MODERN MONETARY SYSTEMS
(b) System of Paper Money.
A system of paper money is usually the result of exceptional
 circumstances in which notes are no longer convertible
 and are granted forced currency. In theory, gold
and silver coins continue to be exchanged internally for
notes according to the previous exchange rate corresponding
 to the number of units of account inscribed upon each
monetary instrument. At the present time in France a ten
franc note ought to be exchangeable for two five and two
ten franc notes for one twenty franc piece ; no other proceeding
 is known to the law.
But in such circumstances gold coin soon disappears in
practice through being exported or hoarded; and silver
may likewise disappear unless it continues to perform the
function of subsidiary coin.
A régime of paper currency is usually preceded, accompanied
 or followed by abnormal issues, but its essential
characteristic is not necessarily either inflation or the
disappearance of coin from internal circulation, but that
the currency only circulates internally. Hitherto a given
paper currency has almost always been peculiar to a single
country ; hence this system does not provide a monetary
basis in common with other national monetary systems.
Almost all monetary phenomena which require elucidation
 and almost all the problems which need solution in
countries on a paper currency will be seen to derive from
this essential characteristic.
The only requirement for bringing a system of paper
currency back to the gold exchange standard is that paper
should again become convertible into gold at a fixed rate
for the purpose of payments abroad, although coin may
have ceased to circulate internally and the note issue may
not have been reduced to the previous figure.
§ 2. Monetary systems in operation; rudimentary notions of
the mechanism of exchange.
With the above definitions in mind it is easy to understand
 how monetary systems work generally and to grasp

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