of greenbacks1 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. 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. (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.

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.

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.

1 92 commodities.

321 commodities.

4 For 78 establishments.

ous, a fact which may be attributed to the uncertain future 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 expense of the Civil War by nearly $600,000,000.1

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 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 no significance in the fact that the greenbacks were in form promises to pay and that they were generally regarded as only

1 This estimate applies only to the increased expense to the government, and consequently to its taxpayers. The real economic costs of the war were not greatly affected by the use of the greenbacks. Bondholders gained, for example, a large part of what taxpayers lost.

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.

QUESTIONS

1. Would wheat make a satisfactory money commodity? iron? platinum? diamonds?

2. Would it be possible to maintain a seigniorage of 10 per cent on United States gold coinage? What would be the effect on the prices of imported commodities? of domestic commodities?

3. Report on the following questions not answered in this chapter: (1) What is the "limit of tolerance"? (2) On whom does the loss from the wear of gold coin fall? (3) To what extent are different kinds of United States money legal tender?

4. If the United States had adopted the free and unlimited coinage of silver in 1896, how would prices have been affected?

5. Is the actual monetary standard pure gold or gold of standard fineness? 6. What elements of truth are there in the statement that "coins get their value from the government stamp"?

7. In the table printed on page 254, why are not gold certificates, silver certificates, and treasury notes of 1890 included in the statement of the aggregate amount of money in the United States?

8. Interpret the statement: "The value of the greenbacks depreciated." Explain in particular the meaning of the words value and depreciated as thus used.

9. Do you make a loan to the government when you receive greenbacks in payment for goods or services?

REFERENCES

BULLOCK, C. J. Essays in the Monetary History of the United States. Commission on International Exchange (1904). Report on the Introduction of the Gold Exchange Standard.

DEWEY, D. R. Financial History of the United States. (See index.)

Director of the Mint. Annual Report.

DODD, A. F. History of Money in Great Britain and America.

HEPBURN, A. B. History of American Currency.

HUNTINGTON, A. T., and MAWHINNEY, R. J. (Compilers). Laws of the United States Concerning Money, Banking, and Loans, 1778–1909.

JEVONS, W. S. Money and the Mechanism of Exchange.

LAUGHLIN, J. L. History of Bimetallism in the United States; The Principles of Money.

MITCHELL, W. C. History of the Greenbacks; Gold, Prices, and Wages under the Greenback Standard.

SCOTT, W. A. Money and Banking, Chaps. i-vi, xiv, xv.