Credit money exists in the form of metallic money as well as in paper money, in so far as the value of any metallic money rests upon the good faith of the gov ernment and the ability to convert it into standard money. In this sense the silver dollars and the token coins of the United States constitute credit money. When government paper money like the "green backs" attains convertibility it passes from the realm of fiat money into that of credit money. The notes of banks like those of the national banks of the United States, which have universal acceptability and which are redeemable in standard money, are a form of credit money even tho they,' may not be a legal tender in the payment of debt.
16. Legal tenden—Standard money of all coun tries is a legal tender which the law compels creditors to accept. Such legal tender runs no further than the authority of the government which confers it. It is not of course the legal tender quality which makes the double eagles of the United States so much de sired in foreig,n trade.
If legal tender is not necessary,- for money in its international use, neither is it necessary for all kinds of money in internal use. Any form of money- read ily convertible directly or indirectly into standard money circulates freely, irrespective of whether it is endowed by law with legal tender quality. .The 'es sence of such money is its convertibilily.
When, however, legislation gives a legal tender quality to money which is not convertible, the seed of trouble is sown. In the history of the United States the legislative authority has made fiat money legal tender. The Revolutionary War was financed by legal tender fiat money, and this was also true in part of the Civil War. In both cases the government was a buyer in a market demoralized by its own acts. Be fore redemption of the notes took place the dollar was not worth 100 cents; yet the law forced the creditor to accept such money for past debts. Much loss of property thus resulted to the creditor class.
The-government's intention regarding such money, when issued on a large scale, is to force its use_ and so relieve the financial needs of the government. The business world begins to guess the amount of money likely to be issued and the possibility of redemption. Thus an adjustment of prices begins at once. The result, of course, is a derangement of business and a kaleidoscopic variation in prices.
Despite this invariable outcome so often noted in our own history there are those who hold that the government has unlimited power to maintain the value of paper money by conferring the kgal tender quality upon it. But for every community there is a point
beyond which it will not take any money. This is reached very quickly in the case of excessive legal tender iSsues. Depreciation follows, with baneful ef fects upon the business man and the wage-earner.
17. Greskani's of the interesting phe nomena which may be noted when two metals or two types of coins, or for that matter two different forms of any kind of money of the same kind of metal, are placed in circulation, is the withdrawal of the heavier coins or the more valuable money from circulation and the continuance of the lighter or less valuable money in the marts of.trade. Sir Thomas Gresham reformulated this idea in the sixteenth century during Queen Elizabeth's reign, when he gave utterance to what has since been known as Gresham's Law.
The law has been tersely put in this way: "Bad money drives out good money." Thus stated it ap plies to paper money as well as to metallic money. When competition works freely there is an effort' to do the economic work at the least expense and- with the largest results. On that basis a fiat paper money ought to circulate and do the money work, but the difficulty with such a suggestion is that the holders of the paper money want in the ultimate analysis something that can be converted into value. Hence there must be a value basis for money of any kind.
It is to be understood that Gresham's Law begins to work when there is more than enough of the two types of money to do the work. The circulation con sists of the cheaper money while that condition exists. When business conditions are such as to den-land both kinds of' coins and require all the circulating media at hand, the more valuable money circulates side by side with the less valuable money. Just as soon, however, as the demand slackens, the more valuable money is withdrawn from circulation for use in the arts or for export for the settlement of trade balances.
To summarize the workings of Gresham's Law, it appears that the tenacity with which a money con tinues in circulation varies inversely with its capacity to do the different kinds of money work. FIence, if a money is worth less for other purposes than as money there will be no attempt to withdraw it. The more valuable money drifts into the reserves main tained by banks and the government. In this con nection it is important to note that trade in itself does not lead to money movement.