* Compiled from Gold, Prices, and Wages under the Greenback Standard, by Wesley C. Mitchell. The figures in the price column are "index numbers," that is, they are obtained by counting the price of each commodity in each year as a percentage of its price in 1860, and then averaging the various relative prices thus obtained for each year. The figures in the wage column are computed in a similar way. In the "price of gold " column parity between greenbacks and gold is represented by 100.

* 92 commodities.

3 21 commodities.

4 For 78 establishments.

greenback period.1 (2) The depreciation in the value of the greenback in gold was measured quickly and accurately in the gold market, but the movement of prices was hampered by habit, custom, existing contracts, local influences, etc. We have seen in the discussion of value that retail prices are less sensitive to changing market conditions than are wholesale prices.

1 This statement is subject to the limitation implied in the fact that general commercial conditions were themselves caused in part by the influence of the cheap and fluctuating medium of exchange.

Wages, in turn, are usually less mobile than retail prices. All these things interacted. Wages, to give only one example, constitute an important part of the expenses of producing commodities, and the sluggish movement of wages kept the expenses of production from advancing, and, later, from falling as rapidly as would otherwise have been the case, and must have had a corresponding effect on the prices charged for commodities.

Aside from these general changes, the minor fluctuations, the shorttime variations in prices, were unusually wide and numerous, a fact which may be attributed to the uncertain value of the medium of exchange. Such fluctuations were apt to upset all business calculations; chance became more important and foresight less important as a factor in profits. Under such conditions an intense and reckless spirit of speculation was bred, with unfortunate effects on business morality as well as on economic conditions.

As a fiscal expedient, the greenbacks led to results as disastrous as those which attended their use as money. The government was forced to sell bonds for depreciated greenbacks, but in order to maintain its credit it had to pay the interest and ultimately the principal of these bonds in gold. Supplies for the army were paid for in depreciated greenbacks, but these greenbacks had to be ultimately redeemed in gold. It has been estimated that the use of the greenbacks increased the cost of the Civil War by nearly $600,000,000.

Fiat Money. After 1873 the advocates of cheap money were not content with merely opposing any reduction in the quantity of the greenbacks. They went so far as to urge that the amount of paper money should be greatly increased, and that the use of metallic money should be definitely and permanently abandoned. Bank notes were also attacked because they were issued by "privileged corporations." The question came to be an important political issue, and in 1876 it brought about the organization of the Greenback party, which figured in three presidential campaigns, and which polled more than a million votes in the congressional elections of 1878. In more recent years similar demands were voiced by the Populist party.

The theory of money which formed the basis of the contention of the members of the Greenback party is sometimes called the "fiat money" theory. Those who held this theory of money saw

R

no significance in the fact that the greenbacks were in form promises to pay and that they were generally regarded as only temporarily irredeemable. In their view they were simply "dollars,' made such by the expressed will of the government. Nor did they see any significance in the fact that during the seventeen years of the suspension of specie payments over $500,000,000 in United States gold coins issued from the mints. As a matter of fact the fiat money advocates were misled by what some logicians have called the "jingle fallacy." That the "dollar" of the ordinary medium of exchange and the "dollar" as a standard unit of value were different things did not occur to them.

If they had succeeded in eliminating the credit element in the value of the paper currency by ceasing to print "promises to pay" (as they actually proposed to do), and had instituted a new name for the money unit, possibly (to reverse the spelling) "rallod," - they would surely have encountered difficulty in getting people to accept pieces of money paper, informing them that "This is a rallod," as money. It is hard to see how "the supply of money as compared with the demand for it," on which the fiat money advocates counted to fix the value of their money units, would have helped matters very much. Nor would the convertibility of fiat money into interest-bearing bonds, which was suggested by some, have given us a standard of value. For the bonds would have been simple promises to pay a certain sum in fiat money units, with interest at a certain rate, also in fiat money units. The difficulties that would have been encountered in international trade would alone have sufficed to make fiat money impossible.

Some writers have referred to the greenbacks as the "standard of value" during the suspension of specie payments. As a matter of fact gold, under the operations of unlimited coinage, was the ultimate standard, and the standard dollar was the gold dollar. The value of the greenback dollar, in which prices were measured, was the value of the gold dollar, discounted according to the outlook for the ultimate redemption of the greenbacks in gold. The greenbacks were at most only a "secondary standard" of value.

(For Questions and References, see the following chapter.)

CHAPTER XV

CREDIT AND BANKING

Credit Transactions. Thus far, in our discussion of money, we have failed to take account of the fact that the greater part of exchanges are credit transactions, which do not directly or immediately involve the use of money (in the sense of generally acceptable money instruments). A credit transaction is a transfer of goods, services, or money, for a future equivalent. In a "cash" transaction there are only two elements, the goods sold and the money paid for them. But in a credit transaction a third element time - is added. The introduction of this third element leads to exceedingly important results. In the first place it makes possible an enormous number of exchanges in which the buyer is either unable or disinclined to render a present equivalent. In the second place it obviates, to a very large extent, the necessity of using money.

Suppose, for example, that A and B are the only inhabitants of an isolated community. Three ways of making exchanges are open to them. They can use a system of direct exchange or barter, which will prevent A from getting goods from B unless he has some equivalent which he is willing to give up and which B is willing to accept. Or, they may use one commodity as money, in which case the purchasing power of either A or B at any given time will be governed by the amount of that particular commodity that he possesses, rather than by the total amount of all his possessions. But by combining a system of credit with their use of money, they will be able to make transfers freely, for in an occasional balancing of accounts most of the payments due each other will cancel, leaving only a relatively small amount to be paid in

money.

Something very much like this third process is continually going on in contemporary economic life. The process is more complex,

however, because A actually sells things to one person or group of persons, and buys them from other persons. And it is very likely that these two groups, the sellers and the buyers in A's transactions, have no direct business transactions with each other in which their respective claims against A and debts to A can be canceled. If, however, we take all buyers and all sellers into account, and if we could push our analysis of the complex network of credit relations far enough, we would find points of contact between A's credits and his debts. That is, if A gives a promissory note in exchange for a purchased good, this promissory note might be passed on from hand to hand until it got into the possession of some one who is indebted to A, if the path it should take were known. The difficulty is that the path is not known. The institution of banking, however, provides clearing centers, where credits and debts are balanced against each other and canceled.

A, for example, has a "deposit" in a local bank, which means that he has the right to demand payments from it at any time up to the amount of his deposit. He usually makes a payment to B, not by a promissory note, but by a check, an instrument ordering the bank to pay B the specified amount. This check will be presented for payment by B at a bank where he has a deposit, but the "payment" will usually be made by adding the amount of the check to B's deposit. If it is the bank where A also has his deposit, the transaction is settled by the simple process of debiting A's deposit and crediting B's. If it is another bank in the same town, and if the town is a small one, the check will enter into the daily exchange by the two banks of such claims against each other, the daily balance in favor of either bank being usually settled in money.

In the larger cities a further economy in the use of money is achieved by means of the clearing house, to which a representative of each bank brings daily all of the checks drawn against other local banks which it has received since the last "clearing." At the clearing house the checks are turned over to the representatives of the banks against which they are drawn, but the balances are not settled between the individual banks. Instead, a balance is struck between the total sum of each bank's claims against other banks and the total claims of other banks against it. Each bank then