person due £100 could pay it in silver, he would get off with a dividend of from 16s. to 18s. in the pound; but by law, silver is not a legal tender for more than 40s. The copper currency is so far below its real value, that it has not been thought worth while to give it a permanent weight—the pence and halfpence now issued are little more than half the weight of those of former mints; but they are only a medium for small sums, and the royal stamp establishes reliance. See BIMETALLISM, BULLION, MONEY, and W. A. Shaw's History of Currency (1895).