Problems of Convertability and Money

It is probably true that all great convulsions in economics result less from the failure of the superstructure of form and legislation, than from a defect of the premise. The superstructure of our money system of the twenties rested on a simple premise: it was taken for granted that if provision were made for the convertibility of the currency into gold, all forms of internal convertibility would automatically follow. This premise proved to be false. From the standpoint of monetary economics, the collapse of 1933 derived from our inability to maintain the internal integrity of our money system.

Now, retrospectively, it would be recognized that the first obligation imposed on a money system is the maintenance of its internal unity or integrity that a dollar in New York shall be a dollar in Chicago or San Francisco -, and that the definition of a dollar is itself not only a matter of law but of fact, or rather that the law must conform to the fact. The elemental fact of our monetary system was and is its dualism, creating the necessity of maintaining its continuous interconvertibility. This concept of the integrity of the money system has never been formally stated in any of our monetary legislation 5 but the sum of our monetary legislation since 1933 is an expression of that concept. It is not, of course, the sole conceivable expression of that concept. Perhaps other formulae could have been found , others were proposed and rejected. However the simple facts are :

(1) that the essential problem of any elaborate money system is the problem of integrity and convertibility ;

(2) that the definition of and provision for convertibility as applied in our pre-1933 monetary legislation proved too limited;

(3) and that the definition of convertibility as applied in our current legislation is not only wider, but is apparently absolutely comprehensive.

With the change in the definition of convertibility, there has also come a change in the character of money to meet the wider definition. All paper currency is an evidence of debt, a promissory note, whether it is a Federal Reserve note, a United States note, or a silver certificate. On its face it has the superscription to the effect that the issuer "promises to pay to the bearer on demand" promises to pay something.

Formerly, it was a promise to pay gold or silver , our silver certificates still promise ambiguously to pay a dollar in silver whatever that may mean.