reserve. It cannot, like a bank, regulate its issues in accordance with its condition, for it is obliged by law to keep these issues to the amount of $346,000,000 constantly outstanding. And it cannot, as we have already seen, realize the property necessary to secure instant convertibility. It is thus subject to the increased demands sure to fall upon any institution whose immediate solvency is doubted, the more so, as it is the only institution which is compelled to furnish gold.

303. It goes without saying that demands for gold may arise from several different causes, but many of these result in the same thing—an export of gold. Either importers find it necessary to ship the gold in payment for purchases, or foreign holders of American securities have for some reason decided to sell these and withdraw gold, or some other force is operating to produce the same effect. Whenever exports of gold are low, that is to say, whenever the greatest cause of demand for gold is inactive, redemptions of United States notes are insignificant in amount, and vice versa. During the months when the Treasury was in greatest danger of finding itself unable to maintain. redemption, exports of gold were heaviest, and were in every case immediately preceded by heavy redemptions of the notes. The outcome of this has already been discussed and is well known. A heavy bond sale for the purpose of replenishing the Treasury gold reserve was absolutely necessary; but the bearing of this necessity, which must always recur in times of stringency, remains to be noted. It is this: the government is obliged to borrow at the time when its credit is the lowest, and it can only realize the poorest prices for its securities. This was notably the case in both the last bond sales, for in both the average price realized was considerably below what it would have been, had the sale taken place under favorable conditions. This amounts merely to saying that the government's lack of immediate property forces it, in times of distress, to borrow at high rates of interest when it need normally borrow only at low ones. And this necessity and the loss ensuing from it are due solely to the obligation of redeeming the legal tenders.

EFFECT OF PAPER ISSUES ON THE COST OF THE CIVIL WAR.'

304. THE depreciation of the monetary unit of the country which served as the standard of value is the significant fact in the history of the greenback currency. From the depreciation followed many consequences of momentous importance to the community. At present, however, we are concerned with but one of these results, the effect of the depreciation upon the cost of the war to the taxpayers of the country. If the depreciation made any difference in that cost, this difference must appear in the amount of the public debt which the nation owed at the close of the struggle. For, if the use of a depreciated paper currency made the expenses of waging war less, it decreased the amount of money which the government had to borrow, and therefore left the country with a debt smaller than would otherwise have been the case. On the other hand, if the currency increased the cost of the war, it added to the sums which had to be borrowed, and therefore created a larger debt. Thus the financial advantage, or disadvantage, of the use of the greenbacks is to be seen in the amount of the debt incurred. The problem may be stated more exactly in this form: By how much was the sum which the nation owed at the close of the war greater or less than the sum which it probably would have owed had no legal-tender paper currency been issued, that is, had the specie standard of value been maintained?

305. An analysis will provide a method by which this problem may be attacked. Had the war been conducted on a specie basis, the debt contracted would have been equivalent to the total excess of the current expenditures expressed in terms of a specie dollar over the ordinary receipts of the Treasury likewise expressed in terms of a specie dollar. Now, the use of a paper dollar

Taken from material kindly furnished to the Commission by Mr. W. C. Mitchell. See Journal of Political Economy (Chicago), March, 1897.

which had a value considerably less than that of a gold dollar artificially increased the nominal amount of all sums expressed in terms of it, in the same way that the use of a foot shorter than twelve inches would nominally increase the length of every article measured by it. Therefore the amount both of expenditures and of income was increased by the issue of paper money over what these sums would have been on a specie basis. The public debt actually contracted was equal to the excess of the annual expenditures, increased as they were by the depreciation, over the annual receipts similarly increased. Comparing this equation with the former one, it appears that the effect of the depreciation upon the amount of the debt is measured by the increase of expenditures minus the increase of revenues. There will, therefore, be three steps necessary to discover the increase or decrease of debt due to the issue of the greenbacks. (1) An estimate of the increase of expenditures caused by the depreciation must be made. (2) The like increase of revenue must be found. (3) The difference between these two sums will give the desired result. If, after this calculation has been made, the increase of revenues be found to exceed the increase of expenses, the conclusion will be that the debt incurred on account of the war was less by reason of the use of the paper currency, and the legal-tender acts must be considered a success from the financial point of view. If, however, the increase of expenditures be greater than the increase of receipts, the reverse conclusion must be drawn.

306. When prices rose in consequence of the depreciation of the currency, the government, like any other purchaser, was compelled to pay more paper money for the supplies which it bought. The following table gives some examples of this increase in necessary expenditures. It shows the progressive rise in the prices which the navy department was compelled to pay to obtain food and clothing for its sailors.

In considering the increase of expenditure, the first question to be settled, is by what method we can most accurately ascertain the addition made by the depreciation to the prices which the government had to pay. Two methods suggest themselves. It may be assumed that the increase was in proportion (1) to

TABLE I.

PRICES PAID BY THE FEDERAL GOVERNMENT FOR FOOD AND CLOTHING FOR YEARS

NOTE. The above are the contract prices which the governmert paid for the arti

cles enumerated. Taken from reports of the Naval Bureau of Provisions and Clothing. See Reports of the Secretary of the Navy, 1861, p. 501; 1862, p. 892; 1863, p. 1049; 1864, p. 1172; 1865, part 11., p. 381.

the rise in the average price level, as shown by Falkner's tables in the Senate report, or (2) to the decline in the gold value of the paper.

To the first method there is a serious objection. The price level is the resultant of forces affecting the supply and demand both of commodities and of paper. Our concern, however, is with the rise of prices only so far as it was due to the depreciation of the paper. There is no certainty that the rise of the price level was due solely to this cause. Indeed, it is reasonably certain that such was not the case. The war necessarily increased the demand for some commodities and decreased the demand for others. At the same time it greatly interfered with the supply of many staple products. Their prices would doubtless have risen considerably even had the war been conducted without a suspension of specie payments. To use an average price level in which these and other articles similarly affected were included, would be to charge to the depreciation of the currency an increase of price due to causes entirely independent of the issue of paper money. The first method would, therefore, not represent accurately the increase which the greenbacks brought about in the cost of the war.'

307. It seems fair, then, to conclude that the depreciation of the paper money in relation to gold gives a better basis than does the rise of prices in currency for estimating what prices the government would have had to pay for commodities upon a specie basis. At any rate, the former basis is the more conservaThis fact is established by the following comparison between the rise of commodities and the rise of gold in terms of the paper currency."

It is worth noticing, however, that the rise of prices which the government paid, as shown in Table I, was more rapid than the rise of general wholesale prices as shown by Dr. Falkner's figures.

* The value of commodities in terms of paper is Dr. Falkner's average price of all articles (Senate Report, part i, p. 91). The value of gold in paper is the average premium for January of each year (from the Treasury table referred to above, p. 125). The January price of gold is taken because Falkner's prices of commodities are from quotations for the month of January, with a few exceptions (Report, part i, p. 29). In making out the table of gold prices from that of currency prices Falkner uses the January premium on gold instead of the average for the whole year (Report, part i, p. 99).