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. Moreover, if a great national emergency should ever again make the issue of government paper money necessary, it would be highly advantageous to have the greenbacks out of the way. 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 greenbacks should be discounted as compared with gold.

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 price.

As the common medium of exchange consisted almost entirely

1

of greenbacks and of bank notes convertible only into greenbacks, prices were stated in greenback “dollars" and naturally rose as the gold value of the greenback depreciated. Reference to the table on the next page will show a rough correspondence between changes in the general level of prices, expressed in greenbacks, and changes in the price of gold, also expressed in greenbacks. But the wholesale prices of commodities rose relatively higher than did the price of gold, and declined less rapidly.2 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 maxi

mum.

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 expressed 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 greenback period.3 (2) The depreciation in the gold value of the greenback was recorded quickly and accurately in the gold market, but the movement of prices was hampered by habit, custom, existing contracts, local influences, etc. Retail prices are less sensitive to changing market conditions than are wholesale prices. Wages, in turn, are usually less mobile than retail prices.

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 1862 the situation was helped by the issue of fractional paper currency in denominations as low as three cents.

* 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.

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.

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 short-time variations in prices, were unusually wide and numer

1 Compiled from Gold, Prices, and Wages under the Greenback Standard, by Wesley C. Mitchell. The figures in the price columns 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.

2 92 commodities.

3 21 commodities.

4 For 78 establishments.

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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 monetary unit were different things did not occur to them.

If they had succeeded in eliminating the credit element in 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 perhaps have encountered difficulty in getting people to use 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 purchasing power of their money units, would have helped matters very much. Nor would the redeemability of fiat money in interest-bearing bonds, which was suggested by some, have given us a monetary standard. For the bonds would have been merely promises to pay certain sums of fiat money, with interest at a certain rate, also in fiat money. The difficulties that would have been encountered in international trade would alone have sufficed to make fiat money impossible.

This should not be taken to mean, however, that irredeemable paper money, issued in familiar denominations, may not under favorable circumstances circulate for some time among people accustomed to its use, even if there is no prospect of its ever being redeemed. The most important of the necessary "favorable circumstances" is the absence of complications in foreign trade, such as have already been discussed in connection with the subject of seigniorage. But, at best, there would be a host of practical difficulties in the way of getting the right amount of money, and only the right amount, into circulation.