§ 1. What determines the value of an inconvertible paper money?
After experience had shown that pieces of paper, of no intrinsic value, by
merely bearing upon them the written profession of being equivalent to a
certain number of francs, dollars, or pounds, could be made to circulate
as such, and to produce all the benefit to the issuers which could have
been produced by the coins which they purported to represent, governments
began to think that it would be a happy device if they could appropriate
to themselves this benefit, free from the condition to which individuals
issuing such paper substitutes for money were subject, of giving, when
required, for the sign, the thing signified. They determined to try
whether they could not emancipate themselves from this unpleasant
obligation, and make a piece of paper issued by them pass for a pound, by
merely calling it a pound, and consenting to receive it in payment of the
taxes.
In the case supposed, the functions of money are performed by a thing
which derives its power of performing them solely from convention; but
convention is quite sufficient to confer the power; since nothing more is
needful to make a person accept anything as money, and even at any
arbitrary value, than the persuasion that it will be taken from him on the
same terms by others. The only question is, what determines the value of
such a currency, since it can not be, as in the case of gold and silver
(or paper exchangeable for them at pleasure), the cost of production.
We have seen, however, that even in the case of metallic currency, the
immediate agency in determining its value is its quantity. If the
quantity, instead of depending on the ordinary mercantile motives of
profit and loss, could be arbitrarily fixed by authority, the value would
depend on the fiat of that authority, not on cost of production. The
quantity of a paper currency not convertible into the metals at the option
of the holder _can_ be arbitrarily fixed, especially if the issuer is the
sovereign power of the state. The value, therefore, of such a currency is
entirely arbitrary.
The value of paper money is, of course, primarily and mainly
dependent on the quantity issued. The general level of value
depends on the _quantity_; but we also find that deviations from
this general level, in the direction of further depreciation than
could be due to quantity alone, is caused by any event which
shakes the confidence of any one that he may get the existing
value for his paper. The “convention” by which real value (the
essential idea of money) was associated with this paper in the
minds of all is thereby broken. _Fiat_ money—that is, a piece of
paper, not containing a promise to pay a dollar, but a simple
declaration that this is a dollar—therefore, separates the paper
from any connection with value. And yet we see that _fiat_ money
has some, although a fluctuating, value at certain times: if the
State receives it for taxes, if it is a legal acquittal of
obligations, then, to that extent, a certain quantity of it is
given a value equal to the wealth represented by the taxes, or the
debts. Jevons remarks on this point(247) that, if “the quantity of
notes issued was kept within such moderate limits that any one
wishing to realize the metallic value of the notes could find some
one wanting to pay taxes, and therefore willing to give coin for
notes,” stability of value might be secured. If there is more in
circulation than performs these functions, it will depreciate in
the proportion of the _quantity_ to the extent of the uses
assigned to it; so that the relation of quantity to uses is the
only thing which can give value to _fiat_ money, but beyond a
certain point in the issues other forces than mere quantity begin
to affect the value. Although the paper is not even a promise to
pay value, the form of expression on its face, or the term used as
its designation, generally tends, under the force of convention
and habit, to give a popular value to paper.
Although the State may not promise to pay a dollar, yet, wherever
such paper money carries any purchasing power with it (which has
very seldom happened, and then only for short periods), it will be
found that there is a vague popular understanding that the State
intends, at some time or other, to redeem the notes with value in
coin to some amount. In the early cases of irredeemable money in
our colonies, the income of taxes, or similar resources, were
promised as a means of redemption. To some—although a
slight—extent, the idea of value was associated with such paper.
The actual quantity issued did not measure the depreciation. The
paper did depreciate with increased issues. But only in so far as
the increased issues proved to the community that there was less
and less possibility of ever receiving value for them did they
depreciate. In other words, we come to the familiar experience,
known to many, of a paper money depending for its value on the
opinions of men in the country. This was partially true, even of
our own greenbacks, which were not _fiat_ money, but promises to
pay (although not then redeemable), as may be seen by the movement
of the line in Chart XII (p. 359), which represents the
fluctuations of our paper money during the civil war. The upward
movement of the line, which indicates the premium on gold during
our late war, of course represents correspondingly the
depreciation of the paper. Every victory or defeat of the Union
arms raised or lowered the premium on gold; it was the register of
the opinion of the people as to the value to be associated with
the paper. The second and third resorts to issues of greenbacks
were regarded as confessions of financial distress; it was this
which produced the effect on their value. It was not only the
quantity but also that which caused the issue of the quantity. It
is, of course, clear that the value of a paper money like the
greenbacks, which were the promises to pay of a rich country,
would bear a definite relation to the actual quantity issued; and
this is to be seen by the generally higher level of the line on
the chart, showing a steadily diminishing purchasing power as the
issues increased. But the thing which weighed largely in people’s
minds was the possibility of ultimate redemption; and the premium
on gold was practically a register of the “betting” on this
possibility. In 1878, when Secretary Sherman’s reserve was seen to
be increasing to an effective amount, and when it became evident
that he would have the means (i.e., the value represented by all
the paper that was likely to be presented) to resume on the day
set, January 1, 1879, the premium gradually faded away. The
general shifting of the level to a lower stage in this later
period was not due to any decrease in the quantity outstanding,
because the contraction had been stopped in 1868, and that
consequent on the resumption act in May, 1878.
Suppose that, in a country of which the currency is wholly metallic, a
paper currency is suddenly issued, to the amount of half the metallic
circulation; not by a banking establishment, or in the form of loans, but
by the Government, in payment of salaries and purchase of commodities. The
currency being suddenly increased by one half, all prices will rise, and,
among the rest, the prices of all things made of gold and silver. An ounce
of manufactured gold will become more valuable than an ounce of gold coin,
by more than that customary difference which compensates for the value of
the workmanship; and it will be profitable to melt the coin for the
purpose of being manufactured, until as much has been taken from the
currency by the subtraction of gold as had been added to it by the issue
of paper. Then prices will relapse to what they were at first, and there
will be nothing changed, except that a paper currency has been substituted
for half of the metallic currency which existed before. Suppose, now, a
second emission of paper; the same series of effects will be renewed; and
so on, until the whole of the metallic money has disappeared [see Chart
No. XIV, Chap. XV, for the exportation of gold from the United States
after the issue of our paper money in 1862]: that is, if paper be issued
of as low a denomination as the lowest coin; if not, as much will remain
as convenience requires for the smaller payments. The addition made to the
quantity of gold and silver disposable for ornamental purposes will
somewhat reduce, for a time, the value of the article; and as long as this
is the case, even though paper has been issued to the original amount of
the metallic circulation, as much coin will remain in circulation along
with it as will keep the value of the currency down to the reduced value
of the metallic material; but the value having fallen below the cost of
production, a stoppage or diminution of the supply from the mines will
enable the surplus to be carried off by the ordinary agents of
destruction, after which the metals and the currency will recover their
natural value. We are here supposing, as we have supposed throughout, that
the country has mines of its own, and no commercial intercourse with other
countries; for, in a country having foreign trade, the coin which is
rendered superfluous by an issue of paper is carried off by a much
prompter method.
Mr. Mill’s statement, that, if paper be not issued of as low a
denomination as the lowest coin, “as much will remain as
convenience requires for the smaller payments,” will not hold
true. During our recent experiment of depreciated paper, the
depreciation was such as to drive out the subsidiary silver coins,
by July, 1862, and we were forced to supply their place by a
fractional paper currency. By an amendment inserted June 17, 1862,
into the act authorizing a second issue of $150,000,000 of
greenbacks, it was ordered “that no note shall be issued for the
fractional part of a dollar, and not more than $35,000,000 shall
be of lower denominations than five dollars” (act, finally passed
July 11, 1862). Although there were no fractional notes, yet
one-dollar notes drove out subsidiary silver, simply because the
paper had depreciated to a value below that of the 345.6 grains of
silver in two halves or four quarters of a dollar. By July 2d the
disappearance of small coin was distinctly noted. Let the value of
gold be represented by 100; and a dollar of small silver coin
(345.6 grains), relatively to a gold dollar, by 96. Now, if paper
depreciates to 90, relatively to gold, it will drive out the
subsidiary silver at 96, in accordance with Gresham’s law.
Up to this point the effects of a paper currency are substantially the
same, whether it is convertible into specie or not. It is when the metals
have been completely superseded and driven from circulation that the
difference between convertible and inconvertible paper begins to be
operative. When the gold or silver has all gone from circulation, and an
equal amount of paper has taken its place, suppose that a still further
issue is superadded. The same series of phenomena recommences: prices
rise, among the rest the prices of gold and silver articles, and it
becomes an object, as before, to procure coin, in order to convert it into
bullion. There is no longer any coin in circulation; but, if the paper
currency is convertible, coin may still be obtained from the issuers in
exchange for notes. All additional notes, therefore, which are attempted
to be forced into circulation after the metals have been completely
superseded, will return upon the issuers in exchange for coin; and they
will not be able to maintain in circulation such a quantity of convertible
paper as to sink its value below the metal which it represents. It is not
so, however, with an inconvertible currency. To the increase of that (if
permitted by law) there is no check. The issuers may add to it
indefinitely, lowering its value and raising prices in proportion; they
may, in other words, depreciate the currency without limit.
Such a power, in whomsoever vested, is an intolerable evil. All variations
in the value of the circulating medium are mischievous: they disturb
existing contracts and expectations, and the liability to such changes
renders every pecuniary engagement of long date entirely precarious. The
person who buys for himself, or gives to another, an annuity of one
[hundred dollars], does not know whether it will be equivalent to [two
hundred or to fifty dollars] a few years hence. Great as this evil would
be if it depended only on accident, it is still greater when placed at the
arbitrary disposal of an individual or a body of individuals, who may have
any kind or degree of interest to be served by an artificial fluctuation
in fortunes, and who have at any rate a strong interest in issuing as much
as possible, each issue being in itself a source of profit—not to add,
that the issuers may have, and, in the case of a government paper, always
have, a direct interest in lowering the value of the currency, because it
is the medium in which their own debts are computed.
The United States Supreme Court had decided in December, 1870, by
the second legal-tender decision, that the issue of greenbacks
(inconvertible from 1862 to 1879) was constitutional during a time
of war; but it was thought that the reissue of these notes since
the war, when no war emergency could be pleaded, was
unconstitutional. This view, however, was met by the unfortunate
decision of the Supreme Court, delivered by Justice Gray, March,
1884, which announced the doctrine that the expediency of an issue
of legal-tender paper money was to be determined solely by
Congress; and that, if Congress judged the issue expedient, it was
within the limits of those provisions of the Constitution (section
8), which gave Congress the means to do whatever was “necessary
and proper” to carry out the powers expressly granted to it.
Nothing now can prevent Congress, should it choose to do so, from
issuing paper money of any description whatever, even if of
absolutely no value. The disaster that might be brought upon the
country by a rising tide of repudiation among debtors, taking its
effect through a facile and plastic Congress (as in the case of
the silver coinage in 1878), is appalling to reflect upon.
§ 2. If regulated by the price of Bullion, as inconvertible Currency might
be safe, but not Expedient.
In order that the value of the currency may be secure from being altered
by design, and may be as little as possible liable to fluctuation from
accident, the articles least liable of all known commodities to vary in
their value, the precious metals, have been made in all civilized
countries the standard of value for the circulating medium; and no paper
currency ought to exist of which the value can not be made to conform to
theirs. Nor has this fundamental maxim ever been entirely lost sight of,
even by the governments which have most abused the power of creating
inconvertible paper. If they have not (as they generally have) professed
an intention of paying in specie at some indefinite future time, they have
at least, by giving to their paper issues the names of their coins, made a
virtual, though generally a false, profession of intending to keep them at
a value corresponding to that of the coins. This is not impracticable,
even with an inconvertible paper. There is not, indeed, the self-acting
check which convertibility brings with it. But there is a clear and
unequivocal indication by which to judge whether the currency is
depreciated, and to what extent. That indication is the price of the
precious metals. When holders of paper can not demand coin to be converted
into bullion, and when there is none left in circulation, bullion rises
and falls in price like other things; and if it is above the mint price—if
an ounce of gold, which would be coined into the equivalent of [$18.60],
is sold for [$20 or $25] in paper—the value of the currency has sunk just
that much below what the value of a metallic currency would be. If,
therefore, the issue of inconvertible paper were subjected to strict
rules, one rule being that, whenever bullion rose above the mint price,
the issues should be contracted until the market price of bullion and the
mint price were again in accordance, such a currency would not be subject
to any of the evils usually deemed inherent in an inconvertible paper.
But, also, such a system of currency would have no advantages sufficient
to recommend it to adoption. An inconvertible currency, regulated by the
price of bullion, would conform exactly, in all its variations, to a
convertible one; and the only advantage gained would be that of exemption
from the necessity of keeping any reserve of the precious metals, which is
not a very important consideration, especially as a government, so long as
its good faith is not suspected, need not keep so large a reserve as
private issuers, being not so liable to great and sudden demands, since
there never can be any real doubt of its solvency.
The United States since 1879 finds that a reserve of from
$130,000,000 to $140,000,000 is a sufficient reserve for
outstanding notes to the amount of $346,000,000, and greenbacks
are now at a par with gold.
Against this small advantage is to be set, in the first place, the
possibility of fraudulent tampering with the price of bullion for the sake
of acting on the currency, in the manner of the fictitious sales of corn,
to influence the averages, so much and so justly complained of while the
corn laws were in force. But a still stronger consideration is the
importance of adhering to a simple principle, intelligible to the most
untaught capacity. Everybody can understand convertibility; every one sees
that what can be at any moment exchanged for five [dollars] is worth five
[dollars]. Regulation by the price of bullion is a more complex idea, and
does not recommend itself through the same familiar associations. There
would be nothing like the same confidence, by the public generally, in an
inconvertible currency so regulated, as in a convertible one: and the most
instructed person might reasonably doubt whether such a rule would be as
likely to be inflexibly adhered to. The grounds of the rule not being so
well understood by the public, opinion would probably not enforce it with
as much rigidity, and, in any circumstances of difficulty, would be likely
to turn against it; while to the Government itself a suspension of
convertibility would appear a much stronger and more extreme measure than
a relaxation of what might possibly be considered a somewhat artificial
rule. There is therefore a great preponderance of reasons in favor of a
convertible, in preference to even the best regulated inconvertible,
currency. The temptation to over-issue, in certain financial emergencies,
is so strong, that nothing is admissible which can tend, in however slight
a degree, to weaken the barriers that restrain it.
The French Government, in the Franco-Prussian War (1870), issued
inconvertible paper on this plan, as explained by Mr. Mill; but,
acting through the Bank of France, they conducted their issues so
successfully that the notes never depreciated more than about one
half of one per cent. But this was a very rare management of
inconvertible paper, since the issues were actually limited as the
price of gold in paper rose above par.
§ 3. Examination of the doctrine that an inconvertible Current is safe, if
representing actual Property.
Projectors every now and then start up, with plans for curing all the
economical evils of society by means of an unlimited issue of
inconvertible paper. There is, in truth, a great charm in the idea. To be
able to pay off the national debt, defray the expenses of government
without taxation, and, in fine, to make the fortunes of the whole
community, is a brilliant prospect, when once a man is capable of
believing that printing a few characters on bits of paper will do it. The
philosopher’s stone could not be expected to do more.(248)
As these projects, however often slain, always resuscitate, it is not
superfluous to examine one or two of the fallacies by which the schemers
impose upon themselves. One of the commonest is, that a paper currency can
not be issued in excess so long as every note issued _represents_
property, or has a _foundation_ of actual property to rest on. These
phrases, of representing and resting, seldom convey any distinct or
well-defined idea; when they do, their meaning is no more than this—that
the issuers of the paper must _have_ property, either of their own, or
intrusted to them, to the value of all the notes they issue, though for
what purpose does not very clearly appear; for, if the property can not be
claimed in exchange for the notes, it is difficult to divine in what
manner its mere existence can serve to uphold their value. I presume,
however, it is intended as a guarantee that the holders would be finally
reimbursed, in case any untoward event should cause the whole concern to
be wound up. On this theory there have been many schemes for “coining the
whole land of the country into money” and the like.
In so far as this notion has any connection at all with reason, it seems
to originate in confounding two entirely distinct evils, to which a paper
currency is liable. One is, the insolvency of the issuers; which, if the
paper is grounded on their credit—if it makes any promise of payment in
cash, either on demand or at any future time—of course deprives the paper
of any value which it derives from the promise. To this evil paper credit
is equally liable, however moderately used; and against it, a proviso that
all issues should be “founded on property,” as for instance that notes
should only be issued on the security of some valuable thing, expressly
pledged for their redemption, would really be efficacious as a precaution.
But the theory takes no account of another evil, which is incident to the
notes of the most solvent firm, company, or government; that of being
depreciated in value from being issued in excessive quantity. The
assignats, during the French Revolution, were an example of a currency
grounded on these principles. The assignats “represented” an immense
amount of highly valuable property, namely, the lands of the crown, the
church, the monasteries, and the emigrants; amounting possibly to half the
territory of France. They were, in fact, orders or assignments on this
mass of land. The revolutionary government had the idea of “coining” these
lands into money; but, to do them justice, they did not originally
contemplate the immense multiplication of issues to which they were
eventually driven by the failure of all other financial resources. They
imagined that the assignats would come rapidly back to the issuers in
exchange for land, and that they should be able to reissue them
continually until the lands were all disposed of, without having at any
time more than a very moderate quantity in circulation. Their hope was
frustrated: the land did not sell so quickly as they expected; buyers were
not inclined to invest their money in possessions which were likely to be
resumed without compensation if the revolution succumbed; the bits of
paper which represented land, becoming prodigiously multiplied, could no
more keep up their value than the land itself would have done if it had
all been brought to market at once; and the result was that it at last
required an assignat of five hundred francs to pay for a cup of coffee.
The example of the assignats has been said not to be conclusive, because
an assignat only represented land in general, but not a definite quantity
of land. To have prevented their depreciation, the proper course, it is
affirmed, would have been to have made a valuation of all the confiscated
property at its metallic value, and to have issued assignats up to, but
not beyond, that limit; giving to the holders a right to demand any piece
of land, at its registered valuation, in exchange for assignats to the
same amount. There can be no question about the superiority of this plan
over the one actually adopted. Had this course been followed, the
assignats could never have been depreciated to the inordinate degree they
were; for—as they would have retained all their purchasing power in
relation to land, however much they might have fallen in respect to other
things—before they had lost very much of their market value, they would
probably have been brought in to be exchanged for land. It must be
remembered, however, that their not being depreciated would presuppose
that no greater number of them continued in circulation than would have
circulated if they had been convertible into cash. However convenient,
therefore, in a time of revolution, this currency convertible into land on
demand might have been, as a contrivance for selling rapidly a great
quantity of land with the least possible sacrifice, it is difficult to see
what advantage it would have, as the permanent system of a country, over a
currency convertible into coin; while it is not at all difficult to see
what would be its disadvantages, since land is far more variable in value
than gold and silver; and besides, land, to most persons, being rather an
incumbrance than a desirable possession, except to be converted into
money, people would submit to a much greater depreciation before demanding
land, than they will before demanding gold or silver.(249)
It has been said that the assignats circulated without
legal-tender power. They were received by the French treasury, and
a law was passed condemning a man to six years in irons for
exchanging gold or silver for assignats at a greater than the
nominal or face value of the latter. The subsequent issues, called
_mandats_, did not _represent_ land, but were directly
exchangeable for the land. Even that kind of money is no more
valuable than a proportional amount of tax receipts for land. In a
very short time _mandats_ were worth 1/1000 of their face value,
and assignats very much less. The assignats, moreover, were not
limited in quantity to the money value of the lands they
represented. By 1796, 45,000,000,000 francs of assignats had been
issued.
§ 4. Experiments with paper Money in the United States.
The experience of the colonies before our Revolution is rich in
warning examples of the over-issue of inconvertible paper money.
Those of Rhode Island(250) and the Province of Massachusetts(251)
are the most conspicuous, perhaps, because we have better
knowledge of them, but other colonies suffered in as great a
degree. The experience of the latter illustrates as well as any,
perhaps, not only the general theory of inconvertible paper, but
the device of supporting the paper by paying interest upon the
notes. Although the issues since 1690 had depreciated, in 1702
£10,000 more notes were issued, because, as it was said, there was
a scarcity of money. It is always noticeable that the more issues
of paper money there are made, the more there is a cry of
scarcity, much like the thirst of a hard drinker after the first
exhilaration has passed off. On the new issues five per cent
interest was paid, and even excises and imposts were set aside as
security for their payment. The year 1709 saw a new expedition to
Canada, and saw also the broken promises of the province, when
£20,000 more notes were put out; the collection of the taxes with
which to pay the notes was deferred in 1707 for two years; in 1709
deferred for four years; in 1710 for five years; in 1711 for six
years. By 1712 they had depreciated thirty per cent, when the
charm of legal tender was thrown around them, but to no purpose.
The idea of value was not associated with them in people’s minds,
and they put no faith in promises. The usual result took place.
People divided politically on the money question, and parties
began to agitate for banks which should issue notes based on real
estate, or for loans from the state to private persons at interest
to be paid annually. Such facts show the train of evils following
the first innocent departure from the maintenance of a currency
equivalent to coin. The people forgot, or did not know, the nature
of money, or the offices it performed. They did not understand
that creating paper money did not create wealth. This experiment
closed only in 1750 (March 31st), when the province had courage
enough to resume specie payments. The effect was to transfer the
West India trade from paper-issuing colonies to Massachusetts, and
to produce a steady prosperity in her business interests.
[Illustration: Chart XI.]
Chart XI. Continental Currency, Issue and Depreciation.
The issue of paper money as a means of making a forced loan from
the people, when there seem to be no other means of getting funds,
has been fully illustrated in our country by the Continental
currency issued during our Revolution. It is not, however,
considered that this is also accompanied by a process by which
every debtor takes “a forced contribution from his creditor.”
Congress had no power to tax, and the separate States would not do
it; and this has been considered as the excuse for making issues
of that well-known paper money, which has given rise to the
familiar by-word for absence of value, “not worth a Continental.”
Without going into details,(252) in one year, 1779, Congress
issued $140,000,000, worth in coin only $7,000,000. They, however,
bravely declared that paper had not depreciated, but that the
price of coin had gone up! Legal attempts were made to repress the
premium on silver; but resolutions do not create wealth as fast as
money can be printed. The depreciation went on more rapidly than
the issues (see Chart No. XI, in which the black line represents
the amounts of issues, and the broken line the depreciation of
paper, starting at 100); and, finally, March 18, 1780, Congress
decided to admit a depreciation, and resumed in silver at the rate
of one dollar in silver for forty in paper.
The question of government issues(253) of paper money again came
up in the United States in 1862, during the civil war, and part of
our present currency is the result of the policy then adopted. The
first step—the one that generally costs—however, was taken July
17, 1861, when the Treasury issued $50,000,000 of “demand notes,”
not bearing interest. These notes, however, were not made legal
tender. They could be used in payment of salaries and other dues
from the United States. It may be well to state that the Treasury
balanced the arguments for and against the issues of paper at the
beginning of the experiment, and we can see how these views were
realized as we go along. In favor of paper issues it was urged
that we could borrow a large amount without interest, as in the
case of the Continental currency; that there would be no expense
beyond the coin necessary for keeping the paper at par; and that
the country would gain a uniform currency. On the other hand, it
was seen that there might be temptations to issue without
provisions for redemption; that even if a fund were kept, a
disturbance of the money market would precipitate a demand for
coin, and all upon this single fund; and, lastly, that there were
all the dangers of over-issue. Secretary Chase(254) then decided
against paper issues. Government bonds, however, did not sell, and
the attempt of the banks toward the end of 1861 to carry
$150,000,000 of bonds brought on a suspension of specie payments,
December 31, 1861. Without any taxation policy, the country
drifted along, until in a spasm of dread at seeing an empty
Treasury, Congress passed the legal-tender act (February 25,
1862), issuing $150,000,000 of paper in the form of promises to
pay. A committee of bankers showed that the issue could have been
avoided by selling bonds at their market price; but Congress would
not sell them below par. No necessity for the issues of paper need
have arrived. In four months another issue of $150,000,000 was
authorized (July 11, 1862); and a third issue of a like amount
(March 3, 1863), in all $450,000,000. The depreciation took place
(see Chart No. XII), for, as Secretary Chase anticipated, no
provision was made for redemption. They were made legal tender,
but this “essential idea” did not preserve their value; nor did
the provision that they be received for taxes (except customs),
avail for this purpose.
The effects of the depreciation were as evil as can well be
imagined. (1) The expenses of the Government were increased by the
rise in prices, so that (2) our national debt became hundreds of
millions larger than it need have been; (3) a vicious speculation
in gold began, leading to the unsettling of legitimate trade and
to greater variations in prices; (4) the existence of depreciated
paper later gave rise to all the dishonest schemes for paying the
coin obligations of the United States in cheap issues, to the ruin
of its credit and honor; and (5) it has practically become a
settled part of our circulation, and a possible source of danger.
Of the whole $450,000,000, $50,000,000 were set aside as a reserve
for temporary deposits; but in July, 1864, $431,000,000 were in
circulation. At this time (June 30, 1864) Congress, retaining
distinctly the feeling that the issue of paper was but a temporary
measure, forbade any further issues. Secretary McCulloch,
immediately on the close of the war, began to contract, and, by a
resolution of the lower branch in Congress (December 18, 1865), a
cordial concurrence in the measures for contraction was
manifested. Of course, the return from the path of inflated credit
and high prices was painful, and Congress began to feel the
pressure of its constituents. Had they not yielded, much of the
severity of the crisis of 1873 might have been avoided; but (April
12, 1866) they forbade any greater contraction than $4,000,000 a
month. Here was a lack of courage not foreseen by Secretary Chase.
This was again shown (February 4, 1868) by a law which absolutely
forbade the Secretary to further reduce the currency, which now
stood at $356,000,000. This marks an important change in the
attitude of the Government, as compared with 1862. After the panic
of 1873, the paper evil produced its usual effect in the cry for
more money, and, as in the Province of Massachusetts in 1712,
parties divided on the question of inflation or contraction. A
bill to expand the Government issues to $400,000,000 (and the
national-bank notes also to $400,000,000) actually passed both
Houses of Congress, and we were fortunately saved from it only by
the veto of President Grant (April 22, 1874). This was another
landmark in the history of our paper money. Secretary Richardson,
however, had already, without authority, reissued $26,000,000 of
the $44,000,000 withdrawn by Secretary McCulloch, and the amount
outstanding was thus $382,000,000. A compromise measure was passed
(June 20, 1874), which retained this amount in the circulation.
When the resumption act was passed (January 14, 1875), the
provision that, for every $100 of new national-bank notes issued,
$80 of United States notes should be retired, resulted in a
contraction of the latter from $382,000,000 to $346,000,000. The
reason of this was, that there was no provision for the increase
of United States notes when national banks withdrew their own
issues; and after the crisis many banks naturally did so. The
culmination of the policy of Congress came in a law (May 31, 1878)
which absolutely forbade all further retirement of United States
notes, and we are now left at the present time with an inelastic
limit of $346,000,000. Finally, in 1877 and 1878, Secretary
Sherman, aided by a most fortunate state of foreign trade, began
to accumulate gold in order to carry out the provisions of the
resumption act, which required him to resume specie payments on
January 1, 1879. He successfully collected $133,000,000 of gold,
and on December 17, 1878, the premium on gold disappeared, and
resumption was accomplished quietly on the day appointed, without
a jar to business.
But it is a significant fact that even after all the evils
inflicted on our country by over-issues, in spite of the
temptation to misuse paper money if it is in any way permitted, in
spite of all the warnings of history, there seems to be a
dangerous acquiescence in the presence of government paper money
in our currency. It is an open pitfall, tempting to evils whenever
sudden emergencies arise. It ought not to be allowed to remain any
longer.
§ 5. Examination of the gain arising from the increase and issue of paper
Currency.
Another of the fallacies from which the advocates of an inconvertible
currency derive support is the notion that an increase of the currency
quickens industry. Mr. Attwood maintained that a rise of prices produced
by an increase of paper currency stimulates every producer to his utmost
exertions, and brings all the capital and labor of the country into
complete employment; and that this has invariably happened in all periods
of rising prices, when the rise was on a sufficiently great scale. I
presume, however, that the inducement which, according to Mr. Attwood,
excited this unusual ardor in all persons engaged in production must have
been the expectation of getting more of commodities generally, more real
wealth, in exchange for the produce of their labor, and not merely more
pieces of paper. This expectation, however, must have been, by the very
terms of the supposition, disappointed, since, all prices being supposed
to rise equally, no one was really better paid for his goods than before.
It calculates on finding the whole world persisting forever in the belief
that more pieces of paper are more riches, and never discovering that,
with all their paper, they can not buy more of anything than they could
before. At the periods which Mr. Attwood mistook for times of prosperity,
and which were simply (as all periods of high prices, under a convertible
currency, must be) times of speculation, the speculators did not think
they were growing rich because the high prices would last, but because
they would not last, and because whoever contrived to realize while they
did last would find himself, after the recoil, in possession of a greater
number of [dollars], without their having become of less value.
Hume’s version of the doctrine differed in a slight degree from Mr.
Attwood’s. He thought that all commodities would not rise in price
simultaneously, and that some persons therefore would obtain a real gain,
by getting more money for what they had to sell, while the things which
they wished to buy might not yet have risen. And those who would reap this
gain would always be (he seems to think) the first comers. It seems
obvious, however, that, for every person who thus gains more than usual,
there is necessarily some other person who gains less. The loser, if
things took place as Hume supposes, would be the seller of the commodities
which are slowest to rise; who, by the supposition, parts with his goods
at the old prices, to purchasers who have already benefited by the new.
This seller has obtained for his commodity only the accustomed quantity of
money, while there are already some things of which that money will no
longer purchase as much as before. If, therefore, he knows what is going
on, he will raise his price, and then the buyer will not have the gain,
which is supposed to stimulate his industry. But if, on the contrary, the
seller does not know the state of the case, and only discovers it when he
finds, in laying his money out, that it does not go so far, he then
obtains less than the ordinary remuneration for his labor and capital;
and, if the other dealer’s industry is encouraged, it should seem that his
must, from the opposite cause, be impaired.
An issue of notes is a manifest gain to the issuers, who, until the notes
are returned for payment, obtain the use of them as if they were a real
capital; and, so long as the notes are no permanent addition to the
currency, but merely supersede gold or silver to the same amount, the gain
of the issuer is a loss to no one; it is obtained by saving to the
community the expense of the more costly material. But, if there is no
gold or silver to be superseded—if the notes are added to the currency,
instead of being substituted for the metallic part of it—all holders of
currency lose, by the depreciation of its value, the exact equivalent of
what the issuer gains. A tax is virtually levied on them for his benefit.
But besides the benefit reaped by the issuers, or by others through them,
at the expense of the public generally, there is another unjust gain
obtained by a larger class—namely, by those who are under fixed pecuniary
obligations. All such persons are freed, by a depreciation of the
currency, from a portion of the burden of their debts or other
engagements; in other words, part of the property of their creditors is
gratuitously transferred to them. On a superficial view it may be imagined
that this is an advantage to industry; since the productive classes are
great borrowers, and generally owe larger debts to the unproductive (if we
include among the latter all persons not actually in business) than the
unproductive classes owe to them, especially if the national debt be
included. It is only thus that a general rise of prices can be a source of
benefit to producers and dealers, by diminishing the pressure of their
fixed burdens. And this might be accounted an advantage, if integrity and
good faith were of no importance to the world, and to industry and
commerce in particular.
§ 6. _Résumé_ of the subject of money.
Before passing on to another branch of our subject, it may be a
gain to clearer ideas to collect in the form of the following
classification the main points discussed (in Chaps. IV to X) under
money and credit, in continuance of a similar classification of
value:
Money measures and transfers value.:
(1.) Hence best served by the precious metals, on account of their
peculiar qualities.
(2.) Depends for its value, in the long run, on the cost of
production at the worst mine worked (Class III); but
practically on demand and supply (Class I). And (if no
credit exists) its value changes exactly with the
supply, which is expressed by V = 1/(Q × R)
(3.) Under two legal standards, obeys Gresham’s law—e.g.,
experience of Japan and the United States.
(4.) Substitutes for money, called _credit_ (which is not capital,
but calls out inactive capital).
Of these substitutes for money, (1) Use of credit depends not on
quality of coin and notes, and (2) Various kinds of credit.
Of those various kinds of credit, there are (1) Book credits, (2)
Bills of exchange, (3) Promissory notes, and (4) checks processed
via clearing-house.
Of the promissory notes, they are of either (1) Individuals, (2)
Banks (Coin Banks or Land Banks, etc.), or (3) Governments.
Of Government notes, there are (1) Convertible or (2)
Inconvertible.