and increase and decrease in quantity. As will appear in later chapters, only certain varieties of paper currency possess this desirable quality. The movements of coin in both the directions indicated are far from automatic, its entrance into and withdrawal from circulation requiring considerable time and the manipulation of the machinery of government.

The superiority of credit currency in the respects mentioned accounts for its extended use in all modern commercial nations, and for its increasing use as commercial operations grow in extent and magnitude. It must not be forgotten, however, that its superiority is confined to certain of the uses of a medium of exchange, and does not extend to all. In retail trade and for the making of change and for small payments everywhere coins still excel in convenience and safety, and there is no reason to expect that their use will ever cease.

4. Gresham's law. The concurrent circulation of metallic and paper currency and the use of coins made of different metals involves a difficulty the removal of which only time and long experience have made possible. This difficulty may be illustrated as follows: Suppose that, at the time of the minting of gold and silver coins, the relative value of these metals is I to 20; that is, one ounce of gold is exactly equal in value to twenty ounces of silver, and that accordingly twenty times the weight of silver is used in the manufacture of five silver dollars as of gold in the manufacture of a five-dollar gold piece. For example, suppose that 125 grains of gold be put into each of the five-dollar pieces and 500 grains of silver into each of the one-dollar pieces. Suppose that the proportions of the two metals used in the manufacture of all the other coins be precisely the same. Under these circumstances the market value of the metallic content of each and every coin would be exactly

expressed by the stamp on its face, and five silver dollars, ten silver half-dollars, and twenty silver quarter-dollars would be equivalent in market value to each other and to a five-dollar gold piece. Let us suppose further that, in order to avoid all possibility of inconvenience or difficulty in the circulation of these coins, a law is passed conferring upon them the so-called legal-tender quality; that is, declaring that in the payment of debts and the making of purchases of all kinds five silver dollars, ten silver half-dollars, twenty silver quarter-dollars, and a five-dollar gold piece shall be equivalent. For a time we may suppose that all goes well, everybody giving and receiving indifferently gold and silver coins in the proportions indicated, the gold coins being naturally used in large payments and the silver in small. Soon, however, the value of one or both of the precious metals changes, so that on the markets twenty-five ounces of silver instead of twenty are needed to purchase an ounce of gold. What now will happen to the coins which have been declared by law equivalent in the making of purchases and the payment of debts? Will people continue indifferently to give and to receive five-dollar gold pieces and five silver dollars in payments of the amount of five dollars? Certainly not. They will sell the gold coins as metal or hoard them for future use, and make their payments in silver alone. If we suppose that the majority of people are unaware of the change in the value of the metals or through habit or ignorance continue indifferently to pay out the gold and silver which comes into their possession, we may be sure that the money-changers and the bulliondealers will be sufficiently shrewd and wide awake speedily to drain the currency of all of its gold.

The same difficulty may result from the concurrent circulation of metallic and paper money. Suppose that the government has issued notes in denominations of five, ten,

twenty, fifty, etc., dollars and made them legal tender at their face value; that is, declared a five-dollar note equivalent to a five-dollar gold piece or to five silver dollars in the payment of debts and in all other kinds of financial transactions, a ten-dollar note to a ten-dollar gold piece or to two five-dollar gold pieces or to ten silver dollars, etc., etc. If the people have perfect confidence in the government's ability and willingness to pay, and it is perfectly easy to procure gold and silver coin with the paper without loss or difficulty of any kind, they will continue to give and to receive the notes and the coins indifferently; but if they should lose confidence in the government or should for any reason prefer coin, they would avail themselves, whenever possible, of the advantages of the legal-tender law by paying out their notes and retaining their gold and silver for the purpose of hoarding or in order to sell them as bullion or for any other use in which they could realize their full value. Under these circumstances it is evident that coins. would speedily disappear from circulation and the government notes remain in full possession of the field.

The difficulty involved in the disappearance of undervalued coins from circulation has been experienced over and over again in the monetary history of the world and in a variety of forms. Now one class of coins has been removed from circulation and now another, and frequently all kinds of metallic money have disappeared before the advent of depreciated paper. In the early years of the last century our currency consisted exclusively of silver, because gold was undervalued at the mint. Later on, after the discovery of the gold-mines of California and Australia, gold diminished in value very greatly, and our silver speedily disappeared from circulation. During our Civil War and for many years after its close depreciated government notes prevented the use of gold and silver coins for monetary

purposes. Sir Thomas Gresham, one of the most famous directors of the English mint, formulated the experiences of his time along this line into a law which has ever since borne his name.* Poor money, he said, always drives good money out of circulation. By poor money he meant money which was not worth its face value, and the process which he described as the driving of the good money out of circulation was simply the disappearance of the coins of superior intrinsic value from circulation as money because they could be more profitably used in other ways. This so-called Gresham's law is simply the expression of a universal experience which has as its cause the commercial instinct common to all men and which urges them to make the most of their possessions.

The operation of Gresham's law is always accompanied by inconvenience and loss. In the first place, it renders impossible the realization of the advantages of a complex currency. If the gold disappears from circulation, the community has no coins suitable for the making of large payments. If the silver goes, it becomes difficult or impossible to make small change. If government paper drives all the coin from circulation, the community suffers from a combination of ills, which will be described in subsequent chapters. In the second place, the operation of Gresham's law interferes seriously with prices.

When people begin to make use of their legal rights by the employment of the depreciated element in the payment of debts, persons of all sorts who have goods for sale and persons who are making loans which are to be paid back in the future will protect themselves against the depreciated currency by raising the prices of their goods to at least

*This law was discovered at least two centuries before Gresham's time, being clearly stated in Oresme's "De Origine, Natura, Jura et Mutationibus Monetarium" published in the fourteenth century.

the extent of the depreciation and by so adjusting the terms of the loan as to avoid loss. The result, therefore, will be a general rise of prices. If the depreciation be a certain fixed amount which can be readily calculated, as I will be the case with a coin whose intrinsic value is less. than its face value, the shock to prices may be but a single one and the new level may be as stable as the old. If, however, the depreciation is more or less uncertain and perhaps in part due to speculation, as is liable to be the case with certain forms of credit currency, the interference with prices is liable to be continuous and the new level to be very unstable. Such conditions are sure to breed speculation of the most dangerous sort, and, if long continued, seriously to shake that confidence between man and man which is essential to the maintenance of the credit system, thus creating conditions favorable to crises and other forms forms of commercial disaster.

5. Standard and subsidiary coins.-How to prevent the operation of Gresham's law and thus to avoid the evils which it involves has been a most difficult problem. During the middle ages its solution was sought in vain, and the monetary history of every European country during several centuries exhibits a succession of fruitless attempts to retain in concurrent circulation gold, silver, and copper coins of the various denominations needed for commercial and governmental purposes. Finally, however, the solution was found, and no nation nowadays needs to be troubled by Gresham's law. So far as the concurrent circulation of coins made of different metals is concerned, the operation of this law is avoided by the device of making certain of the coins subsidiary to others which are called standard. In many countries at the present day the gold coins are the standard ones, and all others are made subsidiary by treating them in the following manner: