ment it and so to expand the total volume of currency. This convertible paper money is not retired when received by the Government, but is paid out again just as coin is paid in discharge of its obligations. The Government merely guarantees its redemption in specie, a certain amount of which is kept on hand for the purpose.

Our United States notes or greenbacks are a conspicuous example of convertible paper money. They were issued originally as inconvertible treasury notes during the Civil War. When specie payments were resumed in 1879, these notes amounting to $346,000,000, instead of being paid off and cancelled, were made convertible. The Government agreed to redeem them in gold coin on demand, though no specific coin reserve was set aside for that purpose until 1900, when a special fund of $150,000,000 in gold was created to be held in the Treasury for their redemption.

The treasury notes of 1890 were of the same general type. They were issued to pay for the silver bullion which the Secretary of the Treasury was directed to purchase and were redeemable either in gold or silver coin at his option. The Sherman Act of 1890 required the Secretary of the Treasury to maintain all forms of the currency at a parity with gold, and since the bullion value of silver dollars was at the time only about one-half their face value, it became necessary to redeem these notes in gold. Before the repeal in 1893 of the silver-purchase acts about $150,000,000 of these treasury notes were issued. The difficulties which for a time confronted the Treasury in its efforts to redeem the greenbacks and the treasury notes are recited elsewhere.1 The coinage of the silver purchased under the terms of the acts of 1878 and 1890 into silver dollars and the substitution of silver certificates for the Sherman notes has resulted in the practical disappearance of the latter from our currency.

Several other countries, for example, Canada and Germany, have made use of convertible treasury notes. In Germany the issue is comparatively small-about $30,000,1 See pp. 32-34.

1

000 and no special fund is set aside for the redemption of the notes. In Canada a much larger amount of treasury notes relatively is outstanding, but there, as under our system, the notes are protected by a reserve of gold.1

In common with other forms of paper currency, government convertible paper has certain advantages: the greater convenience of handling and storing, the saving of the wear on the coins, and the saving of capital in the production of gold and silver. In addition, convertible notes relieve the government of a considerable interest charge, since, being only partially covered by a specie reserve, they are in part a loan to the government without interest.

The advantages of convertible treasury notes, however, are more than counterbalanced by disadvantages. Since the issue of such notes must be authorized by law and the quantity strictly limited, they cannot give to the currency system any degree of elasticity. They cannot be increased and decreased in volume in response to the changing needs of business. Thus the total amount of greenbacks has remained fixed at $346,000,000 ever since 1879, when they were made convertible. Treasury notes simply take the place in the circulating medium of an equal amount of gold or gold certificates which would more effectively support other elements of the currency and the entire credit system. Another disadvantage of this kind of note lies in the fact that it imposes upon the government the_task of redemption, for which it is not properly fitted. To insure prompt redemption of the notes the government must establish and maintain a specie reserve. If this reserve becomes inadequate by reason of the presentation for redemption of an unusual volume of notes, the fund must be increased by taxation or by the sale of bonds. Neither method can be depended upon with certainty. Reliance cannot be placed on current government receipts from taxation, since the coin paid in is needed ordinarily for current expenditures. If a special tax or an increased tax 1 The European war caused changes to be made in the currency issues of most of the nations involved.

rate be levied to provide a redemption fund, the extra payments offset any gain from the issue of the notes. The sale of bonds is also open to the objection that it involves the payment of interest charges, which may exceed the profit accruing from the issue of the notes.

32. Inconvertible or fiat currency.-Inconvertible paper money consists of notes promising to pay money to the bearer, but not actually redeemable in specie. Such paper may be issued by banks as well as by governments. It is known also as fiat money, because its use as money depends upon the fiat or command of the government. The essence of fiat money lies in the lack of expectation or intention of redeeming it in specie and in the artificial regulation of the amount issued. It circulates "either because the people have no better money, and the quantity of it is so limited that its evils do not yet appear, or because the Government is strong enough to compel its citizens to accept the paper." Usually governments in issuing this kind of paper seek to strengthen it by making it a legal tender for debts and by making it receivable for taxes and other public dues.

Inconvertible government notes have usually been resorted to only in times of great fiscal need, when the government has found it difficult to raise necessary funds by the usual methods of taxation or loans. Many countries have had disastrous experiences with this form of currency. Most of the American colonies issued "bills of credit" to meet the expenses of the French and Indian Wars. This appeared to be such an easy method of raising money that some of the colonies used it to meet ordinary current needs. As larger and larger issues of these notes were authorized, without any provision being made for their redemption, they declined in value until they became practically worthless. A similar situation arose during the Revolutionary War, when both the separate colonies and the Continental Congress issued great quantities of irredeemable paper. Continental notes so depreciated that they were quoted in 1 Kinley: Money, p. 332.

1781 at 225 to 1 in coin. After the adoption of the Constitution they were made redeemable at the rate of one Icent to the dollar.

The experience of France during the French Revolution affords a good illustration of the dangers of fiat money. Having exhausted all the ordinary sources of revenue, the French Government in 1789 authorized the issue of noninterest-bearing notes called assignats, which at first were secured by the pledge of confiscated lands of the Church. Successive issues were authorized without any pretence of redemption and in such unlimited volume that they depreciated rapidly and finally became worthless.1

To meet the extraordinary expenditures of the Civil War both the Federal Government and the Southern Confederacy resorted to the issue of inconvertible notes. The Confederate notes were issued in vast quantities and toward the close of the struggle became worthless. The first issue of United States notes or greenbacks, authorized by Congress in 1862, was limited to $150,000,000. Within a few months a second issue of $150,000,000 was put out, and before the war was over a total of $450,000,000 had been issued. Gold disappeared from circulation and prices were quoted in terms of this paper money. Greenbacks fluctuated in value with the fortunes of the war, depreciating in 1864 to about 35 cents on the dollar. When these notes were authorized it was understood that they would be retired as soon as possible after the war was over. In 1866, therefore, Congress authorized their contraction, but strong opposition arose and for many years the greenback controversy agitated the country. It was contended that the reduction of the circulating medium would depress prices, disturb business, reduce government revenues, and hinder the Government in its plan to refund the public debt. In 1868 the act authorizing retirement was repealed, and in 1874, when the amount of greenbacks outstanding was $382,000,000, Congress passed a bill increasing the total 1 See Bullock: Selected Readings in Economics, Ch. XV, "Paper Money in France," by Andrew D. White.

issue to $400,000,000. Fortunately, President Grant had the courage to veto this bill and in the following year provision was made for a partial retirement of the greenbacks and for the resumption of specie payments after January 1, 1879. In 1878, when the total amount of greenbacks outstanding was $346,681,016, Congress passed a law providing that they should be reissued by the Government as redeemed or received into the Treasury. This law stopped further retirement of the notes, the amount of which has ever since remained at the total mentioned. When, in 1879, the Government resumed specie payments, the greenbacks returned to a parity with gold, for they were then redeemable in gold.

The change in the character of greenbacks from inconvertible or fiat money to convertible or credit money with the resumption of specie payments did not end the difficulties attending their use as a part of the circulating medium. The injection into the circulation of over $500,000,000 of silver, either in the form of coin or of notes, under the terms of the silver purchase acts of 1878 and 1890, caused gold to disappear and seriously embarrassed the Treasury in its efforts to maintain sufficient gold reserve to redeem the greenbacks and the treasury notes of 1890. The gold standard act of 1900 provided for a gold reserve of $150,000,000 to be held for the redemption of the greenbacks and treasury notes. It also provided that when these notes were once redeemed they should not be reissued except in exchange for gold. Under present conditions greenbacks constitute a useful and acceptable part of our circulating medium, though many thoughtful people see great disadvantages, if not danger, in their use and urge their removal from our currency system.

33. Advantages and disadvantages of inconvertible paper.— The use of paper money as an element in the circulating medium is justified on the ground that it economizes the use of metallic money. The production of gold and silver requires the outlay of much labor and capital. If paper money can be safely utilized to take the place of gold and