issuers of such notes as the holders, not wishing to use, return to the issuers for redemption.

It is true that in times of speculation the currency increases. Transactions become more numerous. Higher Amount fluctuates prices cause the same transactions to absorb with the times. more of the medium of payment. There is greater disposition to provide for contemplated or possible operations. There is less care to economize the loss of interest on the amount kept on hand. In times of depression, all these conditions are reversed. During the long period of downward tendencies, from 1837 to 1842, the currency fell of itself to about one half its amount at the beginning of the period.

The relation of currency to prices.

In the ordinary and regular relations between a redeemable currency and prices, the fluctuations in the currency follow, instead of preceding, changes in general prices. The notes in the hands of the public, less the reserve kept for their redemption, form a part of the loan fund of a bank; but that amount is not capable of being increased at the will of the bank until a speculation has arisen and higher prices or more transactions have resulted. Even then the increase of currency merely provides for the prior increase of prices or of transactions. It may be said that the increase of currency is a condition without which the increase of prices or transactions could not happen; but that is not true, unless it be shown that no other tool of credit than bank-notes could be used. In cases where a bank originates a speculation by enlarging its loans, it must do so at the expense of its customary reserve. It is only by artificial changes in the currency - generally made by Government- that the currency itself becomes the primal source of speculation. In fact it nearly always happens that speculative purchases are originally made on personal credit, evidenced by open accounts or notes of hand. The banks are applied to only at the expiration of the original credit; and then what is wanted is not a continued use of bank-notes, but a loan of capital. Bank-notes are one of the wheels in the machinery of credit. They have

no quality peculiar in its action on prices or different in its action on prices from any other part of the machinery of credit. The currency, at its present amount of banknotes and legal tenders, is less than the deposits, and is but a small fraction of the whole existing mass of credits, including book accounts, notes of hand, drafts, and bills of exchange; and new forms of credit machinery are capable of being invented indefinitely, as when, in September, 1873, the New York Associated Banks created a currency of twenty millions of certificates, to be used in the exchanges between

Currency only

small part of circulatory credits.

themselves. It is idle to pronounce the machinery of credit a maniac, dangerous to the community, and then to put only its little finger in a straitjacket.

Experience of
England.

The experiment of regulating the note circulation alone has been completely tried in Great Britain. In 1844, when, on the re-charter of the Bank of England, the bank-note circulation of that country was subjected to rules which were supposed to make it fluctuate exactly as if it were coin, it was considered by all but a few great thinkers that there would ever after be stability of prices and stability of business. But in 1847, in 1857, and in 1866 commercial revulsions of undiminished severity demonstrated the fallacy of these hopes and of the system on which they were founded. While the note circulation has ever since been confined by law to a nearly constant amount, the deposit circulation has increased manifold, and the vicissitudes of credit are as violent as ever. It is evident that whenever a foreign demand for coin arises, not caused by domestic over-trading, the system creates an artificial scarcity of an important instrument of commerce, and subjects all business to an unnecessary perturbation, that whenever a panic destroys the credit of inferior dealers, and the interposition of the highest credit is called for to supply the vacuum and revive confidence, the system breaks down, and the law limiting the issues of bank-notes is suspended, with the approval of the

ministry and with a promise to appeal to Parliament for an act of indemnity.

inconvertible cur

The depreciation of a currency not convertible into coin represents the interest and risk, as estimated by the Why and how judgment of investors, on a loan payable at the rency depreciates, will of the Government, without interest, subject to such temporary fluctuations as are induced by the variations in the supply and demand of coin in which that loan is ultimately payable. There is no doubt that the issue of legal tenders during the civil war hastened and greatly increased that inflation of prices which naturally resulted from Thus inflating the increased consumption and the waste re- prices. sulting from military operations, and from the diminished production occasioned by so large a withdrawal of workers from their ordinary industries. It is the nature of credit to be voluntary; it is founded on confidence. Credit on compulsion is a solecism. Therefore a forced loan of capital from all existing private creditors cannot but be costly.

It was made, in this instance, on a security which bore no interest, and interest on which could only be

Legal-tender represented in discount from its par value. It financing. gave to the lender an agreement to pay, which, being instantly due on demand, started in its career a broken and dishonored promise. Every successive holder was left to conjecture when it would be redeemed by the issuer, how far it might be absorbed in the Treasury receipts, whether it could still be paid out to some private creditor, and at what loss it could be passed away in new purchases on a market advancing rapidly and irregularly. Everybody was advised that the Federal Government unwisely distrusting the intelligence and patriotism of the people-shrank from exercising its borrowing power, supplemented by its taxing power, and instead of resorting at once to the whole capital of the country capable of being loaned, which forms a vast fund perhaps thirty or forty times as large as the then existing currency, it chose to begin by debasing that comparatively insignificant part of circulating

credits, creating fictitious prices for the commodities and services for which it was next to exchange its bonds, in an expenditure ten times as large as the whole amount of the legal tenders it ventured to put afloat. No man could know how often or how much of legal tenders might be issued, under possible exigencies of the future. It could not be wholly forgotten that such issues, made by our ancestors to sustain the victorious war for national independence, were never redeemed, while the public loans made for the same purposes were all paid. It was remembered that history affords other warning examples to the same effect. These elements of distrust were needlessly invoked. But the system stopped short of the logical completeness of the expedients of the French Convention in 1793. While it compelled the existing private creditor, or anybody who should grant a new credit, to accept payment in legal tenders, it did not assume to regulate the prices of commodities. The seller, therefore, gradually learned to represent the depreciation of the currency in the price of the article he exchanged for it. As compared with gold, the currency, during all the last year of the war, was depreciated to between forty and fifty cents on the dollar, touching at its lowest point thirtyfive cents on the dollar.

How it raised

It was not alone by the direct effect of the depreciation of the currency that prices were acted upon; speculaprices by provoking speculation, tion was engendered. Political economy takes little account of the emotional and imaginative nature of man. In long periods, with numerous instances, the average, deduced as a law, may perhaps discard that element; but in a particular instance or at a particular time it is often very potent, and must be estimated in any calculation which aims at accuracy. After a period of rest, when the disposition to activity begins to revive, a slight circumstance often excites a speculation that becomes general. The opening of a new market, an apprehended deficiency in the supply of a commodity, any one of a thousand circumstances may, in a certain state of the public mind, be a spark to kindle a blaze of speculation through

out the commercial world. How much more, then, might it have been expected that such a Governmental policy would inspire and inflame the spirit of speculation! The effect was greatest during the process of a new issue of currency, or while it was anticipated; after the issue was completed, there was generally a subsidence or a reaction.

And needlessly doubled the bur

den of the war.

The Government consumption during the war was mostly of our domestic products. As soon as the channels of traffic could be adapted to the new points of consumption and the new classes of consumers, there was no more difficulty in the transfer of these products from producers to consumers than in the ordinary operations of commerce during peace.

Governments, in times of public danger, cannot be expected always to adhere to the maxims of economical science; the few who would firmly trust to the wisest policy will often be overborne by the advocates of popular expedients dictated by general alarm. If the Federal Government had paid out Treasury notes, not made a legal tender, in its own transactions whenever it was convenient, and redeemed them by the proceeds of loans and taxes on their presentation at a central point of commerce, and meanwhile had borrowed at the market rates for its bonds, secured by ample sinking funds founded on taxation, and had supplemented such loans by all necessary taxes, the sacrifice would not have been half that required by the false system adopted, perhaps the cost of the war would not have been half what it became.

This analysis of the process by which the changes in the currency operated to produce the effect on prices witnessed by the people is necessary in order intelligently to discuss the problem now pressed upon us; for the fallacy lurks in many minds that the quantity of the currency, even when it has become stationary and quiescent, creates by its direct action a state of prices proportionate to that in quantity. But this fallacy is confuted by our own experience. The premium on gold fell from one hundred and eighty-five in July, 1864, to