Convertible paper money, otherwise known as redeemable, fiduciary, or credit paper money, consists of notes promising to pay in coin on presentation the amount expressed on the paper. Strictly speaking, such paper is redeemable in standard legal tender coin and in that alone.1 Gold and silver certificates were grouped in the preceding section under the heading of representative money, but it would be entirely proper to class them as convertible paper money, since they are government promises to pay in coin. They differ from credit money proper, however, in that they represent dollar for dollar the specie against which they are issued and that they simply facilitate the use of specie, while convertible government paper is only partially covered by a specie reserve and is not intended to serve as a substitute for coin but to supplement 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.

1Kinley: Money, p. 331.

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. Of the greenbacks, however, $346,000,000 remain.

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,-000 - and no special fund is set aside for the redemption of the notes. In Canada a much larger amount of treasury notes ($29,000,000) relatively is outstanding, but there, as under our system, the notes are protected by a reserve of gold.

1 See pp. 32-34.

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 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.