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difficulties of 1890-1893, together with the history of the treasury of the notes of 1890, has been described in connection with the discussion of bimetallism.

At present the greenbacks constitute a useful and acceptable part of the stock of money. But if another financial crisis should deplete the government treasury, they would very likely prove again to be a source of difficulty. Their retirement is feasible under present conditions, but would be most difficult to accomplish under the very financial conditions under which they would be most dangerous. The currency act of 1900 provides for a gold reserve of $150,000,000, to be held against them to insure their redeemability. If the reserve falls below $100,000,000, the secretary of the treasury is directed to replenish it from the proceeds of bond sales. Although this gold reserve also constitutes part of the real security behind our silver dollars, it could safely be diminished in amount if the greenbacks were retired.

Economic Effects of the Greenbacks. The greenbacks are in form promises to pay, but they are not promises to pay on demand, nor at any specific time. During the period of the suspension of specie payments they were not actually redeemable in gold, nor was gold in general circulation as a medium of exchange except on the Pacific coast. Gold was, however, in addition to its industrial uses, employed as money in international trade, in the payment of interest on government bonds, and for customs duties (for which the greenbacks were not legally receivable). There was thus a constant demand for gold money, which was met by its sale as a commodity in the New York market. The gold market was highly speculative, the daily and even the hourly fluctuations in the price of gold in greenbacks being considerable. Notwithstanding these speculative features the prices paid for gold indicated very accurately, in the long run, how much, in the expert judgment of market specialists, the value of the greenbacks had depreciated.

Everything that was thought to affect the probability of the ultimate redemption of the greenbacks in gold influenced their price. Among these factors were the quantity of greenbacks issued, the condition of the federal treasury, the military successes and reverses of the Union cause, and, in later years, the prospects for the

resumption of specie payments. Greenbacks reached a parity with gold two weeks before the resumption of specie payments on January 1, 1879. A fact of special significance is that until July, 1863, the greenbacks were convertible at par into 6 per cent gold bonds. These bonds formed an actual standard of value for the greenbacks, and although themselves depreciated, exercised for the time being a steadying influence upon their value.

As the common medium of exchange consisted almost entirely of greenbacks1 and of bank notes convertible only into greenbacks, prices were measured in greenback "dollars" and naturally rose as the gold value of the greenback depreciated. Reference to the table on page 240 will show a rough correspondence between changes in the general level of prices, expressed in greenbacks, and changes in the value of gold, measured in greenbacks. But the price of commodities rose relatively higher than did the price of gold, and declined less rapidly. Retail prices, in turn, declined less rapidly than did wholesale prices. Wages advanced more slowly than prices; maximum wages were not paid until 1872,seven years after retail prices and eight years after wholesale prices had reached their maximum.

That there was not a closer correspondence between the movement in general prices and the changes in the gold value of the greenback was due to two sets of influences: (1) Even if greenbacks had not been issued, and if prices had been measured in gold, there would have been marked fluctuations in prices, not only such as continually occur in normal years, but also those due to such exceptional things as the withdrawal of a large number of men from industry and agriculture to military service, the shifting of productive effort in response to the enormous demand for military supplies, the period of extraordinary business activity, of railway building, and of agricultural and industrial expansion that followed the war, the reaction and financial crisis in 1873, and the return of prosperous conditions in the last years of the

1 Subsidiary coins did not go out of circulation until 1862, when the value of the greenback dropped below the value of the bullion in these coins. Postage stamps and notes and tokens issued by cities and by business firms were for a while used as small change. In 1863 the situation was helped by the issue of fractional paper currency in denominations as low as three cents.

2 The more detailed figures, of which the table given here is only a summary, show that the prices of commodities also advanced more slowly than did the price of gold. For an illuminating discussion of these price changes see Mitchell, Gold, Prices, and Wages under the Greenback Standard, Chap. V.

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* 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.

♦ 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

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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.

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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 printed 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.)

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