The fact that inconvertible government notes are legal-tender and a part of the circulating medium has sometimes been supposed to render them proof against the operations of this principle, and the explanation of their depreciation has been sought in other circumstances. The mere fact, however, that people are compelled to take them from the government and permitted to pass them on to others in case they have financial obligations to meet does not render them less sensitive to the ordinary influences of uncertainty. Unless the government also fixes prices, it cannot prevent people from protecting themselves against this uncertainty by charging more for their goods and services and by exacting higher rates on their loans.

In the explanation of the phenomenon of depreciation great stress is usually laid upon the quantity of the notes issued. It is claimed that, so long as this is not excessive, they will circulate at par, and that the degree of their depreciation is proportionate to the quantity in circulation. This claim, however, is supported only by superficial observation, and the quantity theory of money examined in Chapter IV (The Quantity Theory Of Prices). Careful statistical investigations* show that there is no fixed relation between the quantity of the issues and the degree of their depreciation, and we have already attempted to point out the fallacies in the quantity theory. Excess of issues, however, is not without influence upon the value of these notes. It affects appreciably the elements of uncertainty upon which we have shown that their depreciation depends. The opinion of investors regarding the ability of the government to pay is certainly influenced by the quantity of the issues, and a government with a very large outstanding debt of this sort is more apt to be tempted by the allurements of partial or total repudiation than one less heavily burdened. The use of inconvertible notes for monetary purposes doubtless partially counterbalances the influence of uncertainty in the early stages of their issue by preventing the necessity of holding them for any considerable period of time, but finally, when the circulating medium has become thoroughly saturated with them, banks and other investors cannot avoid the incorporation of a portion of their savings in this form, and then the risk involved in the various elements of uncertainty which they possess will operate upon their value without obstruction.

C. The defects of this form of currency. - On account of their tendency to depreciate, inconvertible notes constitute a very imperfect and dangerous form of currency.

* See Miss Hardy's article in the Journal of Political Economy.

First, because, through the operation of Gresham's law, they usually displace all forms of metallic money and thus deprive the community of the advantages of a mixed currency. The reason and method of this substitution have been illustrated in a previous chapter, and it is only necessary here to say that, wherever the depreciation is great, this process is certain to be complete. In both France and the United States, for example, coins completely disappeared from circulation, and it was necessary to issue notes in all the denominations needed for currency purposes.

The second and chief defect of this form of currency is its effect upon prices and upon industry. The depreciated notes become a secondary standard of value; prices necessarily rise, and, so long as the depreciation continues, constantly fluctuate. The result is uncertainty in all commercial calculations. No one knows what the value of money may be from day to day or week to week. The only certainty is that prices will be unstable and subject to changes from purely subjective influences. Every business man must either suspend operations or become a speculator. Shrewd guessing and chance take the place of sound calculation and enterprise. The effect of this sort of thing upon industry is always injurious and sometimes deadly. Even the best habits are not always proof against the insidious influences of speculation in ordinary times, but, when sound business methods are rendered impossible by a fluctuating currency and men are compelled to speculate in order to live, commercial virtues are rendered inoperative and gambling is given a clear field. Even moral sensibilities become blunted under such circumstances, and business men and public servants practise and countenance actions which in normal times would not be tolerated. Witness the gradual smothering of the sentiment of financial honour and integrity and the appearance of a number of theories in support of public dishonesty in the French legislative bodies during the r6gime of the as-signats and the mandats, and the rapid decay of legitimate industry under the blighting influence of the fever of speculation which reigned during that period.* Witness also the greenback heresy in the United States and the wild monetary theories which clouded the vision of many of our public men and of a considerable portion of our population for more than a generation, the evil effects of which have not yet ceased to trouble us. These are the legitimate fruits of inconvertible government notes, and they render the infliction of that kind of currency upon a people one of the greatest of national calamities.