If [unaccounted currencies] were more than trivial in quantitative terms, it would help to explain the decline in the measured velocity of money during the nineteenth century. For if the stock of accounted money were supplemented by an unperceived quantum of unaccounted money, measured velocity – money income divided by the stock of accounted money – would be higher than the true velocity of money. As unaccounted money gradually was replaced by accounted money, the measured velocity of circulation would fall.#
The general and rapid rise in prices in 1862 due to the first issue of greenbacks during the Civil War was perhaps the most acute example of government-inspired paper money inflation and suspension [in the pre-Fed U.S.]. Commodity values of most metallic coins rose sharply above their monetary values, and coins then went out of circulation, leaving the North’s economy with almost no currency denominations below $5. . . . After 1865, private coinage as well as issues of state bank notes were effectively prohibited. But government coinage of fractional currency was still inadequate until after 1880.#
The key to an equilibrium in a laissez-faire monetary system is the understanding that private money would have to be accepted as well as issued, just as privately produced shoes or bankchecks would have to be demanded as well as supplied.#