CHAPTER XVII

THE QUANTITY THEORY _vs._ GRESHAM'S LAW

There is a pretty obvious conflict between the quantity theory and Gresham's Law. The latter is, essentially, a "_quality_" theory of money. For the quantity theory, dodo-bones, or anything else will do. "It is the number, and not the weight, that is essential"![361] For Gresham's Law, the weight makes all the difference in the world, if it is a question as between full weight and light weight coins, and, in general, the _value_ of the thing of which money is made, considered in its commodity aspect, is the starting point of that doctrine.

The quantity theorist seeks, indeed, to harmonize the two. His theory is that Gresham's Law manifests itself only when there is a _redundancy_ of the currency due to the issue of paper money, or overvalued metal. In such a case, prices rise, he holds, and then the undervalued metal, or the metallic currency, which count no more than the paper or the overvalued metal in circulation, tend to leave the country, to another country where prices are lower, or tend to leave the money use for the arts. But the quantity theorist must maintain that it is only _via_ increased issue, with consequent rising prices, that Gresham's Law comes into operation. If there are a million dollars of gold in circulation, and a half million of irredeemable paper is added, then only half a million of the gold (or rather a little less than half) will leave. If more than that left, prices would fall, because of the scarcity of money, and then the gold would come back, because it would be worth more in concurrent circulation with the paper than it would be worth as money abroad, or in the arts. On the quantity theory, there can be no difference in the value of gold and paper, in such a case, after enough gold has left to balance the paper that has been issued. Falling prices would prevent it.

But Gresham's Law is not held by any such fetters! And the facts of monetary history, in important cases, show Gresham's Law controlling, despite the quantity theory. I will refer briefly to two such cases.

The first centres about the suspension of specie payments by the Northern banks and the Federal Treasury on January 1, 1862. This suspension was not accompanied by any increase of money. Rather, there was a _decrease_,[362] shortly following, in the amount of paper money. The banks in New York, and certain other States, were bound so strictly by their charters, and by the State laws, that they dared not leave their notes unredeemed. Speculators, buying notes at a discount--for virtually all bank-notes fell to a discount--were able to present them to the banks in these States and demand gold, which led to a very profitable business. The banks protected their gold by ceasing to issue notes, or by reducing the volume of note issue. Certified checks were used to a considerable extent instead. There was certainly no increase, and probably a reduction, a considerable reduction, in the volume of bank-notes in circulation. The only other paper money in circulation was the Demand Notes of the Federal Government, which were not increased after the date of the suspension, and which were in any case small in volume as compared with the total amount of money. On the quantity theory version of Gresham's Law, there was nothing to drive gold out. Gold was _not pushed out_ by redundant currency. Rather, it _left_, leaving a monetary vacuum behind. Coincidently, strangely enough, prices _rose_. The vacuum in the money supply was so serious, that the subsequent first issue of the Greenbacks brought a welcome relief. Throughout the whole of the first year of the suspension, the volume of money was less than it had been in the preceding year. None the less, the gold stayed out of general circulation. It did not come back from abroad. And prices _rose_.[363]

A similar episode, the obverse of this, occurred when the Bank of England _resumed_ specie payments in the early '20's. Then gold came back, the currency was increased, and, coincidently, _prices fell_.[364]

I conclude that the conflict between Gresham's Law and the quantity theory is real and fundamental, and that in cases where different _qualities_ of money are in concurrent circulation, the undervalued money will leave, regardless of the question of quantity.