Why Has the Greenback Any Value?


In the last two lessons I have sought to show the fallacy of the various notions afloat that Government possesses some peculiar power of giving value to coined money or stamped paper. The reader who has informed himself on financial history will be familiar with many illustrations of the unpleasant truth of the views here maintained. In the history of the bills of credit which used to be issued by our colonies, and which have been issued by other governments in difficulties, the story has been told over and over again. But there are also some apparent exceptions—cases in which money, though for a greater or less space of time not redeemable, has not depreciated to nothing. Our greenbacks are a case in point. The reader may say, “On your theory greenbacks are mere pieces of paper, and ought not to be worth more than the paper on which they are printed. How do you explain the fact that they continue worth from eighty-five to ninety cents on the dollar in gold?”

I answer that there are two reasons for the continued value of the greenback. The first is, that everything which circulates as money in a community may have a certain value merely in virtue of its usefulness as currency. Even the value of gold is much greater than it would be but for its usefulness as money. There are certain conditions under which it is theoretically possible for unredeemed bills to be on a par with gold. These conditions, which it is very important to bear in mind, are:

That they shall actually pass current, and be received as “bankable funds.”
That their quantity shall be so small that they are insufficient to form the entire circulating medium, so that some gold has still to be used. The universal experience of all nations and people who have ever tried it is, that as soon as the currency is issued in such quantities as entirely to displace gold, it begins to depreciate—that is, gold is at a premium.

This is the secret of the non-depreciation of the bills of the Bank of France during the last few years, while specie payments were suspended. There were not enough notes in Paris to transact its business, so that gold had constantly to be used in part. Had the American theory of plenty of currency been acted on, there is no knowing what would have been the result.

Now, although our greenbacks have been issued in a greater amount than was necessary for business, as is conclusively proved by their depreciation, yet the amount has been limited by law. It has been still further limited by the fact that the revenues of the Government have exceeded its expenditures, so that a large quantity of the greenbacks have not been in actual circulation. And so long as the total issue of greenbacks is strictly limited to its present amount, there is no danger of their total loss of value.

The second reason for the value of the greenback is, that there has been more or less expectation of its being redeemed sometime within the life of the present generation. Though no one has seen exactly how specie payments were going to be brought about, the general business sentiment of the country has been that we must reach them in some way. The greenbacks have always been counted as part of the public debt, which proceeding implies an obligation to redeem. In order to set at rest all doubt on this matter, Congress, in 1869, passed a law pledging the faith of the nation to the payment of the greenbacks in coin; and, in 1875, it set a date (January 1st, 1879) when this payment should commence.

To these two reasons, and to no others, are we to attribute the fact that our greenbacks have not gone the way of all previous systems of irredeemable paper money. The reader must carefully notice that neither of these reasons is based on the fact that the greenbacks are issued by a great government. The unredeemed paper of France was issued, not by the Government, but by a bank; yet, as we have seen, it was more successful than our Government paper. It is not the party which issues, but its
quantity, and the
prospect of its redemption, which determine its value. Indeed, bank paper is, under such circumstances, far less liable to depreciation than Government paper, for the reason that, if the public is determined, the bank can always be made to pay up, while the Government cannot. The case is just like your preference for the paper of a small house, which must pay, over that of a firm so rich and powerful that it is above paying.

You see at once that if the policy of the inflationists were permanently inaugurated, both of the reasons for the value of the greenback would be knocked from under it, and it would rapidly go the way of the Continental currency, and every other system of Government paper money that has ever been tried. With no intention to redeem in coin, a note would be a mere piece of paper; and if issued in such quantities as would be demanded, although every one might call them “dollars,” their purchasing power would diminish without limit.