only maintains its par with gold by being always payable ! on demand in the gold it promises to pay, so an incon- j vertible paper currency falls just so much below the par | of gold as the difference between the amount of gold it I professes to be and the amount of gold it exchanges for in its own market. The price of bullion in an inconvertible paper currency rises like that of other commodities not, indeed, in its general market value, but in its market price within the sphere of the currency; and the amount of this rise marks what may be called either a discount on the paper money or a premium on the gold, and this dis count or premium becomes a measure of the depreciation of the currency. It is by no means a satisfactory standard, for it may vary from day to day, and in this respect be as unlike as possible to a par of exchange between the gold and silver moneys alike of small and great states, which may hold good without variation for any number of years, where may also be restrictions on the sale of bullion, prohi bition of the export of bullion, and speculative combinations of paper-holders and gold-holders to " corner " each other, and the fluctuations may be not only constant but sometimes extreme. But, with all its disadvantages, the relation of gold to the paper money, as it happens to be revealed in the markets, is the only measure of the depreciation to be had, and the premium on gold has consequently to be reckoned as a necessary component part of the rate of ex change with other countries. The history of the last twenty years, though years of abundant production of gold and silver and great material prosperity, has been marked by an extended resort to incon vertible paper money in many parts of the world ; and the ex changes of Russia, Austria, Italy, and many other countries might be referred to for ample proofs of the effect of this monetary expedient on the nominal par, and the extra ordinary fluctuations to which it gives rise. The "green back" money of the United States, a result of the war between North and South, is probably the most familiar, while in some respects also the most instructive example. The par of the American dollar to the pound sterling was originally struck in the rough proportion of $40 equal to ,9, which made the quotation at New York $4 44 to the pound, or, as stated on the British side, 54d. to the dollar. But on strict inquiry this did not correspond with the gold, weight for weight, in the dollar and the sovereign, and was in fact 9 per cent, too favourable to the dollar. It thus appeared that to correct the scales $9 had to be thrown in with every hundred, and adhering to the old par with the tenacity which has been the general commercial practice in such cases, the exchanges were held to be in equilibrium when bills on London stood at $109 for every hundred of the purchase-money, or 9 per cent, nominal premium in favour of England. The par, as more definitely stated, was then in New York $4 85 equal to the pound, or in London 49 M. equal to the dollar, and this remained the mean specie point from which all other influences acting on the exchange caused the rate either to rise or to fall, until the period of the civil war, and the issue of paper money, guaranteed by Federal security, but inconvertible. The effect of the new currency on the exchanges was neither immediate nor suddenly great in its proportions. The wide territory and large population of the Northern States were a powerful absorbent. Moreover, as the Government increased its issues the banks withdrew their notes, which had the effect pro tanto of staying the progress of deprecia tion. But gold was still absolutely necessary in the ports, and a premium on gold, inevitable from the first, increased month by month with the increased issue and circulation of " greenbacks." What the nominal par of exchange now was became a sort of arithmetical puzzle ; for, taking the exchange of New York on London alone, without respect 789 to other countries trading with the United States (the money of some of which was undergoing similar deprecia tion at the same period), the established premium of 9 per cent, in favour of London was met and supplemented by this new premium on gold, and to add the one premium to the other would not be enough, because the dollar itself was now fallen away from its value when the $9 to the hundred had been strictly ascertained and arranged as a corrective of the original rough par of $40 equal to <9. The Government, issuing the new currency that produced this disturbance in the foreign exchanges, had no theory on the subject, and only made some feeble attempts to regulate the sale of bullion. The adjustment was left in the main to the calculation of bankers and merchants on both sides, in presence of the natural causes in operation, and the solu tion thus attained may be all the more significant. The premium on gold in its exchange at New York with the paper currency was added to the former premium of 9 per cent, in favour of London, and the 9 per cent, itself, marked of old in $9 of bullion value, was increased pro rata by the same premium. 1 This rule has since regulated the nominal par of exchange between New York and London through wide ranges of fluctuation. The exchange was often as high as 180 during the war, so that the quo tation must often have been New York <$8 = 1, London 30d. = $l 0. It is no less worthy of remark that, without the actual resumption of specie payment, the "greenback dollar has been quoted of late in New York and other American cities at the metallic par of 4 85 a rare though not unprecedented phenomenon, to be attributed to a severe financial and commercial crisis, followed by four years of lowered prices, steady excess of exports over imports, and accumulation of bullion. The effect of issues of inconvertible paper money, or the suspension of cash payment of paper currency already in circulation on the par of exchange, is the same as that of a change of the standard of value, a debasement of the coinage, or, where in one of two countries the money is gold, and in the other silver, a depreciation of one metal as compared with the other. When two countries par their gold coins, the object is to arrive at a common term by which value for value will be paid, in equivalent weight and purity of metal, out of the money of each other. W f hen one of them displaces its gold coins by inconvertible paper money, the same object has to be attained, and this is reached, though not so fixedly as in the par of metallic coins, by the premium which gold commands over the paper money in the sphere of its currency. The former par in such cases maybe adhered to as a landmark, and this gold premium may be treated as nominal premium on one side and nominal discount on the other, but it is sub stantially of the nature of par of exchange, and becomes a necessary integer of the rate of exchange. In the case of countries of 0112 of which gold, and of the other silver, is the standard money, the nominal par is subject to variation from changes in the relative market value of the two metals. If, for example, the relation on which the par proceeded was 15 ounces of silver equal to 1 ounce of gold, and the depreciation of silver becomes such that 17 ounces 1 Mr Goschen, in his book on Foreign Exchanges, gives the follow- ing definition of the process of exchange between New York and London : " If, before the issue of paper money, the purchaser of a bill on England paid 100 dollars and 9 dollars for it, he would, if the premium on gold had risen to 50 per cent., in the first place pay 150 dollars instead of the 100, and in the second 13 J dollars instead of 9 dollars, or half as much again as what we may call the correcting premium. Thus, if the price of bills when gold stood at 150 was 163J, this price would correspond to the price of 109 at the time when there was no premium on gold. The price might rise to 165, or fall to 161, according as there was supply or demand, but the mean point
would be ascertained by the process which has been described."