FEDERAL DEBT-MANAGEMENT POLICIES, 1865-1879

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FEDERAL DEBT-MANAGEMENT POLICIES, 1865-1879

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Xerox University Microfilms 300 North Z eeb Road Ann Arbor, Michigan 48106

1 3 -2 1 3 1 0 LD3907 .G7 P a t t e r s o n , R o b e r t T r e s c o t t , 19091950 F e d e r a l d e b t-m a n a g e m e n t p o l i c i e s •p3 1 8 6 5 -1 8 7 9 . New Y o rk r k , 1 9 ^f e9 . i v , 391 t y p e w r i t t e n l e a v e s , 2 9 cm, T h e s i s ( P h .D .) - New Y ork U n i v e r ­ s i t y , G ra d u a te S c h o o l, 1950. B i b l i o g r a p h y : p . 3 8 9 -3 9 1 . >

C50666

1 L /.

Xerox University Microfilms,

Ann Arbor, Michigan 48106

THIS D IS S E R TA TIO N HAS BEEN M IC R O F IL M E D E X A C T L Y AS RECEIVED.

library of JFF YORK UMI7ERSTTI URIIERSIII HXIQHT3

(

^ v ^

F E D E R A L B T - M A H A O E H E H I 1 8 6 5 - 1 8

P O L I C I E S 7 9

By # ROBERT

t

5*PATTERSON

A d i s s e r t a t i o n I n t h e D e p artm en t o f E c o n o m ic s s u b m i t t e d t o t h e F a c u l t y o f th e g ra d u a te sc h o o l o f A r t s and S c i e n c e o f New Y o rk U n i v e r s i t y I n p a r t i a l f u lf illm e n t o f th e r e q u ir e ­ m en ts f o r th e d e g re e o f D o c to r o f P h ilo so p h y .

WASHINGTON A p r i l 1949

CONTENTS Page I.

I n t r o d u c t i o n .......................................................................................

1

II.

F i n a n c i a l C o n d i t i o n o f t h e G o v e rn m e n t on t h e Eve o f t h e W a r ........................................................ D e f i c i t F i n a n c i n g b e f o r e t h e W a r....................... D e c l i n e o f t h e P u b l i c C r e d i t ................................. P r e - W a r D e b t P o l i c i e s ...................................................

9 10 14 18

III.

D e b t p o l i c i e s o f t h e W a r......................................................... E f f o r t s t o O b t a i n F u n d s i n E u r o p e ..................... V a c i l l a t i o n i n I n t e r e s t - R a t e P o l i c y ................ D ebt P o lic y and th e S u sp e n sio n o f S p e c ie P a y m e n t s .......................................................... The L e g a l - T e n d e r A c t s a n d t h e N a t i o n a l B a n k in g A c t s a s E x p r e s s i o n s o f D e b t P o l i c y ................................................... The S a l e o f B o n d s a t P a r f o r G r e e n b a c k s . . . S o u r c e s o f D e b t P o l i c y . . . . . .................................... S e c r e t a r y C h a s e ' s " O b j e c t i v e s " ............................ The P 0 l i c i e s o f S e c r e t a r y F e s s e n d e n ................

36 40 42 52 55

IV .

The D e b t a t W a r 's E n d ................................................................ T he N a t u r e a n d s t r u c t u r e o f t h e D e b t T r a n s i t i o n f r o m War t o P e a c e ................................. T he D e b t a t I t s Maximum.............................................. P u b l i c O p i n i o n a n d t h e War D e b t ..........................

65 65 72 74 76

V.

P r e l i m i n a r y F u n d in g o f th e S h o rt-T erm D e b t O b je c tiv e s and P o li c i e s of S e c re ta ry M c C u l l o c h ........................................................ The S h o r t - T e r m N a t u r e o f t h e D e b t ..................... T he L o an A c t o f 1 8 6 6 ................................................... The C o n v e r s i o n O p e r a t i o n s ......................................... T h r e a t s o f R e p u d i a t i o n ................................................ The E s s e n t i a l S o u n d n e s s o f t h e C o n v e r s i o n P o l i c y ...............................................................

88

(H i

22 24 29 32

88 91 97 101 1 09 114

ill

V I.

V II.

V III.

IX .

X.

R e f u n d i n g t h e D e b t ....................................................................... P r e p a r a t i o n f o r R e f u n d i n g ........................................ P r o v i s i o n s o f t h e Loan A c t o f 1 8 7 0 .................. A M a jo r E r r o r i n D ebt P 0 l i c y .................................... Some C o n j e c t u r e s ............................................................... The R e f u n d i n g O p e r a t i o n s ........................................... S a l e o f t h e 5 - P e r c e n t L o a n ......................... The E u r o p e a n M a r k e t ........................................... C o m m i s s i o n s ............................................................... C a l l i n g t h e O ld B o n d s ...................................... S a l e o f t h e 4 ^ - P e r c e n t R e f u n d i n g L oan A tte m p ts to P o p u la riz e th e D eb t The R a p i d C o m p le t io n o f t h e R e f u n d i n g P r o g r a m ................................................

1 20 120 126 129 141 145 1 45 1 56 157 165 16 5 168

Debt

180

R e d u c t i o n a n d T ax P0l l c y ......................................... S u rp lu s T re a su ry R e c e ip ts and th e R eal E x t e n t o f D e b t R e d u c t i o n .................. The T a x - R e d u c t i o n C o n t r o v e r s y .............................. G r a d u a l R e d u c t i o n o f T a x e s ...................................... The T a r i f f a n d t h e D e b t .............................................. The S i g n i f i c a n c e o f D e b t R e d u c t i o n ..................

174

180 183 191 207 211

The S i n k i n g F u n d a s a M echan ism f o r D eb t R e d u c ­ t i o n ................................................................................. The I n f l u e n c e o f B r i t i s h S i n k i n g - F u n d T h e o r y ............................................................... D e s u e tu d e o f t h e C i v i l War S i n k i n g - F u n d L aw ....................................................................... The R e v i v a l , O p e r a t i o n , a n d Re i n t e r p r e t a ­ t i o n o f th e S in k in g -F u n d l a w . . . . Common S e n s e a n d t h e S i n k i n g F u n d ....................

22 7 2 32

The E x e m p tio n o f G o v e rn m e n t S e c u r i t i e s fro m T a x a t i o n ...................................................................... The T a x - E x e m p t i o n C o n t r o v e r s y .............................. The A d v a n t a g e s o f Tax E x e m p t i o n .........................

2 34 235 238

218 219 224

M o n e t a r y P o l i c y i n Re l a t i o n t o D e b t M an agem ent; 1 8 6 5 - 1 8 6 8 . ............................................................... The C u r r e n c y ......................................................................... K i n d s a n d A m ounts o f C u r r e n c y .................. B a n k - N o t e , C o i n , a n d " D e p o s i t " C u r­ r e n c y ..................................................... G o v e rn m e n t D e b t a s C u r r e n c y .......................

248 259

The R e l a t i o n o f t h e I n d e p e n d e n t T r e a s u r y to th e N a tio n a l Banks and th e Money M a r k e t ................................................

262

2 43 2 45 245

lv

X.

X I.

X II.

X III.

M o n e t a r y P o l i c y i n R e l a t i o n t o D ebt M a n ag e m en t; 1865-1 Q 6 Q --c o n tin u e d . S e c r e t a r y M c C u l l o c h 1s C u r r e n c y - C o n t r a c t i o n P o l i c y ............................................................... The L o s t O p p o r t u n i t y t o Resume S p e c i e P a y m e n t s .............................................. The A n t i c i p a t e d E f f e c t o f C o n t r a c t i o n The I n c r e a s e d N eed f o r C u r r e n c y a n d t h e R e d u n d a n t S u p p ly o f I t , T r e a s u r y C o n t r o l o v e r t h e Money M ar­ k e t ................................................ 283 I n c r e a s i n g O p p o s i t i o n a n d t h e End o f t h e C o n t r a c t i o n P o l i c y ....... M o n e t a r y P o l i c y i n Re l a t i o n t o D ebt M a n ag e m en t: 1 8 6 9 - 1 8 7 9 .................................................................... S e c r e t a r y B o u t w e l l ' s G r e e n b a c k P o l i c y .......... S e c r e t a r y R ic h a rd so n and th e p a n ic o f 1873 V e to o f t h e I n f l a t i o n B i l l ...................................... The R e s u m p ti o n A c t .......................................................... P r e p a r a t i o n f o r R e su m p tio n and th e F o r c e s O pposed t o I t .................................... 318 The E f f e c t o f D e b t a n d M o n e t a r y P o l i c y u p o n I n f l a t i o n .................................. 328

2?l 272 276 279

290 299 299 306 311 315

The E f f e c t o f D ebt P o l i c i e s on C a p i t a l F u n d s . . . 334 E ffect on t h e I n v e s t m e n t M a r k e t ...... 334 E ffect on t h e P r i c e o f G o l d ................ 337 E f f e c t on t h e I n t e r n a t i o n a l B a l a n c e o f 340 P a y m e n t s ................................................. The F low o f G o v e rn m e n t S e c u r i t i e s t o E urope, and T h e ir R e t u r n . . . 340 L a r g e D ebt O p e r a t i o n s i n F o r e i g n M a r­ k e t s .............................................. 346 E f f e c t on P r o d u c t i o n , D i s t r i b u t i o n , a n d C o n s u m p t i o n .......................................... 351 A Summary o f D e b t-M a n a g e m e n t O b j e c t i v e s : 1 8 6 5 1 8 7 9 .................................................................. 359 B i b l i o g r a p h y ....................................................................... 369 B o o k s .......................................... *.............................................. 382 P e r i o d i c a l s ............................................................. D o c u m e n ts .................................................................. 387

369

FEDERAL DEBT-MANAGE1IENT POLICIES 1865-1879

CHAPTER I INTRODUCTION A l a r g e F e d e ra l d e b t h a s been a consequence o f ev ery m a j o r w ar I n w h i c h t h e U n i t e d s t a t e s h a s e n g a g e d .

The d e b t

o f e a c h w ar h a s been g r e a t e r th a n t h a t o f th e p r e c e d in g w ar. T h e s i z e o f t h e d e b t a n d t h e way i n w h i c h i t w as m an ag ed w e re eac h tim e m a t t e r s o f s e r i o u s is

c o n cern .

The d e b t t o d a y

t e n t i m e s a s l a r g e a s t h a t o f t h e f i r s t W o rld W ar, a n d

o n e h u n d r e d t i m e s t h a t o f t h e C i v i l W ar.

And y e t i n i t s

t i m e t h e C i v i l War d e b t w as c o n s i d e r e d e n o rm o u s . e x is te n c e o f th e d eb t is a h ard f a c t , r e a d y m eans t o do aw ay w i t h i t ,

its

S in c e th e

and s in c e t h e r e

i s no

m an a g em en t i s a s e r i o u s

p ro b lem . The p r e s e n t - d a y q u e s t i o n o f d e b t m anagem ent h a s b e e n w i d e l y d i s c u s s e d , an d a num ber o f t h e o r i e s c o n c e r n i n g i t h av e been d e v e lo p e d .

Some o f them d i f f e r r a d i c a l l y , a n d

n o n e h a v e r e c e i v e d g e n e r a l a c c e p t a n c e among a u t h o r i t i e s i n th e f i e l d .

Under su ch c irc u m s ta n c e s a n In q u ir y i n t o th e

n a t u r e an d e f f e c t s o f d e b t-m a n a g e m e n t p o l i c i e s p e r i o d seem s a p p r o p r i a t e . (1)

in a fo rm er

2

I t m ig h t b e c o n t e n d e d t h a t no tw o p e r i o d s o f h i s t o r y a r e a lik e

a n d t h a t t h e c o m p le x e c o n o m ic a n d s o c i a l s t r u c t u r e o f

t h e p r e s e n t t i m e m akes t h i s p e r i o d i n c o m p a r a b l e w i t h a n y p r e ­ v io u s one.

The f a c t i s ,

h ow ever, t h a t

in any p e rio d th e b a s i c ,

f u n d a m e n t a l r e a l i t i e s o f e c o n o m ic l i f e m ak in g due a llo w a n c e f o r d i f f e r e n c e s

r e m a i n t h e sam e; a n d b y

In th e

s u p e rfic ia l or

t r a n s i t o r y a s p e c t s o f d i f f e r e n t t i m e s , u s e f u l c o m p a riso n s can b e d raw n b e t w e e n tw o o r m ore p e r i o d s o f e c o n o m ic e x p e r i e n c e . M o r e o v e r , t h e v e r y c o m p l e x i t y o f t h e p r e s e n t e c o n o m ic a n d so c ia l

stru c tu re ren d ers i t

d e sira b le

to t u r n f o r e x a m in a tio n

a n d s t u d y t o a n e a r l i e r a n d som ew hat s i m p l e r s i t u a t i o n . F o r t h i s p u r p o s e t h e f o u r t e e n y e a r s o f d e b t m an agem en t b e t w e e n t h e t e r m i n a t i o n o f t h e C i v i l War a n d t h e r e s u m p t i o n of

s p e c i e p a y m e n ts h a v e b e e n s e l e c t e d .

first

s e v e ra l o f th o se y e a r s ,

u n fu n d e d war d e b t . its

Its

ju s t as

T here w as, th e re

in th e

is to d ay , a la r g e

I n f l u e n c e p e r v a d e d t h e e co n o m y , a n d

m a n a g e m e n t w as t h e m a j o r f i s c a l p r o b l e m . C o n t e m p o r a r y p r o b l e m s o f t h e d e b t h a v e b e e n made h i g h l y

c o m p le x by r e a s o n o f t h e e x t e n s i v e d e v e l o p m e n t o f t h e a d m in ­ istra tiv e

b r a n c h o f t h e G o v e r n m e n t,

i n w h ic h a m u l t i t u d e o f

a g e n c i e s s e r v e a v a r i e t y o f p u r p o s e s c o n c e r n e d i n o ne way o r a n o t h e r w ith f i s c a l and m o n etary p o l i c y . o ra te

B a ck o f t h i s e l a b ­

i m p l e m e n t a t i o n o f p o l i c y i s t h e m o d e rn c o n c e p t o f t h e

l a r g e r r o l e o f G o v e rn m e n t i n t h e e c o n o m y .

In t h i s l a r g e r con­

c e p t i o n o f f i s c a l an d m o n e ta ry p o l i c y a n d i n th e d e v elo p m e n t o f m ore e l a b o r a t e

In s titu tio n s fo r i ts

a p p lic a tio n l ie

th e

c h i e f d i f f e r e n c e s b e tw e e n t h e p o s t - C i v l l War p e r i o d a n d t h e p re se n t.

3

None o f t h e s e d i f f e r e n c e s , h o w e v e r , make t h e two p e r ­ i o d s In co m p a rab le.

T h e r e a r e f a r m o re s i m i l a r i t i e s

f e r e n c e s , a n d t h e y a r e m ore s i g n i f i c a n t . th e

T h is i s

th a n d i f ­

because

im p o rta n t s i m i l a r i t i e s a r e fu n d a m e n ta l, w h ile th e d i f ­

fe re n c e s are n o t. e c o n o m ic l i f e

That i s to sa y ,

th e b a s ic r e a l i t i e s o f

f i n a l l y g o v ern an d l i m i t a l l a rra n g e m e n ts i n ­

te n d e d to f a c i l i t a t e

th e p ro d u c tio n ,

d istrib u tio n ,

and con­

su m p tio n o f w e a l t h .

P r i m a r y human m o t i v e s a n d n e e d s h a v e

re m a in e d u n chan ged , th e n a tu r e o f r e a l w e a lth i s b a s i c a l l y th e

s a m e , a n d t h e t r u e n a t u r e o f m oney a n d o f d e b t , h o w e v e r

t h e s e may be m a n i p u l a t e d , h a s n o t c h a n g e d . D ebt m a n a g em en t i s a p a r t o f f i s c a l p o l i c y , a n d y e t i t is

c lo se ly r e la te d a ls o

to m o n etary p o l i c y .

It

is c lo s e ly

in te rw o v e n w ith a l l m a tte r s of r e v e n u e , e x p e n d itu r e , an d b o rro w in g , a s w e ll a s w ith c u rr e n c y a n d b a n k in g .

It

i s a ls o

c l o s e l y r e l a t e d to a l l b u s in e s s a c t i v i t y , b e in g an I n f lu e n c e upon i t and in t u r n b e in g in f lu e n c e d by i t .

A stu d y o f d eb t

m a n a g e m e n t i n a n y p e r i o d t h u s b e c o m e s a s t u d y o f t h e w h o le e co n o m y fro m a p a r t i c u l a r

sta n d p o in t.

The c l o s e r e l a t i o n ­

s h i p o f t h e c u r r e n c y , t a x a t i o n , a n d t h e d e b t m akes i t sib le

im p o s­

to c o n s i d e r a n y one o f t h e s e a s s e p a r a t e fro m th e

o th e rs.

O b v i o u s l y , d e b t m an ag em en t i s a f f e c t e d by t h e

n a tu r e o f th e d e b t.

For th is reaso n ,

d e b t w as c r e a t e d , t h e p u r p o s e s i t

t h e way i n w h i c h t h e

s e r v e d , and th e fo rm s i t

t o o k , a r e c o n s i d e r e d a t some l e n g t h I n o r d e r t o a p p r a i s e t h e p ro b lem s o f i t s

s u b s e q u e n t m a n a g e m e n t.

4

A l t h o u g h t h e m o d ern c o n c e p t o f t h e l a r g e r r o l e o f Gov­ e r n m e n t I n t h e econom y p r e s c r i b e s a b r o a d e r p u r p o s e f o r d e b t m an a g em en t, in t h i s

e a r l i e r p e r i o d d e b t- m a n a g e m e n t

p o l i c i e s e x te n d e d c o n s i d e r a b l y b ey o n d m anagem ent m e re ly f o r th e sake o f th e d e b t. re la tio n sh ip

T h i s f a c t i s m ost a p p a r e n t in th e

o f t h e T r e a s u r y t o t h e money m a r k e t , w h e re d e b t

o p e r a t i o n s w ere c o n d u cted w ith a r e g a r d f o r f i n a n c i a l s t a ­ b i l i t y and th e w e lfa re o f b u s in e s s .

D e b t- m a n a g e m e n t p o l i c y

was c o n c e r n e d n o t o n l y w i t h t h e m e l i o r a t i o n o f t h e i l l e f f e c t s o f th e d e b t, b u t sought a ls o

to c o m p e n sa te f o r th e

in a d e q u a c ie s o f th e c o n te m p o ra ry T r e a s u r y , b a n k in g , and c u rre n c y sy ste m s.

I t e n d e a v o re d , t o o , to a i d m o n etary and

f i s c a l p o l ic y an d to g iv e

some s t a b i l i t y

to th e p ric e le v e l,

th e lo a n m a r k e ts , and b u s i n e s s a c t i v i t y . I n a p e r i o d when t h e c o n c e p t o f t h e r o l e o f f i s c a l p o l ­ i c y was e x t r e m e l y r e s t r i c t e d , one w ish e d i t

i t w as r e a l i z e d t h a t , w h e t h e r

t o be so o r n o t , t h e

in h ere n t fu n c tio n s of

d e b t m a n a g e m e n t d i d i n f l u e n c e g r e a t l y t h e w h o le econom y. Among t h e v a r i o u s f i s c a l p o l i c i e s o f t h e G o v e r n m e n t , t h o s e c o n c e r n e d w i t h t h e m anag em ent o f t h e d e b t w e re p e r h a p s o f g r e a te s t consequence.

E s p e c i a l l y w as t h i s t r u e i n r e s p e c t

t o t h o s e a s p e c t s o f d e b t m anagem ent t h a t c o n c e r n e d m o n e ta ry p o lic y . I t w i l l b e s e e n t h a t t h e p r o b l e m o f t h e C i v i l War d e b t w as g r e a t e s t i n

th e f i r s t

s e v e r a l y e a rs fo llo w in g th e w ar.

5

I t d i m i n i s h e d i n I m p o r t a n c e a s t h e d e b t w as b r o u g h t u n d e r c o n tr o l and a s i t s

s i z e a n d b u r d e n b e ca m e l e s s .

A f te r th e

p a n i c o f 1 8 7 3 , w hen s u r p l u s r e v e n u e s w e r e s m a l l a n d r e f u n d ­ i n g p r o g r e s s e d s l o w l y , d e b t o p e r a t i o n s w e re on a r e d u c e d s c a le u n t i l a r e v i v a l o f b u s in e s s c o n fid e n c e s e t in a s p r e p a r a t i o n s w e r e b e i n g c o m p l e t e d t o r e s u m e s p e c i e p a y m e n ts on th e c u rre n c y p o r t io n o f th e d e b t.

A lth o u g h th e y e a r s

1 8 6 5 t h r o u g h 1 8 6 8 w e re t h e m o st c r i t i c a l

so f a r a s th e

I n f l u e n c e o f t h e d e b t w as c o n c e r n e d , p o l i c i e s d e a l i n g w i t h its

m a n a g em en t c o n t i n u e d t o be o f I m p o r t a n c e t h r o u g h o u t t h e

l a r g e r p e r i o d e x a m in e d i n

th is

stu d y .

B e tw e e n 1 8 6 5 a n d 187 9, t h e r e w e r e t h r e e p h a s e s o f d e b t m anagem ent a c t i v i t y . p le tio n

The f i r s t e n d e d i n 1 8 6 8 w i t h t h e com­

o f t h e p r e l i m i n a r y f u n d i n g , w h i c h was d e s i g n e d t o

e x te n d th e d a te s o f paym ent o f th e d e b t.

From 1 8 6 9 t o 1877,

e m p h a s i s was u p o n r e f u n d i n g a n d c o n s o l i d a t i o n , w i t h a v ie w to

s p re a d in g th e m a t u r i t i e s o f th e d e b t o v er a lo n g p e r io d

o f y e a r s and to r e d u c in g th e i n t e r e s t b u rd e n .

I n 1 877 a n d

1 8 7 8 , p r e p a r a t i o n f o r t h e r e s u m p t i o n o f s p e c i e p a y m e n ts d o m in a te d th e d e b t p o l i c i e s .

P a r a l l e l w ith th e s e th re e

o b j e c t i v e s w as t h e o v e r - a l l on e o f r e s t o r i n g t h e v a l u e o f t h e c u r r e n c y a n d p l a c i n g t h e c r e d i t o f t h e c o u n t r y up on a sound b a s is . T h i s s t u d y a n d i t s b a c k g r o u n d e x t e n d fro m t h e a d m i n i s ­ tra tio n

o f P r e s i d e n t B uchanan th ro u g h th o s e o f P r e s i d e n t s

6

L in c o ln , Jo h n s o n , and G r a n t, and i n to t h a t o f P r e s i d e n t H ayes.

T he S e c r e t a r i e s o f t h e T r e a s u r y a n d t h e i r t e r m s o f

o f f i c e d u r i n g t h i s tim e w e r e ; ! H o w e ll C o b b , o f G e o r g i a , M a rch 7 , 1 8 5 7 - D e c e m b e r 8 , 1 8 6 0 . P h i l i p P . T hom as, o f M a r y l a n d , D ecem ber 1 2 , 1 8 6 0 - J a n ­ u a ry 1 4 , 1861. J o h n A. D i x , o f New Y o r k , J a n u a r y 1 5 , 1 8 6 1 - M a r c h 6 , 1 8 6 1 . S a lm o n P . C h a s e , o f O h i o , M a rch 7 , 1 8 6 1 - J u n e 3 0 , 1 8 6 4 . W i l l i a m P . F e s s e n d e n , o f M a i n e , J u l y 5 , 1 8 6 4 -M a r c h 3 , 1865. Hugh M c C u l lo c h , o f I n d i a n a , M a rch 9 , 1 8 6 5 - M a r c h 3 , 1 8 6 9 . G e o r g e S . B o u t w e l l , o f M a s s a c h u s e t t s , M arch 1 2 , 1 8 6 9 M a rch 1 6 , 1 8 7 3 . W i l l i a m A. R i c h a r d s o n , o f M a s s a c h u s e t t s , M a rc h 1 7 , 1 8 7 3 June 3 , 1874. B e n ja m i n H. B r i s t o w , o f K e n t u c k y , J u n e 4 , 1 8 7 4 - J u n e 2 0 , 1876. L o t M. M o r r i l l , o f M a i n e , J u l y 7 , 1 8 7 6 - M a r c h 9 , 1 8 7 7 . J o h n S h e rm a n , o f O h i o , M a rc h 1 0 , 1 8 7 7 - M a r c h 3 , 1 8 8 1 . D u rin g t h i s p e r io d th e g r o s s F e d e r a l d e b t a t

th e end o f

e a c h f i s c a l y e a r was a s f o l l o w s 1 8 5 7 ..............# 2 8 , 7 0 1 , 3 7 5 1 8 5 8 ............. 4 4 , 9 1 3 , 4 2 4 1 8 5 9 ............. 5 8 , 4 9 8 , 3 8 1 1 8 6 0 ............. 6 4 , 8 4 3 , 8 3 1 1 8 6 1 ............. 9 0 , 5 8 2 , 4 1 7 1 8 6 2 .............. 5 2 4 , 1 7 7 , 9 5 5 1 8 6 3 . . . 1 ,1 1 9 ,7 7 3 ,6 8 1 1 8 6 4 . . . 1 ,8 1 5 ,8 3 0 ,8 1 4 1 8 6 5 . . . 2 ,6 7 7 ,9 2 9 ,0 1 2 1 8 6 6 . . . 2 ,7 5 5 ,7 6 3 ,9 2 9 1 8 6 7 . . . 2 ,6 5 0 ,1 6 8 ,2 2 3 1 8 6 8 ... 2 ,5 8 3 ,4 4 6 ,4 5 6

1 8 6 9 ...# 2 ,5 4 5 ,1 1 0 ,5 9 0 1 8 7 0 ... 2 ,4 3 6 ,4 5 3 ,2 6 9 1 8 7 1 . . . 2 ,3 2 2 ,0 5 2 ,1 4 1 1 8 7 2 ... 2 ,2 0 9 ,9 9 0 ,8 3 8 1 8 7 3 . . . 2 ,1 5 1 ,2 1 0 ,3 4 5 1 8 7 4 ... 2 ,1 5 9 ,9 3 2 ,7 3 0 1 8 7 5 ... 2 ,1 5 6 ,2 7 6 ,6 4 9 1 8 7 6 ... 2 ,1 3 0 ,8 4 5 ,7 7 8 1 8 7 7 ... 2 ,1 0 7 ,7 5 9 ,9 0 3 1 8 7 8 ... 2 ,1 5 9 ,4 1 8 ,3 1 5 1 8 7 9 ... 2 ,2 9 8 ,9 1 2 ,6 4 3 1 8 8 0 ... 2 ,0 9 0 ,9 0 8 ,8 7 2

-^ U n ite d S t a t e s T r e a s u r y D e p a r t m e n t , D i v i s i o n o f P u b l i c R e l a t i o n s , The U n i t e d S t a t e s T r e a s u r y ( W a d n l n g t o n , n . d . ) , p p . 34-35. ^ A n n u a l R e p o r t o f t h e S e c r e t a r y o f t h e T r e a s u r y on t h e S t a te of th e F in a n c e s ( h e r e i n a f t e r r e T ir r e d t o a s T rea su ry KI p o r t T T 1 9 3 7 ; p . ” 3 6 5 . ---------------

7

D u r i n g t h e p o s t - c i v i l War p e r i o d ; a v a r i e t y o f v i e w s r e g a r d i n g d e b t m a n a g e m e n t, some o f a n e x tr e m e n a t u r e , f o u n d e x p r e s s i o n among t h e p e o p l e a n d w i t h i n t h e G o v e r n m e n t.

It

w as t o becom e a p p a r e n t t h a t two i r r e c o n c i l a b l e e c o n o m ic p h i l o s o p h i e s — t h o s e o f I n f l a t i o n and d e f l a t i o n — d o m in a te d th e f i e l d .

B e tw e e n t h e s e e x t r e m e s w e r e o p i n i o n s r e p r e s e n t ­

in g a l l d e g re e s of c o n se rv a tis m and l i b e r a l i s m . n i f i c a n t th a t th e p e r s i s t e n t ,

It

is sig ­

s o m e t i m e s c l a m o r o u s , dem ands

o f t h o s e who p r o p o s e d m e a s u r e s n o t c o n s i s t e n t w i t h m e e t i n g i n f u l l t h e o b l i g a t i o n w h ic h t h e d e b t r e p r e s e n t e d , w ere e n o u g h t o d e p r e c i a t e t h e G o v e r n m e n t 's c r e d i t a n d a d d t o t h e d i f f i c u l t y and expense o f c o n v e r tin g and re f u n d in g th e d e b t. Among t h e p r o b l e m s w h i c h t h e f o l l o w i n g a n a l y s i s u n d e r ­ ta k e s to c o n sid e r, p a r tic u la r a tte n tio n

i s g iv en to

th e e f ­

f e c t o f F e d e r a l d e b t-m a n a g em e n t p o l i c i e s on th e d e b t i t s e l f , and to th e r e l a t i o n s h i p o f th o se p o l i c i e s to o th e r f i s c a l a n d m o n etary p o l i c i e s and t o b u s i n e s s an d f i n a n c e ;

to th e

c lo s e and im p o rta n t r e l a t i o n s h i p o f th e d e b t, th e c u rre n c y , a n d t h e t a x s y s te m ; to t h e e f f e c t o f d e b t-m an a g em e n t p o l i c i e s a n d p r o p o s a ls o f p o l i c y upon th e p u b l ic c r e d i t , and th e e f ­ f e c t o f t h e s t a t u s o f t h e p u b l i c c r e d i t u pon t h e m an ag em en t o f th e d e b t;

t o t h e e f f e c t o f d e b t m an a g em en t u p o n t h e p r o ­

d u c t i o n , d i s t r i b u t i o n , a n d c o n su m p tio n o f w e a l t h , t h e a l l o ­ c a tio n o f r e s o u r c e s , and th e fo rm a tio n o f c a p i t a l ; t h e l i m i t a t i o n s on d e b t m a n a g em en t s e t b y p o l i t i c a l

and to fe a sl-

8

b llity ,

human f a l l i b i l i t y ,

and g ro u p s.

and th e m o tiv e s o f I n d i v id u a ls

E s p e c ia lly im p o rta n t i s

t h e way i n w h ic h t h e

g r e a t w a r d e b t d o m i n a t e d t h e l o a n m a r k e t s , a n d how t h r o u g h t h e i n t e r r e l a t i o n s h i p o f d e b t p o l i c y and m o n e ta ry p o l i c y its

m an a g e m e n t a f f e c t e d

e v e r y a s p e c t o f t h e eco n o m y .

T he s o u r c e s u p o n w h i c h t h i s

stu d y i s based a r e , p r i ­

m a r i l y , d o c u m e n t s o f t h e U n i t e d S t a t e s G o v e r n m e n t, c o n te m ­ p o r a r y p e r i o d i c a l s , p a m p h le ts and b o o k s, and th e l a t e r p r i ­ v a t e w r i t i n g s o f p e r s o n s who p a r t i c i p a t e d i n t h e e v e n t s o f th e p e rio d .

I n a d d i t i o n , m ore r e c e n t w r i t i n g s h a v e c o n t r i b ­

u te d e ith e r d ir e c tly or In d ir e c tly

to t h e w ork.

W here t h e

c o n t r i b u t i o n h a s been of an i n d i r e c t o r g e n e ra l n a tu r e , h a s n o t been p r a c tic a b le

to g iv e c r e d i t

in th e f o o t n o t e s ,

b u t a c k n o w l e d g m e n t i s made i n t h e b i b l i o g r a p h y . th is

it

T hroughout

s tu d y , th e A nnual R e p o rt o f th e S e c r e ta r y o f th e T r e a s ­

u r y on th e S t a t e o f th e F in a n c e s i s r e f e r r e d to a s T re a s u ry R e p o rt.

The r e p o r t s o f o t h e r Tr e a s u r y a n d g o v e r n m e n t a l

o f f i c i a l s w h ich accom pany t h e S e c r e t a r y ' s r e p o r t i n th e H o u se E x e c u t i v e Docum ent s e r i e s a r e d e s i g n a t e d a s t h e r e p o r t o f t h e p a r t i c u l a r o f f i c i a l — f o r e x a m p le , R e p o r t o f th e T r e a s ­ u r e r o f t h e U n ite d S t a t e s , 1 8 6 7 , and R e p o r t o f t h e C o m p tro l­ l e r of th e C u rren cy , 1872.

A l t h o u g h some o f t h e s e r e p o r t s

have been p u b lis h e d s e p a r a te ly ,

th e p a g in a tio n h e re

in d i­

c a t e d i s t h a t o f t h e d o c u m e n t s e r i a l v o lu m e i n w h i c h t h e y a p p e a r w ith th e r e p o r t o f th e S e c re ta ry of th e T re a su ry .

CHAPTER I I FINANCIAL CONDITION OF THE GOVERNMENT ON THE EVE OF TOE WAR

D u r i n g t h e C i v i l War a g r e a t d e b t was I n c u r r e d u n d e r m ost in a u s p ic io u s c ir c u m s ta n c e s .

The c r e d i t o f t h e G o v e rn ­

m e n t r a p i d l y d e t e r i o r a t e d w h i l e t h e e x i g e n c i e s o f t h e war a n d t h e g r e a t s c a l e o n w h i c h i t w as c o n d u c t e d made e a c h f i n a n c i a l m easure an u r g e n t o n e .

The w a r r e p r e s e n t e d a n

e x tre m e n a t i o n a l e f f o r t , b o t h f o r th e N o rth an d f o r t h e S o u th .

I n th e p r o s e c u t i o n o f I t a huge fu n d o f l a b o r and

n a t u r a l r e s o u r c e s w as c o n s u m e d . n a t i o n a l p r o d u c t w as g r e a t l y

A t t h e same t i m e t h a t t h e

e n l a r g e d by t h e I n t e n s i f i e d

e f f o r t s o f t h e p e o p l e w e a l t h w as d e s t r o y e d a n d t h e p r o d u c t i v e f u n c t i o n i n g o f t h e econom y w as d i s t o r t e d b y t h e p r i o r i t i e s o f m ilita r y re q u ire m e n ts.

F in a lly

d e s t r u c t i o n w ere en o rm o u s.

T h e r e e c o n o m ic a c t i v i t y

a lm o st to a s t a n d s t i l l ,

i n th e S o u th th e l o s s and came

a n d r e c o v e r y was s lo w a n d d i f f i c u l t .

A l t o g e t h e r , p r o b a b l y , t h e C i v i l War con su m ed m ore o f t h e l a b o r a n d n a t u r a l r e s o u r c e s o f t h e c o u n t r y t h a n w e re l a t e r t o b e g i v e n o v e r t o t h e p r o s e c u t i o n o f t h e f i r s t W o rld W ar. The d e b t w h i c h came i n t o

e x is te n c e as a r e s u l t o f th e

f i n a n c i a l m e a s u r e s o f t h e C i v i l War was f a r l e s s t h a n t h e a c t u a l c o s t o f th e w ar, even to th e N o rth a lo n e . (9)

Y et i t w as,

10

f o r t h o s e tim e s , a s t a g g e r i n g d e b t .

B o th b e c a u s e o f i t s s i z e

and b e c a u s e o f i t s form and c o m p le x ity th e management o f i t became t h e p rim a ry p ro b lem o f f i s c a l and m onetary p o l i c y .

The

c i r c u m s t a n c e s u n d e r w h ich t h e d e b t was c r e a t e d , t h e p u r p o s e s i t s e r v e d , and t h e form s i t to o k w ere to h av e an i m p o r t a n t b e a r i n g upon th e n a t u r e o f t h e p o l i c i e s l a t e r c o n c e rn e d w i t h it.

The manner i n w h ich t h e war was f i n a n c e d w as, i n a meas­

u r e , d e te r m in e d by t h e f i n a n c i a l c o n d i t i o n o f th e Government a t t h e o u t s e t o f th e w a r. DEFICIT FINANCING BEFORE THE WAR I n t h e f o u r y e a r s p r e c e d i n g t h e war t h e r e h ad b ee n T r e a s u r y d e f i c i t s t o t a l i n g a p p r o x im a te ly # 6 5 m i l l i o n .

These

h a d b een f i n a n c e d l a r g e l y by th e s a l e o f bonds and n o t e s .

By

I S 6 0 p r e s e n t i m e n t o f t h e coming c o n f l i c t h a d i n h i b i t e d b u s i ­ n e s s c o n fid e n c e .^ -

As a co n seq u en ce o f t h i s , and o f t h e t a r i f f

r e d u c t i o n o f 1 6 5 7 , ^ r e v e n u e s had d i m i n i s h e d ; y e t demands upon t h e T r e a s u r y w ere h e a v y . 5

On June 2 2 , 1 6 6 0 , C o ng ress a u t h o r ­

i z e d t h e i s s u e o f | 2 1 m i l l i o n o f b o n d s , t o b e a r n o t more t h a n

■^•Robert A. L ove, F e d e r a l F in a n c in g (C olum bia U n i v e r s i t y P r e s s , New York, 1 9 3 1 ) , p . 7^* 2

^ T a u s s ig s a y s o f t h i s a c t : • . . . many raw m a t e r i a l s w ere a d m itte d f r e e ; and t h e l e v e l o f d u t i e s on t h e w hole l i n e o f m a n u fa c tu re d a r t i c l e s was b r o u g h t down t o th e lo w e s t p o i n t w h ich had been r e a c h e d i n t h i s c o u n tr y s i n c e 1 6 1 5 ." F . W. T a u s s i g , The T a r i f f H i s t o r y o f t h e U n ite d S t a t e s . 6 t h e d . (G. P . P u tn a m 's d o n s , New York a n d L o n d o n , 1 9 3 1 ) t p . 157* 3T r e a s u r y R e p o r t . 1 6 6 0 , p . S .

11

6- p e r c e n t I n t e r e s t a n d t o m a t u r e i n n o t l e s s t h a n t e n n o r m ore th a n tw e n ty y e a r s . *

Ten m i l l i o n s o f t h i s l o a n w e r e o f f e r e d

a t 5 p e r c e n t a n d w ere r e a d i l y s u b s c r ib e d t o a t p a r and above i n e a r ly S e p te m b e r.2

Up t o

t h i s p o i n t t h e G o v e rn m e n t h a d b e e n

a b l e e a s i l y t o f i n a n c e t h e p r e c e d i n g y e a r s o f d e f i c i t by t h e sa le of i t s

o b l i g a t i o n s to a w i l l i n g m a rk e t.

So r a p i d , how­

e v e r , was t h e d e t e r i o r a t i o n o f t h e p o l i t i c a l a n d f i n a n c i a l situ a tio n

th a t,

in f u ll, n e a rly

a l t h o u g h t h i s i s s u e w as p r o m p t l y s u b s c r i b e d #3 m i l l i o n o f i t w e r e n o t t a k e n u p b y t h e

s u b s c r i b e r s w hen p a y m e n t w as d u e . 5

The t e r m s o f p a y m e n t w e re

th e re u p o n e x te n d e d f o r t h i r t y d a y s , an d m ost b i d d e r s c o m p lied a s w e l l a s th e y w ere a b l e ;

y e t by e a r l y D e c e m b e r a p p r o x i m a t e l y

#1 m i l l i o n o f t h e s u b s c r i p t i o n s t i l l r e m a i n e d u n p a i d . ^ The p u r p o s e o f t h i s # 2 1 m i l l i o n l o a n a u t h o r i z a t i o n was to fu n d i n t o l o n g - t e r m d e b t o u t s t a n d i n g T r e a s u ry n o t e s w h ic h , as of

J u n e 3 0 , 1 S 6 0 , a m o u n te d t o # 1 9 , 6 9 0 , 5 0 0 i n a t o t a l d e b t

o f # 6^ , 7 6 9 , 7 0 3 . 0 8 .5

T h is r e p r e s e n t e d a r e v e r s a l o f t h e p o l i c y

w i t h r e g a r d t o th e T r e a s u r y n o t e s w h ic h had b e e n c u r r e n t i n I 6 5 6 &n(* 1 8 5 9 .

A t t h a t t i m e S e c r e t a r y Cobb h a d n o t w a n t e d t o

ad d th e am ount o f th e n o te s t o

t h e p e rm a n en t d e b t by fu n d in g

*1 2 S t a t u t e s . 79* 2T r e a s u r v R e p o r t . i 8 6 0 , p . S . ^Love,

c i t . , p . 75

^ T reasu ry R e p o r t. i 860, p . S. 5l b l d . . I S 6 0 , p p . 8 and ^ 9 7 •

12

t h e m , y e t h e r e a l i z e d t h a t I t w o u ld n o t b e f e a s i b l e t o r e d e e m th e m a l l

in one y e a r .

to a tte m p t

He h a d e x p r e s s e d h i s p o l i c y

in th e f o llo w in g w ords: The t r u e p o l i c y i s t o l o o k i n t h e p r e s e n t r e v i s i o n o f t h e t a r i f f t o t h e i r g r a d u a l r e d e m p t i o n , commen­ c i n g w i t h t h e n e x t f i s c a l year,-*T h is g r a d u a l re d e m p tio n d i d n o t ta k e p l a c e a s a n t i c i p a t e d , and f i n a l l y , o riz e d

i n J u n e , i 8 6 0 , t h e a b o v e - m e n t i o n e d l o a n w as a u t h ­

in o rd e r to a c c o m p lish th e fu n d in g .

The s t a t e m e n t o f

th e p u b l i c d e b t a t t h a t tim e ( J u l y 1 , 1660) a p p e a re d a s f o l ­ lo w s : 2

.

.

2 ,8 8 3 ,3 6 4 .1 1 L o an o f 1 8 4 2 ......................................... $ L oan o f 184-7....................................... 9 ,4 1 5 ,2 5 0 .0 0 L o an o f 1 8 4 8 ....................................... 6 ,9 0 8 ,3 4 l.S O L o an o f 1 8 5 8 ....................................... 2 0 ,0 0 0 ,0 0 0 .0 0 T exan I n d e m n i t y .................................. 3 ,4 6 1 ,0 0 0 .0 0 L oan o f 1 8 4 8 . . . . . 1 ,0 0 0 .0 0 T e x a s d e b t .............................. 1 9 1 ,0 1 6 .9 9 O ld f u n d e d a n d u n f u n d e d d e b t . 1 1 4 ,1 1 8 .5 4 T reasu ry n o te s Issu ed under a c t s p r io r to 1857 1 0 5 ,1 1 1 .6 4 T reasu ry n o te s is s u e d under a c t o f D e ce m b er 2 3 ,1 8 5 7 .* 1 9 .6 9 0 .5 0 0 .0 0 ♦ The T r e a s u r y n o t e s , re -issu e d

6 4 ,7 6 9 ,7 0 3 .0 8

a l l o f o n e -y e ar m a tu rity , had been

c o n tin u o u sly a s th e y had re tu rn e d to th e T re a su ry .

S in c e th e y r e p r e s e n te d n e a r ly o n e - th ir d o f th e t o t a l d e b t, c o n s i d e r a t i o n s o f p r u d e n c e m ust f i n a l l y h a v e p ro m p te d t h e a t t e m p t t o fu n d a t l e a s t a l a r g e p a r t o f th em .

The s a l e o f

bonds in advance o f th e m a tu rity o f th e n o te s to p ro v id e th e f u n d s f o r t h e i r pay m en t w o u ld , on f i r s t t h o u g h t, b e e n o r d i n a r y g o o d m a n a g e m e n t.

seem t o h a v e

N e v e r th e le s s , a lth o u g h th e

^-T r e a s u r y R e p o r t . I 8 5 8 , p . 1 6 . 2T r e a s u r y R e p o r t , I 8 6 0 , p . 2 2 .

13

b o n d s w h i c h w o u l d h a v e made p o s s i b l e t h i s o p e r a t i o n h a d b e e n a u t h o r i z e d on J u n e 2 2 , th e y w ere n o t o f f e r e d f o r s a l e u n t i l S e p tem b er S.

T h i s d e l a y w as t o h a v e s e r i o u s c o n s e q u e n c e s .

S e c r e t a r y Cobb g i v e s t h e f o l l o w i n g e x p l a n a t i o n f o r i t ; . . . t o h a v e n e g o t i a t e d t h e w h o le a m o u n t t h e r e o f , o r any p o r tio n , in advance o f th e n o te s f a l l i n g d u e, w o u ld h a v e s u b j e c t e d t h e g o v e r n m e n t t o t h e u n n e c e s ­ s a r y p a y m e n t o f I n t e r e s t d u r i n g t h e t i m e t h e money w o u ld h a v e r e m a i n e d i n t h e v a u l t s o f t h e t r e a s u r y u n c a lle d f o r. T h e r e was no p o w e r i n t h e d e p a r t m e n t t o c a l l i n t h e t r e a s u r y n o t e s u n t i l t h e y cam e d u e . B e s id e s , th e w ith d ra w a l o f su c h an am ount o f s p e c ie from t h e p u b l i c w o u ld h a v e b e e n a t t e n d e d w i t h t h e m ost i n j u r i o u s e f f e c t s upon th e f i n a n c i a l o p e ra ­ tio n s o f th e c o u n try . d Of t h e s e tw o r e a s o n s f o r t h e d e l a y i n o f f e r i n g t h e b o n d s th e f i r s t

se e m s s p e c i o u s .

The s m a l l s a v i n g b y a v o i d i n g t h e

p a y m e n t o f d o u b l e I n t e r e s t f o r a few m o n th s m i g h t h a v e b e e n o f p e tty p o l i t i c a l s ig n ific a n c e i f th e S e c re ta ry fe a re d th e a c c u s a t i o n o f w a s t e f u l T r e a s u r y m a n a g e m e n t. o f d o u b le I n t e r e s t

B ut th e paym ent

f o r a s h o r t tim e i n o r d e r to i n s u r e t h e

s u c c e s s o f th e fu n d in g c o u ld h a r d ly have l e n t i t s e l f d ra m a tiz a tio n in

to

t h e c o m in g p o l i t i c a l c o n t e s t .

The s e c o n d r e a s o n — t h a t w i t h d r a w i n g a n d h o l d i n g so l a r g e a sum i n

s p e c i e fro m c i r c u l a t i o n p e n d i n g t h e p a y m e n t o f

t h e n o t e s w o u ld c r i p p l e I n d u s t r y a n d comm erce — w as v a l i d . S u c h was t h e n a t u r e o f t h e I n d e p e n d e n t T r e a s u r y s y s t e m t h a t t h e d a n g e r o f a money a n d o r e d l t s t r i n g e n c y a n d p o s s i b l e p a n i c w o u ld h a v e b e e n v e r y g r e a t .

1T rea su ry R e p o r t. I 860, p . S. ^ Id e m .

I t c a n n o t b e s a i d t h a t i n t h e e a r l y summer o f I 8 6 0 Cobb s h o u l d h a v e b e e n m o re a b l e t h a n m o s t o t h e r f i n a n c i e r s o f t h e c o u n try to

f o r e s e e t h e f i n a n c i a l c r i s i s w h ic h o c c u r r e d i n t h e

a u tu m n o f t h a t y e a r .

I t w as, h o w ev er,

sound d e b t-m a n a g e m e n t

p o l i c y on th e p a r t o f b o t h th e C o n g re ss and t h e S e c r e t a r y t h a t th e y so u g h t th e fu n d in g o f th e T re a su ry n o te s .

H ere,

t h e n , was a n i n s t a n c e o f d e b t - m a n a g e m e n t p o l i c y i n w h i c h , b e la te d ly

( a f t e r th r e e y e a rs o f n o te is s u e and r e - i s s u e ) ,

it

w as s o u g h t t o f u n d t h e l a r g e a m o u n t o f c u r r e n t d e b t i n t o m ore p e r m a n e n t fo r m ; a n d , u n t i l t h e f u n d i n g o p e r a t i o n w as w e l l beg u n , c o n d itio n s c o n tin u e d fa v o ra b le to Y et b e f o r e th e f u n d in g c o u ld be c a r r i e d c r i s i s p re v e n te d I t s

its

a c c o m p lish m e n t.

th ro u g h a f i n a n c i a l

fu lfillm e n t.^

DECLINE OF THE PUBLIC CREDIT S u d d e n l y t h e T r e a s u r y w as i n a d i f f i c u l t p o s i t i o n . H e re to fo re ,

in s p i t e o f d e f i c i t s ,

had been e a s i ly

so ld .

bonds and T re a s u ry n o te s

But th e f i n a n c i a l c r i s i s

i n t h e a u tu m n

o f I 860, and th e g rav e p o l i t i c a l u n c e r t a i n t i e s o f th e tim e , had u p s e t a l l c a lc u la ti o n s .

An i n c r e a s i n g p r o p o r t i o n o f t h e

d i m i n i s h i n g c u s t o m s r e c e i p t s w e r e b e i n g r e c e i v e d I n t h e fo rm o f T reasu ry n o te s n o t y e t due.

M a tu red T r e a s u r y n o t e s w i t h

i n t e r e s t d u e w e re r e q u i r i n g c o n s i d e r a b l e e x p e n d i t u r e , a n d

•^ T r e a s u r y R e p o r t . i 8 6 0 , p . 8 .

15

more o f t h e s e n o t e s would c o n t i n u e t o m a tu re d u r i n g t h e r e ­ m a in d e r o f t h e f i s c a l y e a r 1 8 6 1 .^ The S e c r e t a r y f e l t t h a t i t was h o p e l e s s t o a t t e m p t to n e g o t i a t e th e r e m a in d e r o f t h e bonds on r e a s o n a b l e te r m s . A c c o r d in g ly , h e a s k e d C o n g ress t o r e p e a l th e a u t h o r i z a t i o n f o r t h e # 1 1 m i l l i o n a s y e t u n o f f e r e d and a u t h o r i z e t h e i s s u e o f th e same amount i n T r e a s u r y n o t e s .

A t t h i s tim e he made

t h e s u g g e s t i o n t h a t t h e p u b l i c l a n d s be p le d g e d f o r a l l th e n o t e s i t m ig h t be n e c e s s a r y t o i s s u e . ^

T his p a r t o f h i s

p r o p o s a l was c o n s i d e r e d b u t n o t a c t e d u p o n ,3 a p p a r e n t l y f o r f e a r o f im pedin g t h e p a s s a g e o f t h e Homestead b i l l w h ich had p a s s e d t h e H oused and gone t o th e S e n a t e ,

C o n g re s s , how ever,

p r o m p tly a u t h o r i z e d th e i s s u e o f #10 m i l l i o n i n T r e a s u r y n o te s .5

i t was r e q u i r e d t h a t t h e s e b e i s s u e d a t p a r , a t

i n t e r e s t r a t e s o f f e r e d by th e l o w e s t b i d d e r s , f o l l o w i n g a t l e a s t te n d a y s o f p u b l i c a d v e r t i s e m e n t .

On December 1 8 , I 8 6 0 ,

p r o p o s a l s w ere s o u g h t f o r #5 m i l l i o n o f t h e s e . ^ ^•T r e a s u r y R e p o r t . i 8 6 0 , p . 8 . See a l s o , Jo h n Sherman, R e c o l l e c t i o n s o f F o r ty Y ears i n t h e H ouse. S e n a t e and C a b in e t , 2 V o ls . (The W erner Company, " C h ic a g o , New York, e t c . , 1 8 9 5 ) > V o l. I , p p . 2 1 ^ , 2 5 1 -2 5 3 . 2T re a s u r y R e p o r t . I 8 6 0 , p p . 8 - 9 . 3C o n g r e s s l o n a l Q lo b e . 3 6 t h C o n g ., 2d S e e s . , December 1 0 , I 860, p p .4 1 -4 5 . ^ I b i d . , December 5 , I 8 6 0 , P . 1 ^ . 5 Act o f December 17, i 8 6 0 , 12 S t a t u t e s . 1 2 1 .

^ A lb e r t S id n e y B o l l e s , The F i n a n c i a l H i s t o r y o f t h e U n ite d S t a t e s from 1 8 6 l t o 1885 (D. A p p le to n & Company, New f o r k , 1 S8 6 ), P. 5.

16

The r e s u l t o f t h i s

o f f e r I s d e s c r i b e d by one f i n a n c i a l

h i s t o r i a n a s fo llo w s:^ The b i d s w e r e o p e n e d D e c e m b e r 2 S t h , a n d o n l y $500»0°0 w ere ta k e n a t 12 p e r c e n t . I t w as im p o rta n t to n e g o tia te th e lo a n , in o rd e r to m e e t t h e i n t e r e s t on G o v e rn m e n t b o n d s u p o n Jan u ary 1 s t. T he r e m a i n d e r o f t h e l o a n was s u b s c r i b e d b y t h e b a n k s i n New Y o r k , p r e v i o u s t o t h a t d a t e , a t 12 p e r c e n t . G e n . J o h n A. D i x w as a p p o i n t e d S e c r e t a r y o f t h e T r e a s u r y on J a n u a r y 1 1 t h , d and b i d s f o r th e r e m a in in g $ 5 # 0 ° 0 » 0 ° ° w ere o p en ed on t h e 1 9 th , and th e n o te s aw arded a t th e a v e ra g e r a t e o f 10 5 / S t h p e r c e n t . . . A d d itio n a l o f f e r in g s b e a r i n g I n t e r e s t , r a n g i n g fro m 15 t o 36 P e r c e n t . , w ere d e c l i n e d . N o tw ith sta n d in g th e o f th e T reasu ry

sum s t h u s a c q u i r e d ,

th e s itu a tio n

i n D ecem ber an d J a n u a r y c o n ti n u e d c r i t i c a l .

P u b l i c c r e d i t o r s w e r e d e m a n d in g p a y m e n t .

O v e rd u e T r e a s u r y

n o t e s w ere b e i n g p r e s s e d f o r r e d e m p tio n , w h ile t h e T r e a s u r e r w as u n a b l e t o d r a w s u f f i c i e n t sum s i n d r a f t s

f o r paym ent

a t New Y o r k w h e r e t h e h o l d e r s w i s h e d t h e r e m i t t a n c e s m ad e.

■^■John J a y K no x, U n i t e d S t a t e s N o t e s : a H i s t o r y o f t h e V a r i o u s I s s u e s o f P a p e r Money b y t h e G o v e rn m e n t o f t h e U n i t e d S t a t e s ( C h a r l e s S c r i b n e r ' s S o n s . New Y o r k . l ^ F ) . W r 7 Z - 7 T .— ^ S e c r e t a r y Cobb h a d r e s i g n e d on D e ce m b er 1 0 , I 8 6 0 . He w as s u c c e e d e d f o r a b r i e f p e r i o d b y P h i l i p F . T hom as. C obb f e l t t h a t h i s d u t y t o t h e S t a t e o f G e o r g i a r e q u i r e d h i s w ith d r a w a l fro m th e T r e a s u r y D e p a rtm e n t. Jo h n S herm an, who a t t h a t t i m e w as C h a irm a n o f t h e H o u se C o m m itte e on Ways a n d M e a n s , a n d who w as s o m e ti m e s s t r o n g l y p a r t i s a n i n h i s v i e w s , l o n g a f t e r w a r d m a i n t a i n e d t h a t Cobb " h a d a i d e d i n e v e r y p o s s i b l e way t o c r i p p l e t h e d e p a r t m e n t w h i l e i n charg e o f i t . " Op. p i t . , V o l . I , p . 2 5 1 .

17

T h e r e h a d a c c u m u l a t e d some $ 3 5 ° > 0 ° 0 o f w a r r a n t s w h i c h t h e T r e a s u r e r w as u n a b l e t o pay.-*Two o t h e r l o a n e n a c t m e n t s o f t h e B u c h a n a n a d m i n i s t r a t i o n fo llo w e d .

The a c t o f F e b r u a r y 8 , 1 8 6 l , 2 a u t h o r i z e d a t e n ­

o r t w e n t y - y e a r l o a n o f $25 m i l l i o n a t 6 p e r c e n t , b i d s a b o v e o r b e lo w p a r b e in g a c c e p t a b l e . w ith a l i t t l e

Of t h i s a m o u n t , S e c r e t a r y D l x ,

m ore s u c c e s s t h a n h i s p r e d e c e s s o r , s u c c e e d e d

in n e g o tia tin g $8 , 006, 000.^

F i n a l l y 1 1 8 ,4 - 1 5 ,0 0 0 o f t h i s

a u t h o r i z a t i o n was s o l d a t a n a v e r a g e r a t e

o f $ 8 9 .0 3 p e r # 1 0 0 .^

The A c t o f M a rc h 2 , 1 8 6 1 , 5 a u t h o r i z i n g a $ 10 m i l l i o n t e n - t o tw e n ty -y e a r lo a n , The l a w a l s o

s tip u la te d

s ta te d th a t,

i n t e r e s t n o t e x ce ed in g 6 p e r c e n t.

i n c a s e th e lo a n c o u ld n o t be s o ld

o n r e a s o n a b l e t e r m s , T r e a s u r y n o t e s b e a rin g no m ore t h a n 6 p e r c e n t c o u ld be i s s u e d i n l i e u o f i t w h o le o r a n y p a r t o f t h e / o t h e r / l o a n s

and a l s o o f " th e ...

now b y la w

a u th o riz e d .

■ ^ B o lle s, o p . c i t . ,

p. 5.

21 2 S t a t u t e s . 1 2 9 . ^See B o l le s ,

op. c i t . . p . 6 ,

^ n o x , op. c i t . . p . 7 9 ; S h e rm a n , o p . c i t . . V o l . I , a n d T r e a s u r y R e p o r t . 1914-, p . 2 0 1 . 5 12 S t a t u t e s . 1 7 8 . 6 Idem .

p.

253;

16 PRE-WAR DEBT POLICIES S u c h was t h e

f i n a n c i a l b a c k g r o u n d f o r t h e new a d m i n i s t r a ­

t i o n , and (soon t h e r e a f t e r ) c o s t l y w ar.

f o r th e b e g in n in g o f a lo n g and

C e r ta in a s p e c t s o f t h i s b a ck g ro u n d a r e o f con­

sid e ra b le sig n ific a n c e

in t h e i r r e l a t i o n to th e n a tu r e and

t r e n d o f C i v i l War f i n a n c e .

The f i r s t o f t h e s e w as t h e

i m p o v e r i s h m e n t o f t h e T r e a s u r y a n d t h e lo w s t a t e

t o w h ic h th e

p u b l i c c r e d i t h a d f a l l e n even b e f o r e t h e w ar had b e g u n . F in a n c ia lly ,

t h e F e d e r a l G o v e rn m e n t w as m o re p o o r l y p r e p a r e d

f o r w ar t h a n i t h a d e v e r b e e n , o r h a s b e e n s i n c e . S ig n if ic a n t to o , as a p o rte n t o f th e fu tu re use o f s p e c i a l in d u cem en ts to in v e s tm e n t i n c o n n e c tio n w i t h th e s a l e o f G o v e rn m e n t o b l i g a t i o n s , w as t h e p r o p o s a l t h a t t h e p u b l i c l a n d s b e p l e d g e d a n d t h e u s e o f t h e p r o c e e d s fr o m t h e i r s a l e be a p p lie d to th e re d e m p tio n o f i n d e b te d n e s s .^ A n o th e r p r o p o s e d in v e s tm e n t in d u c e m e n t r e c e i v e d d is c u s s io n d u rin g th e w in te r o f 1860- 6 1 , e ffe c t th a t i f

T h i s w as t o t h e

t h e G o v e rn m e n t w e r e t o o b t a i n t h e e n d o r s e m e n t s

o f New Y o r k , P e n n s y l v a n i a , O h i o , a n d M a s s a c h u s e t t s , o t h e r w i s e b e i n g a t so lo w a n e b b , is s u e .^ It

some

its

c re d it

i t m ig h t o b t a i n p a r f o r t h e

The s u g g e s t i o n came t o n a u g h t . i s a p p a r e n t , h o w e v e r , t h a t some c o n s i d e r a t i o n was

a lr e a d y b e in g g iv e n to s p e c i a l in d u ce m e n ts to s t i m u l a t e th e

•^•T r e a s u r y R e p o r t . i 8 6 0 , p . 9 ; a n d L o v e , 0£ .

c it. .

PP. 2S e e H a r p e r 1s W e e k ly . F e b r u a r y 2 3 , 1 8 6 1 , V o l . V . , p . 1 1 ^ ; a n d Sherman, o p . c i t . , V o l . I , p p . 251- 2 5 2 .

19

s a l e o f bonds a n d T re a s u r y n o t e s by means o f p r o v i s i o n s n o t d i r e c t l y a s s o c i a t e d w i t h t h e p r i c e and y i e l d o f t h e o b l i g a ­ t i o n s i n t h e money m a rk e t.

I n th e p e r i o d t o f o l l o w , many

su ch d e v i c e s w ere em ployed, u s u a l l y to f a c i l i t a t e n e g o t i a ­ t i o n s , t o a v o i d p o s s i b l e c r i t i c i s m from p o l i t i c a l o p p o n e n ts o r t h e l e s s p e r c e p t i v e o f t h e p u b l i c , an d to s u s t a i n an appearance o f f i n a n c i a l s t r e n g t h .

I t h a s been w e l l e s t a b ­

l i s h e d t h a t t h e u s e o f su c h d e v i c e s h a s f r e q u e n t l y been d e t r i m e n t a l e i t h e r to th e p u b l i c c r e d i t o r t o t h e n a t i o n a l economy, o r b o t h , and h a s b ee n a t th e r o o t o f many su b se­ q u e n t p ro b le m s o f governm ent f i n a n c e . 1 A lso s i g n i f i c a n t was t h e n a t u r e o f t h e d e b t w h ich had been i n c u r r e d i n th e p r e - w a r p e r i o d from 1857 "to 1861.

T h is

i s se e n i n t h e u s e o f , and t h e r e a d i n e s s t o t u r n t o , s h o r t ­ te rm T re a s u r y n o t e i s s u e s a s an e a s y means o f f i n a n c i n g , e s p e c i a l l y a t c r i t i c a l tim e s o r when t h e p u b l i c c r e d i t was weak.

The $20 m i l l i o n o n e - y e a r T re a s u r y n o t e s o f 1857 w hich

were r e p e a t e d l y r e - i s s u e d w ere a p p a r e n t l y s h o r t - t e r m o b l i g a ­ t i o n s l e s s by r e a s o n o f n e c e s s i t y th a n b e c a u s e o f th e f a c t t h a t th e S e c r e t a r y ' s w is h and f o r e c a s t were t h a t t h e n o t e s b e g r a d u a l l y redeem ed and n o t f u n d e d .

p

T hat l o n g - t e r m b o rro w in g was p o s s i b l e i s se e n i n th e p la c e m e n t o f t h e lo a n o f 1S5&.

Til© A ct o f

J u n e 1 ^ , 1S5S,

■^See L o ve, 0 £ . c l t . , i n w hich a d e f i n i t i v e s tu d y h a s b een made o f t h i s a s p e c t o f F e d e r a l f i n a n c i n g . 2 T r e a s u r y R e p o r t . 1 8 5 8 , P» 1&.

20

h ad a u t h o r i z e d a § 2 0 m i l l i o n f i f t e e n - y e a r 5 - p e r c e n t l o a n . 1 Ten m i l l i o n s o f t h a t l o a n h ad been p r o m p tly d i s p o s e d o f i n t h a t same m onth . 2 had b e e n s o l d .

A y ear l a t e r , n e a r ly a l l of th e b alan ce

W hether t h e l a t t e r p a r t o f t h e i s s u e was

moved l e s s e a s i l y i s n o t c l e a r , b u t t h e S e c T re 'ta ry ' s r e p o r t o f i t s n e g o t i a t i o n shows no d i s s a t i s f a c t i o n o r c o n c e r n . 3 M o reo v e r, th e e n t i r e i s s u e was f i n a l l y s o l d a t an a v e r a g e premium o f 3*59 p e r c e n t . ^

When, i n th e autumn o f 1 S 6 0 , i t

s u d d e n ly a p p e a re d t o be im p o s s ib le t o s e l l bonds on s a t i s ­ f a c t o r y t e r m s , S e c r e t a r y Cobb I n d i c a t e d t h a t h i s e x p e c t a ­ t i o n s had n o t b een r e a l i z e d . 5

As shown a b o v e , he t h e n

s o u g h t and r e c e i v e d a u t h o r i t y to i s s u e T r e a s u r y n o t e s . S e c r e t a r y C o b b 's e s t i m a t e o f th e u s e f u l n e s s an d t h e a d v a n ta g e s o f T r e a s u r y n o t e s — w e l l i n a d v a n c e o f S e c r e t a r y C h a s e 's e l a b o r a t e employment o f them d u r i n g th e war — a s w e l l a s t h e r e s o r t t o o n e - and tw o - y e a r T r e a s u r y n o t e s a t v a r i o u s tim e s l o n g b e f o r e h i s a d m i n i s t r a t i o n , ^ were s t r o n g i l l S ta tu te s . 365. 2T r e a s u r y R e p o r t . I 8 5 S, p . 1 5 . 3T r e a s u r y R e p o r t . 16 59, p p . 1 0 , 21. *^This i s n o t s t a t e d i n th e 1659 T r e a s u r y R e p o r t . b u t i s shown i n l a t e r R e p o r t s i n t h e S ta te m e n t o f t h e O u ts ta n d in g P r i n c i p a l o f t h e P u b l i c D e b t. For ex am p le, C f . T r e a s u r y R e p o r t . 1 9 1 ^ , p . 201. 5T r e a s u r y R e p o r t . 1 6 6 0 , p . 6 . ^ T r e a s u r y n o t e s h ad p la y e d an im p o r t a n t p a r t i n t h e f i n a n c i n g o f t h e War o f 16 12. A ls o , b e tw e e n I 837 an d 164-7 t h e r e w ere numerous i n s t a n c e s i n w h ic h o n e - an d tw o - y e a r T r e a s u r y n o t e i s s u e s w ere a u t h o r i z e d by C o n g r e s s . See S t a t e m e n t o f t h e O u ts ta n d in g P r i n c i p a l o f t h e P u b l i c D e b t, T r e a s u r y R e p o r t . 1914-, p . 2 0 1 * and R a f a e l A. B a y l e y , The N a t i o n a l Loans o f t h e U n ite d s t a t e s (G overnm ent P r i n t i n e PfT l'o e n raelgnglonTT G8 S T7 ~Sd~e 2T. , pp . 6 7 - 7 5 .

21

p r e c e d e n t s f o r th e m I n l a t e r

fin a n c in g .

h is re q u e st fo r a u th o rity to

Is s u e such n o te s ,

p a rtia l fa ilu re

A f t e r c o m m e n tin g o n fo llo w in g th e

o f th e bond is s u e o f f e r e d in S e p te m b e r, i 8 6 0 ,

S e c r e t a r y Cobb s t a t e d : I make t h i s r e c o m m e n d a t i o n o f s u b s t i t u t i n g t r e a s u r y n o t e s f o r s t o c k t h e m ore r e a d i l y fro m th e c o n v i c t i o n t h a t t h e r e s h o u ld a lw a y s e x i s t i n t h e d e p a r tm e n t pow er t o i s s u e t r e a s u r y n o t e s f o r a l i m i t e d a m o u n t, u n d e r t h e d i r e c t i o n o f t h e p r e s i d e n t , to m eet u n f o r e s e e n c o n ti n g e n c i e s . It i s a p o w e r w h ic h n e v e r c a n b e a b u s e d , a s t h e am ount r e a l i z e d from s u c h s o u r c e c a n o n ly b e u s e d t o m eet l a w f u l dem ands u pon t h e t r e a s u r y . No S e c r e t a r y o f t h e T r e a s u r y o r P r e s i d e n t w o u ld e v e r e x e r c i s e i t e x c e p t c o m p e l l e d t o d o s o by th e e x ig e n c ie s o f th e p u b lic s e r v ic e . On t h e o t h e r h a n d , i t w o u ld e n a b l e t h e g o v e r n m e n t t o m eet w ith o u t em b a rrassm en t th o se sudden r e v u l ­ s i o n s t o w h ic h t h e c o u n tr y i s a lw a y s l i a b l e , and w h ic h c a n n o t a lw a y s be a n t i c i p a t e d . 1

I n t h e R e p o r t o f t h e S e c r e t a r y o f t h e T r e a s u r y ^ w h ic h w as s u b m i t t e d t o t h e s p e c i a l s e s s i o n o f C o n g r e s s when i t c o n v e n e d J u l y 4-, 1 8 6 l , t h e s t a t u s o f t h e p u b l i c d e b t a t t h e com m encem ent o f t h e C i v i l War w as shown a s f o l l o w s : M a rch 7 . 1 8 6 1 P erm anent d e b t . . # 5 9 ,9 9 2 ,8 8 7 .6 4 T reasu ry n o te s .. 1 6 .4-6 2.4-11.64I

7 6 ,4 5 5 ,2 9 9 .2 8

J u l y 1 . 1861 $

7 0 ,2 5 6 ,1 6 7 .0 4 2 0 . 6 1 1 .6 6 1 .6 4 -

$

9 0 ,S 6 7 , 82S . 6S

^-T r e a s u r y R e p o r t , i 8 6 0 , p . 9 . 2 S e n . E x . D o c . No. 2 , 3 7 t h C o n g . , 1 s t S e s s . , p . 1 8 .

CHAPTER I I I DEBT POLICIES OF THE WAR N e i t h e r S e c r e t a r y C hase n o r t h e P r e s i d e n t f o r e s a w a lo n g w ar.

F o r n e a r l y a g e n e r a t i o n no g ra v e and lo n g - c o n ­

t i n u e d p ro b lem s o f p u b l i c f in a n c e had s t i m u l a te d g e n e r a l d is c u s s io n o r c a l l e d f o r t h and c lo th e d w ith e x p e rie n c e th e m ost a b le f i n a n c i e r s .

The n a t i o n a l t r a i t s

o f o p tim ism and

"Y ankee i n g e n u i t y " , a s w e ll a s l a c k o f any w id e s p re a d u n d e r­ s t a n d i n g o f t h e n a t u r e o f money a n d c r e d i t , m u st h a v e f o r ­ tifie d

s t r o n g l y th e i n c l i n a t i o n t o f i n a n c e t h e w ar a lo n g

t h o s e l i n e s w h ic h , e x p e n siv e .

s p e c i o u s l y , se e m e d e a s i e s t a n d l e a s t

The l e s s o n o f h i s t o r y , a s r e c e n t l y a s t h e War

o f 1 8 1 2 , w as o v e r l o o k e d — t h a t t h e f a i l u r e t o e n a c t a d e q u a t e re v e n u e m easures and th e r e s o r t to

e x c e ssiv e is s u e s of

T r e a s u r y n o t e s 1 m ig h t w e l l have l e d t o d i s a s t e r h a d t h a t w ar c o n tin u e d lo n g e r .

^•See, f o r ex am p le, The B a n k e r s ' M agazine and s t a t i s ­ t i c a l R e g i s t e r , A ugust 1561, "Vol. XixT No7 2, p p . 81-82; a n d A l b e r t B u s h n e ll H a r t , salm on P o r t l a n d Chase (Houghton M i f f l i n Company, B o s to n , n . d . ) , p . 24Z~. "The p o l i c y o f c a r r y i n g on a war by means o f c r e d i t was a d o p te d i n th e U n ite d S t a t e s i n 1812 a n d a g a i n i n 1861, and i n b o th c a s e s p r o v e d t o be weak and i n e f f i c i e n t . " H enry C a r t e r Adams, The S c ie n c e o f F in a n c e ; a n I n v e s t i g a t i o n o f P u b l i c Expend­ i t u r e s and- P u b l i c R evenues (Henry H o lt and- Company, New f o r k , 1B93) , p . 5o 6. ( 22)

23

F o llo w in g th e r e p o r t o f th e S e c r e ta r y o f th e T re a su ry , made on J u l y 4 ,

1 8 6 1 ,1 t o th e

s p e c ia l s e s s io n of C ongress,

t h e l o a n m e a s u r e s o f J u l y 17 a n d A u g u s t 5 w e r e e n a c t e d . 2 T h e s e a c t s w e r e c l o s e l y I n a c c o r d a n c e w i t h s u g g e s t i o n s made by th e S e c r e ta r y . m illio n

He w as a u t h o r i z e d t o I s s u e u p t o $250

In t h r e e - y e a r 7 .3 - p e r c e n t T re a su ry n o te s o r in

tw e n ty -y e a r bonds w ith I n t e r e s t n o t e x c e e d in g 7 p e r c e n t . The t h r e e - y e a r n o t e s w e r e made e x c h a n g e a b l e a t a n y t i m e f o r t w e n t y - y e a r 6- p e r c e n t b o n d s .

I t was a l s o p r o v i d e d t h a t

$50 m i l l i o n o f t h e t o t a l a m o u n t a u t h o r i z e d m i g h t t a k e t h e form e i t h e r o f n o n - i n t e r e s t - b e a r i n g T r e a s u r y n o t e s ,

In

d e n o m i n a t i o n s o f f ro m #5 t o $ 5 0 , p a y a b l e on dem and a n d re c e iv a b le fo r a l l p u b lic d u es, o r o f 3 .6 5 -p e rc e n t n o te s , p a y a b le in one y e a r ,

and f u n d a b le In to T r e a s u r y n o t e s w ith

d e n o m in a tio n s above #50. by th e S e c r e t a r y ,

A lso in a c c o rd a n c e w ith a p r o p o s a l

$100 m i l l i o n o f t h e b o n d s a u t h o r i z e d by

t h e a c t o f J u l y 17 m ig h t b e n e g o t i a t e d i n E u r o p e . 3 B e f o r e g i v i n g c o n s i d e r a t i o n t o th e m anner i n w h ich a c o n s i d e r a b l e p a r t o f t h e l o a n was p l a c e d , a n d t h e c i r c u m ­ s ta n c e s a tte n d in g th e t r a n s a c ti o n ,

two s i g n i f i c a n t e x p r e s ­

s io n s o f f i n a n c i a l p o l ic y sh o u ld be c o n s id e r e d .

B o th o f

th e m a p p e a r e d i n t h e S e c r e t a r y ' s r e c o m m e n d a t i o n s t o C o n g r e s s ,

^ S e n . E x . D o c . No. 2 . 3 7 t h C o n g . , 2i2 S t a t u t e s . 259, 313. 3!2 S ta tu te s .

259.

1 st Seas.

24

a n d b o t h w e re a d o p t e d b y t h a t b o d y I n t h e a b o v e - m e n t i o n e d e n a c tm e n ts. EFFORTS TO OBTAIN FUNDS IN EUROPE The f i r s t o f t h e s e was t h e p r o v i s i o n

t h a t |1 0 0 m il l io n

o f th e b o n d s a u t h o r i z e d c o u ld be s o ld i n E urope. f i n a n c i a l a i d fr o m E u r o p e ,

That

e s p e c i a l l y fro m E n g la n d , d i d n o t

m a t e r i a l i z e i s n o t p ro o f t h a t t h i s p r o v is io n in th e lo a n a u t h o r i z a t i o n was m e r e l y a f o n d h o p e . th e

I n t h e summer o f 186 1

s u s p e n s i o n o f s p e c i e p a y m e n ts b y t h e b a n k s a t t h e y e a r ^

e n d , f o l l o w e d s o o n a f t e r by t h e s u s p e n s i o n o f s u c h p a y m e n ts a t th e T re a su ry , and th e consequ en t i n j u r y to b o th p u b lic and p r i v a t e c r e d i t ,

ms

sc a rc e ly fo re s e e n .

a f f a i r , 3- w h ic h becam e known l a t e

The T r e n t

in th e y e a r, had n o t y e t

c r y s t a l l i z e d E n g l i s h s e n tim e n t a g a i n s t t h e U n io n .

A lth o u g h ,

I n 1 8 6 1 , b o t h t h e L ondon T im es a n d t h e London E c o n o m i s t saw s m a ll c h a n c e f o r v i c t o r y by t h e U n io n , a n d th o u g h t h e E n g l i s h a r i s t o c r a c y h e a r t i l y f a v o r e d t h e c a u se o f th e S o u th , t h e m a j o r i t y o f t h e E n g l i s h p e o p l e a p p e a r t o h a v e b e e n more h o s t i l e to th e

S o u th th a n t o t h e N o r th .^

S la v e ry a s an

i n s t i t u t i o n was g e n e r a l l y d i s a p p r o v e d o f i n E n g l a n d . 3 P r o f e s s o r B a r r e t t p o i n t s o u t t h a t some s m a l l p u r c h a s e s

■^Thomas L e G ra n d H a r r i s , The T r e n t A f f a i r (T h e BowenM e r r i 11 com pany, I n d i a n a p o l i s , 1 8 9 6 ) , p p . 3 7 - 1 1 5 . 2

An a n a l y s i s o f t h e E n g l i s h a t t i t u d e t o w a r d A m e ric a n l o a n s d u r i n g t h e f i r s t y e a r o f t h e w ar i s g i v e n i n B a r r e t t , oj!^. c i ^ * | PP • 41—4 4 . 3 S e e R o b e r t J . W a l k e r , A m e ric a n S l a v e r y a n d F i n a n c e s . 3 d e d . ( W i l l i a m R id g w a y , L on d o n , 1 8 6 4 j ^

25

o f t h e 7 . 3 - p e r c e n t T r e a s u r y n o t e s w e re a c t u a l l y made a t a b o u t t h a t t i m e b y E u r o p e a n s , a n d t h a t I n S e p te m b e r t h e h o u s e o f B a r i n g s s t a t e d t h a t t h e E n g l i s h p e o p l e w o u ld be q u i t e w i l l i n g t o t a k e a p a r t o f t h e l o a n b e i n g a s s u m e d by t h e A m e r ic a n b a n k s , *

He a d d s t h a t a l t h o u g h a d e q u a t e p r o o f

i s l a c k i n g , r e p o r t s w e r e c u r r e n t i n O c t o b e r a n d N ovem ber t h a t E n g l i s h I n t e r e s t s h a d made t h e p r o p o s a l t o S e c r e t a r y C h a s e t h a t t h e y w o u ld t a k e #100 m i l l i o n a t 6£ p e r c e n t . ^ Thus i t

a p p e a r s t h a t d u r i n g t h e few m o n th s b e f o r e t h e T r e n t

a ffa ir,

a n d i n t h e fe w m o n th s a f t e r i t s

p a rtic u la rly

a d ju s tm e n t, b u t

d u r i n g t h e f o r m e r p e r i o d — t h e au tum n o f 18 61 —

t h e U n io n m i g h t h a v e p l a c e d l o a n s I n E n g l a n d , a l t h o u ^ i u n d o u b te d ly a t c o n s id e r a b le d is c o u n t.

In t h e s p r i n g o f

1 8 6 2 E n g l i s h s e n t i m e n t h a d becom e m ore f a v o r a b l e , in th e y e ar i t

but la te r

ag ain d e te r io r a te d .®

I n 1 8 6 3 S e c r e t a r y C h a s e i n d u c e d R o b e r t J . W a l k e r , who had h e ld th e T re a su ry p o r t f o l i o under P o lk , s p e c i a l re v e n u e a g e n t in E u rope. c u l a r l y i n E n g la n d , im m e d ia te ,

H is e f f o r t s t h e r e ,

in 1863 and 1864,

ta n g ib le r e s u l t s .

to serv e a s a p a rti­

d id n o t y ie ld

He was m ore t h e p r e s s a g e n t

^Don c. B a r r e t t , The g r e e n b a c k s a n d R e s u m p ti o n o f S p e c i e P a y m e n t s . 1 8 6 2 - 1 6 7 9 (H a rv a rd . U n i v e r s i t y £ r e s s , C a m b r i d g e , 1 9 3 l ) , p . 451 He c i t e s t h e B o s t o n A d v e r t i s e r , S e p t e m b e r 16 a n d N ovem ber 2 5 , 1 8 6 1 . 2 I d e m . He c i t e s t h e B o s t o n A d v e r t i s e r , O c t o b e r 2 1 a n d 2 2 , 1 8 6 1 ; t h e New Y o rk J o u r n a l o f C om m erce. November 1 5 a n d 1 6 , 1 8 6 1 ; a n d t h e L ondon S p e c t a t o r , November 2 , 1 8 6 1 . ® Ib ld . ,

p p . 43—4 4 .

26 a n d p r o p a g a n d i s t e x t r a o r d i n a r y , ' 1" h i s o b j e c t b e i n g t o dam age th e c r e d i t o f t h e S o u th and e n h an c e t h a t o f th e N o rth t h r o u g h p th e w r i t t e n an d spoken w o rd . Two r e p r e s e n t a t i v e s o f t h e Navy D e p a r t m e n t , A s p i n w a l l a n d F o r b e s ,

w e re s e n t t o London i n

t h e s p r i n g o f 1 863 t o n e g o t i a t e a l o a n w i t h B a r i n g s ,

th e

p ro c e ed s to be u sed in p r e v e n tin g th e s a le o f c e r t a i n v e s s e ls to

th e C o n fed eracy .

H a v in g l i t t l e

war

s u c c e s s th ey

r e t u r n e d w i t h i n a few m o n t h s . 0 I t w as i n

t h e l a t t e r h a l f o f 1863 t h a t Js.y C o o k e ,

a c tin g as s p e c ia l ag en t o f th e T re a su ry ,

c o n d u c te d th e

h i g h l y s u c c e s s f u l c a m p a ig n f o r p o p u l a r s u b s c r i p t i o n t o n e a r l y |5 0 0 m i l l i o n o f th e f i v e - t w e n t i e s .

W h il e t h i s

s a le of th e

b o n d s was i n p r o g r e s s h e w as u r g e d r e p e a t e d l y , b o t h by h i s b r o t h e r H enry — a p a r t n e r i n h i s a tte m p t th e

firm — and by o t h e r s ,

to

s a le o f a s u b s t a n t i a l b lo c k o f th e s e c u r i t i e s

i n E uropean m a r k e ts ,

"but he r e s i s t e d

o f such a d v i s o r s on p a t r i o t i c

a l l th e im p o rtu n itie s

p r i n c i p l e s . 1,4

Some e x p r e e -

^"For h i s l e t t e r s o f p r o p a g a n d a , w h ic h w e r e w i d e l y c i r c u l a t e d i n E n g l a n d , se e R o b e r t J , W a l k e r , A m e r ic a n S la v e r y and F in a n c e s , 3a e d . (W illia m R id g w ay , London, 1 8 6 4 ) . 2

* . . . n e i t h e r C h a s e n o r W a lk e r c o n s i d . e r e d a n I m m e d ia te l o a n t h e m ost i m p o r t a n t o b j e c t i v e . The i m m e d i a t e e x i g e n c y w as t o s t r i k e a d a m a g in g b l o w a t t h e c r e d i t o f t h e S o u t h . " S e e Amos E . T a y l o r , " W a l k e r ' s F i n a n c i a l M i s s i o n t o London on B e h a lf o f th e N o rth , 1 8 6 3 -1 8 6 4 ," J o u r n a l o f E c o n o m ic a n d B u s i n e s s H i s t o r y . N o v e m b e r, 1 9 3 0 , V o l . I l l , No. I , p . 3 5 T . Ib id ..

p p . 30 3 -3 0 4 ,

311.

^ E l l i s P ax o n O b e r h o l t z e r , J a y Cooke, F i n a n c i e r o f th e C i v i l War ( O e o r g e W. J a c o b p & C o . , P h i l a d e l p h i a , 190*77 2 V o ls. V o l. I , p p . 2 8 5 -2 8 6 .

27 s i o n s o f i n t e r e s t w ere b e in g r e c e i v e d fro m E n g lis h I n v e s t o r s ; and in F e b ru a ry ,

1864,

s m a l l s h i p m e n t s o f b o n d s w e re s e n t t o

W illia m E vans,

a banker th e re ,

W ith r e g a r d t o

th is

b y J a y C ooke a n d C om p an y,*

s a le o f a sm a ll q u a n ti t y o f bonds in

E n g l a n d a t t h a t t i m e J a y C o o k e 1s b i o g r a p h e r s t a t e s ; . . . t h e i n c i d e n t , u n p r o d u c t i v e a s i t was o f l a r g e r e s u l t s , i s I n d i c a t i v e o f w hat M r, C o o k e c o u l d a n d w o u ld h a v e d o n e b y a n a p p l i c a t i o n o f h i s m e th o d s i n f o r e i g n c o u n tr i e s , i f he had n o t succeeded in d i s ­ t r i b u t i n g t h e l o a n s a t h o m e. The p re m iu m on g o l d w as s u c h t h a t t h e 5 - 2 0 s w e r e s o l d i n E n g l a n d a t t h i s t i m e f ro m $60 t o | 6 5 f o r a $ 1 0 0 b o n d .*5 The f a i l u r e g re a t d isc o u n t,

to o b ta in fu n d s in E urope, was c e r t a i n l y u n f o r t u n a t e ,

h a p s , be a s c r i b e d t o m a n a g e m e n t, " 3

even i f

at a

a n d may, p e r ­

" th e absence o f p ro p e r f i n a n c i a l

B ut p o p u la r a p p ro v a l o f such f i n a n c i e r ­

i n g , no m a t t e r how u r g e n t t h e n e e d , w a s h a r d l y t o b e a n tic ip a te d .

The tw o w a r s w i t h E n g l a n d w e re n o t f o r g o t t e n

i n t h e p u b l i c m in d ; 4

th e d e m o c ra tic d i s l i k e o f E n g lis h

w ays a n d m a n n e r s was s t r o n g among t h e r u r a l a n d f r o n t i e r p o p u la tio n s.

No d o u b t many w o u ld h a v e f e l t , h o w e v e r

1I b l d . . pp. 288 -2 8 9 . 2Ib id .,

p . 289.

3B a r r e t t ,

o p . c i t . , p . 44•

B l a i n e , op. c i t . , V o l . I I , p p . 4 8 3 - 4 8 5 . 5 S u c h h o s t i l i t y a p p e a r s t o h a v e b e e n m uch l e s s e v i d e n t i n New E n g l a n d , e s p e c i a l l y among t h e m o re e d u c a t e d , t h a n e ls e w h e re . S e e Van Wyck B r o o k s , The F l o w e r i n g o f New E n g l a n d . 1 8 1 5 -1 8 6 5 . r e v . ed . (E .P , D u tto n & C o .. I n c . , l f f i O ) p a ssim .

28 illo g ic a lly ,

t h a t n a ti o n a l p rid e ana d ig n ity haa been

i n j u r e d w e re F e d e r a l b o n d s c h e a p l y s o l d I n a f o r e i g n m a r k e t . S e c r e t a r y C h a s e , f a r m o re a p o l i t i c i a n

th an a f i n a n c i e r ,

may

w e l l h a v e s e n s e d b e f o r e h a n d t h e s e n t i m e n t o f t h e p e o p l e when he f a i l e d to p r e s s v ig o r o u s ly th e

s a le o f U n ite d S ta te s

b o n d s i n Slur o p e . T h i s same n o t i o n ,

t h a t n a t i o n a l d i g n i t y was l o w e r e d i f

l o a n s w e re o f f e r e d b e l o w p a r , 1 e v e n w i t h i n t h e c o u n t r y , fo u n d e x p re s s io n in th e l e g a l - t e n d e r c o n tr o v e r s y . essay,

In t h e i r

“ The L e g a l T e n d e r A c t , “ F r a n c i s A. W a lk e r a n d H e n r y

Adams r e c o g n i z e d t h e p a r t t h i s v i e w p l a y e d i n e n c o u r a g i n g r e s o r t t o th e i s s u e o f g r e e n b a c k s , and th e y em p h a size d th e fa lla c y of i t . 2

E v e n S e c r e t a r y F e s s e n d e n , b e f o r e t h e w ar

h a d e n d e d , w as t o p o i n t o u t t h a t t h e c o u n t r y h a d n o t h a d t o a p p e a l f o r a i d to any f o r e i g n p e o p le , te d i t s

own p o w e r a n d a b i l i t y

t h a t i t h a d d e m o n stra ­

t o p u t down i n s u r r e c t i o n .

"The p e o p l e o f t h e U n i t e d S t a t e s h a v e f e l t a j u s t p r i d e i n t h i s p o s i t i o n b e fo r e th e w o rld ." T hus, th e p la n t o b orrow i n E u ro p e a p a r t o f th e c o s t o f t h e w a r was p r o p o s e d by C h a s e ,

a u t h o r i z e d by C o n g re s s ,

■^See, f o r e x a m p l e , B l a i n e , 0£ . c i t . , V o l . I I , p . 3 2 5 . 2 I n C h a p t e r s o f E r i e , a n d O t h e r E s s a y s ( J a m e s R . Osgood a n d Com pany. B o s t o n , 1 6 7 1 ) , p p . 5 3 1 - 3 3 2 . "In o rd e r to p ro ­ t e c t t h e n a t i o n ^ c r e d i t fro m d e g r a d a t i o n i n t h e h a n d s o f b a n k e r s and b r o k e r s , t h e g o v ern m en t u n d e r to o k t o d i s h o n o r i t o f i t s own f r e e w i l l . " 3 T re a su ry R e p o r t. 1864, p . 1 7.

29

a n d a n t i c i p a t e d b y A m e r i c a n b a n k e r s a n d b y many o f t h e p e o p le ,

yet i t

was n o t f o l l o w e d o u t — d e s p i t e c o n s i d e r a b l e

e v id e n c e t h a t a t c e r t a i n (th o u g h p o l i t i c a l l y

t i m e s s u c h b o r r o w i n g was f e a s i b l e

in e x p e d ie n t).

VACILLATION IN INTER EST-RATE POLICY A n o th e r p o l i c y in c o n n e c tio n w ith t h i s

f i r s t la rg e

l o a n a u t h o r i z a t i o n o f t h e w ar f a v o r e d a r e l a t i v e l y h i g h r a t e of in te re s t.

(T h is p o lic y ,

a u th o r i z e d by C o n g re s s .3 )

a ls o ,

w as p r o p o s e d by C h a s e 2 a n d

The f i r s t

t h e i s s u e o f a s m uch a s #250 m i l l i o n

lo a n a c t p ro v id e d f o r in th re e -y e a r 7 .3 -p e rc e n t

T re a su ry n o te s or tw e n ty -y e a r bonds w ith i n t e r e s t n o t exceed­ in g 7 p e rc e n t. 4

T h ese w ere r e a l i s t i c

In te re st ra te s;

f r o m t h e com m ents o f t h e S e c r e t a r y r e g a r d i n g th em i t

and w o u ld

seem t h a t h i s l a t e r u n w i s e a n d s t u b b o r n 5 d e t e r m i n a t i o n t o

■ ^ B a r r e tt ,

op. c i t . ,

p . 42, e t s e q .

2 S e n . E x. D o c . N o. 2 , 3 7 t h C o n g . , 312 S t a t u t e s , 259,

1 s t S e s s .,

pp.

1 2 -1 3 .

313.

^Aot o f J u l y 1 7 , 1861 (1 2 S t a t u t e s . 2 5 9 ) . The s u p p l e ­ m e n t a r y l o a n l e g i s l a t i o n , A c t o t A u g u s t 5 , 1861 ( 1 2 S t a t u t e s , 3 1 3 ) , made t h e t h r e e - y e a r 7 . 3 - p e r c e n t n o t e s e x c h a n g e a b l e f o r t w e n t y - y e a r b o n d s b e a r i n g 6- p e r c e n t i n t e r e s t . T h i s b e co m es a p p a r e n t a s o n e f o l l o w s t h e c o u r s e o f S e c r e t a r y C h a s e * s p o l i c i e s , a n d i t i s c o n c u r r e d i n b y many w r i t e r s on t h e s u b j e c t . S e e , f o r e x a m p l e , E l b r i d g e G. S p a u l ­ d i n g , H i s t o r y o f t h e L e g a l T e n d e r P a p e r Money I s s u e d D u r i n g t h e G r e a t R e P e l T l o n ( f i x p r e s s P r i n t I n g Com pany, B u f f a l i f 1 8 o 9 ) , p p . 1 - 1 1 ; B o l l e s , o p . c i t . , p p . 9 7 -9 8 an d 1 03-111; D a v is R i c h Dewey, F i n a n c i a l H T s t o r y o f t h e U n i t e d S t a t e s , 1 2 t h e d . ( L o n g m a n s, G re e n a n d C o . , New Y o r k , L ondon / e t c . / , 1 9 3 4 ) , p p . 3 0 7 - 3 0 9 ; B a r r e t t , o p . c i t . , p p . 3 2 - 3 3 ; L o v e, o p . c i t . , p p . 7 6 - 7 7 ; H a r v e y E . F l a k , Our P u b l i c D e b t ( B a n k e r s T r u s t C om pany, New Y o r k , 1 9 1 9 ) , p . 37;" a n d W i l l i a m J . S h u l t z a n d M. R . C a i n e , F i n a n c i a l D e v e lo p m e n t o f t h e U n i t e d S t a t e s ( P r e n t i c e - H a l l , I n c . , New Y o r k , 1 9 3 7 ) , p p . 3 0 0 - 3 0 1 .

30

borrow a t

s u c c e e d in g ly lo w e r r a t e s had n o t y e t b een form ed.

In h is r e p o r t

to th e s p e c i a l s e s s io n o f C o n g re ss,

1861, h e s t a t e d ,

J u ly 4,

In u r g i n g th e 7 . 3 - r a t e o f I n t e r e s t :

The I n t e r e s t o f s e v e n and t h r e e - t e n t h s I s s u g g e s te d , b ecau se I t Is l i b e r a l to th e s u b s c r ib e r , c o n v e n ie n t f o r c a l c u l a t i o n , and, u n d e r e x is ti n g c irc u m s ta n c e s, a f a i r r a t e f o r th e g o v e rn m e n t. I t i s b e n e f i c i a l t o t h e w h o le p e o p l e t h a t a l o a n d i s t r i b u t e d among t h e m s e l v e s s h o u l d be so a d v a n t a g e o u s t o t h e t a k e r s t o I n s p i r e s a t i s f a c t i o n and h o p e s o f p r o f i t r a t h e r t h a n annoyance and f e a r s of l o s s ; and, i f th e r a te o f i n t e r e s t p r o p o s e d b e som ew hat h i g h e r t h a n t h a t a llo w e d In o r d in a r y tim e s , i t w i l l n o t b e g r u d g e d t o t h e s u b s c r i b e r s when i t i s r e m e m b e r e d t h a t t h e I n t e r e s t on t h e l o a n w i l l go i n t o t h e c h a n n e l s o f home c i r c u l a t i o n , a n d I s t o r e w a r d t h o s e who come f o r w a r d I n t h e h o u r o f p e r i l t o p l a c e t h e i r m eans a t t h e d is p o s a l of t h e i r c o u n try . Y e t a s t h e war c o n ti n u e d C hase to o k g r e a t p r i d e in o a c h i e v i n g l o w e r r a t e s o f i n t e r e s t on s u c c e e d i n g l o a n s . " N o r w o u ld h e c o n s e n t t o

s e l l b o n d s a t w h a t t h e y w o u ld

b r i n g o n t h e m a r k e t when t o o lo w a n I n t e r e s t r a t e u n a ttr a c tiv e f o r p u b lic

su b s c rip tio n .

made them

He s e e m s n o t to h a v e

r e a l i z e d t h a t a c t u a l l y t h e T r e a s u r y was s e l l i n g i t s

bonds

a t a v e ry g r e a t d is c o u n t In term s of th e d e p r e c i a t i n g g re e n ­ b a c k s p a i d f o r th e m . 7 .3 -p e rc e n t, fin a lly

A lth o u g h th e f i r s t

su c c e e d in g lo a n s b ore r a t e s o f 7 , 6,

5 p e rc e n t.

and

The l a r g e a m o u n ts o f U n i t e d S t a t e s n o t e s

and f r a c t i o n a l c u rre n c y ,

o f c o u r s e , b o r e no i n t e r e s t H e

^ S e n . E x . D o c . No. 2 , 3 7 t h C o n g ., p T re a su ry R e p o rt. 1863, p. 13. ^Idem .

l o a n w as s o l d a t

1 st S e s s .,

p p . 12 -1 3 .

31 w as p r o u d o f w h a t h e r e g a r d e d a s h i s a c h i e v e m e n t i n m a i n t a i n ­ i n g lo w i n t e r e s t r a t e s on t h e d e b t . - 1p e rc e iv e th e r e l a t i o n tro u s s ta te in to

A p p a re n tly h e f a i l e d to

of h i s p o l i c i e s to th e n e a r ly d i s a s ­

w h ic h t h e T r e a s u r y h a d f a l l e n .

The f i r s t a c t u a l w a r l o a n was a u t h o r i z e d i n t h e a c t s o f J u l y 17 a n d A u g u s t 5, 1 8 6 1 , r e f e r r e d

to above.

Under

t h e s e a u t h o r i z a t i o n s t h e i s s u e o f $150 m i l l i o n 7 , 3 - p e r c e n t t h r e e - y e a r T r e a s u r y n o t e s was u n d e r t a k e n . was o p e n e d t o p u b l i c c e rta in

su b s c rip tio n i t

A lth o u g h th e lo a n

w as u n d e r w r i t t e n by

e a s t e r n b a n k s w h ic h w e re c o m m i t t e d t o a d v a n c e

i n s t a l m e n t s o f $50 m i l l i o n a t tw o - m o n th I n t e r v a l s , m e n t t o be made t o th e m b y t h e T r e a s u r y a s p u b l i c t i o n s w e re r e c e i v e d .

su b sc rip ­

O nly $45 m i l l i o n o f t h e f i r s t

I n s t a l m e n t c o u ld be s o l d , a s w e ll as a l l o f th e

re im b u rse ­

and th e b an k s to o k th e r e m a in d e r

second i n s ta lm e n t h o p in g to d is p o s e

o f th e m t o t h e i r c u s t o m e r s . ^

In p la c e o f th e t h i r d

in sta l­

m e n t t h e b a n k s t o o k 6- p e r c e n t l o n g - t e r m b o n d s a t a p r i c e t o y i e l d 7 p e r c e n t ,*5 H ere a g a in ,

th e n ,

i s a n i n s t a n c e i n w h ic h a p a r t i c u l a r

^Idem . 2 S h u ltz and C a in e , o p . c i t . , p p . 294-295.

3

B a rre tt,

op. c i t ..

p. 9

32

p o l i c y , 1 d e t e r m i n e d u p o n a n d u r g e d , was r e v e r s e d a n d t h e r e v e r s a l stu b b o rn ly ad hered to ,

to th e d e trim e n t o f th e

c o u n tr y 's f in a n c e s and C h ases* s r e p u t a ti o n a s a f i n a n c ie r among t h o s e who u n d e r s t o o d s u c h m a t t e r s . re p e a te d ,

a s w i l l be shown f u r t h e r o n ,

i n s t a n c e s i n w h ic h t h e

p

T h i s p a t t e r n was

in o th e r im p o rta n t

S e c r e t a r y d o m in a te d .

DEBT POLICY AND THE SUSPENSION OF SPECIE PAYMENTS B e tw e e n M arch a n d J u l y ,

1861, th e a d m i n i s t r a t io n had

b e e n o b l i g e d t o r e l y on u n u s e d l o a n a u t h o r i z a t i o n s u n d e r t h e a c t s o f J u n e 2 2 , i 8 6 0 , F e b r u a r y 8 , 1 8 6 1 , a n d M arch 2 , 3 1861. T he i n c r e a s e d i m p o r t d u t i e s p r o v i d e d b y t h e A c t o f M arch 2 s t r e n g t h e n e d t h e G o v e r n m e n t 's c r e d i t t o a n d made p o s s i b l e t h e

some e x t e n t

s a l e o f $ 3 , 0 9 9 , 0 0 0 m ore o f t h e b o n d s

a u t h o r i z e d on F e b r u a r y 8 a t p r i c e s r a n g i n g f r o m 9 4 t o p a r . T h e s e w e re n e g o t i a t e d o n A p r i l 2 .

On May 31 a n a d d i t i o n a l

$ 7 , 3 1 0 , 0 0 0 o f t h e b o n d s w e re s o l d a t a n a v e r a g e p r i c e o f

B o l l e s s a y s o f t h i s p o l i c y o f C h a s e ; "A f i n a n c i e r * n e v e r l i v e d d i s l i k i n g a f i n a n c i a l s y s t e m o r p o l i c y so s t r o n g l y a s f i r . C h a s e , who, n e v e r t h e l e s s , so p e r s i s t e n t l y f o l l o w e d i t , a n d who w i t h e q u a l p e r s i s t e n c e c o n t i n u e d t o t a k e t h o s e s t e p s w h ic h w o u ld c o m p e l h im t o f o l l o w i t . He f o r c e d h i m s e l f i n t o t h e t r a p , a n d was c o n t i n u a l l y w e a v in g t h e web t i g h t e r , t h u s m a k in g r e l e a s e more a n d m ore d i f f i c u l t . A s a d d e r e x a m p le o f f i n a n c i a l h e l p l e s s n e s s h a s b e e n r a r e l y se e n ." 0£. c i t . , p . 98. 2 S e e L o v e , o p . c i t . , p p . 7 6 - 7 7 : a n d B a n k e r s * M a g a z in e , A u g u s t , 1 8 6 4 , VoT. pp. 8 1-82. 3 l2 S ta tu te s , 79,

129,

178, re s p e c tiv e ly ,

33

& 5.3^»

M e an w h ile , f i v e m i l l i o n

o f T reasu ry n o te s a u th o riz e d

b y t h e A o t o f M a rc h 2 h a d b e e n s o l d w i t h some d i f f i c u l t y o n A p r i l 11 a n d s o o n t h e r e a f t e r . 1

I t was i n c o n n e c t i o n w i t h t h i s s a l e o f T r e a s u r y n o t e s t h a t t h e r e d e v e lo p e d a n o t h e r f i n a n c i a l p o l i c y o f t h e S e c r e t a r y w hich was t o h av e f a r - r e a c h i n g c o n s e q u e n c e s .

He i n s i s t e d t h a t th e

n o t e s u n d e r w r i t t e n by th e b a n k s be p a i d f o r i n s p e c i e .

Chase

c o n s i d e r e d h i m s e l f a " h a rd money" man; and he d i d n o t r e l i s h t h e p r o s p e c t o f a c c e p t i n g ban k n o t e s a t th e T r e a s u r y . E s p e c i a l l y i n t h e w e s t e r n p a r t o f t h e c o u n try t h e n o t e I s s u e s o f some b an k s w ere n o t w e ll s e c u r e d . ^

The t r a d i t i o n o f t h e

I n d e p e n d e n t T r e a s u r y system was f i x e d f i r m l y i n h i s m ind.

It

h a s b ee n s u g g e s te d t h a t h i s p l a n f o r a n a t i o n a l b a n k in g sy stem may have c o n t r i b u t e d to h i s o p p o s i t i o n to th e i n c r e a s e i n S t a t e b a n k - n o te c i r c u l a t i o n w h ich would have r e s u l t e d had m e d ia o t h e r th a n s p e c i e b e e n a c c e p t a b l e . 3

However t h i s may

h a v e b e e n , i t seems e v i d e n t t h a t he d i d n o t com prehend th e m a g n itu d e o f t h e t r a n s a c t i o n i n te rm s o f t h e s p e c i e a v a i l a b l e ; n o r d i d he s e e t h a t t o draw s p e c i e from th e b an k s and d i s b u r s e i t a b o u t t h e c o u n t r y i n a tim e o f f e a r and i n s e c u r i t y would

1 Knox, p p .

c i t . , p . SO.

p

T h is w ould be p a r t i c u l a r l y t h e c a s e where a p a r t o f t h e s e c u r i t i e s h e l d f o r n o te r e d e m p tio n w ere th e d e p r e c i a t e d bonds o f S o u th e r n S t a t e s . See B o l l e s , p p . c i t . , p p . 2 S -2 9 . ^ S h u ltz and C a in e , p p . c i t . , p . 295*

3*

w eaken t h e f o u n d a t i o n o f t h e w hole b a n k in g s t r u c t u r e . 1

He

seemed, unaw are o f t h e mechanism o f t h e b a n k in g sy stem w h ereb y , th r o u g h t h e u s e o f b i l l s o f e x c h a n g e , c e r t i f i c a t e s o f d e p o s i t , d ra fts,

c h e c k s, and n o t e s , a v e ry l a r g e volume o f b u s i n e s s 2 was t r a n s a c t e d d a i l y . I t i s t h e more r e m a r k a b le t h a t he u n y i e l d i n g l y demanded paym ent i n s p e c i e , n o t o n ly c o n t r a r y to t h e e a r n e s t u r g i n g and a d v i c e o f t h e most a b l e b a n k e rs i n t h e c o u n t r y , 3 b u t con­ t r a r y to o t o a d e f i n i t e p r o v i s i o n i n th e A ct o f A ugust 5» 1 8 6 l , ^ w h ich had b een s p e c i f i c a l l y i n c lu d e d t o f r e e him from t h e

lM0 f t h e two e v i l s , a c c e p ta n c e o f b ank n o t e s i n payment o f governm ent d u e s and t h e s u s p e n s io n o f s p e c i e p a y m e n ts, t h e f i r s t , o f c o u r s e , was i n f i n i t e l y t h e l e s s . The m is ta k e o f S e c r e t a r y C hase was i n t h i n k i n g h e c o u ld a v o id b o t h . * See D av id K i n l e y , The H i s t o r y . O r g a n i z a t i o n and I n f l u e n c e o f t h e I n d e p e n d e n t T r e a s u r y o f t h e U n ite d S t a t e s (Thomas Y. C ro w e ll & 5 o , , New ifo rk , 1893/* P* 7 . ^"Were n o t paym ents t o t h e amount o f tw e n ty m i l l i o n s d a i l y e f f e c t e d i n New-York C i t y w i t h o u t c o i n and n o te s ? The d a i l y s e t t l e m e n t o f an a d d i t i o n a l m i l l i o n o r so o f governm ent I n d e b t e d n e s s c o u ld h av e been e a s i l y and s a f e l y e f f e c t e d by em p lo y in g t h e same m a c h in e r y ." B o l l e s , op. c i t . . p p . 3 8 -3 9 . ^See B a r r e t t , o p . c i t . , p p . 9 , 1 3 - 1 ^ ; and B o l l e s , p p . c i t . , p p . IJ-O-lKL. 1l

1 2 S t a t u t e s . 3 1 3« w o rd ing o f t h e a c t c l e a r l y i n d i ­ c a t e s t h a t paym ent r e c e i v e d from th e s a l e o f bonds m ig h t be c r e d i t e d t o th e a c c o u n t o f th e T r e a s u r y by th e b a n k s . S ec­ t i o n 6 s u sp e n d s th e p r o v i s i o n o f t h e I n d e p e n d e n t T re a s u r y A ct o f 1&4-6 "so f a r a s t o a l lo w t h e S e c r e t a r y o f th e T r e a s u r y t o d e p o s i t any o f th e moneys o b t a i n e d on any o f th e l o a n s now a u t h o r i z e d by la w , t o th e c r e d i t o f t h e T r e a s u r e r o f t h e U n ite d S t a t e s , i n su c h s o l v e n t s p e c i e - p a y i n g bank s a s he may s e l e c t . . . " Id em .

35

I n d e p e n d e n t T r e a s u r y law (known a l s o a s t h e S u b - t r e a s u r y law ) w h ich r e q u i r e d t h a t o n ly c o i n be a c c e p t e d a s paym ent to t h e Government .3* The f i r s t m a t e r i a l m is ta k e i n t h e management o f t h e f i n a n c e s , o c c u r r e d when S e c r e t a r y Chase d i s c a r d e d th e u s e o f t h e bank c h e c k , and t h e c l e a r i n g h o u s e , i n t h e f a l l o f 1 6 6 1 . The S e c r e ­ t a r y o f War m ig h t, w i t h t h e same p r o p r i e t y , have r e j e c t e d th e r a i l r o a d , th e l o c o m o t i v e , and t h e te le g ra p h . A n o th e r p o l i c y , w h ic h , i n c o n j u n c t i o n w i t h t h e f o r e g o i n g , c o u ld o n ly h a v e been h a r m f u l , was th e i s s u e o f demand n o te s ( l a t e r r e f e r r e d t o a s " o ld demand n o t e s " ) . a u t h o r i z e d by t h e Loan A ct o f J u l y 1 7 ,

lS 6l,

T hese had been 3 to th e e x te n t

o f 1 5° m i l l i o n , t o b e a r no i n t e r e s t , and t o be r e i s s u a b l e . I n f a c t , by t h i s a u t h o r i z a t i o n p r e c e d e n t was s e t f o r t h e c i r c u l a t i o n o f T r e a s u r y n o t e s a s p a p e r m o n ey .^

They were

i s s u e d d u r i n g t h e same p e r i o d t h a t th e $ 1 5 0 m i l l i o n o f t h r e e y e a r T r e a s u r y n o t e s was b e i n g u n s u c c e s s f u l l y u n d e r w r i t t e n by th e banks.

They w ere s t r o n g l y o b j e c t e d t o by t h e ban k s on

t h e g ro u n d t h a t a s a r e s u l t o f any v e ry l a r g e c i r c u l a t i o n o f them t h e b an k s would " r e c e i v e l e s s g o ld i n t h e i r d a i l y

1 S p a u l d i n g , op c i t . . p p . 1 - ^ ,

6- 1 0 , 1 6 6 - 1 6 9 . See a l s o , W esley C l a i r M i t c h e l l , A H i s t o r y o f th e G reen b ack s (U n iv e r­ s i t y o f C hicago P r e s s , C h ic a g o , 1 9 0 3 ) , p p . 25 - 2 6 , 2

S p a u ld in g , jgp. c i t . , p . 1 .

3 i 2 S t a t u t e s , 259. k See B a r r e t t , o p . c i t . , p . 5 , and Sherm an, o p . c i t . . V o l. I , p . 259? *lEe f i r s t f e e b l e a t t e m p t to c r e a t e a n a t i o n a l c u r r e n c y was t h e i s s u e o f demand n o t e s . . . "

36 b u sin e ss tra n s a c tio n s ,

a n d t h u s w o u ld b e l e s s a b l e t o f u l f i l l

t h e i r lo a n ag reem en t w ith th e g o v e rn m e n t.” 1 T h a t t h e s e tw o p o l i c i e s c o n t r i b u t e d

to th e f in a n c ia l

c r i s i s a n d t h e n e c e s s i t y f o r t h e s u s p e n s i o n o f s p e c i e p a y m e n ts by t h e b a n k s l a t e

i n D e ce m b er o f l S 6l

seem s a p p a r e n t .

The

b a n k e r s o f t h e c o u n t r y p l a c e d t h e b la m e e n t i r e l y u p o n t h e T reasu ry .

Y e t t h e u n d e r l y i n g c a u s e s w e re l a r g e r t h a n t h e s e .

P u b l i c c o n f i d e n c e w a s a t a lo w e b b ; w e ll f o r th e N o rth ;

t h e w a r w as n o t g o i n g

th e T ren t a f f a i r th re a te n e d tro u b le w ith

E n g l a n d ; no a d e q u a t e t a x l e g i s l a t i o n h a d b e e n u n d e r t a k e n t o b o l s t e r th e p u b lic c r e d i t ;

an d s p e c i e was g r a d u a l l y b e in g

d r a i n e d fro m t h e b a n k s t o b e h o a r d e d . ^ THE LEGAL-TENDER ACTS AND THE NATIONAL-BANKING ACTS AS EXPRESSIONS OF DEBT POLICY A l t h o u g h i t w as n o t i n t e n d e d , n o te s

th e is s u e o f U n ited S ta te s

( g r e e n b a c k s ) w as a d e p a r t u r e fr o m o r t h o d o x f i n a n c i n g

i n d u c e d by t h e s u s p e n s i o n o f s p e c i e p a y m e n ts a n d t h e c o n f u s e d and p a n ic k y t h in k i n g o f sta te s m e n fo llo w in g th e o u tb r e a k o f th e w ar.

T hese n o t e s w ere t o hav e a p ro fo u n d i n f l u e n c e upon

th e p r ic e l e v e l ,

th e c o s t o f th e w ar, th e f u tu r e c o u rse o f

b o rro w in g , and th e u l ti m a t e

s iz e o f th e d e b t.

n o t e s s e r v e d a s a fo rm o f m oney, a s o n e i s s u e th e y d e p r e c ia te d r a p i d l y .

fo llo w e d a n o th e r

I t was o n l y a f t e r t h i s d e p r e c i a t i o n

iD e w e y , o p . c i t . . p p . 27 9 - 2 SO. 2I b l d . , p p . 2 S 1 - 2 S 3 .

A lth o u g h th e

37

t h a t t h e p e o p l e w e r e I n c l i n e d t o i n v e s t i n t h e G o v e r n m e n t 's bonds.

A t t h e o u t s e t t h e g r e e n b a c k s h a d b e e n r e g a r d e d by t h e

G o v e rn m e n t a s a f o r m o f d e b t w h i c h I n t i m e w o u ld b e c o n v e r t e d in to lo n g -te rm o b l ig a t io n s ,

in s te a d o f p ro v id in g f o r t h e i r

r e d e m p t i o n a t a g i v e n d a t e C o n g r e s s made th e m c o n v e r t i b l e a i any tim e , a t

th e o p tio n o f th e h o ld e r ,

i n t o 6- p e r c e n t f i v e -

tw e n ty b o n d s. Had t h i s p r o v i s i o n f o r t h e i r c o n v e r s i o n b e e n r e t a i n e d t h e g r e e n b a c k n o t e s w o u ld e v e n t u a l l y h a v e b e e n f u n d e d , a n d t h e r e w o u ld h a v e b e e n no l a t e r p r o b l e m c o n c e r n e d w i t h t h e r e s u m p t i o n o f p a y m e n t o f th e m i n s p e c i e . rig h t

U n fo rtu n a te ly th e

t o e x c h a n g e th e m f o r b o n d s was a b r o g a t e d , a n d t h e p r i ­

v i l e g e t e r m i n a t e d on J u l y 1 , 18t>3.^ "b reach o f p u b lic f a i t h . "

>

It

To many u liis w as a

changed fu n d a m e n ta lly th e

n a t u r e o f t h e n o t e s , ^ a n d made t h e . r e t u r n

10 s p e c i e p a y m e n ts

a slo w and p a i n f u l p r o c e s s . 5

1 1 2 S t a t u t e s . 3^ ,

5 3 2 , 7 1 0 , S2 2 .

^ A c t o f M a rc h 3 , 1 8 b 3 , 1 2 S t a t u t e s . 7 H . ^ B o lle s, o p . c i t . , p . 109. k S e « , f o r e x a m p l e , K no x, o p . c i t . , op. c i t . . pp. g -9.

p . I 3 S; a n d S p a u l d i n g ,

5 "No m e a s u r e f o r r e s u m i n g s p e c i e p a y m e n ts p o s s e s s i n g h i g g le r m e r i t w as e v e r d e v i s e d . I n a t h o u g h t l e s s h o u r i t w as re p e a le d . C o n g r e s s , t h o u g h , when d o i n g t h i s , d i d n o t r e a l i z e th e p o te n c y o f th e m easure f o r r e s t o r i n g th e s p e c ie s ta n d a r d o f p a y m e n t. A l l w ere t h i n k i n g o f t h e a n x io u s p r e s e n t , and le a v in g th e fu tu re fo r o th e rs ." B o lle s, op. c i t . , p . 110. S e e a l s o K n o x , who s a y s , "By t h i s r e p e a l t h e y w e r e made a p erm an en t c i r c u l a t i o n . " O p. c i t . , p . v l .

3*

T hese U n ite d S t a t e s n o t e s ,

c i r c u l a t i n g a s m oney, w ere i n

e f f e c t a fo rc e d lo a n upon th e p e o p le . a n d h a d no r e d e m p t i o n d a t e . n a tio n s.

T hey b o r e no i n t e r e s t

Many w e re i s s u e d i n s m a l l d e n o m i­

T h ey w e r e , b y l a w , t e n d e r a b i e f o r p a y m e n t o f a l l

p u b l i c a n d p r i v a t e d e b t w i t h i n t h e c o u n t r y , e x c e p t d u t i e s on i m p o r t s a n d i n t e r e s t on t h e p u b l i c d e b t . ' 1. fa c t,

The n o t e s w e r e , i n

p r i n t i n g - p r e s s m oney , a n d a s s u c h t h e i r v a l u e i n t e r m s

o f g o ld q u ic k ly d e p r e c ia te d .

u n J u n e pu, I S o 1^ , when t h e w a r­

t i m e e m i s s i o n o f th em c e a s e d , $^31 m i l l i o n w e r e o u t s t a n d i n g . F o r many y e a r s t h e s e g r e e n b a c k s w e r e t o b e a s u b j e c t o f c o n tr o v e r s y , and th e m ag n itu d e o f t h e i r i n f l u e n c e upon th e fin a n c ia l l i f e

o f th e c o u n tr y and upon th e p u b l i c c r e d i t a t 2 c e r t a i n c r i t i c a l t i m e s was t o b e v e r y g r e a t . T h e ir r e l a t i o n to ,

an d t h e i r i n f l u e n c e u p o n , t h e d e b t-m a n a g e m e n t p o l i c i e s

o f t h e G o v e rn m e n t a p p e a r t h r o u g h o u t t h i s

stu d y .

The i n t r o d u c t i o n o f a n a t i o n a l - b a n k - n o t e c u r r e n c y h a d a sa lu ta ry

e f f e c t upon th e m o n e ta ry s i t u a t i o n ,

8to p th e f u r t h e r

issu an ce o f g reen b ack s.

s iv e su p p ly o f t h i s l a t t e r

f o r i t h e lp e d to

I n a way t h e e x c e s ­

fo rm o f c u r r e n c y f a c i l i t a t e d

th e

g r e a t r e f o r m o f t h e b a n k in g and c u r r e n c y sy ste m w h ic h fo u n d e x p r e s s i o n i n t h e N a t i o n a l B a n k in g A c ts o f F e b r u a r y 2 ^ , I 8 0 3 , a n d J u n e 3 » l& b4-.3

T h i s r e f o r m w as S e c r e t a r y C h a s e ’ s g r e a t

a c h ie v e m e n t. 11 2 S t a t u t e s . 3^ 5 . P

c Much h a s b e e n w r i t t e n o n t h e s u b j e c t o f Among t h e b e s t w o r k s a r e t h o s e o f M i t c h e l l , B Newcomb, K n o x , W a lk e r a n d A dam s, H e p b u r n , a n d c e r t a i n p a r t s o f h is T re a su ry R e p o rts f o r th e ^12 S t a t u t e s , b b 5 ; a n d 13 S t a t u t e s . 9 9 .

th e g reen b ack s. a r r e tt, B o lle s, M c C u llo c h ( i n y e a r s 1S65-1S 6S K

39

T h e re was r e a l n e e d f o r a n a t i o n a l c u r r e n c y . 1 t h a t th ro u g h t h e i r p o l ic y o f i n c r e a s e d

I t w as f e l t

c i r c u l a t i o n and lo a n s

t h e S t a t e b a n k s h a d made t h e vo lu m e o f c u r r e n c y i n t h e c o u n t r y e x c e ssiv e .

E x tre m e e x p a n s io n and c o n t r a c t i o n o f b an k i s s u e s

In th e p a s t had l e d t o u n d e sira b le .

th e b e l i e f t h a t

s u c h e l a s t i c i t y w as

Many o f t h e S t a t e b a n k s w e r e n o t c o o p e r a t i n g

w i t h t h e G o v e rn m e n t i n t h e f i n a n c i n g o f t h e w a r .

I t w as b e ­

l i e v e d t h a t a n a t i o n a l b a n k i n g s y s t e m w o u ld do much t o b o l s t e r th e p u b lic c r e d i t ,

as w e ll as to p r o v id e d e p o s i t a r i e s f o r a

p a r t o f th e p u b l i c m oneys. an a i d to th e r e t u r n

to

S e c r e t a r y C h a s e saw i t a l s o a s 2 s p e c ie p a y m e n ts. E s p e c i a l l y Im p o r ­

t a n t w as t h e m a r k e t f o r G o v e rn m e n t b o n d s w h ic h t h e b a n k s w o u ld affo rd .

C h a se e s t i m a t e d t h a t $ 2 5 0 m i l l i o n w o u ld b e n e e d e d t o

secu re th e ir c ir c u la tio n .

W ith p o p u l a r o p i n i o n o p p o s e d t o t h e

S t a t e b an k s, and w ith th e P r e s i d e n t 's a p p ro v a l s u p p o rtin g th e p la n ,

t h e n a t i o n a l b a n k i n g b i l l d u l y b ecam e a la w .-^

1 " A ll t o l d , a b o u t 7 * 0 0 0 d i f f e r e n t k i n d s o f n o t e s c i r c u ­ l a t e d , to say n o th in g o f s u c c e s s f u l c o u n t e r f e i t s . . . I n I6b2 o n l y 25 > b a n k s i s s u e d n o t e s w h i c h h a d n o t b e e n a l t e r e d o r I m i t a t e d . * D ew ey , o p . c i t . . p . 3 2 2 . p M . . . i t i s t h e S e c r e t a r y 's f ir m b e l i e f t h a t by no o t h e r p a t h can th e r e s u m p ti o n o f s p e c i e p a y m e n ts b e so s u r e l y r e a c h e d and so c e r t a i n l y m a in ta in e d ." T re a s u ry R e p o r t. 1 6 6 2 , p. 21.

3See D e w e y , o o « c i t . , p p . 3 2 0 - 3 2 6 ;

2£. c i t . ,

PP.

315-310 .

and S h u l t z a n d C a i n e ,

40

THE SALE OF BONDS AT PAR FOR GREENBACKS S e c r e t a r y C h a s e 's i n s i s t e n c e u p o n s e l l i n g b o n d s a t p a r w h i l e m a i n t a i n i n g a lo w r a t e o f i n t e r e s t on th e m h a d a t f i r s t made t h e w a r b o n d s u n a t t r a c t i v e t o

I n v e s t o r s and

h a d o b l i g e d h im t o r e s o r t t o r e p e a t e d I s s u e s o f s h o r t ­ te rm , l e g a l - t e n d e r , and n o n - i n te r e s t- b e a r i n g o b l ig a t io n s . As t h e g r e e n b a c k p o r t i o n o f t h e d e b t d e p r e c i a t e d , how­ ever

f a l l i n g t o l e s s t h a n f o r t y c e n t s on t h e d o l l a r

i n g o l d by 1 8 6 4 — t h e G o v e r n m e n t 's b o n d s , p a y a b l e p r i n ­ c i p a l an d i n t e r e s t in g o l d , c o u ld be s o ld a t p a r f o r th e g reen backs.

T h is e x tre m e d e p r e c i a t i o n o f t h e c u r r e n c y

a n d o f t h e G o v e r n m e n t 's c r e d i t se em s n o t t o h a v e b e e n e ffe c tiv e ly tio n ,

c o m p re h e n d e d b y a l a r g e p a r t o f t h e p o p u l a ­

fro m whom i t w a s c o n c e a l e d , i n a w a y , b y t h e g e n e r a l

u s e o f t h e p a p e r n o t e s p o p u l a r l y r e g a r d e d a s m oney. . . . a t t h e v e r y t i m e when t h e p rem iu m on g o l d o v e r p a p e r w as a p p r o x i m a t i n g ( o r i n e x c e s s o f) 1 0 0 , th e p u b l i c w ere g r a v e l y con­ g r a t u l a t e d , b o th in C o n g ress and th ro u g h th e p r e s s , t h a t th e tr e a s u r y had n o t been fo rc e d to th e n e c e s s ity o f is s u in g any o f i t s bonds t o s u b s c r i b e r s a t a p r i c e b e lo w p a r . . . 1 I t h a s b e e n e s t i m a t e d t h a t t h e c o s t o f t h e w ar was i n c r e a s e d a t l e a s t $500 m i l l i o n by th e u se o f t h e r a p i d l y

D a v i d A . W e l l s , T he R e c e n t F i n a n c i a l , I n d u s t r i a l , a n d C o su n erclal E x p e r ie n c e s o f th e U n lte d H S ta te s ; a d u r i o u s C h a p t e r T n P o l i t i c o - E c o n o m i c H i s t o r y , z d e d . J j , fl. a n * O. f i . "G o o lse T T j" S e w Y o r F T T B 7 S T 7 p T ‘ 1 5 .

41

d e p re c ia tin g le g a l-te n d e r g reenbacks. 1

But t h e m anner

I n w h i c h t h e w a r w as f i n a n c e d s u g g e s t s t h a t f i n a l l y

th e

e x c e s s i v e c o s t w as s u b s t a n t i a l l y g r e a t e r t h a n t h i s f i g u r e . T h e e x t r a v a g a n t m e th o d w h ic h b o t h C o n g r e s s a n d t h e S e c ­ r e t a r y deem ed i t n e c e s s a r y t o e m p lo y h a s b e e n a p t l y sum­ m a r i z e d by tw o I n f o r m e d c o n t e m p o r a r y o b s e r v e r s ; The g o v e rn m e n t, a d h e r i n g to t h e p o l i c y o f s e l l i n g I t s b onds o n ly a t p a r , was o b l i g e d to c o n s id e r I t s p a p er as th e p a r s ta n d a rd , a n d t h e n e x t s t e p w a s t o I s s u e o f I t s own a c c o r d enough p a p e r to " f l o a t " th e s u c c e s s iv e lo a n s. T h is was e q u i v a l e n t t o s e l l i n g I t s c r e d i t a t th e m ark et p r i c e , w ith th e a d d i­ t i o n o f v o l u n t a r i l y d e g r a d i n g i t s own s t a n d ­ ard of v a lu e .2

lw 0 f t h i s im m ense d e b t . . . some $ 5 8 9 , 0 0 0 , 0 0 0 , o r r a t h e r m ore t h a n a f i f t h o f t h e w h o le a m o u n t, w a s d u e t o t h e s u b s t i t u t i o n o f U n ite d S t a t e s n o te s f o r m e t a l l i c m o n e y ." M i t c h e l l , A H i s t o r y o f t h e G r e e n b a c k s , p . 4 1 9 . S e e a l s o B a r r e t t , o p . c l t .~T~P• 7 2 ; a n d H a r o l d U. F a u l k ­ n e r , A m e ric a n E c o n o m ic H i s t o r y , 4 t h e d . ( H a r p e r & B r o t h ­ e r s , New j f o r k a n d L o n d o n , 1 9 3 4 ) , p p . 6 2 8 - 6 2 9 . 2 F r a n c i s A. W a lk e r a n d H e n r y A dam s, "T he L e g a l T e n d e r A c t" , i n C h a p te r s o f E r i e a n d O th e r E s s a y s (Jam es R . O sgo od a n d C o S 5 ^ r B o s * o n T i e 7 I T , “ p T T 5 3 r:--------

42

SOURCES OP DEBT POLICY The v e r y g r e a t i n f l u e n c e o f a few m en, a n d o f o n e i n p a r t i c u l a r — S e c r e t a r y C hase — i n th e f o r m u la tio n and e x e c u t i o n o f t h e d e b t p o l i c i e s o f t h i s p e r i o d m ust be a p p a r ­ e n t.

It

i s c l e a r t o o t h a t many o f t h e s e p o l i c i e s w e r e

p re m ise d upon f a l s e a ssu m p tio n s o r upon c o n s i d e r a ti o n s o f e x p e d i e n c y . N o t much t i m e w a s t o e l a p s e b e f o r e i t becam e e v id e n t t h a t su c h p o l i c i e s w ere h i g h l y d i s a d v a n ta g e o u s to th e T re a s u ry , u n e c o n o m ic a l, d i s t u r b i n g t o th e n a t i o n a l e co n o m y , a n d h a r m f u l t o t h e p u b l i c c r e d i t . S e v e ra l su ch p o l i c i e s have a lre a d y been in d ic a te d . o f t h i s sam e p a t t e r n w as r e p e a t e d

Much

in o th e r im p o rta n t in s ta n c e s

i n w h ic h C hase d o m in a te d .

H i s v a c i l l a t i o n s on t h e p r i n c i p l e p o f l e g a l t e n d e r a r e w e l l known t o t h e s t u d e n t o f f i n a n c e . When C o n g r e s s a u t h o r i z e d h im t o s e l l b o n d s a t t h e i r v a l u e , " w h ich p l a i n l y m eant a t th e b e s t p r i c e b rin g ,

th e y c o u ld

e v e n i f b e lo w p a r , S e c r e t a r y C h a s e i n s i s t e d

"m ark e t v a lu e " m eant " p a r v a lu e " and t h e r e f o r e

"m arket

th a t

th e bonds

A c o n t e m p o r a r y s t u d e n t o f p o l i t i c a l econom y r e m a r k e d on " t h e g e n e r a l d i s p o s i t i o n m a n i f e s t e d i n o u r l e g i s l a t i v e h a l l s and our o rg an s o f p u b lic o p in io n , to ig n o re a l l t h a t th e n i n e t e e n t h c e n tu r y h a s done f o r f i n a n c i a l s c i e n c e , and to a d h e r e e n t i r e l y t o th e v iew s and p r a c t i c e s o f t h e e ig h te e n th ." S im on Newcomb, A C r i t i c a l E x a m i n a t i o n o f Our F i n a n c i a l P o l i c y D u rin g t h e S o u th e r n R e b e l l i o n ( D .A p p l e t o n a n d Com pany, New Y o r k , 1 8 b 5 )» p . 2 I n h i s v a r y i n g l o y a l t y t o t h e P r e s i d e n t may a l s o b e s e e n some o f t h e same c o m p u l s i o n s . See p ag e 5 0 , b e lo w .

43

c o u ld n o t be s o l d . fo r la rg e th e r a t e

T h i s l e d t o t h e i s s u e o f m ore g r e e n b a c k s ,■*■

sums w e r e u r g e n t l y d u e t h e arm y a n d n a v y .

F ix in g

o f i n t e r e s t a t 5 p e r c e n t i n s t e a d o f 6 on th e bonds

o f f e r e d i n t h e s p r i n g o f lS t) ^ was a n u n f o r t u n a t e a t t e m p t a t e c o n o m y , f o r t h e m a r k e t f o r G o v e rn m e n t b o n d s t h e n i n d i c a t e d th e need fo r a h ig h e r r a t e in v e s tm e n t.

t o make t h e i s s u e a n a t t r a c t i v e

S a le o f th e bonds f e l l f a r s h o rt o f re q u ire m e n ts ,

a n d t h e T r e a s u r y w as o b l i g e d t o r e l y o f sh o rt-te rm

f u r t h e r upon a v a r i e t y

fo rm s o f in d e b te d n e s s to m eet t h e dem ands b e in g

made u p o n l t . ^ E v e n h i s l a s t o f f i c i a l a c t a s S e c r e t a r y w as a n a t t e m p t t o e s t a b l i s h a p o l l o y w h i c h w as u t t e r l y u n w o rk a b le .^

In a l e t t e r

u n r e a l i s t i c and

to H orace G r e e le y , l a t e r p u b l is h e d

i n t h e New Y o rk D a l l y T r i b u n e h e

had w r i t t e n ,

o f g o l d m u s t a n d s h a l l come dow n, o r I ' l l body e ls e

try ."

J u s t b efo re th is ,

"The p r i c e

q u i t a n d l e t som e­

o n J u n e 17> 1 S 6 ^ , a b i l l

p r e p a r e d b y him h a d b e e n p a s s e d b y C o n g r e s s t h a t a im e d t o p r e v e n t a l l d e a l i n g i n g o l d e x c e p t when t h e a c t u a l m e t a l w as s o l d b y i t s p o s s e s s o r a n d d e l i v e r e d on t h e same d a y .

■^See t h e w o r k s c i t e d o n p a g e

He d i d

3 8 , above.

D ew ey, o p . c i t . . p p . 3 1 3 —31*+. >*Edwin R . A. S e l i g m a n , C u r r e n c y I n f l a t i o n a n d P u b l i c D e b t ( T h e E q u i t a b l e T r u s t Com pany, New Y o r k , 1 9 2 1 ) , p . 2 5 . ^Jan uary 2 0 , IS 65.

44

n o t u n d e r s t a n d t h a t h i s own T r e a s u r y p o l i c i e s , a n d n o t t h e a c tiv ity

o f s p e c u l a t o r s , was th e c a u s e o f th e r i s e

term s o f d e p r e c i a t i n g g re e n b a c k s. v a n c e d fro m 1 9S t o 2 5 0 .

in g o ld in

W i t h i n tw o w e e k s g o l d a d ­

C ongress h a s t i l y r e v e r s e d t h i s p o lic y

o f t h e former-*- S e c r e t a r y b y r e p e a l i n g t h e a c t o n J u l y

2 .^

D u rin g t h i s p e r io d o f n a t i o n a l f in a n c e th e b a n k e rs had little

to do w i t h t h e f o r m u la ti o n o f d e b t p o l i c i e s .

S e c re ta ry th em .

The

ig n o re d t h e i r a d v ic e and a p p a r e n tly d i s t r u s t e d

They b l a m e d him f o r f a i l u r e

to p ro p o se a d e q u a te ta x

l e g i s l a t i o n a t th e b e g in n in g o f th e w ar, and f o r th e s u b s t i ­ t u t i o n o f p a p e r money i n p l a c e o f t a x e s . 3

Jam es G a l l a t i n ,

p ro m in e n t b a n k e r and f i n a n c i a l a u t h o r i t y o f t h e p e r i o d , w ro te o f C hase and th e g re e n b a c k p o l i c y : . . . i t i s e v id e n t th a t in th e m u lt i p li c it y o f h i s e n g a g e m e n t s , he h a s h a d f o r c e d u p o n h i s a t t e n t i o n , a n d b ecom e m e n t a l l y c o n f u s e d b y , th o s e d e s t r u c t i v e and r e v o l u tio n a r y t h e o r i e s o f c u r r e n c y , w h i c h t h e d i s c i p l e s o f t h e fa m o u s JOHN LAW h a v e b e e n d i s s e m i n a t i n g i n b o t h h e m i­ s p h e r e s d u r in g a c e n tu r y and a q u a r t e r . Such

3-He h a d r e s i g n e d on J u n e 2 9 , I 6 b 4 , n e c te d w ith t h i s in c id e n t.

f o r r e a s o n s n o t con­

P

H o r a c e W h i t e , Money a n d B a n k i n g : I l l u s t r a t e d b y A m e ri­ c a n H i s t o r y . 2d e d . ( ( rln n & C om oanv. B o s t o n . 1 § 0 2 ) . d d . 1*H -

j_J| )|

'

3 "At a m o d e r a t e c o m p u t a t i o n t h e g o v e rn m e n t h a s p a i d f i v e h u n d r e d m i l l i o n s o f d o l l a r s m ore on i t s arm y a n d n a v y c o n t r a c t s t h a n w o u ld h a v e b e e n p a i d w i t h a f i n a n c i a l p o l i c y m ore c o n s i s t e n t a n d m ore s o u n d . " B a n k e r s 1 M a g a r .in e . A u g u s t , 166H-, V o l . XIX, p . 6 2 ,

45

th e o r ie s have been f r u i t f u l o f g re a t p o p u la r d e l u s i o n s i n n a t i o n s ; a n d am ong l e g i s l a t o r s as w e ll a s sta te sm e n , . . . 1 H is p o l i c i e s had d e s t r o y e d th e good f e e l i n g b e tw e e n t h e b a n k e r s a n d t h e G -o v e rn m e n t, a n d t h e y w e lc o m e d h i s r e s i g n a t i o n . ^ The p o w e rs o f t h e S e c r e t a r y o f t h e T r e a s u r y w e r e , o f c o u rse , lim ite d by th e w i l l of C o n g r e s s . 3 te n t,

T0 a n u n u s u a l e x ­

how ever, t h e f f t ih and 38t h C o n g re s s e s r e l i e d upon t h e

r e c o m m e n d a t i o n s o f S e c r e t a r y C h a s e , a n d much o f t h e i r f i n a n ­ c i a l l e g i s l a t i o n w as e n a c te d i n a c c o r d a n c e w i t h h i s p o l i c i e s . ^ Few m em bers o f C o n g r e s s w e r e e v e n s l i g h t l y e x p e r i e n c e d i n m a tte rs o f fin a n c e .

Ig n o ra n c e , p ro b a b ly , r a th e r th a n la c k o f

p r i n c i p l e , made p o s s i b l e

th e p a ssa g e o f th e L e g a l-T e n d e r A c t.

W a lk e r a n d Adams s a y o f i t :

•^■"Letter t o H o n . S a m u e l H o o p e r , o f M a s s a c h u s e t t s , Mem­ b e r o f t h e C o m m itte e o f Ways a n d M eans o f t h e U n i t e d S t a t e s H o u s e o f R e p r e s e n t a t i v e s , fro m J a m e s G a l l a t i n , E s q . , o f New Y o r k . " ( R e p r i n t f ro m New Y ork C o m m e r c ia l A d v e r t i s e r o f D e ce m b er 2 0 , 1 8 b 2 ) , p . 5 ^ " T h e a n n o u n c e m e n t w as h a i l e d w i t h s a t i s f a c t i o n b y t h e p e o p l e a n d t h e p r e s s g e n e r a l l y ; t h e m a n a g em en t o f t h e p u b l i c f in a n c e s i n d ic a te d a w ant o f f o r e s ig h t and s a g a c ity a s to t h e w ays a n d m ean s o f t h e g o v e r n m e n t . 11 B a n k e r s ' M a g a z i n e . A u g u s t , IQbk-, V o l . XIX, p . 8 1 . 3 " I t i s n o t t o o much t o s a y t h a t t h e S e c r e t a r y o f t h e T r e a s u r y c an e x e r c i s e no c o n s t i t u t i o n a l i n f l u e n c e u p o n f i s c a l le g is la tio n ." H e n ry C a r t e r Adams, The S c i e n c e o f F i n a n c e ( H e n r y H o l t a n d Com pany, New Y o r k , T 8^ S } , p . 1 2 ^ 7 ^"C hase th e N a tio n . w ie ld e d su ch o p. o l t. . p.

w as t h e g u i d i n g s p i r i t o f t h e f i s c a l a f f a i r s o f N ever b e f o r e n o r s in c e had a f in a n c e m i n i s t e r p o w e r a s w as p l a c e d i n h i s h a n d s . " H epburn, 196.

46

The g ood s e n s e a n d h ig h m o ra l s t a n d a r d o f a fe w men s e r v e d o n l y t o r e l i e v e a n d make m ore c o n sp ic u o u s th e d a rk and im p e n e tra b le c lo u d o f i g n o r a n c e a g a i n s t w h i c h t h e i r e f f o r t s w e re u t t e r l y th r o w n a w a y . 1 I n t h e H o u s e , T h a d d e u s S t e v e n s 2 was c h a i r m a n o f t h e Com­ m i t t e e on Ways a n d M e an s.

T ho ugh u n t r a i n e d i n m a t t e r s o f

f i n a n c e , h e e x e r t e d much i n f l u e n c e on t h e f r a m i n g o f f i n a n ­ c i a l m easu res.

J u s t i n S . M o r r i l l w as c h a i r m a n o f a H ouse s u b ­

c o m m i t t e e on t a x a t i o n .

He w as a p r a c t i c a l man a n d e x p e r i e n c e d

in m a tte rs of ta x a tio n .

I n t h e e a r l i e r p a r t o f t h e war b o rro w ­

i n g r a t h e r t h a n t a x a t i o n w as t h e p o l i c y , a n d , a s a c o n s e q u e n c e , h i s a b i l i t i e s a t t h a t tim e s e rv e d b u t l i t t l e . 3

E l b r i d g e G-.

S p a u l d i n g , c h a i r m a n o f a s u b c o m m i t t e e on l o a n s a n d c u r r e n c y , h a d h a d some e x p e r i e n c e i n b a n k i n g b u t a p p e a r s t o h a v e b e e n 4 l e s s a f i n a n c i e r th a n a p o l i t i c i a n . The two o t h e r m em bers o f

^L oc. c l t . , p . 322, 2 0 f h im W a l k e r a n d Adams w r o t e * " T h a t Mr. S t e v e n s w as g r o s s l y i g n o r a n t upon a l l e c o n o m ic a l s u b j e c t s an d p r i n c i p l e s was th e l e a s t o f h i s d e f i c i e n c i e s . A d o g m a tic m in d , a h ig h te m p e r, and an o v e rb e a rin g w i l l a r e t h r e e s e r io u s d i s q u a l i ­ f i c a t i o n s f o r f i n a n c i a l s u c c e s s , e s p e c i a l l y when c o m b in e d w i t h c o n te m p t f o r f i n a n c i a l k n o w le d g e ." Qp. c l t . , p . 3 0 7 . 3 D ew ey, o p . c l t . , p .

275.

*He h a d s e r v e d a s T r e a s u r e r o f t h e S t a t e o f New Y o rk , a n d a t o n e t i m e h a d m an a g ed a b a n k i n t h e c i t y o f B u f f a l o . Id e m . Jo h n Sherm an, i n h i s R e c o l l e c t i o n s , p r a i s e d S p a u ld in g f o r h i s p a r t i n d e a l in g w ith th e f i n a n c i a l p ro b le m s o f th e t i m e . He m e n t i o n e d S t e v e n s w i t h c o n s i d e r a b l e r e s p e c t , r e f e r ­ r i n g t o h im a s " o n e o f t h e m o st r e m a r k a b l e men o f t h e l a s t g e n e ra tio n ". W ith r e g a r d t o t h e C o m m itte e on Ways a n d M e a n s , o f w h i c h h e w a s c h a i r m a n , S h e rm a n w r o t e , " I b e l i e v e t h a t t h e g e n e r a l o p i n i o n o f t h e H o u se w as t h a t we d i d o u r d u t y w e ll." O p. c l t . , V o l . I , p p . 1 9 2 - 1 9 6 , 2 7 1 - 2 7 3 .

4?

S p a u l d i n g 's su b -c o m m itte e w ere Samuel Hooper and E r a s t u s C o r n in g .

Hooper h ad some r e p u t a t i o n a s an a u t h o r i t y on

m oney,^ and a t t h i s tim e he was r e g a r d e d a s c o n s e r v a t i v e i n h i s m on etary v i e w s . 2

Y et i t d e v e lo p e d t h a t he was q u i t e

w i l l i n g t o e n d o r s e t h e u se o f p a p e r money i n " g r e a t em ergen­ c i e s " and t o d e f e n d i t s i s s u e . 3

W illia m P . F e s s e n d e n , an

a b l e la w y e r and c o n s c i e n t i o u s l e g i s l a t o r , was c h a irm a n o f th e S e n a te Committee on F i n a n c e .^ P r e s i d e n t L i n c o l n was n o t s k i l l e d i n m a t t e r s o f f i n a n c e , a n d , l i k e C hase, a t t h e o u t s e t o f t h e war he d i d n o t a n t i c i ­ p a t e i t s lo n g c o n t i n u a t i o n .

N e ith e r th e P re s id e n t nor h is

c a b i n e t r e a l i z e d how enormous would be t h e f i n a n c i a l s t r a i n on th e G o v e r n m e n t . 5

H is m essages and o f f i c i a l p a p e r s make

o n ly l i m i t e d comment w i t h r e g a r d t o t h e f i n a n c i n g o f t h e w a r. I n h i s f i r s t a n n u a l m essage t o C o n g r e s s , December 3 , l S 6 l , th e P re s id e n t s ta te d :

% e b e l i e v e d i n r e s t r i c t i n g t h e power o f b an k s t o i s s u e n o t e s and i n r e q u i r i n g t h e d e p o s i t o f a d e q u a te s e c u r i t y f o r s u c h I s s u e s . He em ph asized t h a t g o ld and s i l v e r c o n s t i t u t e d " th e o n ly r e a l money o f com m ercial n a t i o n s . " See Samuel Hoopo*, C u rre n c y o r Money, i t s N a tu r e and Use ( L i t t l e , Brown and Comp a n y , 1S557, p p . 5 - 7 . 2

I n c o r r e s p o n d e n c e w ith him James G a l l a t i n s a i d o f h i s w r i t i n g s t h a t th e y " e n u n c i a t e d sound p r i n c i p l e s o f f i n a n c e , " and r e f e r s t o H o o p e r 's book a s " t h a t a d m ir a b le w o rk ." "L e tte r t o Hon. Samuel Hooper . . . from James G a l l a t i n , E s q . , " c i t e d above. 3 B a r r e t t , o p . p i t . , p p . 2 6 -2 7 . **Hugh M cC ulloch, Men mid M easures o f H a lf a C e n tu ry ( C h a r l e s S c r i b n e r ' s S o n s, Hew Y ork, 18657, p . 1^ 0 . ^Dewey, o p . p i t . , p . 275.

48

T he o p e r a t i o n s o f t h e T r e a s u r y , . . h a v e b e e n c o n d u cted w ith s i g n a l s u c c e s s . The p a t r i o t i s m o f t h e p e o p l e h a s p l a c e d a t t h e d i s p o s a l o f t h e Gov­ e r n m e n t t h e l a r g e m eans d e m a n d ed b y t h e p u b l i c e x ig e n c ie s. 1 In h is

se c o n d a n n u a l m essage he r e f e r s

to th e l a r g e is s u e o f

U n ite d S t a te s n o te s a s b e in g u n a v o id a b le , and sa y s: I n no o t h e r way c o u l d t h e p a y m e n t o f t h e t r o o p s a n d t h e s a t i s f a c t i o n o f o t h e r J u s t dem ands be so e c o ­ n o m ic a lly or so w e ll p ro v id e d f o r . . . A r e t u r n to s p e c i e p a y m e n ts, h o w e v er, a t th e e a r l i e s t p e r i o d c o m p a tib le w ith due r e g a r d to a l l I n t e r e s t s con­ c e r n e d sh o u ld e v e r be k e p t i n v iew . F lu c tu a tio n s in t h e v a l u e o f c u r r e n c y a r e a l w a y s i n j u r i o u s , and t o re d u c e th e s e f l u c t u a t i o n s to th e lo w e s t p o s s ib le p o i n t w i l l a lw a y s b e a l e a d i n g p u rp o s e i n w ise le g is la tio n .* I n t h i s m e s s a g e h e a l s o rec o m m e n d e d t h a t t h e o r g a n i z a t i o n o f b a n k in g a s s o c i a t i o n s be p e r m itte d u n d e r a g e n e r a l a c t o f C o n g ress and t h a t th e c i r c u l a t i o n

o f su ch o r g a n i z a t i o n s sh o u ld

b e s e c u r e d by t h e p l e d g e o f U n i t e d S t a t e s b o n d s . 3 Upon s i g n i n g t h e J o i n t r e s o l u t i o n ^ w h i c h a u t h o r i z e d t h e S e c r e t a r y o f t h e T r e a s u r y t o i s s u e an a d d i t i o n a l # 1 0 0 m i l l i o n i n U n i t e d S t a t e s n o t e s n e e d e d f o r p a y m e n t o f t h e a rm y a n d n a v y he s e n t a m e s s a g e t o C o n g r e s s , J a n u a r y 1 7 , 1 8 6 3 , e x p r e s s i n g re g re t th a t i t

w as n e c e s s a r y t o a u t h o r i z e so l a r g e a n a d d i ­

tio n a l issu e .

He s t a t e d :

B a r n e s D. R i c h a r d s o n , A C o m p i l a t i o n o f t h e M e s s a g e s a n d P a p e r 8 o f t h e P r e s i d e n t s . 1 7 8 9 -1 8 9 7 (G overnm ent P r i n t i n g O f f i c e , W a s h i n g t o n , 1 896- 1 8 9 9 7 , V o l . V I , p . 4-7. 2I b l d . . p .

129

3l b l d . . p . 1 3 0 **12 S t a t u t e s . 8 2 2 .

49

I t seem s v e r y p l a i n t h a t c o n ti n u e d i s s u e s o f U n ite d S t a t e s n o te s w ith o u t any checks to th e is s u e s o f su sp en d ed b an k s and w ith o u t a d e q u a te p r o v is io n f o r t h e r a i s i n g o f money b y l o a n s a n d f o r f u n d i n g t h e i s s u e s s o a s t o k e e p th e m w i t h i n d u e l i m i t s m u st s o o n p r o d u c e d i s a s t r o u s c o n s e q u e n c e s ; a n d t h i s m a t t e r a p p e a r s t o me s o i m p o r t a n t t h a t I f e e l b o u n d to a v a i l m y se lf o f t h i s o c c a s io n to ask th e s p e c i a l a t t e n t i o n o f C ongress to i t . 1 He t h e n r e p e a t e d t h e

s u g g e s t i o n made i n

th e p re c e d in g a n n u al

m essage t h a t an a c t o f C o n g re ss p e rm it th e o r g a n i z a t i o n o f b a n k i n g a s s o c i a t i o n s w h i c h w o u ld s e c u r e t h e i r c i r c u l a t i o n by th e p led g e o f U n ite d S t a t e s b o n d s ,2 I n h i s t h i r d a n n u a l m e s s a g e , D e c e m b e r S, I S 6 3 , h e s t a t e d t h a t th e o p e r a tio n s o f th e T re a su ry had been s u c c e s s f u lly c o n d u c te d .

He co m m en ted a l s o on t h e e n a c t m e n t o f t h e n a t i o n a l

b a n k i n g la w a n d t h e r e s u l t i n g v a l u a b l e s u p p o r t t o t h e p u b l i c c r e d i t . 3'

I n h i s f o u r t h a n n u a l m e s s a g e , D ecem ber 6 , 1 8 6 4 , t h e

P re s id e n t sa id : The f i n a n c i a l a f f a i r s o f t h e G o v e rn m e n t h a v e been s u c c e s s f u lly a d m in is te re d d u rin g th e l a s t y e a r.^ He t h e n com m ented on t h e n a t u r e o f t h e d e b t a n d made a n o v e l p ro p o sa l: H e l d a s i t i s , f o r t h e m o s t p a r t by o u r own p e o p l e , i t h a s b eco m e a s u b s t a n t i a l b r a n c h o f n a t i o n a l , th o u g h p r i v a t e , p r o p e r t y . For o b v io u s r e a s o n s th e m ore n e a r l y t h i s p r o p e r t y c a n b e d i s t r i b u t e d among a l l th e p e o p le th e b e t t e r . . . I s u g g e s t w h e th er i t

^ R ic h a rd s o n , o p . c l t . . p p . 1 4 9 -1 5 0 . 2I b l d . . p .

150

3I b l d . . p . I 8 3 . W

. ,

pp.

24 6 - 2*1-7 .

50

m ig h t n o t be b o t h co m p e te n t and e x p e d i e n t f o r C o n g ress to p r o v i d e t h a t a l i m i t e d am ount o f some f u t u r e i s s u e o f p u b l i c s e c u r i t i e s m ig h t be h e l d by any bona f i d e p u r c h a s e r exempt from t a x a t i o n and from s e i z u r e f o r d e b t , u n d e r su c h r e s t r i c t i o n s and l i m i t a t i o n s a s m ig h t be n e c e s s a r y t o g u a rd a g a i n s t a b u s e o f so I m p o r ta n t a p r i v i l e g e . . . The g r e a t a d v a n ta g e o f c i t i z e n s b e i n g c r e d i t o r s a s w e l l a s d e b t o r s w i t h r e l a t i o n t o th e p u b l i c d e b t i s o b v io u s . Men r e a d i l y p e r c e i v e t h a t th e y can n o t b e much o p p r e s s e d by a d e b t w hich th e y owe to th e m selv es. 1 I t seems p l a i n t h a t th e P r e s i d e n t c o n c u r r e d , i n g e n e r a l , in th e S e c r e t a r y ’s p o l i c i e s , l e a v i n g th e management o f th e T re a s u r y D e p a rtm e n t to him.

U n t i l , to C h a s e 's s u r p r i s e ,

L i n c o l n a c c e p t e d h i s r e s i g n a t i o n , he had r e g a r d e d h i m s e l f a s i n d i s p e n s a b l e t o th e a d m i n i s t r a t i o n . 2

He c o u ld h a r d l y h av e

m a i n t a i n e d t h i s i l l u s i o n o f i n d i s p e n s a b i l i t y i f t h e r e had b ee n any s e r i o u s d is a g r e e m e n t b etw e en h i m s e l f and t h e P r e s i ­ d e n t w i t h r e g a r d to h i s T r e a s u r y p o l i c i e s . ^ Hot alw ay s w ere th e d e b t p o l i c i e s o f S e c r e t a r y Chase u n h e s i t a t i n g l y c o n c u r r e d i n by C o n g re s s , a l t h o u g h many m e a su re s were e n a c te d a t h i s b e h e s t .

He was i n no way a

l o b b y i s t , and he had "few p e r s o n a l f r i e n d s i n e i t h e r h o u se

I I b i d . . p p . 2^ 7 - 2 ^ . 2B a r r e t t ,

o p . c l t . . p p . 7 0 and 1 1 0 .

^Chase a s p i r e d to th e p r e s i d e n c y , and he had p e r m i t t e d h i s name t o be u s e d i n o p p o s i t i o n to t h a t o f h i s c h i e f . M eCulloch sa y s o f t h i s : "The acknow ledged c a u s e o f h i s r e s i g ­ n a t i o n was a d i s a g r e e m e n t b etw e en th e P r e s i d e n t and h i m s e l f i n r e g a r d t o t h e a p p o in tm e n t o f a s u c c e s s o r t o Mr. C isco i n t h e o f f i c e o f t h e A s s i s t a n t T r e a s u r e r a t New Y ork. The r e a l c a u s e was th e i n t e r r u p t i o n o f t h e i r p l e a s a n t r e l a t i o n s by p o l i t i c a l r i v a l r y . Mr. C h a s e 's r e s i g n a t i o n was p ro m p tly a c c e p t e d — I t h i n k to h i s s u r p r i s e , I am s u r e t o h i s l a s t i n g r e g r e t . " Op. c l t . . p . 16 6.

51

and few er sp o k e sm en ." 1

He was acknow ledged and r e s p e c t e d a s

a man o f I n t e l l e c t and pow er, and b o t h h i s p r o b i t y and h i s p a t r i o t i s m w ere w e l l re c o g n iz e d .* -

Yet c e r t a i n o f h i s p o l i c i e s

d i f f e r e d w id e ly from t h o s e o f C o n g r e s s , a s can b e se en in h i s w i l l f u l i n t e r p r e t a t i o n o f th o s e e n a c tm e n ts th e p l a i n r e a d i n g o f w hich was n o t i n a c c o rd a n c e w i t h h i s w is h e s .

One m ig h t

g a in th e i m p r e s s io n from h i s b i o g r a p h e r t h a t he was c o n t i n u a l l y a t odds w i t h t h e l e g i s l a t i v e b r a n c h o f t h e G o v e r n m e n t , 3 b u t t h i s was e v i d e n t l y n o t th e c a s e .

I n m ost i m p o r ta n t I n s t a n c e s

l e g i s l a t i o n was e n a c te d t o Im plem ent h i s p o l i c i e s ; i n o t h e r i m p o r ta n t I n s t a n c e s (when h i s w is h e s w ere c o n t r a v e n e d ) he o v e r lo o k e d o r o v e r r o d e th e e x p r e s s e d p o l i c i e s o f C o n g r e s s .^ I n g e n e r a l , w i t h r e s p e c t to t h e c r e a t i o n and t h e management o f t h e d e b t d u r i n g h i s term o f o f f i c e , th e c o n c e p t i o n s o f S e c r e t a r y Chase became t h e p o l i c i e s o f th e G o v e rn m e n t.5

^ H a r t , o p . c l t . , p . 235* ^ I b i d . , p a s sim . 3" . . . he n e v e r c o u ld b r i n g C o n g ress to a c c e p t h i s f i n a n c i a l scheme i n an e n t i r e t y , o r any p a r t o f i t w i t h o u t g r e a t m o d ific a tio n o f d e t a i l s . " I b i d . . p . 235. ^ e e a b o v e ; and a l s o S p a u ld in g , o p . c l t . . p p . and

1 -1 1 ,

1 & S -1 6 9 .

^The l e g a l - t e n d e r i d e a , w h ich d e v e lo p e d i n t o a p o l i c y o f f a r - r e a c h i n g I m p o rta n c e , was a m a jo r e x c e p t i o n . I t d i d n o t o r i g i n a t e w i t h C hase, a l t h o u g h h e ap p ro v ed o f i t , a t f i r s t r e l u c t a n t l y , on th e g ro u n d s o f n e c e s s i t y an d f a i r n e s s t o a l l t h e p e o p l e . B o l l e s , o p . c l t . . p p . 51» 5 ^ - 5 5 . See a l s o , Sherman, 0 £ . c l t . . V ol. I , p . 27H-.

52

SECRETARY CHASE‘ S « OBJECTIVES « I n h i s r e p o r t t o C o n g re s s , In D ecem ber, I S 6 3 , S e c r e t a r y C hase s t a t e d

th e o b je c tiv e s o f h is d e b t p o lic y :

I n t h e c r e a t i o n o f d e b t , by n e g o t i a t i o n o f lo a n s o r o th e r w is e , th e S e c r e t a r y h a s k e p t fo u r o b i e c t s s t e a d i l y i n v ie w : ( l ) m o d e ra te i n t e r e s t ; ( 2 ) g e n e r a l d i s t r i b u t i o n ; (3 ) f u tu r e c o n t r o l l a b i l i t y ; and (4 ) I n c i d e n t a l u t i l i t y . 1 The a v e r a g e r a t e

o f i n t e r e s t on t h e t o t a l am o u n t o f d e b t

h a d i n d e e d d e c l i n e d a n d w as c e r t a i n l y a t a lo w l e v e l , b u t i t w as a r t i f i c i a l l y

so:

. . . t h e a v e r a g e r a t e i s now i n c r e a s i n g , a n d I t i s o b v io u s t h a t i t m ust c o n tin u e to i n c r e a s e w i t h th e in c r e a s e o f th e p ro p o rtio n o f th e i n t e r e s t - b e a r i n g to th e n o n - i n t e r e s t - b e a r i n g d e b t . And a s t h e am ount o f t h e l a t t e r , c o n s i s t i n g o f U n ite d S t a t e s n o t e s a n d f r a c t i o n a l c u r r e n c y , c a n n o t be m a t e r i a l l y a u g m e n te d w i t h o u t e v i l c o n s e q u e n c e s o f t h e m o s t s e r i o u s c h a r a c t e r , th e r a t e o f i n t e r e s t m ust in c r e a s e w ith th e d e b t, and a p p ro a c h c o n tin u a lly th e h ig h e s t a v e ra g e . 2 T h is a v e r a g e r a t e

v a rie d a s fo llo w s :3 Ju ly 1, Jan u ary Ju ly 1, O c to b e r

1 5 6 2 ...................^ .3 6 1 , I S 6 3 . . . . 4-.02 I S 6 3 ................ 3 .7 7 1 , I S 6 3 . . . . 3 .9 5

Much o f t h e w i d e s p r e a d d i s t r i b u t i o n o f t h e d e b t w as a c o n s e q u e n c e o f t h e fo rm s i n w h ic h i t h a d b e e n c r e a t e d .

The

U n i t e d S t a t e s n o t e s a n d f r a c t i o n a l c u r r e n c y b o r e no i n t e r e s t a n d c i r c u l a t e d a s m ed ia o f e x c h a n g e .

G e r t l f i c a t e s o f In d e b te d ­

n e s s h a d b e e n d i s t r i b u t e d am ong a h o s t o f c o n t r a c t c r e d i t o r s

^ T r e a s u r y R e p o r t . 1 6 6 3 , p . 13 2I d e m . 3 Idem .

53

and tem p o rary d e p o s i t o r s .

P o p u la r s u b s c r ip tio n to bonds had

a l s o b r o a d e n e d t h e d i s t r i b u t i o n o f t h e d e b t . 3To C h a s e t h e t e r m c o n t r o l l a b i l i t y

gave v i r t u e

to a d e b t

s t r u c t u r e w h ic h had d e v e lo p e d a s a r e s u l t o f h i s p o l i c i e s . He d i d n o t r e c o g n i z e t h a t t h e r e w as c o n t r o l l a b i l i t y r e s p e c t and s e r io u s la c k o f i t

in o th e rs .

i n one

When h e s t a t e d t h a t

t h e d e b t was " i n s u c h s h a p e t h a t p r o m p t a d v a n t a g e c a n b e t a k e n o f fa v o ra b le c irc u m s ta n c e s to d im in is h th e b u rd e n s i t on i n d u s t r y , "

im p o ses

2 h e s a i d n o t h i n g o f t h e h a z a r d s w h i c h so g r e a t

an am ount o f v e ry s h o r t - t e r m

o b l i g a t i o n s m ig h t p r e s e n t to t h e

T re a su ry in th e even o f d im in is h in g re v e n u e s o r a f i n a n c i a l strin g e n c y .3

He w as s a t i s f i e d

t h a t th e n a tu r e o f th e d e b t

w o u ld p e r m i t l a r g e - s c a l e f u n d in g u n d e r f a v o r a b l e

c o n d itio n s,

and i n p o i n t i n g t h i s o u t c o n c lu d e d t h a t " N o th in g f u r t h e r seem s d e s i r a b l e

on t h e s c o r e o f c o n t r o l l a b i l i t y . "

As f o r i n c i d e n t a l u t i l i t y ,

he c i t e d

^

th e a d v an tag e o f th e

te m p o ra ry d e p o s i t s , a g a i n s t w h ic h b u s i n e s s m ig h t draw i n tim e o f strin g e n c y ;

th e u t i l i t y

o f h a v in g a l a r g e p a r t o f th e d e b t

a d a p t e d t o c i r c u l a t e a s m oney; t h e n a t i o n a l u n i t y w h i c h

T reasu ry R e p o r t. IS 6 3 , p . 1 3 . 2I b l d . .

p.

15

^The t e n d e n c y i n e v e r y i l l - o r d e r e d f i n a n c i a l s y s t e m i s to I n c r e a s e t h e am ount o f th e f l o a t i n g d e b t an d so l e s s e n t h a t o f th e fu n d ed d e b t." G u s t a v C o h n , The S c i e n c e o f F i n a n c e , t r a n s l a t e d by T. V e b l e n (T h e U n i v e r s i t y o f C h i c a g o P r e s s , C h i c a g o , 1 8 9 5 )> p . 7 ^ . ii T re a s u r y R e p o r t . 1 8 6 3 , p . 1 5 .

54 r e s u l t s when a l l

th e p e o p le s h a re i n th e o w n e rsh ip o f th e d e b t;

and t h e a d v a n ta g e s o f a n a t i o n a l b a n k in g c u r r e n c y s e c u r e d by a p a r t o f t h e n a t i o n a l d e b t . - 1It

is

t o b e n o t e d t h a t t h e s e o b j e c t i v e s w e re n o t f o r m a l l y

s t a t e d u n t i l h i s r e p o r t t o C o n g r e s s w a s made i n D e c e m b e r , I 8 6 3 . The w a r w as t h e n w e l l a l o n g i n i t s

th ir d y ear.

As C h a s e d e ­

s c r i b e d th em , t h e o b j e c t i v e s f i t t e d

p e rfe c tly

th e d e b t s i t u a ­

tio n as i t

th e n e x i s t e d .

H i s d e t a i l e d d i s c u s s i o n o f th e m

w as a c t u a l l y a n e l a b o r a t e a t t e m p t t o

J u s t i f y th e d e b t s t r u c ­

t u r e w h ic h had e v o lv e d u n d e r h i s d i r e c t i o n .

T hese o b j e c t i v e s ,

a s h e d e f i n e d th em , a n d a s th e p r e c e d i n g p a r t o f t h i s

stu d y

i n d i c a t e s , w e re n o t a l l a p a r t o f a n o r i g i n a l p o l i c y , n o r h a d he k e p t them a l l

" ste a d ily

in v ie w ."

He was m a k in g a v i r t u e

o f w h a t , a t t i m e s , h a d s e e m e d t o h im n e c e s s i t y .

C o n v in ce d o f

t h e g r e a t n e s s o f h i s a c h i e v e m e n t by h i s own a r g u m e n t s h e c o n ­ c lu d e d th e d is c u s s i o n o f h i s fo u r o b j e c ti v e s w ith u n w ittin g iro n y : I n t h e s e s e v e r a l w a y s may e v e n s u c h g r e a t e v i l s as a r e b ro u g h t upon us by r e b e l l i o n be tr a n s m u te d , by a w ise a lc h e m y , i n t o v a r i o u s fo rm s o f u t i l i t y . The S e c r e t a r y h a s e n d e a v o r e d to u s e t h i s a lc h em y ; w i t h w hat s u c c e s s t h e c o u n t r y w i l l J u d g e when t i m e a n d t r i a l s h a l l h a v e a p p l i e d t o h i s w o rk t h e i r u n f a i l i n g t e s t s . 2

•^ T r e a s u r y R e p o r t . I 8 6 3 , p p . 1 5 - 1 6 . 2I b i d . , p .

16.

55

THE POLICIES OF SECRETARY FESSENDEN W illia m P i t t F e s s e n d e n , d u r in g h i s b r i e f te rm a s s e c r e ­ t a r y o f t h e T r e a s u r y , ^ - d i d much t o r e s t o r e o r d e r a f t e r t h e s e r i o u s c o n f u s i o n i n t o w h ich T r e a s u r y a f f a i r s h a d f a l l e n u n d e r S e c r e t a r y C hase.

H is e f f o r t s ,

In c re a s in g in te r n a l rev en u e, m ent to m eet i t s o ffic e

its

by a s t e a d i l y

e v e n t u a l l y e n a b le d th e G o v ern ­

o b lig a tio n s ;

a n d by t h e e n d o f h i s t e r m o f

c r e d i t had been g r e a t l y

o u tc o m e o f h i s

fo rtifie d

s tre n g th e n e d .^

That th e

e i g h t - m o n t h p e r i o d o f s e r v i c e w o u ld be so

f a v o r a b l e was n o t I n d i c a t e d b y t h e c o n d i t i o n s t h a t o b t a i n e d 3 a t i t s b e g in n in g . On J u l y 1 , 1 8 6 4 — T he c a s h b a l a n c e i n t h e T r e s a u r y w as $ 1 8 , 8 4 2 , 5 5 8 , an d t h e u n p a id r e q u i s i t i o n s w ere $ 7 1 ,8 1 4 ,0 0 0 . The a m o u n t o f c e r t i f i c a t e s o f i n d e b t e d n e s s o u t ­ s t a n d i n g w as $ 1 6 1 , 7 9 6 , 0 0 0 . The d a i l y e x p e n d i ­ t u r e s e x c e e d e d tw o m i l l i o n s a n d a q u a r t e r . The l a r g e r p o r t i o n o f u n p a i d r e q u i s i t i o n s w as f o r p a y t o t h e a r m y , w h ic h w o u ld b e i n c r e a s e d o v e r f i f t y m i l l i o n s on t h e 1 s t o f S e p te m b e r .4 M o re o v er, $110 m i l l i o n o f th e 7 . 3 - p e r c e n t n o t e s i s s u e d i n 1 8 6 1 w e re t o m a t u r e b e t w e e n A u g u s t a n d O c t o b e r . 5 How c r i t i c a l

t h e s i t u a t i o n w as i s

s e e n i n t h e f a i l u r e on

% e s e r v e d fro m J u l y 1 , 1 8 6 4 , t o M arch 3 , 1 8 6 5 . 2 M e m o r ia l A d d r e s s e s o n t h e L i f e a n d C h a r a c t e r o f W i l l i a m P i t t F e s s e n d e n , D e l i v e r e d “ T n t h e s e n a t e a n d H o u se oT ”R e p r e s e n T a f T v e s 7 " 5 T i f " C ong7 7 “2 3 “5 e s s . 7 “T 3ecelB er T ¥7 TB 6 9 " (S o v ern m e n F " P r i n t i n g O f f i c e , W a s h i n g t o n , 1 8 7 0 ) , R e m a rk s o f M r. M o r r i l l o f V e rm o n t, p . 3 3 ; F r a n c i s F e s s e n d e n , L i f e and P u b l i c S e r v i c e s o f W i l l i a m P i t t F e s s e n d e n ( H o u g h t o n , M i f f l i n a n d Com pany, B o s t o n , , V o l. I , p p . 3 6 0 , 3 6 2 -3 6 3 ; an d B o l l e s , o p . c l t . , p . 1 1 9 . F e s s e n d e n , op. c l t . , V o l. I , p p . 3 1 3 -3 6 0 . ^ B o lle s,

op. c l t . , p . 119.

5 Dewey, o g .

c lt.,

p . 315.

56

J u l y 2 o f an o f f e r o f $ 3 2 ,4 5 9 ,7 0 0 o f g o ld bonds o r i g i n a l l y a d v e r t is e d by S e c r e ta r y C h ase. w ant o f a c c e p ta b le b id s .

I t h ad t o be w ith d ra w n f o r

T h i s w as c o n c u r r e n t w i t h t h e s h a r p

ad v an ce i n th e p r i c e o f g o ld f o llo w in g th e e n a c tm e n t o f th e s h o r t - l i v e d g o l d b i l l . - * - The g o l d p r i c e ,

i n g r e e n b a c k s , was

v a r y i n g b e t w e e n 225 a n d 2 5 0 , a n d i n t h e p a n i c o f b u y i n g h a d r e a c h e d 2 S5 , m a k i n g t h e v a l u e o f a p a p e r d o l l a r a p p r o x i m a t e l y 3^ c e n t s . ^ A w id e v a r i e t y o f l o a n t e r m s a n d m a t u r i t i e s w e r e a v a i l ­ a b le

t o t h e S e c r e t a r y t o c h o o s e f r o m i n d e c i d i n g how b e s t

t h e p u b l i c c r e d i t m ig h t b e e m p lo y e d t o r e l i e v e t h e T r e a s u r y . The l o a n A c t o f J u n e 3 °» 166*1-, 3 a u t h o r i z i n g a t o t a l o f 1*1-00 m i l l i o n , g a v e him c o n s i d e r a b l e d i s c r e t i o n a s t o and m a t u r i t i e s ;

term s

h e w as p e r m i t t e d t o o t o s e l l a n y f i v e - t w e n t y

bonds a u th o r iz e d by e a r l i e r a c t s b u t s t i l l u n s o ld ;

sh o rt-te rm

I n t e r e s t - b e a r i n g T r e a s u r y n o t e s o f p r e v i o u s i s s u e s w h ic h had b e e n r e d e e m e d a n d c a n c e l l e d , a m o u n t i n g t o $ 6 2 , 1 9 1 ,*1-0 0 , m ig h t be r e is s u e d ;

a n d t h e r e r e m a i n e d , u n d e r t h e A c t o f M a rc h 3 ,

1 8 6 3 , ^ a u t h o r i z a t i o n f o r $1 6 0 , 0 6 3 ,2 2 0 o f v a r i o u s b o n d s a n d n o te s.

Among t h e u n u s e d n o t e a u t h o r i z a t i o n s w e re some o f

le g a l-te n d e r q u a lity .

^■See a b o v e . p See F e s s e n d e n , o p . c l t . . V o l. I , p . 3 1 3 ; and B o l l e s , op. c l t . , p . 1 2 2 . ^13 S t a t u t e s . 2 1 b . **12 S t a t u t e s . 7 0 9 .

57

He was d e t e r m i n e d , h ow ever, n o t t o i s s u e any s h o r t - t e r m l e g a l - t e n d e r n o t e s i f he c o u ld p o s s i b l y a v o id d o in g s o .

F a ll­

in g to o b t a i n a l o a n o f 1 5 ° m i l l i o n from th e l a r g e e a s t e r n b a n k s , he s o u g h t, d u r i n g th e summer o f 1S64-, to s e l l t h r e e - y e a r 7 . 3 - p e r c e n t notes.-*-

A lth o u g h w id e ly a d v e r t i s e d , th e l o a n s o ld

s l o w l y , f o r o t h e r more a t t r a c t i v e I s s u e s were a v a i l a b l e t o In v e s to rs .^

S e r i o u s l y c o n c e rn e d w i t h th e problem o f m e e tin g

a r r e a r a g e s in pay to t h e army and navy th e S e c r e t a r y o f f e r e d , a s a p a r t i a l s o l u t i o n , th e 7 . 3 - P e r c e n t n o t e s , i n s m a ll denomi­ n a t i o n s , to th o s e i n t h e s e r v i c e who would a c c e p t them .

More

th a n tw en ty m i l l i o n d o l l a r s 1 w o rth were t h u s d i s p o s e d o f , r e d u c i n g the c l a i m s a g a i n s t th e T re a s u r y by t h a t a m o u n t.^ L a te i n A u g u st F esse n d e n r e - o f f e r e d th e !*32 m i l l i o n o f g o ld bonds w h ich had been w ithd raw n soon a f t e r th e y w ere o f f e r e d l a t e i n J u n e by S e c r e t a r y C h a se.

H e a rly tw ic e t h e

amount o f f e r e d was b i d f o r , and a t a premium a p p r o x im a tin g 4 p e rc e n t. ber 1 st.

T h is was f o llo w e d by a n o t h e r o f f e r i n g on O cto ­ F iv e - tw e n ty 6 - p e r c e n t bonds w ere a d v e r t i s e d i n t h e

iT h e s e w ere p a y a b l e , p r i n c i p a l and i n t e r e s t , i n c u r r e n c y r a t h e r th a n g o l d , b u t w ere c o n v e r t i b l e i n t o 6 - p e r c e n t f l v e t o tw e n t y - y e a r g o ld b o n d s . % o l l e s , o p . c l t . . p p . 120 - 1 2 2 . ^ T re a s u ry R e p o r t . 1S64, p . 21. k

T h is im provem ent i n s a l e a b i l i t y o f th e bonds was p a r t l y a c c o u n te d f o r by t h e f a c t t h a t paym ent c o u ld be made i n c o m p o u n d - in t e r e s t n o t e s w i t h a c c r u e d i n t e r e s t . S ee B o l l e s , o p . c l t . . p . 1 2 2; and F e sse n d e n , o p . c l t . . V o l. I , p p . 34-S-3*+9.

58

amount o f $40 m i l l i o n , and w ere o v e r s u b s c r i b e d by f i f t y p e r ­ c e n t , a premium o f n e a r l y one p e r c e n t b e i n g o b t a i n e d . 1 A n o th e r f e a t u r e o f F e s s e n d e n 's e n d e av o r t o im prove t h e d e b t s t r u c t u r e was th e c o n v e r s io n o f a c o n s i d e r a b l e amount o f t h e o n e - and tw o - y e a r 5 - p e r c e n t n o t e s , w hich had been a u t h o r i z e d on March 3» 1 8 6 3 . ^

These had become a p a r t i c u ­

l a r l y tr o u b le s o m e elem e n t i n t h e d e b t . ^

I n t h e i r p l a c e some

$88 m i l l i o n ^ i n t h r e e - y e a r 6 - p e r c e n t c o m p o u n d - in t e r e s t n o t e s was i s s u e d .5

T h is was done by th e S e c r e t a r y w i t h r e l u c t a n c e ,

f o r t h e new n o t e s were l e g a l t e n d e r , and i t was n o t c e r t a i n what p a r t o f them would e n t e r i n t o th e c i r c u l a t i o n a s c u rre n c y .6 By t h e end o f S e p te m b e r, how ever, th e c o n d i t i o n o f th e T re a s u r y was e x tr e m e ly p r e c a r i o u s . 7

H oping f o r an i n c r e a s e

^To b o l s t e r th e m a rk e t p r i c e o f t h e l a r g e o u t s t a n d i n g amount o f c e r t i f i c a t e s o f I n d e b t e d n e s s , w h ich had f a l l e n t o 91 i n S eptem ber 1 8 6 4 , o n e - f o u r t h o f th e paym ent on t h i s lo a n o f f e r i n g was made r e c e i v a b l e i n su ch c e r t i f i c a t e s . See T re a s u ry R e p o r t , 1864-, p . 2 1 ; and F e s s e n d e n , o p . c l t . . V o l. I , P. 3 3^. ^12 S t a t u t e s . 710.

3See th e d e s c r i p t i o n o f them on p ag e

, b elow .

% )ew ey, o p . c l t . . p p . 3 1 2 , 31&J a n d S h u l t z a n d C a i n e , 00. c l t . . p. 302.

5By a u t h o r i t y o f t h e A c t o f J u n e 3 0 , 1 8 6 4 , 13 S t a t u t e s '. 218.

See a l s o T r e a s u r y R e p o r t . 1 8 6 4 , p p . 1 8 -1 9 ; and F e s s e n d e n , V o l. 1, p . 3 3 5 .

££• £ l t . ,

kT r e a s u r y R e p o r t . 1 8 6 4 , p p . 1 8 - 1 9 .

7 F e s s e n d e n 's b i o g r a p h e r q u o te s A s s i s t a n t S e c r e t a r y George H a rrin g to n : "Few o u t s i d e o r even i n s i d e th e d e p a rtm e n t e i t h e r know o r a p p r e c i a t e t h e d e s p e r a t e c o n d i t i o n o f th e T r e a s u r y . " F essenden, o p . c i t . . V o l. I , pp. 3 5 1 -3 5 2 .

59

i n t h e s a l e o f t h e 7 . 3 - p a r c e n t n o t e s a n d f o r a s s i s t a n c e fro m t h e b a n k s , a n d w i s h i n g , no d o u b t ,

t o a v o id th e c r i t i c i s m

to

w h i c h G hase h a d b e e n s u b j e c t e d , F e s s e n d e n h a d h e s i t a t e d t o make u s e o f t h e

s e r v i c e s o f J a y C o o k e .*

W h ile he d e l a y e d

a v a i l i n g h i m s e l f o f t h i s m ea n s o f o b t a i n i n g f u n d s t h r o u g h p o p u la r s u b s c r ip tio n

wt h e t r e a s u r y becam e c o n s i d e r a b l y

e m b a r r a s s e d a n d t h e G o v e rn m e n t c r e d i t

im p a ire d ."

2

So t h r e a t e n i n g was t h e s i t u a t i o n o f t h e T re a s u ry i n O c to b er t h a t th e s e c r e t a r y s to p p e d t h e i s s u e o f m o n th l y s t a t e m e n t s o f t h e p u b l i c f in a n c e s i n o rd e r n o t to e x c i te a la rm . . . 3 B u t t i m e w as now r u n n i n g i n f a v o r o f t h e T r e a s u r y , f o r r e c e i p t s f ro m t h e i n t e r n a l r e v e n u e w e r e s t e a d i l y

in c re a s in g .

As a r e s u l t t h e c r e d i t o f t h e G o v e rn m e n t was c o n s i d e r a b l y stre n g th e n e d .

I n D ecem b er S e c r e t a r y F e s s e n d e n w as a b l e t o

n e g o t i a t e a 125 m i l l i o n l o a n w i t h c e r t a i n New Y o rk b a n k s . On t h e 1 0 t h o f t h a t m o n th he o f f e r e d t o r e d e e m o r c o n v e r t in to

o th e r n o te s o r bonds th e th r e e - y e a r T reasu ry n o te s o f

1 8 6 1 .^

At t h i s

e n liste d .

p o i n t t h e s e r v i c e s o f J a y Cooke w e r e a g a i n

He s u c c e s s f u l l y u n d e r t o o k t o p r o m o te t h e s a l e o f

t h e b a l a n c e o f t h e 7 « 3 - P er c e n t T r e a s u r y n o t e s a u t h o r i z e d by

^ M c C u llo c h , o p . c l t . . p . 1 9 1 ; a n d O b e r h o l t z e r , o p . c l t . . V o l. I , p p . ^ 2 9 - ^ 3 4 . ^ M c C u llo c h , o p . c l t . . p . 1 9 1 . ^ F e sse n d en , o p . c l t . . V o l. I ,

p. 352.

^ B o l l e s , p p . c l t . . p p . 1 2 0 - 1 2 6 ; Dewey, o p . c l t . . p p . 3 1 4 - 3 1 6 ; a n d S h u l t z a n d C a i n e , o£ . c l t . . p . 3 0 2 .

60

th e A ct o f June

3 0 , 1 6 6 M-.I s s u e d I n d e n o m i n a t i o n s a s

$50 t h e s e n o te s

now

At f i r s t ,

s h o r t - t e r m d e b t , dem and n o t e s , a n d g r e e n b a c k s

o f th e g reen b ack s and th e e n la rg e d

W it h t h e d e p r e c i a t i o n

s u p p ly o f c u r r e n c y w h ic h

i s s u e o f th o s e n o te s b ro u g h t a b o u t, i t

s e l l lo n g -te rm bonds a t p a r or b e t t e r .

becam e p o s s i b l e t o

The p o l i c y o f s e l l i n g

su c h b o n d s a t p a r a t m o d e ra te r a t e s o f i n t e r e s t h a d , f o r e , made th em u n a t t r a c t i v e th e

as

f o u n d a w id e m a r k e t .^ -

had p re d o m in a te d in f in a n c in g th e w a r.

th e

sm a ll

to i n v e s t o r s .

th e re to ­

But l a t e r ,

I n t e r e s t on th e m w as p a i d i n g o l d c o i n e a c h d o l l a r

sin c e of

w h i c h h a d come t o b e w o r t h two d o l l a r s — m ore o r l e s s — i n g re e n b a c k s, th e

t r u e y i e l d on t h e b o n d s was much g r e a t e r t h a n

t h e n o m i n a l , a n d t h e p u r c h a s e o f th e m a t p a r w i t h g r e e n b a c k s w as e q u i v a l e n t t o

t h e p u r c h a s e o f th em f o r g o l d a t a p p r o x i ­

m a te ly a f i f t y - p e r c e n t d is c o u n t. P referen ce

fo r th e s e

bonds c o n tin u e d th ro u g h th e l a t t e r

p a r t o f t h e war

a s w e ll a s a f t e r i t s t e r m in a t io n , and th e y O c o n t i n u a l l y s o l d a t a p r e m iu m . So many w e r e a l r e a d y o u t ­

sta n d in g ,

h o w e v e r , w hen F e s s e n d e n t o o k o f f i c e t h a t h e was

re lu c ta n t

to in c re a s e

Increased

r e q u i r e m e n t o f I n t e r e s t p a y m e n ts i n g o ld s h o u ld

t h e am o u n t v e r y g r e a t l y l e s t t h e

e x c e e d t h e g o ld p o r t i o n o f th e re v e n u e a n d e n d a n g e r th e

■^"The m ere p u b l i c a t i o n o f t h e f a c t t h a t he was a g a i n t h e g o v e rn m e n t's f i s c a l a g e n t b r e d c o n f id e n c e and e n th u s ia s m i n t h e p e o p l e , a n d t h e m oney w as p o u r e d f o r t h i n a f l o o d . n O b e r h o l t z e r , o p . c l t . . V o l. I , p . ^ 6 3 . 2A. B a r t o n H e p b u r n , H i s t o r y o f C o i n a g e a n d C u r r e n c y i n t h e U n i t e d S t a t e s *T he M a c m i ll a n C om pany, New Y ork a n d L on­ d o n , 1 9 0 3 ), p . 34S.

SI

c r e d i t o f t h e G o v e rn m e n t t h r o u g h t h e r i s k o f d e f a u l t . 1 was c o n v i n c e d t h a t t h e t h r e e - y e a r 7 . 3- p e r c e n t n o t e s ,

He

on w h i c h

t h e I n t e r e s t w a s p a y a b l e i n c u r r e n c y , w e r e much m ore a t t r a c ­ t i v e to i n v e s t o r s th a n lo n g e r - te r m bonds b e a r in g I n t e r e s t in c u r r e n c y , a n d t h a t t h e n o t e s w o u ld i n v o l v e a much s m a l l e r s a c rific e , a lto g e th e r,

t o t h e G o v e rn m e n t.2

S e c r e t a r y F e ss e n d e n h e l d d e f i n i t e v iew s w i t h r e g a r d to t h e m an ag em en t o f t h e d e b t . to p u t in to p r a c t i c e .

O n ly a p a r t o f them was h e a b l e

He f e l t

t h a t th e

c r e d i t o f t h e G o v e rn ­

m e n t m i g h t b e im p r o v e d b y p l e d g e o f t h e p r o c e e d s f r o m s a l e o f p u b lic la n d s .

Though h e f a v o r e d t h e e s t a b l i s h m e n t o f a

s i n k i n g fu n d he c o n s id e r e d s u c h a fu n d i m p r a c t i c a b l e so lo n g a s e x p e n d itu re s exceeded re v e n u e s . in g in fo re ig n c o u n tr ie s .

He w as o p p o s e d t o b o r r o w ­

The s u g g e s t i o n was made b y him

t h a t w id e r d i s c r e t i o n in n e g o t i a t i n g

lo a n s sh o u ld be acco rd ed

t h e S e c r e t a r y o f t h e T r e a s u r y , a n d t h a t h e s h o u l d b e em p ow ered t o i n c r e a s e t h e am o u n t o f c u r r e n c y i n c i r c u l a t i o n .

He was

o p p o s e d t o f u r t h e r i s s u e o f l e g a l - t e n d e r n o t e s o r o f a n y fo rm o f d e b t w h ic h m ig h t c a u s e an I n c r e a s e i n th e am ount o f c u r ­ ren cy in c ir c u la t io n .

He u r g e d t h a t G o v e rn m e n t l o a n s b e made

a s a t t r a c t i v e a s p o s s i b l e t o t h e p e o p l e , a n d t h a t a w id e d i s ­ trib u tio n

o f th e m b e s o u g h t .

He f a v o r e d n o t e s b e a r i n g a

r e l a t i v e l y h i g h r a t e o f i n t e r e s t , b u t p a y a b l e , i n t e r e s t an d

^ T r e a s u r y R e p o r t . 1 S 6 4 , p . 24-. ^ Id e m .



p r i n c i p a l , .in c u r r e n c y r a t h e r th a n g o l d , v e rtib le

su ch n o te s to be con­

i n to g o ld bonds b e a r in g a lo w e r r a t e .

L ik e C h a se , h e

v a l u e d h i g h l y t h e f a c t t h a t so s u b s t a n t i a l a p a r t o f t h e d e b t w as i n s h o r t - t e r m p ria te

fo rm , and t h a t t h u s i t m ig h t, a t th e a p p ro ­

t i m e , b e r e a d i l y r e d u c e d and fu n d e d a t a lo w e r r a t e o f

In te re st. The L oan A c t o f M a rc h 3> 1 S & 5 w a s ,

in a c o n sid e ra b le

m e a s u re , t h e e x p r e s s io n o f F e s s e n d e n 's p o l i c i e s . 3 h a d he d i r e c t e d

Not o n ly

t h e o p e r a t i o n s of, t h e T r e a s u r y t h r o u g h a v e r y

d i f f i c u l t p e r i o d , d u r i n g w h i c h t h e c r e d i t o f t h e G o v e rn m e n t g r e a t l y I m p r o v e d , b u t he h a d l a u n c h e d " t h e l o a n ^ w h i c h p r o ­ v i d e d f o r t h e p u b l i c e x p e n d i t u r e s o f t h e c o m in g y e a r u n d e r h is s u c c e s s o r." 5 th is

fin a n c in g ,

B e s i d e s t h e p r o v i s i o n w h i c h i t made f o r

th e a c t

" p r e p a r e d t h e way f o r f u n d i n g t h e

p u b l i c d e b t a t lo w e r r a t e s o f i n t e r e s t . "

6

The r e l a t i o n s h i p

^See T re a su ry R e p o r t. 1 8 6 ^, p p . 1 5 -2 ^ ; and F e sse n d e n , o p * c l t . . V o l. I , p p . 3 1 5 -3 3 2 . ^13 S t a t u t e s . Jj-6 8 . ^T he o r i g i n a l b i l l h a d b e e n p r e p a r e d b y h i m , a n d o f f i ­ c i a l s o f th e T re a su ry had b een r e p e a t e d l y c o n s u lte d R eg ard in g I t w h i l e i t was u n d e r c o n s i d e r a t i o n b y C o n g r e s s . C o n g re ssio n a l G l o b e . 3 & th C o n g . , 2d S e s s . , F e b r u a r y 2 7 , I S 6 5 , p . I I 0 5 ; a n d F e s s e n d e n , o p . c l t . . V o l. I , p . 3 63. h By t h e e n d o f May, I S 6 5 , Cooke h a d s o l d a p p r o x i m a t e l y $ ^ 0 0 m i l l i o n o f t h e | 6 0 0 m i l l i o n a u t h o r i z e d by t h i s a c t . O b e r h o l t z e r , o p . c l t . . V o l . I , p p . 4 -79-^8 0; a n d F e s s e n d e n , o p . c l t . . V o l. I , 362. ^ F e s s e n d e n , o p . c l t . . V o l. I , p p . 362- 3 6 3 * 6Idem ,

63

o f T r e a s u r y p o l i c y t o t h e s t a t e o f t h e money m a r k e t w as e m p h a s i z e d when t h e p r o v i s i o n e m p o w e rin g t h e S e c r e t a r y t o i s s u e g o l d - b e a r i n g b o n d s w as d e b a t e d i n t h e H o u s e .

T hat such

I n f l u e n c e o v e r t h e money m a r k e t w as n o t r e g a r d e d w i t h d i s a p ­ pro v al is

s e e n i n t h e s t a t e m e n t o f Mr. K a s s o n w ho, i n d e f e n d ­

in g th e b i l l ,

and e s p e c i a l l y t h a t p r o v i s i o n o f i t ,

"By v e s t i n g t h i s p o w e r i n

sa id ,

t h e S e c r e t a r y o f t h e T r e a s u r y we

g i v e him a n I m p o r t a n t I n f l u e n c e o v e r t h e money m a r k e t . " 1 By M a rc h 1 8 6 5 when F e s s e n d e n r e s u m e d h i s p l a c e i n t h e S e n a t e , t h e T r e a s u r y ' s p o s i t i o n w as s u b s t a n t i a l l y I m p r o v e d . New f i n a n c i a l d i f f i c u l t i e s d e v e l o p e d i n t h e s p r i n g a n d sum m er, b u t t h e s e w e r e r e s o l v e d by S e p t e m b e r w h e n , a t l a s t ,

revenues

exceeded e x p e n d itu re s . 2

*

*

*

«

*

P e r h a p s t h e b e s t b r i e f summary o f t h e c o u r s e o f C i v i l War f i n a n c e i s

t h a t made by A. B a r t o n H e p b u rn i n h i s H i s t o r y

o f C o in a g e an d C u rre n c y i n t h e U n ite d S t a t e s : U t t e r f a i l u r e to f o r e s e e th e p r o b a b le l e n g t h and m ag n itu d e o f th e w a r, h e n ce f a i l u r e to p ro v id e l a r g e l y i n c r e a s e d t a x a t i o n , a lw a y s u n p a l a t a b l e to s h o r t- s ig h te d l e g i s l a t o r s ; f i r s t r e s o r t to n o t e - i s s u e s re n d e r e d n e c e s s a r y by th e a b sen c e o f a r e p u t a b l e c u r r e n c y sy ste m and o f c r e d i t a b ro a d th r o u g h w h ic h s p e c i e c o u ld be draw n; th e v a in d e s i r e n o t to s e l l b onds a t a d i s c o u n t , and con­ s e q u e n t i n a b i l i t y t o s e l l th em a s r a p i d l y a s n e e d s 1-

C o n g r e s s i o n a l G l o b e . 3 s J u n e 9» 1 8 6 6 , V o l . I I , p . 7 0 5 ; a n d M e r c h a n t *s M a g a z i n e . M a r c h 1 8 6 6 , V o l . LIV, p . 229. ^The l a r g e s t a m o u n t o f t e m p o r a r y d e p o s i t s was $14-9.5 m i l l i o n on J u n e 1 2 , 1 8 6 6 . B o lle s , o p . c i t . . p. 91. k , C o m m e r c i a l a n d F i n a n c i a l C h r o n i c l e . O c t o b e r 7> I S 6 5 , V o l . I , p . 4-4-9, M a rch 3 , l 4 6 6 , V o l . I I , p . 2 5 7 ; M e r c h a n t ' s M a g a z i n e . November I 8 6 5 , V o l . L I I I , p . 33&> M a r c h 1 8 6 6 , Vo1 . L I V , p . 23 O; M a r c h I 8 6 7 , V o l . L V I , p . 2 3 7 ; a n d B a n k e r s 1 Maga­ z i n e , S e p t e m b e r 1 8 6 6 , V o l . XXI, p . 24-0.

103 sound d e b t p o l i c y .

L a t e i n 1&66 h e b l u n t l y e x p r e s s e d t h e

s t a n d w h i c h he h a d i n d i c a t e d a t o t h e r t i m e s : . . . f e e lin g s e n s ib le o f the g re a t r e s p o n s i­ b i l i t y o f h i s p o s i t i o n , t h e S e c r e t a r y h a s d e em ed i t s a f e r and b e t t e r f o r th e c o u n tr y to a c t a c c o r d ­ i n g t o t h e d i c t a t e s o f h i s own j u d g m e n t , c a r e f u l l y r e g a rd in g th e c o n d itio n o f th e m arkets and o f the t r e a s u r y , r a t h e r th a n ta k e h i s d i r e c t i o n from th o se who, h o w e v e r I n t e l l i g e n t a n d a b l e , w e r e u n d e r no o f f i c i a l o b l i g a t i o n s to th e g o v ern m en t, and m ight be l e s s a c c u r a t e l y a d v i s e d i n r e g a r d t o t h e a c t u a l sta te of i ts fin an cial a f f a i r s . 1 P r e v e n t e d b y t h e L oan A c t o f 1S66 f r o m t a k i n g w h a t h e deemed t o be " t h e

first

im portant step "

the S e c re ta ry co n tin u ed h is

tow ard r e s u m p tio n ,

endeavor to conv ert the i n t e r e s t -

b e a r i n g n o te s i n t o bonds and to re d u c e th e d e b t . t i m e h e made i t

a p art of h is

ury a larg e reserv e

A t t h e same

p o lic y to m aintain in th e T reas­

o f gold c o in — a m easure w hich h e b e li e v e d

i t u l s d u t y t o employ i n o r d e r " to k e e p th e b u s i n e s s o f t h e c o u n t r y a s s t e a d y a s p o s s i b l e , w h i l e c o n d u c t e d on t h e u n c e r t a i n b a s is o f an Irredeem able c u r r e n c y ."

I t was t h e o p i n i o n

o f th e C o m p tro ller o f th e C urrency th a t a l l th e i n t e r e s t - b e a r ­ i n g l e g a l - t e n d e r n o t e s m ig h t be c o n v e r t e d i n t o b o n d s ( t h u s e l i m i n a t i n g one f o r m o f d e b t a v a i l a b l e a s c u r r e n c y ) w i t h o u t causing a f in a n c ia l strin g e n c y ,

f o r probably n o t 5 p e rc e n t

o f them were i n a c t i v e c i r c u l a t i o n .

" I t would be s im p ly

e x c h a n g i n g one s e c u r i t y h e l d a s a n i n v e s t m e n t f o r a n o t h e r . " - ^

1 T r e a s u r y R e p o r t . 1&66, p . 9 . 2I d e m . ^R e p o r t o f t h e C o m p t r o l l e r o f t h e C u r r e n c y . I S 6 5 , p p . 66- 6 7 .

104 The c o u r s e o f c o n v e r s i o n f o r some m o n t h s a f t e r t h e p a s ­ sage o f

t h e L o a n A c t was h a m p e r e d b y two e v e n t s i n E u r o p e .

The L o n d o n p a n i c i n May t e m p o r a r i l y d e p r e s s e d t h e p r i c e s o f A m erican bonds i n E uropean m a r k e ts ,

the

i n g i n t h e c o u r s e o f a m o n t h f r o m 72i

fiv e-tw e n ties d e clin ­

to 6k in term s o f g o ld .

Some E u r o p e a n h o l d i n g s w e r e s o l d on A m e r i c a n m a r k e t s . a f t e r m a t h o f t h e p a n i c was b r i e f , c i a l c o m m u n i ty r e g a i n e d i t s arose sia.

The

bu t sc a rc e ly had the fin a n ­

b a l a n c e when a demand f o r s p e c i e

i n E u ro p e b e c a u s e o f t h e war betw een A u s t r i a and P r u s -

1

ITT.

The f i n a n c i a l m a r k e t s q u i c k l y r e c o v e r e d f r o m t h e s e

adverse

in flu en ces,

becam e a p p a r e n t t h a t

the T reasury co u ld

In J u l y the

Com m ercial and

to

p u b lic anx iety " i

t

h

t

d eb t,

owing to

e

d e b t would

the

that w

m ature.

The a r t l c l e ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ f l g t h o f t h e m a r k e t s

in a b s o r b in g th e bonds

h

"con sid erab le

E uropeans.

"Everyone

c o n v e r s a n t w i t h W a l l S t r e e t knows t h a t g o l d - b e a r i n g b o n d s a r e e xtrem ely s c a rc e ,

...

it

is

s u r e l y t h e p a r t o f w isd o m t o b e g i n

t h e i s s u e a s s o o n a s we c a n . " ^

W ith th e r e s t o r a t i o n o f c o n f i ­

d e n c e c o n v e r s i o n moved f o r w a r d r a p i d l y .

II,

^ C o m m e r c i a l a n d F i n a n c i a l C h r o n i c l e . May 2 6 , 1 6 6 6 , V o l . p . 642; J u l y 7, 1666, V ol. I l l , p T ^ . 2 2J u l y 7 , 1 6 6 6 , V o l . I l l ,

^Idem

p.

2.

B e t w e e n A u g u s t 3 1 , 16& 5» a n d O c t o b e r 3 1 , l & o o , the f o l ­ l o w i n g s i g n i f i c a n t c h a n g e s i n t h e d e b t s t r u c t u r e h a d taken place:^ D ecrease i n the

sh o rt-te rm debt:

7.3 p e r c e n t T r e a s u r y n o t e s ..................... $ 1 0 5 C e r t i f i c a t e s o f i n d e b t e d n e s s ................ 84 C o m p o u n d - i n t e r e s t n o t e s ............................ 68 T e m p o r a r y l o a n . ................................................ 62 5 -p e rc e n t Treasury n o te s ...... .31 U nited S ta te s n o te s ( g r e e n b a c k s ) ... 42 Increase

98 5 , 7 0 0 . >3 9 1 1 , 0 0 0 . DC

5 1 2 , 020.30 1 4 6 , 7 1 ^ . 7? O'- 0 ,0a 0 . 0 0

830, 17^.00

in the funded d e b t :

6- p e r c e n t f i v e - t w e n t y bonds a u t h o r ­ i s e d b y t h e L o a n A c t s o f M a rch 3 , I S 6 5 , a n d A p r i l 1 2 , 1 8 6 6 . . . 1 2 0 5 , 2 8 1 , 2 0 0 . DO

V a r i o u s o t h e r d e b t i t e m s w h i c h I n c r e a s e d o r d e c r e a s e d we r m inor am o u n ts.

of

D u r i n g t h i s p e r i o d t h e n e t d e b t d e c r e a s e d by

$206,379,565.71.2 The p r i n c i p a l l o a n I n s t r u m e n t b y w h i c h t h e c o n v e r s i o n o p e r a t i o n s were c a r r i e d o u t , tw enty 6- p e r c e n t bond.

as

h a s b e e n s e e n , was t h e

five-

A n o th e r , b u t m in o r , o b l i g a t i o n employ­

e d f o r c o n v e r s i o n was t h e 3 - p e r c e n t c e r t i f i c a t e w h i c h w a s «ut x i o r i 7 ed by t h e A c t o f M a r c h 2 , 1 8 6 7 , ^ i n w h i c h t h e S e c r e t a r y was d i r e c t e d t o i s s u e $ 5 ° m i l l i o n o f t h e s e c e r t i f i c a t e s

to be

used f o r the red e m p tio n and r e t i r e m e n t o f c o m p o u n d -in te re s t n o tes.

I n O c t o b e r an d Decem ber o f t h a t y e a r $ 1 1 , 5 6 0 , 0 0 0 of

t h e s e c e r t i f i c a t e s were i s s u e d t o red eem c o m p o u n d - I n t e r e s t

1 T r e a s u r y R e p o r t s . 1 6 6 6 , pp. 6 - 7 ; 2 T r e a s u r y R e p o r t . 1 S6 6 , p . 6 . 51 ^ S t a t u t e s . 5 5 6 .

a n d 191^-, P. 205

104 The c o u r s e o f c o n v e r s i o n f o r some m o n t h s a f t e r sage o f

the p as­

the L o a n A c t w ss h a m p e r e d b y two e v e n t s i n E u r o p e .

The L o n d o n p a n i c i n May t e m p o r a r i l y d e p r e s s e d t h e p r i c e s o f A m erican bonds in E uropean m a r k e ts , in g in the

the

flv e-tw en ties d e c lin ­

c o u r s e o f a m o n t h f r o m 7 2 * t o 64- i n

term s o f g o l d .

Some E u r o p e a n h o l d i n g s w e r e s o l d on A m e r i c a n m a r k e t s . a f te rm a th o f the

p a n i c was b r i e f ,

c i a l comm unity r e g a i n e d i t s arose

b u t s c a r c e l y hod th e f i n a n ­

b a l a n c e when a d em an d f o r s p e c i e

i n E u r o p e b e c a u s e o f t h e war b e t w e e n A u s t r i a a n d P r u s -

sia.

The f i n a n c i a l m a r k e t s q u i c k l y r e c o v e r e d f r o m t h e s e

adverse

i n f l u e n c e s , how ever,

and i t

s o o n be ca m e a p p a r e n t t h a t

the T re a su ry c o u ld push fo rw ard w ith i t s

p lan s.

Com m ercial and F i n a n c i a l C h r o n ic le r e f e r r e d p u b lic anx iety " the

The

?

w ith re g ard

fa c t t h - t w ith in

m ature.

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to

In J u ly the "co n sid erab le

to the s h o r t- te r m d e b t,

owing t o

two y e a r s $ 1 , 0 0 0 m i l l i o n o f t h e d e b t w o u l d p o in ted

to the

s t r e n g t h o f the m arkets

in a b s o r b i n g t h e bonds r e c e n t l y s o l d by E u r o p e a n s ,

"Everyone

c o n v e r s a n t w i t h W a i l S t r e e t knows t h a t g o l d - b e a r i n g b o n d s ex trem ely s c a r c e ,

...

it

is

surely

t h e i s s u e a s s o o n a s we c a n . " ^

the p a r t

are

o f wisdo m t o b e g i n

W ith t h e r e s t o r a t i o n o f c o n f i ­

d e n c e c o n v e r s i o n moved f o r w a r d r a p i d l y .

II,

^ C o m m e r c i a l a nd F i n a n c i a l C h r o n i c l e . May 2 6 , 1 S 6 6 , V o l . p . “ 6 ^ 2 ; J u l y 7 , 1 S6 6 , V o l . I l l , p . f . 2J u l y 7 , 1 £ 6 6 , V o l . I l l , ^Idem.

p.

2.

105 B e tw e e n A u g u s t 1 1 , I 0 6 5 , a n d O c t o b e r 3 1 , 1 8 6 6 , t h e f o l ­ low ing s i g n i f i c a n t changes in 1 p lace: D ecrease

i n the

the d e b t s t r u c t u r e had ta k e n

s h o rt-te rm d ebt:

7 . 3 p e r c e n t T r e a s u r y n o t e s .................... $ 1 0 6 , 9 6 5 , 7 0 0 . 0 0 C e r t i f i c a t e s o f i n d e b t e d n e s s ................ 8 4 ,9 1 1 ,0 0 0 .0 0 C o m p o u n d - i n t e r e s t n o t e s ............................ 6 8 , 5 1 2 , 0 2 0 .0 0 T e m p o r a r y l o a n ................................................... 6 2 , l 4 6 , 7 l 4 . 27 5 - o e r c e n t T r e a s u r y n o t e s .......................... 3 1 , 0 :0 , 0 0 0 . 0 0 U nited S ta te s n o te s ( g r e e n b a c k s ) ... 4-2,830,174.00 Increase

in the funded d e b t:

6- p e r c e n t f i v e - t w e n t y bo n ds a u t h o r i 7 e d by t h e L o a n A c t s o f M a rch 3 , I& 6 5 , a n d A p r i l 1 2 , 1 8 6 6 . . . $ 2 0 5 , 2 S 1 , 0 0 0 . 0 0

V a r io u s o t h e r d e b t ite m s w h ic h i n c r e a s e d o r d e c r e a s e d were o f m inor am o u n ts.

D u r i n g t h i s p e r i o d t h e n e t d e b t d e c r e a s e d by

$ 206, 379,5 6 5 .7 1 . 2 The p r i n c i p a l l o a n i n s t r u m e n t b y w h i c h t h e o p e r a t i o n s were c a r r i e d o u t , tv/enty 6- p e r c e n t bond.

a s h a s b e e n s e e n , was t h e

A nother,

e d f o r c o n v e r s i o n was t h e

conversion fiv e-

b u t m in o r, o b l i g a t i o n em ploy­

3- p e r c e n t

c ertifica te

w h i c h was a u -

t n o r i r . e d by t h e A c t o f M a r c h 2 , 1 8 6 7 , ^ i n w h i c h t h e S e c r e t a r y was d i r e c t e d

to

i s s u e $56 m i l l i o n o f th e s e c e r t i f i c a t e s

to be

used f o r th e red e m p tio n and r e t i r e m e n t o f c o m p o u n d -in te re s t notes.

I n O c t o b e r and December o f t h a t y e a r $ 1 1 , 5 6 0 ,0 0 0 o f

t h e s e c e r t i f i c a t e s were I s s u e d t o redeem c o m p o u n d - i n t e r e s t

1T r e a s u r y R e p o r t s . 1 8 6 6 , p p . 6 - 7 ; 2 T re a su ry R e p o r t . 1866, p . 6 . 3l 4 S t a t u t e s . 5 5 6 .

and 1914,

p.

205.

106 n o t e s t h e n m a t u r i n g , 1 a n d t h e b a l a n c e o f t h e i s s u e was s u b ­ sequently d isp o sed o f. m a t u r i t y , were p a y a b l e e lig ib le

The c e r t i f i c a t e s w e r e o f i n d e f i n i t e i n l a w f u l money o n d e m a n d , a n d w e r e

t o be h e l d b y b a n k s a s a p a r t o f t h e i r r e s e r v e s .

The i s s u a n c e o f t h e s e c e r t i f i c a t e s advantage

to th e n a ti o n a l b a n k s,

n o t e s , which w .r e a l s o e l i g i b l e r e d e e m e d by t h e T r e a s u r y , p l a c e as r e s e r v e s ,

fo r as the com pou nd-in terest f o r bank r e s e r v e s , had been

l e g a l - t e n d e r n o te s had tak e n t h e i r

and t h u s t h e amount o f c u r r e n c y i n c i r c u ­

l a t i o n was c o n t r a c t e d . new c e r t i f i c a t e s

was, o f c o u r s e , an

The e m p l o y m e n t b y t h e b a n k s o f t h e

r a t h e r than greenbacks

to r e p la c e

the r e ­

d e em ed c o m p o u n d - i n t e r e s t n o t e s f o r m e r l y h e l d a s r e s e r v e s

thus

re le a se d greenbacks for c ir c u la tio n . The t h r e e p e r c e n t , c e r t i f i c a t e s a r e a s u b ­ s t i t u t e , to a c o n s id e r a b le e x t e n t , f o r U n ite d S t a t e s n o t e s , b e in g l a r g e l y h e l d by th e banks a s a p o r t i o n o f t h e i r r e s e r v e , and th u s i n d i r e c t l y , th o u g h n o t to t h e i r f u l l nom inal v a lu e , th e y s w e l l t h e volume o f c u r r e n c y . 2 The r e a l m o t i v e o f C o n g r e s s i n a u t h o r i z i n g t h e s e c e r t i ­ f i c a t e s was n o t so much t o f a v o r t h e b a n k s a s n e u tra liz e"

to

’’c h e c k a n d

th e p r o c e s s o f c u rr e n c y c o n t r a c t i o n 3 w hich had

been put in o p e ra tio n j u s t a year e a r l i e r . ^

^T r e a s u r y R e p o r t . 1 8 6 7 ,

L ater,

t o remove

p. V I.

^T re a s u ry R e o o r t . 1869, p . X V III. ^ B laine, 0£

.

c i t . , V ol.

II,

p.

327.

^The A c t o f A p r i l 12^ 1 8 6 6 (l^- S t a t u t e s . 3 1 ) h a d p r o ­ v i d e d t h a t n o t more t h a n $ 1 0 m i l l i o n o f t h e g r e e n b a c k s c o u l d be r e t i r e d i n t h e f i r s t s i x m onths f o l l o w i n g t h e p a s s a g e o f t h e a c t , a n d n o t more t h a n f o u r m i l l i o n i n a n y o n e m o n th th ereafter. T his p e r m itte d t h e i r g r a d u a l c o n t r a c t i o n .

107

t h e p o s s i b i l i t y o f a s t r i n g e n t money m a r k e t , 1 a n a d d i t i o n a l $25 m i l l i o n o f t h e c e r t i f i c a t e s was p r o v i d e d f o r b y t h e A c t O o f J u l y 2 5 , 1 6 6 S , ‘~ They w e r e t o b e u s e d f o r t h e r e t i r e m e n t of the rem aining co m p o u n d -in terest n o te s .^

I n the Act of

J u l y 1 2 , I S 7 0 , p r o v i s i o n was made f o r t h e i r r e d e m p t i o n . ^ The s u r p r i s i n g r a p i d i t y w i t h w h i c h t h e c o n v e r s i o n b o n d s w e r e d i s p o s e d o f i n I S 67 a n d 1S6S i s a c c o u n t e d f o r b y two fav o rab le circu m stan ces.

The f i r s t

o f t h e s e was t h e c o n d i ­

t i o n o f t h e money m a r k e t , w h i c h r e m a i n e d r e l a t i v e l y u n d e r th e w a t c h f u l eye and p o w e r f u l i n f l u e n c e

stab le

of S ecretary

M c C u l l o c h , who made i t a p a r t o f h i s p o l i c y b o t h t o r e s t r a i n sp ecu lativ e

e x p a n sio n o f c r e d i t and to a i d th e m arket a t

tim es o f s t r i n g e n c y . two o u t l e t s

The s e c o n d was t h e f a c t

fo r the bonds.

t h a t t h e r e were

They c o u l d b e exchanp*ed f o r t h e

7 . J , - p e r c e n t n o t e s , t h e o u t s t a n d i n g a m o u n t o f w h i c h was v e r y larg e;

and th e y

vertised p ric e .5

c o u ld be b o u g h t f o r cash a t th e p u b l i c l y a d ­ So l o n g a s t h e S e c r e t a r y ' s

t h e money m a r k e t was s u c c e s s f u l ,

c o n tro l over

t h e c o n v e r s i o n b o n d s com­

manded a p r e m i u m w h i c h made th e m a n a t t r a c t i v e

1J a c o b K. U p t o n , Money i n P o l i t i c s Company, B o s t o n , 1S&4-), p . 1 3 2 .

exchange fo r

(D. L o t h r o p a n d

215 S t a t u t e s . I 6 3 . ^Idem. S t a t u t e s . 251. n - Com mercial and F i n a n c i a l C h r o n i c a l , A u gust 1 0 , 1 6 6 7 , V o l . V, p . 1 6 5 .

108 t h e 7 - 3 1s a s t h o s e n o t e s a p p r o a c h e d m a t u r i t y . By D e c e m b e r 186 7 a l l o f t h e t e m p o r a r y l o a n s , f ic a te s of indebtedness,

the c e r t i ­

and th e 5 -P & rc en t n o t e s ( e x c e p t f o r

s m a l l am ounts n o t p r e s e n t e d f o r paym ent) had b e e n p a i d . t h a t rem ained o f th e $71*875 , 0^0

A ll

s h o r t - t e r m i n t e r e s t - b e a r i n g d e b t was

o f c o m p o u n d - i n te r e s t n o t e s and $ 3 3 7 , 9 7 8 ,8 0 0 o f

t h e 7 . 3 - P &rc e n t n o t e s , 1

On J u l y l p ,

1868, th e m a t u r it y d a te

o f t h e l a s t o f t h e 7 . 3 1s » th-; " t a s k o f c o n v e r t i n g a t h o u s a n d m il l io n s o f tem porary o b l ig a t io n s p rac tic ally

com pleted,

p

i n t o a f u n d e d d e b t " was

the rem nant o f c o m p o u n d -in te re s t

n o t e s b e i n g r e d e e m e d w i t h i n a few m o n th s t h e r e a f t e r . T h u s , by r e a r r a n g i n g t e r m s a n d m a t u r i t i e s a n d e l i m i n a t ­ ing a v a rie ty o f is s u e s , and i t s

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were i s s u e d a s o f f o u r d i f f e r e n t d a t e s and a c c o r d i n g l y be­ came r e d e e m a b l e a t d i f f e r e n t

tim es.

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shown t h e way

i n w h ich th e y were d e s i g n a t e d and c e r t a i n d e t a i l s issu an ce.^

1 T r e a s u r y R e p o r t . I 6 6 7 , p . V, 2 I b l d . , 1&68,

o p . XLI-XLIV.

5 l b i a . . 1 9 1 1*-, p .

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109

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F i v e - t w e n t i e s o f I S 6 5 I . N 0 V. C o n s o l s o f I S 6 5 .................. J u l y C o n s o l s o f 1 8 6 7 ..................J u l y C o n s o l s o f 1 S 6 S .................. J u l y

1, 1, 1, 1,

Amount I s s u e d

Average P rice a t Which S o l d

I S 7 0 . . . # 2 0 3 , 3 2 7 , 2 5 0 _____103.54-7 1 8 7 0 . . . ' ' 5 3 2 , 9 9 6 , 9 5 0 ......... 1 0 1 . 6 9 1 1 8 7 2 . . . 3 7 9 , 6 1 8 , 0 0 0 ____ 1 0 0 . 0 6 2 1873. . . 4 - 2 , 5 3 9 , 9 3 0 ____ 1 0 0 . 0 ^ 5

THREATS OF REPUDIATION A lthough th e T reasu ry

co uld s e l l bonds a t

some pr em ium

i n t h e home m a r k e t , a n d t h e r e b y f o l l o w t h r o u g h t o c o m p l e t i o n i n 1 8 6 8 t h e c o n v e r s i o n of t h e f l o a t i n g d e b t , t h e p a p e r c u r r e n 2 cy c o n t i n u e d a t a s u b s t a n t i a l d i s c o u n t and U n ite d S t a t e s bonds s o l d a t a p p r o x i m a t e l y t h e same d i s c o u n t i n E u r o p e . tim e a f t e r th e war " i t

se em ed t o be f e l t

/ i n Europ,e/

F o r some ...

th at

t h e U n i t e d S t a t e s was on a b o u t a 1 0 - p e r c e n t i n t e r e s t b a s i s . T his r e f l e c t e d

t h e d o u b t i n m in d s o f i n v e s t o r s a s t o t h e m a n n e r

i n w hich th e Government would pay i t s

o b lig atio n s.

p r o v i s i o n s h a d b e e n made i n t h e l o a n a u t h o r i s a t i o n s b o n d s b e p a i d i n c o i n , a l t h o u g h t h a t was p l a i n l y

the

No c l e a r t h a t the in te n t

o f t h e l e g i s l a t o r s a n d t h e u n d e r s t a n d i n g o f t h o s e who b o u g h t the b o n d s.^

The g r o w i n g demand I n C o n g r e s s a n d among t h e

These were I s s u e d p r i o r t o passage- o f t h e Loan A ct o f 1 8 6 6 , b u t e x c e p t f o r t h e d a t e s when r e d e e m a b l e a n d p a y a b l e t h e y were i d e n t i c a l w i t h t h e s u b s e q u e n t l y i s s u e d C o n s o l s .

'-In May I S 6 5 t h e a v e r a g e p r i c e o f g o l d i n g r e e n b a c k s was 1 3 5 * 6 ; i n S e p t e m b e r 1869 I t was I 3 6 .S . At t i m e s b e tw e e n t h e s e d a t e s i t r a n g e d much h i g h e r . M i t c h e l l , G o ld . P r i c e s . and Wages U n d e r t h e G r e e n b a c k S t a n d a r d . p p . 13-14-. ^S p eare, 0 0 . c l t . . p.

4-

271.

For an a n a l y s i s o f the i n t e n t o f C ongress see T re a su ry R e p o r t . I 8 6 7 , o p . XXIV-XXVII.

110

p e o p l e t h a t t h e d e b t be p a i d i n g r e e n b a c k s ( w o r t h a r o u n d s e v e n t y c e n t s on t h e d o l l a r )

thus r a i s e d

the t h r e a t t h a t the

v a s t a m ou n t o f f i v e - t w e n t i e s w h i c h , by t h e i r * t e n o r , w e r e a l r e a d y r e d e e m a b l e o r s o o n t o become so w o u ld s i m p l y b e c a l l 1 ed a n d p a i d w i t h f r e s h l y p r i n t e d g r e e n b a c k s .

I b i d . , p p . X X I II - X X I X . I n t i l l s a n n u a l r e p o r t M c C u l l o c h d w e lt a t l e n g t h , and e l o q u e n t l y , upon t h e n e c e s s i t y f o r p a y ­ m e n t o f t h e b o n d s i n c o i n , h o l d i n g i t t o be t h e h o n o r a b l e a n d e c o n o m i c a l way o f m n n s g i n • t h e d e b t . The U n i t e d S t a t e s was p l e d g e d t o pay i t s d e b t " a c c o r d i n g to t h e u n d e r s t a n d i n g b e ­ tween th e g rv e rn m e n t end th e s u b s c r i b e r s to i t s l o a n s a t th e t i m e t h e s u b s c r i p t i o n s w e r e s o l i c i t e d a n d o b t a i n e d . . . The b o n d s w ere n e g o t i a t e d w i t h t h e d e f i n i t e u n d e r s t a n d i n g t h a t t h e y w e r e p a y a b l e I n c o i n . . . . The c o n t r a c t s w e r e made i n g o o d f a i t h on b o t h s i d e s , a p a r t o f them when t h e g o v e r n m e n t was i n i m m i n e n t p e r i l a n d n e e d e d money t o p r e s e r v e i t s e x i s ­ t e n c e . . . . Good f a i t h a n d p u b l i c h o n o r , w h i c h t o a n a t i o n a r e o f p r i c e l e s s w o r t h , r - q u i r e t h a t t h e s e c o n t r a c t s s h o u l d be c o m p lie d w i t h i n t h e s p i r i t I n w h ich t h e y were made. . . . N a t i o n a l d e b t s a r e s u b j e c t t o the.' m o r a l l a w o f t h e n a t i o n s . W h e n e v e r t h e r e i s no e x p r e s s i o n t o t h e c o n t r a r y , c o i n p a y ­ m ents in such o b l i g a t i o n s a r e h o n o r a b ly i m o l l e d . " I b i d . , pp. X X I I I , XXIV, XXVII. J a y C o o k e , who h o d t a k e n so a c t i v e a n d s u c c e s s f u l a p a r t i n p l a c i n g t h e b o n d s w i t h t h e p u b l i c , was o u t r a g e d a t t h e t h o u g h t t h a t t h e G o v e r n m e n t m i g h t be l e d t o r e d e e m i t s d e b t w ith a cheapened c u rre n c y . In an open l e t t e r to th e p u b l i c h e e m p h a s i z e d t h a t " I t i s s u i c i d a l a n d f o o l i s h t o t h u s damage o u r c r e d i t b y a t t e m p t i n g t o f o r c e a c o n s t r u c t i o n o f t h e L oan l a w s n e v e r c o n t e m p l a t e d by t h o s e who f r a m e d t h e m , b y t h o s e who e x e c u t e d t h e m , n o r by t h o s e who i n v e s t e d u n d e r t h e i r p r o v i s i o n s . " E ven g r e a t e r was h i s c o n c e r n t h a t h e a n d h i s s u b - a g e n l B , who h a d d i s t r i b u t e d many o f t h e b o n d s , w o u l d h a v e h a d a p a r t i n th e "g ross d e c e p tio n " o f the p e o p le . To t h e n e w s p a p e r e d i t o r s o f t h e c o u n t r y he s a i d , "You g e n t l e m e n o f t h e p r e s s a r e e q u a l ­ l y r e s p o n s i b l e . . . . You d i s s e m i n a t e d , I n t h o u s a n d s o f e d i t o r i ­ a l s , the s ta te m e n t t h a t th e funded d e b t ( th e 5 -2 0 and o th e r l o a n s ) w ere, p r i n c i p a l nad I n t e r e s t , p a y ab le i n c o in . You d i d I t h o n e s t l y and so d i d I . " " L e t t e r o f Mr. J a y Cooke on t h e P a y m e n t i n G o ld o f t h e U. S . F i v e - T w e n t y B o n d s , t o t h e E d i t o r o f t h e P h i l a d e l p h i a I n q u i r e r , 11 M a rch 1 9 , 1 5 6 7 .

I ll By I S b S t h e c l e a v a g e i n p u b l i c o p i n i o n w i t h r e s p e c t t o the

c u r r e n c y end. t h e d e b t was so b r o a d t h a t t h e q u e s t i o n b e ­

came t h e m a j o r p o l i t i c a l i s s u e

in th e e l e c t i o n s

th a t year.

In J u l y the R e p u b lic a n N a tio n a l C onvention denounced " a l l forms o f r e p u d i a t i o n to rs

...

...

and c a l l e d

f o r payment o f a l l c r e d i ­

not only a c c o rd in g to the l e t t e r , b u t to the s p i r i t

of the la w s."^

The D e m o c r a t i c N a t i o n a l C o n v e n t i o n d e m a n d ed

t h ' t u n l e s s a Government o b l i g a t i o n co in i t

s p e c i f i e d payment in

s h o u ld be p a id i n g r e e n b a c k s .

I t p ro p o se d one c u r-

ren c y fo r bondholders as w e ll as a l l o th e r I n d i v i d u a l s . ~ If

the p u b lic

c r e d i t c o u l d b ecom e a m a j o r i s s u e i n a

p re sid e n tia l ele ctio n ,

t h e r e vr s g o o d r e a s o n f o r i n v e s t o r s

t o be wary o f t h e G o v e r n m e n t's o b l i g a t i o n s , and f o r t h o s e who p u r c h a s e d th em t o do so a t a d i s c o u n t c o m m e n s u r a t e w i t h the r i s k .

In s p i t e o f th e f a v o r a b le

im p lic a tio n s o f G ra n t's

e l e c t i o n i n N o v e m b e r , t h e n a t i o n ' s c r e d i t c o n t i n u e d a t a low lev e l.

The p o o r s t a t u s o f A m e r i c a n G o v e r n m e n t o b l i g a t i o n s

i n t h e w o r l d m a r k e t i s made e m p h a t i c a l l y c l e a r by a c o m p a r i ­ son o f th e 6- p e r c e n t f i v e - t w e n t i e s

w ith the l o w - i n t e r e s t - r a t e

bonds o f c e r t a i n Eurooean g o v ern m en ts.

I n December t h e i r

p r i c e s were a s f o l l o w s : ?

1C h a r l e s F . D u n b a r , "The S a f e t y o f t h e L e g a l T e n d e r P a o e r , " Q u a r t e r l y J o u r n a l o f E c o n o m i c s . A p r i l 1&97> V o l . X I , p.* 2 2 S. p

Barrett, oo. c l t . . p. 169.

^B a n k e r s ' Maga?i n e . May IS 6 9 , V o l .

2 3 , p.

909.

112

3- p e r c e n t B r i t i s h 3- p e r e e n t F ren ch 2 1 - p e r c e n t Dutch 6- p e r c e n t U n ite d

C o n s o l s .............................. §2 1 / S R e n t e s ................................... 69a l o a n ........................................ 57 S t a t e s f i v e - t w e n t i e s . 7 f+'i"

The R e p u b l i c a n v i c t o r y was r e a s s u r i n g , b u t t h e p r o p o s a l a month l a t e r by P r e s i d e n t J o h n s o n t h a t s i x t e e n y e a r s o f i n t e r e s t paym ents s h o u ld w ipe o u t t h e d e b t 1 i n d i c a t e d

to what

extrem es in h ig h p la c e s c o n c e p tio n o f d e b t p o lic y c o u ld go. R e s o l u t i o n s s t r o n g l y c o n d e m n i n g t h e p r o p o s a l w e r e p a s s e d by 2 t h e S e n a t e a n d t h e H o use b y l a r g e m a j o r i t i e s . On M a rch l b , 1869, G rant approved the C r e d i t , a

"Act to S t r e n g t h e n th e P u b l i c

m easure w hich s t a t e d d e f i n i t e l y

t h e G o v e r n m e n t w o u l d be p a i d i n c o i n . l o w e d on J u l y l 4 ,

k

t h a t the bonds o f

T his l e g i s l a t i o n ,

fo l­

1870, by t h e R e fu n d in g A c t, w h ich c l e a r l y

s p e c i f i e d t h a t a l l o f t h e b o n d s a u t h o r i s e d by i t be p a i d i n co in ,

settled

f o r a t i m e one i m p o r t a n t a s p e c t o f t h e p u b l i c -

cred lt c o n t r o v e r s y T h e

continuous re d u c tio n o f the d ebt

n

R i c h a r d s o n , M essages and P a o e rs o f th e P r e s i d e n t s , V ol. VI, p . 6 7 8 . ' ^ C o n g r e s s i o n a l G l o b e , ^Oth C o n g ., 1 7 , 1 boo, pp. 7 1 - 7 3 , 1 2 3 - 1 2 8 .

3d S e s s . , Decem ber l 4 ,

^16 S t a t u t e s . 1 .

^ " I t i s e v i d e n t t h a t t h i s p l e d g e and p rom ise so s o le m n ly g i v e n c a n n e v e r be r e c a l l e d . . . . I t e n t e r s i n t o t h e e s s e n c e o f t h e c o n t r a c t a n d i s b i n d i n g on b o t h p a r t i e s . " M e r c h a n t 1s Mag a r. i n e . March 1 8 6 9 , V o l . 6 0 , p . 2 2 6 . p-

y i t i s "w ise s t a t e s m a n s h i p to d e c l a r e a s im p le , s s t r o n g , a n d a n h o n e s t p o l i c y , a n d t o so i n t e r p r e t t h e c o n t r a c t t h a t no d o u b t may e x i s t r e s p e c t i n g i t , f o r t h e n o n l y c a n a p e o p l e r e a l i z e th e f u l l v a lu e o f t h e i r d e b t upon e x p o r t a t i o n . " H. C. Adams, P u b l i c D e b t s . p . 1 8 2 .

113

also

tended to enhance th e p u b lic c r e d i t I n v e s t o r s

reassu red in tio n ists

were

s p ite of the f a c t th a t the ranks of th e i n f l a ­

c o n t i n u e d to grow.

The p l a i n f a c t i s

th a t in

t h is p o st-w ar period

o f t h e U n i t e d S t a t e s was e x t r e m e l y p o o r . fundam ental rea so n ;

It

the c r e d i t

was p o o r f o r o ne

a s u f f i c i e n t l y l a r g e p o r t i o n o f th e popu­

l a t i o n d i d n o t com prehend or were m is in fo rm e d a s t o t h e r u d i ­ m e n t a r y n a t u r e o f money a n d c r e d i t . ^ rep u d iatio n is

ju stifie d ,

T h e r e c a n b e t i m e s when

b u t t h i s was n o t o n e o f t h e m .

Eow

much o f t h e p o p u l a r m ovem ent w h i c h so w e a k e n e d c o n f i d e n c e i n the p u b lic

c r e d i t c a n b e a s c r i b e d t o I g n o r a n c e , how much t o

a low s e n s e o f t h e

eth ical,

c a n n o t be d e t e r m i n e d ,

t i m e s were c o n d u c iv e to b o t h . 0

I t must be s a i d ,

but the of course,

^M e rc h a n t1s M a g a z in e , Ju n e 1869, V o l. 60, p . 402. 2 "T h ey t h o u g h t t h e y w a n t e d m o re c u r r e n c y ; w h a t t h e y n e e d e d was more c a p i t a l . H H e p b u r n , H i s t o r y o f C o i n a g e a n d C urren cy , p . 226. One o b s e r v e r o f t h e t r e n d t o w a r d c u r r e n c y i n f l a t i o n i n t h e l a s t t h i r d o f t h e n i n e t e e n t h c e n t u r y w r o t e , "The a r g u m e n t o f t h e l e a d e r s , t h a t o u r m o n etary e m b a rra ss m e n ts p r o c e e d from a s c a r c ity of gold, d o u b tle ss r e p r e s e n ts f a i r l y the honest c o n v i c t i o n o f t h e g r e a t b o d y o f t h e s u p p o r t e r s o f t h e move­ m e n t . * W i l l i a m B r o u g h , The N a t u r a l Lav; o f Money (G . P . P u t ­ n a m ' s S o n s , New Y o r k a n d I o n d o n , ' 1 8 9 6 ) , p . 1 4 6 . A n o th e r comm ented, "F o r t h e l a s t t h i r t e e n y e a r s t h e m o r a l s e n s e o f t h e p e o p l e h a s b e e n c h l o r o f o r m e d by t h e c i r c u ­ l a t i o n , a s money, o f a b o u t s e v e n h u n d r e d m i l l i o n s o f l i e s , " E l i z u r W r i g h t , "The R e l a t i o n s o f D e b t a n d M o n e y ," N o r t h A m e r i c a n R e v i e w . May 1 8 7 7 , V o l . 1 2 4 , p p . 4 3 3 - 4 3 4 . W alter Bagehot h a s p o in te d out t h a t "There i s a n a t u r a l t e n d e n c y i n men t o f o l l o w t h e e x a m p l e o f t h e G o v e r n m e n t u n d e r w hich th e y l i v e . The G o v e r n m e n t i s t h e l a r g e s t , m o s t i m p o r ­ t a n t , a n d m ost c o n s p i c u o u s e n t i t y w i t h w h ic h t h e mass o f any p e o p l e a r e a c q u a i n t e d ; i t s r a n g e o f k n o w le d g e m ust a lw a y s be i n f i n i t e l y g r e a t e r t h a n th e a v e ra g e o f t h e i r k n o w led g e, and

114 t h a t one e a s i l y

comes t o b e l i e v e

w n i c li seems t o s e r v e b e s t h i s

in th a t p a r t i c u l a r

policy

im m ediate p e r s o n a l i n t e r e s t .

was a n u n d e r s t a n d a b l e human r e a c t i o n

o f the fa rm e r,

It

f o r ex­

am ple, c a u g h t betw een h eav y f i x e d - d e b t c h a r g e s and d e c l i n i n g p r ic e s fo r a is produce,

to r e b e l a g a i n s t d e b t and c u r r e n c y

p o l i c i e s ■/.•filch t h r e a t e n e d

to r u i n him.

The e v i l s o f u n s o u n d

w a r f i n a n c e be ca m e more t h a n e v e r a p p a r e n t when m e a s u r e s w e r e t a k e n t o c o r r e c t them. THE ESSENTIAL SOUNDNESS OF THE CONVERSION POLICY M c C u l l o c h 1s c o n v e r s i o n o f t h e e n o r m o u s s h o r t - t e r m d e b t in to

funded form in a r e l a t i v e l y

n o ta b le achievem ent.

s h o r t p e r i o d o f t i m e was a

T hroughout th e o p e r a t i o n he had e x h i­

b ited

r e m a r k a b ly sound ju d g m e n t.

The d a n g e r i n h e r e n t i n a

larg e

f l o a t i n g d e b t a nd t h e n e e d t o f u n d i t w h i l e c o n d i t i o n s

w e r e f a v o r a b l e made t h e c o n v e r s i o n a n u n d e r t a k i n g o f c o n s i d e r ­ a b le urgency.

A t t h e same t i m e ,

t h e u n a v o i d a b l y hi p;h r a t e

o f i n t e r e s t on t h e new o b l i g a t i o n s a n d t h e f a c t annual in te r e s t

t h a t the

p a y m e n t s on t h e d e b t w a r e t h e r e b y t e m p o r a r i l y

t h e r e f o r e , u n l e s s t h e r e i s a c o n sp ic u o u s w arning to th e con­ t r a r y , m o a t men a r e i n c l i n e d t o t h i n k t h e i r G o v e r n m e n t r i g h t , a n d when t h e y c a n , t o do w h a t i t d o e s . " Lombar d S t r e e t : a D e s c r i p t i o n o f t h e Money M a r k e t . l L t h e d i t i o n T e . P . D u t t o n a n d Company, Hew Y o r k , 1 9 2 0 FT P. 9 3 . A more r e c e n t s t u d e n t o f p u b l i c d e b t s h a s r a i s e d t h e b r o a d q u e s t i o n o f " th e n a t u r a l r e p e r c u s s i o n s o f D e b t upon c h a r a c t e r and a t t i t u d e s , upon p a s s i o n s and p o l i t i c a l c o n d i ­ t i o n s , upon m o r a ls and la w , a s w e l l a s upon t h e p u r e l y econom ic w e l f a r e o f m en." F re em a n T i l d e n , A W o rld i n D e b t ( F u n k & Wagn a l l s Company, New Y o r k a n d L o n d o n , 1 9 3 &) , p . 3 ^ S .

115 i n cre as ed -* * made t h e c o n v e r s i o n

se e m t o t h o s e who w e r e u n a w a r e

o f the

c r e d i t much l e s s o f a n a c h i e v e ­

low s t a t e

of the p u b lic

ment t h a n i t r e a l l y There i s th at

was.

a c o n c e n s u s o f o p i n i o n among s t u d e n t s

under fav o ra b le

c o n d itio n s conv ersio n is

sim p le u n d e rta k in g .

of fin an c e

a re la tiv e ly

O ften th e h ig h p r a i s e acc o rd e d a p u b lic

f i n a n c i e r f o r t h e a c h ie v e m e n t of so l a r g e

an o p e r a t i o n

should

j u s t l y be s h a r e d w i t h h i s p r e d e c e s s o r s and c o n t e m p o r a r i e s whose p o l i c i e s it.

2

have r e s u l t e d in

The f e a s i b i l i t y

both the p u b lic

sta te

of co nversion,

how ever,

It

may b e s a i d

d e p e n d s upon

s tr e n g th o f the

t h a t t h e more u r g e n t

f i n a n c i a l o p e r a t i o n t h e more d i f f i c u l t

ta k in g of i t ,

the need

the under­

f o r a l a r g e f l o a t i n g d e b t can be "a s o u r c e o f

g re a t d an g er,"

e s p e c i a l l y fo llo w in g a w ar,

" m o r e h e a v i l y on p u b l i c c r e d i t tio n s.

c o n d i t i o n s f a v o r a b l e to

o f t h e money m a r k e t and t h e

c re d it.3

for th is

the

T his p o in t

in t h a t i t

weighs

th a n o t h e r form s of o b l i g a ­

i s made b y two w r i t e r s ,

as fo llo w s:

I t i s b e t t e r to borrow f o r a lo n g term and to pay a h i g h e r r a t e o f I n t e r e s t t h a n to be p e r p e t u a l l y a t t h e m ercy o f h o l d e r s o f T r e a s u r y b i l l s f o r r e ­ p a y m e n t . . . . The f a c t t h a t a l a r g e f l o a t i n g d e b t a l r e a d y e x i s t e d w o u ld make i t f a r m ore d i f f i c u l t to secu re f u r t h e r sh o rt borrow ing w ith o u t re c o u rs e t o m e a s u r e s w h i c h w ou ld i n v o l v e s e r i o u s I n f l a t i o n w ith a l l I t s harm ful c o n s e q u e n c e s .5

1 T r e a s u r y R e p o r t , 1946, p . 369 2 Adams, S c i e n c e o f F i n a n c e , p . 5 5 4 . ^ C f . Adams, P u b l i c D e b t s , p p . 4Ib id . , p. S hirras,

220,

238.

202. op. c l t .,

V ol.

II,

p. 799.

116 I f a c o u n t r y e m e r g e fr o m a w a r b u r d e n e d w i t h i r r e ­ d e e m a b l e p a p e r n o t e s , i t i s w i s e t o s e t on f o o t a t once a p o l ic y o f c o n t r a c t i o n , s in c e in t h i s m a n n e r t h e c o u n t r y may h o p e t o e v a d e t h e f u l l c o n ­ s e q u e n c e o f an i n f l a t e d c u r r e n c y . 1 I t h a s been o b s e rv e d t h a t in a l a r g e is

laten t

t h e f i n a n c i a l d a n g e r t h a t a g o v e r n m e n t may b e p r e s s ­

ed t o pay l a r g e tain

flo a tin g debt there

sums when i t

i s n o t c o n v e n i e n t t o do s o .

Cer­

e c o n o m i c d i s a d v a n t a g e s a l s o may d e v e l o p a s t h e r e s u l t o f

an unw ieldy s h o r t - t e r m d e b t s t r u c t u r e .

By c o n t i n u a l r e n e w a l s

such

d e b t may come

t o a p p e a r p e r m a n e n t , b a n k s may g i v e

ence

to governm ent

b ills,

b u siness loans,

certifica tes,

prefer­

and n o te s over p ro p e r

some f o r m o f i n f l a t i o n may d e v e l o p , a n d t h e

c o n f i d e n c e o f f o r e i g n b o n d h o l d e r s may b e s o i m p a i r e d t h a t e x ­ change r a t e s

and t h e flo w o f s p e c i e a r e

In ab ility tro l

or u n w illin g n ess

w ill raise

adversely a f f e c t e d . 2

to b r i n g the d e b t u n d e r con­

th e c o s t o f borrow ing e i t h e r d i r e c t l y

governm ent o r i n d i r e c t l y

to the p e o p le .

Where t h e

to th e

situ atio n

i s e x t r e m e , a g o v e r n m e n t may f i n d i t s e l f on t h e v e r g e o f b an k ru p tcy .^

"A ccording to th e d e g re e o f d i f f i c u l t y

ment e x p e r i e n c e s i n o b t a i n i n g f u n d s , l o a n s and from l o a n s t o i n f l a t i o n .

^Adams, P u b l i c D e b t s . p .

Li

it

a govern­

p a s s e s from t a x e s to

F o llo w in g a war t h e r e

is

202.

2S h u t a r o M a t s u s h i t a , The E c o n o m ic E f f e c t s o f P u b l i c De b t s ( C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k , 1 9 2 7 7 , p p . b o - c o ; arid' W i l l i a m W i t h e r s , The R e t i r e m e n t o f N a t i o n a l D e b t s ( C o lu m ­ b i a U n i v e r s i t y P r e s s , 19 3 2 ), p . 39. ^ W i l l i a m J . S h u l t z , A m e r i c a n P u b l i c F i n a n c e . 3& e d . ( P r e n t i c e - H a l l , I n c . , New Y o r k , 19^ -2 ), p . 6 6 6 . ]q

W ith ers, oo.

o i l . , p.

I p '■).

117 t h e t w o - f o l d p r o b l e m o f c o n v e r s i o n and p a y m e n t .

R e v isio n of

th e d e b t s t r u c t u r e t h r o u g h a sound p o l i c y o f c o n v e r s i o n g i v e s c o n t r o l o v e r t h e d e b t an d may, t h r o u g h a n i m p r o v e m e n t i n public c r e d i t, Interest.-*-

make p o s s i b l e a r e d u c t i o n i n t h e r a t e

So f a r a s a r e d u c t i o n i n t h e d e b t t a k e s p l a c e ,

o th er c o n d itio n s rem aining the fu rth er

of

stren g th en ed .^

same, t h e p u b l i c c r e d i t

is

D e p e n d i n g upon t h e u r g e n c y o f t h e

n e e d f o r c o n v e r s i o n a n d t h e amount o f i n t e r e s t - s a v i n g i t achieve,

i t s p a r t in re d u c in g the debt burden i s ,

may

of c o u rs e ,

l i m i t e d compared w ith t h a t o f a c t u a l re p a y m e n t. C o n s i d e r a t i o n s s u c h as t h e s e were s e t f i r m l y in t h e m ind o f S e c r e t a r y M c C u l l o c h a s h e d e v e l o p e d h i s d e b t - m a n a g e ment p o l i c i e s .

He p e r c e i v e d

th a t conversion of the f l o a t i n g

d e b t would enhance t h e p u b l i c c r e d i t ,

y e t th e pu blic c r e d i t

must f i r s t be s t r o n g enough to in d u c e i n v e s t o r s new o b l i g a t i o n s .

to a c c e p t t h e

C o n t r a c t i o n o f t h e g r e e n b a c k s seemed t o h im

an I m p o r t a n t and d i r e c t m ea n s t o a c h i e v e t h e s e o t h e r two

1

E dw in R. A. S e l i g m a n , S t u d i e s i n P u b l i c F i n a n c e (T h e M a c m i l l a n Company, New Y o r k , 1 9 2 5 ) , p p . 2t)4-9C)El Q ^ A l l repaym ent te n d s to r a i s e th e c r e d i t o f th e S ta te and t o Im prove t h e b a s i s f o r p o s s i b l e f u t u r e l o a n s . " B a s ta b le , op. c i t . , p. 705. 3uB u t c o n v e r s i o n I s no s u b s t i t u t e f o r r e p a y m e n t , i f o u r aim i s a s u b s t a n t i a l r e d u c t i o n o f t h e b u rd e n o f p u b l i c d eb ts. I t i s o n l y a so m e w h at weak a u x i l i a r y , a n d s u c h s t r e n g t h a s i t h a s i s p a r t l y d e p e n d e n t upon a v i g o r o u s p o l i c y of repaym ent b e in g s im u lta n e o u s ly p u r s u e d ." Hugh D a l t o n , P r i n c i p l e s o f P u b l i c F i n a n c e , 9 t h e d . ( G e o r g e R o u t l e d g e & S o n s , L t d . , London, 1 9 3 6 ) , p p . 2 8 7 - 2 8 8 .

118

o b jectiv es.

To h i m c o n t r a c t i o n was s i m p l y a p a r t o f t h e

conversion o p e ra tio n . up on t h i s

aspect of I t ,

For a l l

th e em phasis w hich he p l a c e d

how ever, h i s view of th e d e b t-m an a g e-

raent p r o b l e m was c o m p r e h e n s i v e .

H is a n n u a l r e p o r t s abound

w ith r e f e r e n c e s

t o t h e many f o r c e s i n a n economy w h i c h ,

g reater or less

d e g r e e , b e a r upo n t h e p r o b l e m o f t h e d e b t a n d

m u s t be r e c o g n i z e d a nd w e i g h e d i n d ebt-m anagem ent p o l i c y .

t h e d e v e l o p m e n t o f so u n d

In o n e way o r a n o t h e r h e r e l a t e d t o

i t n o t o n ly such p rim ary m a tte r s as th e s t r u c t u r e the p u b lic

th e banking system ,

a n d t h e money m a r k e t , b u t a l s o t h e

sh ip of i t ,

cre d it,

of the debt w ith in the c o u n try , p r iv a te Indebtedness,

t r a d e and t h e b a l a n c e o f p a y m e n t s , the dem ocratic i n s t i t u t i o n s

th e currency,

f o r e i g n ow n e r ­

sp ecu latio n ,

in tern atio n al

economy i n g o v e r n m e n t ,

of th e co u n try ,

developm ent o f th e n a t i o n a l r e s o u r c e s , crops,

tax atio n ,

and terras

of the debt I t s e l f ,

d istrib u tio n

in

n a tio n a l defense,

grow th o f p o p u la tio n ,

t h e d e g r e e o f p r o s p e r i t y a nd b u s i n e s s c o n f i d e n c e ,

the p rice

lev el,

sh ip b u ild in g ,

n a t i o n a l Income,

ev en r a i l r o a d

and th e r e h a b i l i t a t i o n

T kis G e s ta lt

su b sid ies,

of th e S o u th .1

s o r t of view of th e d e b t i n i t s

rela tio n

t o t h e G o v e rn m e n t’ s g e n e r a l f i s c a l p o l i c y a n d t o t h e whole economy was e n l i g h t e n e d and r e a l i s t i c .

P r o f e s s o r A bbott

h a s p o in te d out t h a t " a l l governm ental a c t i v i t i e s

1T re a s u ry R e p o r t , 1865-1868,

passim .

th at

119 a f f e c t th e l e v e l o f "business a c t i v i t y a r e , elem ents of d ebt p o l i c y . " 1

Indeed,

in a l a r g e

sense,

g overnm ental a c t i v i t i e s

a n d t h e l e v e l o f b u s i n e s s a c t i v i t y may b e r e l a t e d management p o l i c i e s b o t h a s c a u s e an d a s e f f e c t ,

to d eb ta l l of the

f o r c e s and c o n d i t i o n s h a v in g a m u tu a lly d e te r m in in g I n f lu e n c e upon one a n o t h e r .

2

C h a r l e s C o r t e z A b b o t t , M a n agem en t o f t h e F e d e r a l D e b t ( M c G r a w - H i l l Book Company^ Inc. , Mew Y o r k , 1946), p . 186. p Some r e a d e r s w i l l r e c a l l A l f r e d M a r s h a l l ' s r e f e r e n c e t o t h e c o n c e p t o f c o n t i n u i t y — t h a t one must r e g a r d " t h e v a r i o u s e l e m e n t s o f an e c o n o m i c p r o b l e m . . . a s a l l m u t u a l l y d e t e r m i n i n g one a n o t h e r . " P r i n c i p l e s o f E conom ics. 8 th ed. ( M a c m i l l a n and C o . , L t d . , L o n d o n , 1 9 3 0 J 7 p p . i x - x .

CHAPTER VI REFUNDING THE DEBT

PREPARATION FOR REFUNDING The d e b t h a v i n g b e e n f u n d e d I n t o m ore m a n a g e a b l e f o r m , alth o u g h a t a high r a t e refund

It

In e f f e c t , (notes,

of I n t e r e s t ,

a t low er r a t e s .

t h e n e x t s t e p was t o

W hile t h e e a r l i e r o p e r a t i o n had,

b ro u g h t a b o u t th e exchange o f s h o r t- te r m d eb t

c e rtific a te s,

and tem p o rary lo a n s )

r e f u n d i n g was a l s o a c o n v e r s i o n ,

f o r bonds,

the

b u t o f bonds b e a r i n g c e r t a i n

r a t e s and m a t u r i t i e s i n t o bonds of o t h e r r a t e s and m a t u r i t i e s . The t e r m s " c o n v e r s i o n " d e s i g n a t e two q u i t e

and " r e f u n d i n g , "

sep arate u n d ertak in g s,

w h i c h s h o r t - t e r m d e b t was c h a n g e d i n t o In the

as used h e re , in t h e f i r s t

lon g-term d e b t,

of and

s e c o n d o f w h i c h t h e f o r m o f t h e l o n g - t e r m d e b t was

a d a p t e d t o w h a t was b e l i e v e d , t o b e t h e g r e a t e r a d v a n t a g e o f t h e Government. S e c re ta r y C h a se 's p o l ic y o f s h o r t - t e r m f i n a n c in g , had p la c e d th e T re a s u ry in a v u l n e r a b le p o s i t i o n and to

which some

d e g r e e had weakened t h e p u b l i c c r e d i t d u r i n g t h e y e a r s im m e d ia te ly f o l l o w i n g t h e war,

yielded a b e tte r r e s u lt

once

t h e way was c l e a r e d t o d e a l w i t h t h e w a r t i m e b o n d i s s u e s .

(120)

121

M ost o f t h e s e w e r e s h o r t - t e r m t o o ,

h u t o f such a n a t u r e

t h e y d id n o t p r e s s upon t h e T r e a s u r y f o r r e d e m p t i o n .

th at

The

f i v e - t w e n t i e s were r e d e e m a b le a f t e r f i v e y e a r s and p a y a b le in tw enty y e a r s .

In 1869 t h r e e f o u r t h s

of th e i n t e r e s t -

b e a r i n g d e b t was i n t h i s f o r m a n d was e i t h e r t h e n r e d e e m a b l e o r s o o n t o beco m e s o . 1 T his

f o r m o f " l i m i t e d o p t i o n " d e b t was an i n n o v a t i o n

C i v i l War

f i n a n c e w h i c h h a d become known i n E u r o p e a s t h e

"Am erican

s y s t e m . I t s

apparent,

for

fiv e

years.

fa c t th at

of

a d v a n t a g e t o t h e Government i s

s u c h b o n d s c o u l d be p a i d a t i t s p l e a s u r e a f t e r

Som ething o f a d i s a d v a n t a g e , how ever,

t h e y were n o t t h e most d e s i r a b l e

was t h e

form o f i n v e s t ­

m e n t f o r t h o s e i n v e s t o r s who p r e f e r r e d l o n g e r m a t u r i t i e s , even a t low er r a t e s . ®

Such i n v e s t o r s b e c a m e n u m e r o u s i n

t r e a s u r y R e p o r t , 1 8 6 9 , p . XVI. p Adams, P u b l i c D e b t s , p . 1 6 2 . D u r i n g t h e n i n e t e e n t h and i n t o t h e t w e n t i e t h c e n t u r y t h e r e was a m a r k e d p r e f e r e n c e f o r l o n g - t e r m G o v e r n m e n t b o n d s , even a t i n t e r e s t r a t e s below t h o s e o f s h o r t e r - t e r m o b l i g a t i o n s . In sta n c e s i l l u s t r a t i n g t h i s appear a t v a rio u s p o in ts in t h is study. H e n r y c. Adams, who was w r i t i n g on s u b j e c t s o f fin a n c e in the l a s t t h i r d of the n in e te e n th c e n tu ry , observed, " I n v e s t o r s alw ays p r e f e r bonds o f lo n g l i f e . . . " He b e l i e v e d t h a t i f t h e d e b t w e r e i n r a p i d p r o c e s s o f r e p a y m e n t , " I t may b e w i s e t o e f f e c t a l a r g e I m m e d i a t e s a v i n g up on p a r t o f t h e d e b t , by g r a n t i n g a lo n g g u a ra n te e , f o r th e purp o se of se c u r­ i n g a d d i t i o n a l f u n d s w i t h w h i c h t o c a r r y on t h e p o l i c y o f d e b t-p ay m en t upon th e h i g h - p r i c e d b o n d s ." He d i d n o t a p p r o v e , h o w e v e r , o f t h e 3 0 - y e a r 4 - p e r c e n t R e f u n d i n g L o an o f 1 8 7 7 • P ttb llo D e b t s , p p . 172, 2 3 4 -2 3 5 .

122

t h e l a t t e r p a r t o f t h e war,

when money was p l e n t i f u l ,

yet

t h e I n t e r e s t y i e l d on G o v e r n m e n t b o n d s r e m a i n e d v e r y h i g h . I t was p e r c e i v e d t h a t

th e lo n g e r t h e te rm o f a bond b e a r in g

a high r a t e of i n te r e s t

t h e more t h e b o n d w o u l d a p p r e c i a t e

in v a lu e a s t h e n a t i o n r e c o v e r e d from w ar, as i t s was r e s t o r e d , d eclin ed .

and a s ,

consequently,

cred it

the r a t e of i n t e r e s t

B e c a u s e o f i n v e s t o r p r e f e r e n c e b a s e d upon t h i s

fu tu re p ro sp ect,

t h e G o v e r n m e n t was o b l i g e d t o p a y a some­

w h a t h i g h e r r a t e o f i n t e r e s t on b o n d s t h a t i t

m ight c a l l in

at its

seen t h e

pleasure a f te r

fiv e years.

In t h i s

is

e x p l a n a t i o n f o r th e g r a d u a t i o n o f i n t e r e s t r a t e s from h i g h e r to low er y l e l a s th e lo n g e r th e m a t u r i t y . t h e o p p o s i t e o f t h e modern i n t e r e s t - r a t e was d u e t o a g e n e r a l a n t i c i p a t i o n t h a t

T h i s was e x a c t l y stru ctu re,

the r a te of I n te r e s t

i n t h e money m a r k e t w o u l d e v e n t u a l l y d e c l i n e . the

and i t

But w hatever

e x t r a c o s t t o t h e Government in i n t e r e s t c h a r g e s ,

the

a d v a n t a g e which t h e f i v e - t w e n t i e s gave f o r r e f u n d i n g a t later

t i m e s a t much l o w e r r a t e s ,

as w ell as the advantage

i n being' a b l e t o r e d u c e t h e p r i n c i p a l o f th e d e b t a s s u r p l u s revenues p erm itted , d o llars

was w o r t h f a r more s i m p l y I n t e r m s o f

saved.

A r e f u n d i n g b i l l had. b e e n p r o p o s e d i n t h e S e n a t e i n F e b r u a r y 18 6 8 a n d h a d b e e n e l a b o r a t e l y d e b a t e d , a l m o s t e v e r y S enator p a r t i c i p a t i n g .

It

"was c o n c e d e d t o b e t h e m o st

c o m p r e h e n s i v e a n d i n s t r u c t i v e d e b a t e on f i n a n c i a l q u e s t i o n s f o r many y e a r s . "

On J u l y 14 t h e b i l l p a s s e d t h e S e n a t e ,

and

123

soon t h e r e a f t e r ,

w i t h amendments,

I t passed th e House,

A

c o n f e r e n c e com m ittee th e n r e p o r t e d a m o d if ie d b i l l w hich p a s s e d b o th H ouses and went to t h e P r e s i d e n t . was l a t e i n t h e

s e s s io n , however,

to approve th e b i l l p re v e n te d i t

Since i t

the p r e s id e n t's

failu re

from b eco m in g la w .

No

f u r t h e r a t t e m p t was made t o e n a c t a r e f u n d i n g m e a s u r e d u rin g J o h n s o n 's a d m i n i s t r a t io n ,

fo r the r i f t

b e t w e e n h im

and C o n g r e s s a lm o s t a s s u r e d t h e v e t o o f an y b i l l w hich t h a t b o d y m i g h t f a v o r ,^ The s t a t u s o f t h e r e g a r d to i t s

I n t e r e s t - b e a r in g p a r t of the d eb t,

m a t u r i t y and, r e d e e m a b i l l t y a n d i t s

D e c e m b e r 1 , 1 8 6 9 , was a s f o l l o w s :

w ith

a m o u n t , on

p

I n t e r e s t R ate (P ercent)

I s s u e s Redeemable or P a y a b le

Amount

A ll of the fiv e -tw e n tie s , issu e d b e t w e e n 18 6 2 end 1 8 6 8 , t h e l a t e s t o f w h i c h would become r e d e e m a b l e J u l y 1 , 1 8 7 3 ...................................................

i

6

3# 1 ,602,671,100

Loan o f J a n u a r y 1, 1 8 6 1 , p a y a b l e J a n u a r y 1 , 1 8 7 1 , . ......................................

t

6

7 ,0 2 2 ,0 0 0

L oan o f 1 8 5 8 , p a y a b l e J a n u a r y 1 , 1 8 7 4 ...........................................

[

5

20,00 0 ,0 0 0

T e n - f o r t i e s o f 1864, re d e e m a b le M a r c h 1 , 1 8 7 4 ................................................ 1

5

194,576,300

V a r io u s l o a n s , a l l becom ing p a y a b le or red e em a b le betw een D e ce m b er 3 1 , 1 8 8 0 , a n d J u l y 1 , 1 8 8 1 .......................................................................

6

283,677,600

^Sherman, R e c o l l e c t i o n s , V ol. 2

i I,

p p , 439-441.

D a ta d e r i v e d from T re o s u ry R e p o r t s , 1 8 8 0 , p , X; and 1 9 1 4 , p p . 2 0 1 - 2 0 5 , 3

1 8 6 9 , p , XVI;

A b o u t $75 m i l l i o n o f t h e s e h a d a l r e a d y b e e n p u r c h a s e d and w e r e h e l d i n t h e T r e a s u r y a t t h i s t i m e .

124

From t h i s

i t may be s e e n t h a t t h e r e f u n d i n g o p e r a t i o n s

c o n t e m p l a t e d i n l f t u9 ^ a n d a u t h o r i z e d b y l e g i s l a t i o n were s o l e l y c o n c e r n e d w i t h t h e ; . a r e h 1,

1874,

w ould f a l l

fiv e-tw en ties,

only a r e l a t i v e l y

for,

i n 1870 ~

u n til

s m a ll a m o u n t of o t h e r bonds

d u e , a n a i t w a s a s s u m e d t h a t t h e s e w o u l a be p a i d

from s u r p l u s r e v e n u e s . secretary

Boutv /e l 1 ,

fo reseein g

s u r p l u s r e v e n u e s and c o n ­

te m p la tin g s u b s t a n t ia l annual re d u c tio n s

in the debt,

t h a t t h e r e f u n d i n g a u t h o r i z a t i o n be made f o r lio n ,

su t c ested

o n l y *,1 , 0 0 0 m i l -

o r ^1 , 2 0 0 m i l l i o n a t t h e m o s t , s o t a u t a c o n s i d e r a b l e

amount o f t h e

f i v e - t w e n t i e s m i, ^ h t be a v a i l a b l e

o r r e d e m p t i o n , a lon,_ w i t n t h e o u t s t a n d i n g p e r i o d b e f o r e t h e 18 81 m a t u r i t i e s ,

te n -fo rtie s,

he e s t i m a t e d

$60 m i l l i o n a y e a r m i.J e t t h u s be p a i d o f f t o Confer e s s l a t e

i n 1869 t h a t

was a u t h o r i z e d f o r rei: u n a i n ^ , by m a t u r i t i e s

in to

if

for purchase in

the

t h a t some

He h a d r e c o m m e n d e d

so rauch a s 1 1 , 2 0 0 m i l l i o n

t h i s amount should

t h r e e c l a s s e s o f $400 m i l l i o n

be d i v i d e d each,

the

f i r s t t o be re d e e m a b le i n f i f t e e n y e a r s and p a y a b l e i n t w e n ty years,

the

s e c o n d t o be r e d e e m a b l e i n t w e n t y y e a r s and p a y a b l e

i n t w e n t y - f i v e y e a r s , and t h e t h i r d t o t w e n t y - f i v e y e a r s and p a y a b l e

in th ir ty

be r e d e e m a b l e years.

^T r e a s u r y d e p o r t . 1 8 6 9 , p p . X V I - X V I I I . t o f J u l y 1 4 , 1 8 7 0 , 16 s t a t u t e s . 2 7 2 . ^ T r e a s u r y R e p o r t , 1 8 6 9 , p . XVI.

in

V arious o th e r

123 soon t h e r e a f t e r ,

w ith amendments,

I t p a sse d th e House.

A

c o n f e r e n c e com m ittee th e n r e p o r t e d a m o d if ie d b i l l which p a s s e d b o t h H o u s e s a nd w e n t t o t h e P r e s i d e n t . was l a t e

in the

s e s s io n , however,

t o a p p ro v e th e b i l l p r e v e n t e d i t

Since I t

the P resid en t* s f a i l u r e from becom ing la w .

No

f u r t h e r a t t e m p t was made t o e n a c t a r e f u n d i n g m e a s u r e d u rin g J o h n s o n 's a d m in is tr a tio n ,

f o r t h e r i f t b e t w e e n h im

and C o n g r e s s a l m o s t a s s u r e d t h e v e t o o f a n y b i l l

which

t h a t body m ight f a v o r . 1 The s t a t u s o f t h e i n t e r e s t - b e a r i n g p a r t o f t h e d e b t , w i t h r e g a r d to

its

m a t u r i t y and r e d e e m a b i l i t y and I t s p D e c e m b e r 1 , 1 8 6 9 , was a s f o l l o w s * I s s u e s R ed eem a b le or P a y a b le

a m o u n t , on

I n t e r e s t R ate (P ercent)

Amount

A ll o f the fiv e -tw e n tie s , issu ed b e tw e e n 1862 end 1 8 6 6 , t h e l a t e s t o f w h i c h w o u ld become r e d e e m a b l e J u l y 1 , 1 8 7 3 ...................................................

t

6

3$ 1 ,6 0 2 ,6 7 1,10 0

L o a n o f J a n u a r y 1, 1 8 6 1 , p a y a b l e J a n u a r y 1 , 1 8 7 1 . ............................

i

6

7 ,0 2 2 ,0 0 0

Loan o f 1 8 5 8 , p a y a b l e J a n u a r y 1 , 1 8 7 4 ........................................ ..

|

5

2 0,00 0 ,0 0 0

T e n - f o r t i e s o f 1864, red e em a b le M a r c h 1 , 1 8 7 4 .................................................

*

5

19 4 ,5 7 6 ,3 0 0

V a r io u s l o a n s , a l l b eco m in g p a y a b l e o r r e d e e m a b le b e tw e e n D e c e m b e r 3 1 , 1 8 8 0 , and J u l y 1 , 1 8 8 1 .......................................................................

i

6

28 3 ,6 7 7 ,6 0 0

1 Sherm an, R e c o l l e c t i o n s , V o l. I ,

p p . 439-441.

^ D ata d e r iv e d from T r e e s u r y R e p o r t s , 1 8 6 9 , p . XVI; 1 8 8 0 , p . X; and 1 9 1 4 , p p . 2 0 1 - 2 0 5 . 3

A b ou t f ? 5 m i l l i o n o f t h e s e h a d a i r e a d y b e e n p u r c h a s e d a n d w e r e h e l d i n th e T r e a s u r y a t t h i s t i m e *

124

Fro m t h i s

i t may be s e e n t h a t t h e r e f u n d i n g o p e r a t i o n s

c o n t e m p l a t e d i n 18o9 ^ a n d a u t h o r i z e d b y l e g i s l a t i o n were s o l e l y c o n c e r n e d w i t h t h e

fiv e-tw en ties, f o r,

March 1 , 1 8 7 4 , o n l y a r e l a t i v e l y

i n 18 70 2

u n til

s m a ll am ount of o t h e r bonds

w o u ld f a l l d u e , a n d i t w a s a s s u m e d t h a t t h e s e w o u l d be p a i d from s u r p l u s r e v e n u e s . S e c r e t a r y B o u tw el1, f o r e s e e i n g s u r p l u s r e v e n u e s and c o n ­ tem p latin g s u b s t a n t i a l annual re d u c tio n s in th e d e b t, t h a t the refu n d in g a u t h o r i z a t i o i O y ^ ^ ^ ^ f o r lio n ,

o n ly *1,000 m i l ­

or *1,200 m i l l i o n a t

amount o f th e f i v e - t

w

e

suggested

co n sid erab le n

t

p

u

r

c

h

a

s

redem p tio n , a lo n g p erio d before

in the

1881

t h a t some

$60 m i l l i o n a y e a r m i g h t to Congress l a t e

by m a t u r i t i e s i n t o first

recommended

i n 1869

w as a u t h o r i z e d f o r r e f u n d i n g ,

e

m illio n t h T ^ ^ R f n t should

be d i v i d e d

t h r e e c l a s s e s o f $400 m i l l i o n e a c h ,

the

to be red eem ab le i n f i f t e e n y e a r s and p a y a b le i n tw e n ty

y e a r s , t h e s e c o n d t o be r e d e e m a b l e i n t w e n t y y e a r s an d p a y a b l e i n t w e n t y - f i v e y e a r s , a n d t h e t h i r d t o be r e d e e m a b l e i n t w e n t y - f i v e y e a r s an d p a y a b l e i n t h i r t y y e a r s .

3-T r e a s u r y R e p o r t . 1 8 6 9 , p p . X V I - X V I I I . 2 A c t o f J u l y 1 4 , 1 8 7 0 , 16 S t a t u t e s . 2 7 8 . 3 T r e a s u r y R e p o r t . 1 8 6 9 , p . XVI.

V arious o th e r

125

p r o v i s i o n s w ere s u g g e s t e d by t h e S e c r e t a r y . 1

A year before,

M c C u l l o c h h a d p r o p o s e d t h a t e n o u g h b o n d s be a u t h o r i z e d t o r e f u n d a l l t h e o u t s t a n d i n g 6 - p e r c e n t o b l i g a t i o n s and t h a t $500 m i l l i o n o f t h e new a u t h o r i z a t i o n s h o u l d m a t u r e a t t h e rate

o f $50 m i l l i o n a n n u a l l y , p r i n c i p a l and i n t e r e s t

p a y a b l e i n l a w f u l money; t h a t t h e r e m a i n d e r o f the b e r e d e e m a b l e i n t e n y e a r s a n d p a y a b l e 3n t h i r t y ,

t o be

lo an should in te rest

and p r i n c i p a l t o be p a i d i n c o i n . 2 Both p l a n s c o n t e m p l a te d s u b s t a n t i a l d e b t r e d u c t i o n e a c h year,

and b o t h lo o k e d to t h e e n h an cem en t t h e r e b y o f t h e p u b l i c

c re d it.'-’

B o u t w e l l ' s p l a n , h o w e v e r , a l l o w e d m ore f l e x i b i l i t y

i n t h e management o f t h e d e b t , f o r , larg e

a l t h o u g h he h a d i n v ie w

a n n u a l p a y m e n t s , i t d i d n o t make t h e m a n e c e s s i t y a s

th e p r o p o s e d a n n u a l m a t u r i t i e s o f ^ c C u l l o c h * s p l a n would have done.

In the l i g h t o f a f t e r e v e n t s w hich n e i t h e r

c o u ld have f o r e s e e n ,

it

S ecretary

is apparent th a t annual m a tu ritie s

d u r i n g th e p a n ic y e a r and th e d e p r e s s i o n w ould have been e x tre m e ly burdensom e.

1I b i d . . p . X V II. 2I b i d . , 1868, p . X X III. ^ I b i d . , p . X X I I I ; an d G e o rg e S e w e l l B o u t w e l l , R e m i n i s c e n c e s o f S i x t y Y e a r s i n P u b l i c A f f a i r s ( M c C l u r e , P h i l l i p s & C o . , New Y ^ r k T i s o ^ r T o T : T i T p T T W ,------

126

PROVISIONS OF THE LOAN ACT OF 1870 The Loan a c t o f J u l y 1 4 , 1 8 7 0 , ^ e m b o d i e d m o s t o f t h e f e a t u r e s of B o u tw e ll’s p ro p o sa l,

although i t

m a t u r it y term s o f th e th r e e proposed i s s u e s . rep o rted

The b i l l ,

o u t o f c o m m i t t e e by S e n a t o r S h e r m a n , w a s ,

to B outw ell,

2

as the

co n sid era b le debate

^ S e c r e t a r y had draw n i t.* ' In t h e S e n a t e ,

E x c e p t i n a few p a r t i c u l a r s g reatly

changed the

I t received

i t s fin al, form did not d i f f e r He h a d e s p e c i a l l y

d e s i r e d t h a t i n t e r e s t o n t h e b o n d s b e made p a y a b l e

p ro v isio n th a t th e th irty

according

and some i n t h e H o u s e . ^

fr o m B o u t w e l l ’ s r e c o m m e n d a t i o n s .

b u t t h i s was n o t d o n e . 5

as

in Europe,

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l o n g e s t m a t u r i t y be r e d e e m a b l e a f t e r

years.

-*■16 S t a t u t e s , 2 7 2 . 2B o u t w e l l , o p . c i t . , V o l . I I , p p . 1 4 0 - 1 4 2 , 3 The b i l l h a d f i r s t b e e n i n t r o d u c e d i n t h e S e n a t e b y C h a r l e s Sumner, o f M a s s a c h u s e t t s , b u t i t was r e p o r t e d from c o m m i t t e e w i t h a n amend ment i n t h e n a t u r e o f a s u b s t i t u t e . I t was t o t h i s l a t t e r f o r m t h a t B o u t w e l l made r e f e r e n c e . C o n g r e s s i o n a l Q l o b e , 4 1 s t C o n g . , 2d S e s s . , J a n u a r y 1 1 , 1 2 , 1870, and F e b ru a ry 3, 1870, p p . 348, 378, 992. 4 I b i d . , J a n u a r y 1 2 ; F e b r u a r y 3 , 2 4 , 28; March 3 , 3 , 8 , 1 1 ; June 3 0 7 7 u l y 1, 1870; pp. 378-380; 992, 1537-1542, 1587-1594; 1 627-1634, 1653-1664, 1756, 1858-1884; 5018-5026; 5055-5070. 5 /Wien i n C o n g r e s s he h a d v i g o r o u s l y u r g e d t h i s same p r o v i s i o n d u r i n g d e b a te on t h e e a r l i e r r e f u n d i n g b i l l . Ib id *, 4 0 t h C o n g . , 2d S e s s . , J u l y 2 1 , 1 8 6 8 , p p . 4 2 9 6 - 4 2 9 7 .

127

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l a t e r on,

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tw o i n t e r p r e t a t i o n s . ver,

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t h o s e Who f a v o r e d t h e l a t t e r m e t a l w e r e t o a r g u e t h a t

t h e b o n d s m i g h t be p a i d i n e i t h e r .

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b e e n s u b s t i t u t e d f o r t h e w o r d " g o l d " when t h e b i l l was u n d e r c o n s i d e r a t i o n g a v e some v a l i d i t y t o t h i s c l a i m .

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who a r g u e d f o r s i l v e r i g n o r e d t h e g e n e r a l l y a c c e p t e d m e a n i n g o f t h e t e r m " c o i n " a t t h e t i m e t h e b i l l was p a s s e d .

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t h o s e Who b o u g h t t h e b o n d s t h e t e r m s i g n i f i e d g o l d , 3

1

The A c t o f J a n u a r y 2 0 , 1871, a m e n d i n g t h i s e n a c t ­ m ent, s im p ly a llo w e d t h e i s s u a n c e o f $500 m i l l i o n o f 5 - p e r c e n t b o n d s i n s t e a d o f t h e $ 2 0 0 m i l l i o n , b u t d i d n o t p e r m i t an in c r e a s e in the t o t a l a u t h o r i z a t i o n . I t a ls o au th o rize d th e q u a r t e r l y payment o f i n t e r e s t . 16 S t a t u t e s . 3 9 9 . 2 16 S t a t u t e s . 2 7 2 ; a n d W i l l i a m A. R i c h a r d s o n , P r a c t i c a l I n f o r m a tio n Concerning th e P u b lic Debt o f th e U nit e d S t a t e s ? 2 d e d . ( W . H, & 0 . H. M o r r i s o n , W a s h i n g t o n 7 ' l 8 l>l3 ) , p . 1 1 , 3 See Dewey, F i n a n c i a l H i s t o r y , p , 3 5 4 ,

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^ e n r y C. Adams, w r i t i n g a b o u t t h e y e a r 1 6 8 5 , t o o k a s t r o n g s t a n d a g a i n s t such l o n g - t e r m f i n a n c i n g and a t t e m p t e d to account fo r i t s o c cu rren c e in r e f u n d in g o p e r a tio n s p a r t l y i n t e r m s o f human n a t u r e : ” . . . no g o v e r n m e n t s h o u l d c o n ­ t r a c t i t s e l f o u t o f t h e r i g h t t o make a f u r t h e r c o n v e r s i o n a t some f u t u r e t i m e i n o r d e r t o s e c u r e a s l i g h t i m m e d i a t e re d u c tio n in the interest-p& ym ent . . . The a d m i n i s t r a t i o n s h o u l d a s s e n t to no p l a n o f c o n v e r s i o n by w h i c h t h e p o l i c y o f d e b t p a y m e n t may be e m b a r r a s s e d . ” P u b l i c D e b t s . p . 2 2 5 . " P e r h a p s t h e r e i s no t e m p t a t i o n p r e s e n t e d to t h e f i n a n c i e r so a l l u r i n g a s t h a t w h ic h l e a d s him t o s a c r i f i c e c o n t r o l over a d e b t f o r a s l i g h t though im m ediate r e d u c t i o n i n th e a n n u al payment f o r i n t e r e s t . . . He s e e s t h a t , b y g r a n t i n g a g u a r a n t e e a g a i n s t new c o n v e r s i o n f o r t w e n t y o r t h i r t y y e a r s , he c a n y e t f u r t h e r red u c e the im m ediate b u rd en o f t h e d e b t , and t h e g r e a t e r t h e r e d u c t i o n t h e g r e a t e r w i l l be h i s p o p u l a r r e p u t a t i o n . Few men c a n w i t h s t a n d s u c h a t e m p t a t i o n , b u t i t i s a g a i n s t t h i s c h o ic e t h a t sound f i n a n ­ c i a l p r i n c i p l e s u t t e r t h e i r s tr o n g e s t p r o t e s t . ” I b i d . . p . 227. I n a l a t e r w o r k Adams p o i n t e d o u t t h a t ” . . . the p o lic y o f d e b t paym ent s h o u l d be f o r m u l a t e d a t t h e t im e t h e d e b t i s t h r o w n i n t o i t s d e f i n i t e s h a p e , w h i c h means t h a t b o t h t h e f u n d i n g o f f l o a t i n g o b l i g a t i o n s and th e p r o c e s s o f c o n v e r s i o n , w hich i n e v i t a b l y f o l l o w th e c r e a t i o n o f a d e b t u n d e r t h e s t r e s s o f a n e x i g e n c y , s h o u l d be so c a r r i e d t h r o u g h a s t o b r i n g t h e d e b t i n t o sh ap e f o r o r d e r l y and u n i f o r m p ay m en t. T here i s no o t h e r s i n g l e a c t i n c o n n e c t i o n w i t h t h i s b r a n c h o f f i n a n c i e r i n g t h a t c a l l s f o r so h ig h a grade o f b u s i n e s s j u d g m e n t . ” The S c i e n c e o f F i n a n c e ( 1 8 9 8 ) , p . 5 6 4 .

132

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y e a rs.1

To

S e n a to r Sherman o b j e c t e d w i t h vehem ence: . . . n e v e r f r o m t h e f o u n d a t i o n o f o u r Gov­ ernm ent t o th is hour, did th e U n ited S t a t e s i s s u e a b o n d u n d e r a n y c i r c u m s t a n c e s t h a t was n o t a t the p le a su re o f the U nited S ta te s to redeem a f t e r tw enty y e a r s , and m o s tly a f t e r fifte e n y e a rs.8 But Sherm an, l i k e

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co lleag u es,

p ro p o s e d r a t e s o f i n t e r e s t were too low . th at

he d i d n o t b e l i e v e b o n d s b e a r i n g

f e l t t h a t the

His words i n d i c a t e

le s s than 5 p erc en t

c o u ld be n e g o t i a t e d witHn th e f o r e s e e a b l e f u t u r e . The o n l y f e a r I h a v e a s t o t h e s u c c e s s o f t h i s m easure i s on acc o u n t o f the r a t e o f i n t e r e s t fix ed . I s h o u l d be v e r y g l a d , i n d e e d , t o s e e our w hole d e b t funded a t f i v e p e r c e n t . , b u t the S e c re ta ry o f th e T reasu ry is of the o p in io n t h a t he c a n n e g o t i a t e b o n d s b e a r i n g a l e s s r a t e o f i n t e r e s t fo r a p o r t i o n o f the p u b lic d e b t. I f he c a n I h o p e he w i l l . 3 S e n a to r M o r r i l l , a l s o d o u b t i n g t h a t bonds c o u ld be s o l d a t l e s s t h a n 5 p e r c e n t , s u s p e c t e d t h a t the p o l i t i c a l o p p o n e n ts o f t h e a d m i n i s t r a t i o n w o u l d v o t e f o r t h e lo w r a t e s to

see the p r o j e c t f a i l . 4

in order

I t was S h e r m a n who p o i n t e d o u t t h a t

t h e t a s k s o f C h a s e , F e s s e n d e n , and M cCulloch i n s e l l i n g bonds

C o n g ressio n al 1870, p . 1860.

G lo b e , 4 1 s t C o n g ., 2d S e s s . , M arch 11,

8Idem . 3I b i d . , February 28,

1870, p . 1591

4 I b i d . , M arch 3 , 1870, p p .

1653-1656.

133 a t p a r f o r g r e e n b a c k s w a s much e a s i e r

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| 1 , 2 0 0 , 0 0 0 b o n d s b e a r i n g a much l o w e r r a t e

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In

the

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d eclared,

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the p r e s e n t . " 2

The p e r p e t u a t i o n o f t h e n a t i o n a l b a n k i n g s y s t e m a n d i t s c i r c u l a t i o n p r i v i l e g e was a n o th e r r e a s o n g i v e n f o r t e r m bo n d.

a long­

Sumner made t h e c l e a r e s t s t a t e m e n t o f t h i s v i e w

when h e s a i d : . . . t h e whole sy stem o f n a t i o n a l banks i s fo u n d e d upon t h e bo n d s o f t h e n a t i o n , so t h a t a t t h e r a t e o f l i q u i d a t i o n now a d o p t e d f o r t h e n a t i o n a l d e b t t h e s y s t e m w i l l be w i t h o u t s u p ­ p o r t in th e la p s e o f tw elve o r f i f t e e n y e a r s . The s t a b i l i t y o f t h e b a n k s w h i c h i s so v i t a l a l i k e t o t h e n a t i o n a l c u r r e n c y and to th e p e cu n iary i n t e r e s t s involved in th e b u s in e s s , c a n b e a s s u r e d o n l y by a n i s s u e o f b o n d s f o r a lo n g er term . Of c o u r s e , t h e l o n g e r t h e p e r i o d t h e m ore v a l u a b l e t h e b o n d . S e c r e ta r y B ou tw ell, f o r a l l h i s z e a l d eb t,

in a c o n s i d e r a b l e measure

in re d u c in g th e

s h a r e d t h i s view .

1I b i d . , March 8 , 1 8 7 0 , p . 1 7 5 6 . 2 I b i d . , March 2 , 1 8 7 0 , p p . 1 6 2 7 - 1 6 3 0 . 3 I b i d . , Ja n u a ry 12, 1870, p . 380.

T h is was

134 r e v e a l e d when, n o t lo n g a f t e r t h e p a s s a g e o f t h e R e f u n d in g A ct, he p ro p o s e d t h a t C o n g re ss a u t h o r i z e 4 - p e r c e n t f i f t y year

oonds and r e q u i r e t h e n a t i o n a l h a n k s ,

th eir

ch arters,

held to

to a cc ep t

on p a i n o f l o s i n g

them i n e x ch a n g e f o r t h e bonds t h e n

s e c u r e t h e i r n o t e c i r c u l a t i o n . 1-

A gainst the v ig o r ­

ous h o s t i l i t y o f t h e b a n k e r s w hich t h i s h i g h - h a n d e d p r o p o s a l en g en d e re d B o u tw ell so u g h t to j u s t i f y h im s e lf by d e c l a r i n g t h a t he had e n d e a v o re d to p e r p e t u a t e t h e n a t i o n a l b a n k in g system .

I n h i s m e m o i r s he w r o t e : I had e a r l y f o r e s e e n t h a t t h e P u b l i c D e b t c o u l d b e p a i d w i t h o u t much d e l a y . . . I p r e d i c t e d a l s o t h a t t h e s e paym ents w o u ld menace t h e n a t i o n a l banking system . My scheme l o o k e d f o r t h e p e r p e t u a ­ t i o n o f t h a t system fo r f i f t y y e a rs a t l e a s t . . . At t h a t tim e th e c a p i t a l o f a l l th e n a t i o n a l banks was l i m i t e d t o t h r e e h u n d r e d m i l l i o n d o l l a r s . Thus d i d t h e b a n k s d e f e a t a m e a s u r e w h i c h was d e ­ s ig n e d to s e c u r e t h e i r p e r p e t u i t y and c a l c u l a t e d t o prom ote t h e i r f i n a n c i a l i n t e r e s t s . They a c t e d upon th e id e a t h a t th e c r e d i t o f th e c o u n try c o u ld n e v e r be so a d v a n c e d t h a t a f o u r p e r c e n t b o nd w o u l d be w o r t h p a r . 2

a ctu ally ,

he b e l i e v e d t h a t $800 m i l l i o n o f t h e d e b t —

a p p r o x i m a t e l y o n e - t h i r d o f i t a t t h a t t i m e — m i g h t be p e r ­ p etu ated fo r

currency purposes:

Should the p r e s e n t sy stem o f f u r n i s h i n g a p a p e r c i r c u l a t i o n f o r t h e c o u n t r y , p a r t l y by t h e t r e a s u r y and p a r t l y by th e n a t i o n a l b a n k s , be c o n t i n u e d , o r th e e n t i r e c i r c u l a t i o n be f u r n i s h e d by th e t r e a s u r y , o r b y t h e b a n k s . . . a b o u t $800 m i l l i o n o f t h e p u b l i c

^B o u tw ell, op. c i t . . V ol. I I , p . 142. In h is o r i g i n a l r e f u n d i n g p r o p o s a l , B o u t w e l l h a d s u g g e s t e d t h a t t h e b a n k s be c o m p e l l e d t o e x c h a n g e o l d b o n d s f o r new o r l o s e t h e i r c h a r t e r s . T r e a s u r y R e p o r t . 1869, p . X V III. 2B o u tw e ll, o p . c i t . , V ol.

I I , p . 143.

135

d e b t w i l l r e m a in , u n p a i d , e x i s t i n g e i t h e r i n t h e form o f t r e a s u r y n o t e s i n c i r c u l a t i o n w ith o u t i n t e r e s t , o r i n b o n d s ov.ned by t h e b a n k s a n d h e ld as s e c u r i t y fo r t h e re d e m p tio n o f t h e i r n o t e s , a n d t h a t o n l y a b o u t # 1 , 6 0 0 , 0 0 0 , 0 0 0 o f th e p r i n c i p a l o f t h e d e b t i s s u b j e c t t o p a y m e n t.! P e r h a p s t o B o u t w e l l 4 p e r c e n t was t h e

lo w e st r a te

G o v e rn m e n t m i g h t e x p e c t t o pay f o r many y e a r s ;

th e

p e rh a p s

#300 m i l l i o n o f b o n d s s e c u r i n g n a t i o n a l - b a n k - n o t e c i r c u l a t i o n seem ed t o

h im a n e g l i g i b l e p a r t o f t h e d e b t a n d m ig h t p r o p e r l y

be r e n d e r e d i r r e d e e m a b l e f o r h a l f a c e n t u r y ;

no d o u b t he

v a lu e d h i g h l y th e n a t i o n a l b a n k in g s y s te m o f n o te i s s u e d id n o t e n v is a g e a b e t t e r o n e .

Y et h i s

and

j u s t i f i c a t i o n o f th e

p r o p o s a l w as i n c o n s i s t e n t w i t h t h e e n e r g e t i c d r i v e w h i c h he m ade t o r e d u c e t h e d e b t b y e v e r y m e a n s w i t h i n h i s a u t h o r i t y , in c l u d i n g th e c o m p o u n d -in te re s t p r o c e s s o f th e s i n k i n g f u n d , ikore t h a n o n c e h e h a d r e p e a t e d

th e s e n tim e n ts e x p re s s e d in

h i s R ep o rt o f 1870: W h a te v e r a r g u m e n t s may b e a d d u c e d , o r w h a t ­ e v e r t h e o r i e s a d v a n c e d , th e f a c t m ust e v e r re m a in t h a t a p u b lic d e b t is a p u b lic e v i l . I t is e s p e c i a l l y burdensom e to t h e l a b o r i n g c l a s s e s , and i t i s , t h e r e f o r e , i n t h e i r i n t e r e s t to p ro v id e f o r th e c o n s ta n t r e d u c tio n of th e e x i s t i n g n a t i o n a l d e b t.^

^ T r e a s u r y R e p o r t . 1 8 7 0 , p p . XY-XVI. ^ T r e a s u r y R e p o r t . 1 8 7 0 , p . X V I. D u r i n g t h e d e b a t e i n 186 8 o n t h e r e f u n d i n g b i l l w h i c h f a i l e d f o r w ant o f t h e P r e s i d e n t ’ s s i g n a t u r e , B o u tw e ll had v e h em en tly o p p o sed a p r o v i s i o n t h a t p a r t o f th e d e b t m atu re in fo rty y e a rs . He h a d s a i d , "We m u s t k e e p t h e l o a n so t h a t we c a n c o n t r o l I t o u r s e l v e s — p a y i t when we c h o o s e . " Con­ g r e s s i o n a l G lo b e . 4 0 th C o n g ., 2d S e s s . , J u l y 2 1 , 1 868, p . 4 2 9 7 .

136

B o u t w e l l 1s e a r l i e r p r o p o s a l s b e a r i n g on t h e r e f u n d i n g l e g i s l a t i o n h a d n o t gone beyond a t w e n t y - f i v e - y e a r p e r i o d , and t h i s f o r o n ly a t h i r d o f th e t o t a l p ro p o se d a u th o r iz a ­ tio n . 1

The b i l l w h i c h h a d p a s s e d t h e S e n a t e h a d d i v i d e d t h e

lo a n s In to " th re e p e rio d s o f te n ,

fifte e n ,

and tw e n ty y e a r s .

I t was i n t h e H o u se t h a t dem and was s t r o n g e s t f o r t h e l o n g ­ term I s s u e .

T h ere a b i l l o f f e r e d as a s u b s t i t u t e

f o r th e one

p a s s e d by th e S e n a te s im p ly p r o v id e d f o r an i s s u e o f $ 1 ,0 0 0 m illio n a t 4 p e rc e n t,

re d e e m a b le a f t e r

th irty

y ears.

R o b ert

C. S c h e n c k , C h a ir m a n o f t h e Ways a n d M eans C o m m i t t e e , p o i n t e d out th a t th is

p r o v i s i o n was i n t e n d e d " t o make t h o s e b o n d s

a c c e p ta b le to

c a p i t a l i s t s a t home an d a b r o a d . T h r e e

amend­

m en ts c h a n g in g t h e tim e o f r e d e e m a b l l i t y w ere p r o p o s e d and d e fe a te d . y ears.

One s o u g h t t o make I t

tw e n ty y e a r s ;

a n o th e r f i f t y

The t h i r d was p r o p o s e d b y a Mr. Van T rum p, whose

m o ti o n t o make i t

a t h o u s a n d y e a r s was r e c e i v e d w i t h l a u g h t e r . 4

The b i l l r e a d i l y p a s s e d t h e H ouse and w e n t t o a c o n f e r ­ e n c e c o m m i t t e e , w h e r e , a f t e r a n um ber o f m e e t i n g s , m i s e o f a s o r t was r e a c h e d .

The $ 1 , 0 0 0 m i l l i o n t h i r t y - y e a r

4 - p e r c e n t b o n d s w ere a u t h o r i z e d ;

and in a d d it i o n

t r e a s u r y R e p o r t . 1 8 6 9 , p . X V II. o

‘'S h e r m a n , o £ . c i t . ,

V o l.

C o n g r e s s i o n a l G lo b e . J u n e 36, 1 8 7 0 , p . 5 0 1 6 .

4 I b ld . . p . 5025.

a co m p ro ­

I,

p. 452.

4 1 s t C o n g .,

2d S e s s . .

t o th em

137

$ 2 00 m i l l i o n o f 5 - p e r c e n t s a n d $300 m i l l i o n o f 4 | - p e r c e n t s , re d e e m a b le a f t e r te n and f i f t e e n y e a r s r e s p e c t i v e l y . ^ I n many r e s p e c t s t h e R e f u n d i n g A c t h a d m e r i t , its

p r o v i s i o n s w e re s o u n d , a n d i t

p u b lic c r e d i t . w h ic h i t

f o r m o st o f

d i d much t o b o l s t e r t h e

B u t t h e am ount a n d t e r m s o f t h e 4 - p e r c e n t i s s u e

a u t h o r i z e d w e r e t h e e p i t o m e o f p o o r d e b t- m a n a g e m e n t

p o l i c y an d s h o r t - s i g h t e d f i n a n c i a l s t a t e s m a n s h i p .

S e n a to r

S h e r m a n , who s e r v e d o n t h e c o n f e r e n c e c o m m i tt e e w h i c h d e t e r ­ m in e d t h e f i n a l fo r m o f t h e b i l l , th e l e g i s l a t i o n .

p e r c e iv e d th e w eakness o f

I n h i s m e m o irs h e w r o t e o f i t

som ew hat

p h ilo so p h ic a lly j . . . i t was a c o m p ro m is e w h i c h , l i k e many o t h e r c o m p r o m i s e s , was i n i t s r e s u l t s a n i n j u r y o f g r e a t m a g n i t u d e , b u t i t w as an h o n e s t d i f f e r ­ e n c e o f o p i n i o n b e tiv e e n t h e S e n a t e a n d t h e H o u s e , i n w h i c h , t e s t e d by t h e m arc h o f t i m e , t h e S e n a t e w as r i g h t a n d t h e H ouse was w r o n g . B u t i t was p e r f e c t l y m a n ife s t t h a t w ith o u t t h i s c o n c e ssio n by th e S e n a te to th e H ouse, th e b i l l c o u ld n o t h a v e p a s s e d . . . t h u s t h i r t y - y e a r s e c u r i t i e s , sub­ s e q u e n t l y a t a p re m iu m o f more t h a n t w e n t y - f i v e p e r c e n t . , w e re f o r c e d ^ i n t o t h e l a w . . . T h i s p r o v e d t o be an e r r o r . 0

1 S h e rm a n ,

0£ . c i t . ,

V o l. I ,

p p . 452 -4 5 3 .

o

••T his l e g i s l a t i o n was e x t r e m e l y u n f o r t u n a t e f o r t h e g o v e rn m e n t. In t h e y e a r s fr o m 1887 t o 1891 t h e r e was a b u n d a n t re v e n u e a v a i l a b l e f o r r e d u c tio n o f th e p u b l ic d e b t, b u t no o b l i g a t i o n s o f t h e g o v ern m en t w ere a v a i l a b l e f o r re d e m p tio n . I t b e ca m e n e c e s s a r y t o p u r c h a s e t h o s e b o n d s w h i c h w e re n o t p a y a b l e u n t i l t h e e x p i r a t i o n o f t h i r t y y e a r s . I n a l l , m ore t h a n $ 5 0 , 0 0 0 , 0 0 0 o f p re m iu m s w e re p a i d , t h e r a t e o f p re m iu m i n some i n s t a n c e s r e a c h i n g a s h i g h a f i g u r e a s 29# . * T h e o d o r e S . B u r t o n , J o h n S herm an ( H o u g h to n , M i f f l i n a n d Com pany, New Y o rk a n d B o s t o n , 1 9 0 6 ) , p . 2 0 7 . 3 S h e rm a n ,

o£.

c it.,

V o l. I , p p . 4 5 3 -4 5 4 .

138

T h is u n f o r t u n a t e p r o v i s i o n o f th e a c t , e ffe c t,

by w h ic h ,

In

t h e G o v e rn m e n t s u r r e n d e r e d c o n t r o l o v e r a l a r g e

p a r t o f t h e d e b t f o r many y e a r s , c a n h a r d l y b e e x c u s e d w i t h t h e comment t h a t th e

tim e , I t

is

"h in d sig h t is b e tte r tru e ,

a ra te

th a n f o r e s i g h t . "

At

l e s s t h a n 4 p e r c e n t w as h a r d l y

I m a g i n e d , b u t n o i m a g i n a t i o n o r f o r e s i g h t was n e e d e d t o p e r ­ c e i v e t h a t i n i s s u i n g a t h i r t y - y e a r b o n d t h e r e was t o s s e d aw ay a h i g h l y i m p o r t a n t , p r e r o g a t i v e .

By i t

t h e G o v e rn m e n t

g a v e u p a v a l u a b l e o p t i o n w h ic h w o u ld h a v e e n a b l e d i t , a r e a s o n a b le tim e ,

w ith in

a g a in to re fu n d th e d e b t to a d v a n ta g e .

S h e r m a n 's a r g u m e n t t h a t t h e c o n c e s s i o n made t o t h e H o u s e was n ecessary i f w h e th er i t

t h e b i l l was t o p a s s o v e r l o o k e d t h e q u e s t i o n

s h o u ld h av e p a s s e d a t a l l w ith such a p r o v i s i o n .

R e fu n d in g a t lo w e r r a t e s h a d , and t h e

c e rta in ly ,

been lo n g d e la y e d ,

t i m e se em e d f a i r l y p r o p i t i o u s f o r i t s

b u t t h e r e was no u r g e n c y i n t h e m a t t e r ,

u n d e rta k in g ;

fo r th e c o n v e rsio n

o p e r a t i o n s u n d e r M c C u llo c h h a d p l a c e d t h e d e b t , a t t h e o p t i o n o f t h e G o v e r n m e n t, on a l o n g - t e r m b a s i s . The p a s s a g e o f a r e f u n d i n g a c t m i g h t w e l l h a v e b e e n d e la y e d ,

even f o r

t h e G o v e r n m e n t,

some l e n g t h o f t i m e ,

at little

lo s s to

f o r a b ro a d m ark e t even f o r t h e 5 - p e r c e n t

i s s u e p l a i n l y d i d n o t e x i s t when t h e b i l l was u n d e r c o n sid e ra tio n .

^See a b o v e.

E x p e rt o p in io n in C o n g ress

and e ls e w h e re

139 p e r c e i v e d t h i s . '* '

The f i v e - t w e n t i e s — w h i c h b o r e 6 p e r c e n t —

i n F e b r u a r y 1870 h a d come c l o s e t o p a r , E urope.

in term s o f g o ld ,

o

By May t h e y h a d d e c l i n e d t o 8 8 . "

s a l e o f t h e new b o n d s a f t e r

in

So slo w w as t h e

th e p a ssa g e of th e a c t t h a t th e

5 - p e r c e n t i s s u e , w h ic h w as o f f e r e d f i r s t ,

w as n o t e n t i r e l y

d isp o se d o f u n t i l 1 8 7 6 .^

The N a t i o n n o t e d t h a t a l t h o u g h t h e 6- p e r c e n t b o n d s o f t h e U h ite d S t a t e s w ere s e l l i n g t o y i e l d 7 p e r c e n t i n E n g la n d and H o lla n d , th e T re a s u ry e x p e c te d to s e l l n e a r l y a b i l l i o n and a h a l f o f bonds p a y in g 4 to 5 p e r c e n t . Ja n u a ry 27, 1870, V o l . X, p . 5 3 . The L ondon E c o n o m i s t d r y l y c o m m en te d , "when t h e A m e ric a n g o v e r n m e n t h a s t o p a y 6 p e r c e n t , f o r i t s m on ey, Mr. B o u t w e l l sim p ly o f f e r s 1 to 2 p e r c e n t , l e s s , and e x p e c ts t h a t th e p u b l i c w i l l s u p p l y h im w i t h t h e m oney— t h e o n l y a d v a n t a g e b e i n g t h a t t h e new b o n d s w i l l be i r r e d e e m a b l e f o r s p e c i f i e d term s. I t i s e a s y t o p r e d i c t im m e d ia te f a i l u r e . " N ovem ber 5, 1 8 7 0 , V o l . X X V III, p . 1 3 4 2 . The C o m m e r c ia l a n d F i n a n c i a l C h r o n i c l e h a d o p p o s e d t h e re fu n d in g p ro p o s itio n fo r v a rio u s re a s o n s . I t e x p re sse d th e b e l i e f t h a t t h e a g i t a t i o n w h ic h i t s d i s c u s s i o n p r o d u c e d "en d an g ers th e f i n a n c i a l p r o s p e r ity o f th e c o u n try ," th e b i l l was " t o o c o m p l e x ," i t t h r e a t e n e d " c h a n g e s i n b a n k s a n d b a n k ­ i n g , " an d " i t d i s t u r b s th e c u r r e n c y sy ste m o f th e c o u n t r y ." I t c o n d e m n e d t h e b i l l e s p e c i a l l y f o r t h e r e a s o n t h a t i t a im e d a t " a n o b j e c t w h i c h many men o f e x p e r i e n c e deem i n c a p a b l e o f a c c o m p l i s h m e n t i n t h e way a n d a t t h e t i m e p r o p o s e d . A t an im m ense e x p e n s e d u r i n g M r. M c C u llo c h * s S e c r e t a r y s h i p , t h e d e b t was f u n d e d i n i t s p r e s e n t fo rm , a n d i n t h a t f o r m i t o u g h t t o r e m a i n f o r some t i m e t o come . . • a n y a t t e m p t t o p u t t h e d e b t i n a p erm an en t fo rm b e f o r e t h a t c r e d i t i s f i n a l l y e s t a b ­ l i s h e d , a n d t h e p r e s e n t g r o w t h o f i t f u l l y m a t u r e d , w o u ld b e p re m a tu re and i n j u r i o u s . " F e b r u a r y 1 9 , 1 8 7 0 , V o l . X, p . 2 2 9 : J u n e 4 , 1 8 7 0 , V o l . X, p p . 7 0 9 - 7 1 1 . 2 C o m m e r c ia l a n d F i n a n c i a l C h r o n i c l e . F e b r u a r y 2 6 , 1 8 7 0 , V o l . X,“ p . £ 6 2 ; May 1 4 , i8*?0, V oT ."X , p . 6 1 4 . ^ W o r t h i n g t o n C. F o r d , " R e f u n d i n g o f t h e P u b l i c D e b t o f th e U n ite d S t a t e s , " C y c lo p a e d ia o f P o l i t i c a l S c ie n c e , P o l i t i c a l Econom y, a n d o f t h e P o l i t i c a l B l s t o r y o f t h e U h i t e d S t a t e s , J o h n J . L a i o r , e d . ( R a n d , M c N a lly & Com pany, a n d M e l b e r t B. C a r y & Com pany, C h i c a g o , 1 8 8 1 - 1 8 8 4 ) , V o l . I l l , p p . 5 6 0 - 5 6 1 .

140 In th e T r e a s u r y D e p artm en t t h e o b s e s s io n t h a t a v e ry l o n g - t e r m bond w as t h e m o st d e s i r a b l e f o r r e f u n d i n g p u r p o s e s c o n t i n u e d f o r some y e a r s a f t e r p a s s a g e o f t h e R e f u n d i n g A c t , I n h i s a n n u a l r e p o r t o f 1875 S e c r e t a r y B r i s t o w , who was In many r e s p e c t s an a b l e f i n a n c i e r , th e

t o o k o c c a s i o n t o comment on

im p ro v ed p u b l i c c r e d i t and th e f a v o r a b l e p r o g r e s s o f r e f u n d ­

in g ,

Y e t he i m m e d i a t e l y f o l l o w e d t h i s w i t h t h e p r o p o s a l t h a t

t h e R e f u n d i n g A c t b e am ended so t h a t t h e 4 ^ - p e r c e n t b o n d s ( t o be re d e e m a b le f i f t e e n

y e a r s a f t e r d a t e o f t h e i r i s s u e ) be

made r e d e e m a b l e “ t h i r t y y e a r s f r o m t h e d a t e o f t h e i r I s s u e . " The o n l y r e a s o n w h i c h h e g a v e f o r s u c h a p r o p o s a l w as t h a t because " l i t t l e

in d u cem en t i s

o f f e r e d i n t h e am oun t a l l o w e d

a s c o m m issio n s f o r p l a c i n g t h e U h ite d S t a t e s l o a n s , w i t h t h a t p a id by o t h e r g o v e rn m e n ts ,

it

is

com pared

th o u g h t im p o rta n t

t o g i v e t h e s e b o n d s a l l t h e e l e m e n t s o f p o p u l a r i t y t h a t may be p o s s ib le ." ^ A som ew hat m ore J u s t i f i a b l e p r o p o s a l , w h i c h a l s o th e in

e n v is a g e d

i s s u e o f a t h i r t y - y e a r b o n d , was made by S e c r e t a r y M o r r i l l 1876 i n c o n n e c t i o n w i t h h i s r e f l e c t i o n s on t h e p r o b l e m o f

p r e p a r i n g f o r r e s u m p tio n o f s p e c i e p a y m e n ts . t h a t th e re su m p tio n l e g i s l a t i o n

He rec o m m e n d ed

sh o u ld a ls o g iv e th e S e c re ta r y

a u t h o r i t y to fund th e g ree n b ac k s i n t o

"a bond b e a r i n g a r a t e

o f i n t e r e s t n o t m ore t h a n f o u r a n d o n e - h a l f p e r c e n t , , n o t l e s s th a n t h i r t y

y e a rs to ru n .

^•T r e a s u r y R e p o r t , 1 8 7 5 , p p . X I - X I I . 2 Ib id .,

1 8 7 6 , p . XV.

w ith

141

SOME CONJECTURES What t h e r e a l f o r c e s w e re w h i c h b r o u g h t a b o u t t h i s m a j o r e r r o r i n t h e m a n a g e m e n t o f t h e d e b t , o r t h e c o n d i t i o n s w h ic h p e rm itte d i t ,

can o n l y be c o n j e c t u r e d .

o f th e p e o p le ,

and i t

I t was n o t t h e w i l l

d o e s n o t a p p e a r t o have been f u r t h e r e d

t o a n y g r e a t e x t e n t by p r e s s u r e fr o m b a n k e r s a n d c o n s e r v a t i v e I n v e s t o r s who s t o o d t o b e n e f i t f r o m I t .

3h f a c t ,

th e p ro v isio n

f o r a t h i r t y - y e a r b o n d was i n s i s t e d u p o n b y t h e H o u s e o f R e p re s e n ta tiv e s — a body f a r l e s s

sy m p a th e tic to th e d e s i r e s o f

v e s te d f i n a n c i a l I n t e r e s t s th a n th e S e n a te .

The r e a s o n s

ad v an c ed to J u s t i f y I t — a lo w e r I n t e r e s t r a t e ,

ta x re d u c tio n ,

p e rp e tu a tio n o f n a tlo n a l-b a n k -n o te c ir c u la tio n — appear to have been i n s u f f i c i e n t or s p e c io u s . I n a n e g a t i v e way Sherm an m i g h t b e h e l d r e s p o n s i b l e f o r th e f i n a l p assag e o f th e a c t, r e p r e s e n t h i s own c o n v i c t i o n s . m a tte rs of fin a n c e ,

In t h a t i t s

term s d id n o t

As t h e S e n a t e * s l e a d e r i n

and a s one o f th e th r e e S e n a te c o n f e r e e s

who c o m p ro m is e d w i t h t h e c o n f e r e e s o f t h e H o u se on t h e b i l l , h e m ig h t h a v e l e t i t

be d e f e a t e d .

S im p ly to s e c u r e i t s

p a s s a g e , h o w e v e r , h e a c q u i e s c e d t o t e r m s much l i k e

th o s e to

w h ich h e h a d v i g o r o u s l y o b j e c t e d i n t h e S e n a te d e b a t e .

It

w as a s i f h e w e r e w i l l i n g t o s e e a d o p t e d a l m o s t a n y k i n d o f r e f u n d i n g m easure r a t h e r th a n n o n e . Though S h e r m a n * s i n f l u e n c e m i g h t h a v e p r e v e n t e d p a s s a g e of th e b i l l , o f C ong ress.

n e v e r t h e l e s s th e e n a c tm e n t r e p r e s e n t e d t h e w i l l Few i n t h a t b o d y w e re v e r s e d i n f i n a n c i a l

142

m a tte rs.

Many,

d o u b tle ss,

th e l e g is la tio n ,

d i d n o t com prehend, t h e I m p o r t o f

o r w e r e sw ayed b y t h e o v e r - e m p h a s i s o f i t s

c u rren cy a s p e c ts .

P e rh ap s th e e a r l i e r c o n v e rsio n of th e debt

I n to f iv e - tw e n tie s a t a h ig h i n t e r e s t r a t e

l e f t an i m p r e s s i o n

t h a t a r a d i c a l l y new t y p e o f o b l i g a t i o n m ust be t r i e d .

She

h i g h c o n v e r s i o n r a t e w as a t t r i b u t e d t o t h e t y p e o f o b l i g a t i o n r a t h e r th a n to

t h e c o n d i t i o n o f t h e m oney m a r k e t a n d t h e s t a t e

of th e p u b lic c r e d i t . C e rta in ly , p e o p le a t l a r g e ,

b o t h f o r m em bers o f C o n g r e s s a n d f o r

th e

t h i s w as a p e r i o d o f m u d d le d a n d c o n t r a d i c ­

to r y th in k in g , n o t o n ly in f i n a n c i a l m a tte rs but in p o l i t i c a l a n d e t h i c a l m a t t e r s a s w e l l # 3-

T he r e v e r s a l o f d e b t p o l i c y

fro m t h a t o f s h o r t - t e r m

re d e e m a b lllty , c o n t r o l l a b i l i t y ,

and

e v e n t u a l expungem ent to

t h e v e r y o p p o s i t e o f t h e s e w as b u t

o n e o f many a n o m a l i e s a n d i n c o n s i s t e n c i e s o f t h e t i m e .

It

had i t s

of

c o u n t e r p a r t in c su ch phenom ena a s th e r e s o l u t i o n

C o n g ress to r e t u r n to Its

s p e c i e p a y m e n ts a t a n e a r l y d a t e an d

l o n g d e l a y I n t a k i n g m e a s u r e s t o do s o ; t h e t u r n f r o m

g ra d u a l cu rren cy c o n tra c tio n

to m easu res o f a c t u a l i n f l a t i o n ;

J o h n s o n ^ d e p a r t u r e f r o m e a r l i e r - e x p r e s s e d p r i n c i p l e s when h e a d v o c a te d r e p u d i a t i o n ; B o u tw e ll* s d e s i r e to p ay th e deb t and y e t p e rp e tu a te I t ;

G ra n t* s I n c l i n a t i o n

to w ard c u r r e n c y

^ T h l s t r e n d i n A m e ric a n p o l i t i c s w as e a r l y r e c o g n i z e d b y t h e L ondon E c o n o m i s t * "T he a p p e t i t e f o r p o l i t i c a l com­ p r o m i s e among t h e m a n a g e r s o f p o l i t i c a l s e c t i o n s i n A m e ric a i s so k e e n , t h a t p r i n c i p l e s v a n i s h l i k e smoke b e f o r e t h e v i s i o n o f a new c o m b i n a t i o n . * S e p t e m b e r 8 , 1 8 6 6 , V o l . XXIV, p . 1050.

143

e x p a n s io n and h i s

tu r n a b o u t in v e to i n g th e

In fla tio n b i ll ;

t h e c a m p a ig n t o make " c o i n " b o n d s p a y a b l e i n g r e e n b a c k s ; u n w illin g n e s s o f C o n g re ss to d e f in e th e term " c o in " R e f u n d i n g A c t;

th e

in th e

t h e v a c i l l a t i o n s o f B o u tw e ll and R ic h a r d s o n in

i s s u i n g and red e em in g th e g re e n b a c k s . t y p i c a l o f th e p e rio d .

T h i s s o r t o f t h i n g was

T h e r e was l a c k o f c o n s i s t e n c y ,

o f c o m p re h e n s io n , l a c k o f v i s i o n ,

la c k of c h a ra c te r,

la c k

an d l a c k

of p rin c ip le . I t w as a b e w i l d e r e d e r a ,

a n d a v i c i o u s one a s w e l l .

was t h e t i m e o f t h e i n t o l e r a n t , p o lic y of re c o n stru c tio n

o p p re ssiv e ,

in th e 3 o u th .

o f w id e sp re a d c o r r u p tio n in C o n g ress, o f t h e G o v e rn m e n t d e p a r t m e n t s . p o l i t i c a l p u rp o ses. i n B lac k F rid a y ,

and v e n g e f u l

I t w as t h e th e c o u rts,

tim e a l s o and v a rio u s

A P r e s i d e n t was i m p e a c h e d f o r

The g r e a t g o l d c o n s p i r a c y w h i c h c u l m i n a t e d

and th e

e x p o s u r e o f t h e ^ d iis k e y r i n g ,

th e c h a r a c t e r o f o f f i c i a l s and p r i v a t e honest

T h is

su llie d

c itiz e n s a lik e .

D is­

s p e c u l a t i o n a n d d i s h o n e s t f i n a n c e w e re e v e r y w h e r e

rife .1

" S o c i a l l y , f i n a n c i a l l y , and p o l i t i c a l l y , i t s ta n d s o u t q u i t e a p a r t f r o m a n y o t h e r d e c a d e o f t h e c e n t u r y . . . M o ra l s e n s e seem ed f o r a t i m e t o h a v e d e t e r i o r a t e d i n t h e w h o le c o m m u n ity . . . The G o v e r n m e n t ^ f i n a n c i a l r e c k l e s s n e s s was r e a d i l y i m i t a t e d b y t h e c o m m u n ity a t l a r g e ; d e b t w as t h e o r d e r o f th e day in th e a f f a i r s o f b o t h ." N o y es, F o r t y Y ears, pp. 17-1 8 . "T he f e s t e r i n g c o r r u p t i o n s o f t h e p o s t - w a r p e r i o d s p r a n g u p i n e v e r y p a r t o f A m e ric a a n d i n a l m o s t e v e r y

144 I t w as l i t t l e p o lic y ,

w o n d e r t h a t p r i n c i p l e was c o n f u s e d w i t h

a n d c o m p ro m is e was e a s i l y

Ju s tifie d .

So f a r a s a

m a j o r p o r t i o n o f t h e d e b t was c o n c e r n e d , f o l l y r a t h e r th an k n av ery p e rm itte d i t s

u n w a r r a n t e d and u n e c o n o m i c a l e x t e n ­

sio n f o r a t h i r d of a c e n tu ry .

d e p a rtm e n t o f n a t i o n a l l i f e . . . th e G ran t e ra s ta n d s u n iq u e i n th e c o m p re h e n s iv e n e s s o f i t s r a s c a l i t y . . . * A lla n N e v ln s , H a m ilto n F i s h ; th e I n n e r H i s t o r y o f t h e G r a n t A d m i n i s t r a t i o n (D o d d , Mead & Company, New Y o r k , 1 3 3 5 7 , p . 6 3 8 .-----------"T h ese y e a r s r e v e a l an u n s t e a d i n e s s o f p u rp o s e , an i g n o r a n c e o f f u n d a m e n t a l e c o n o m ic c o n c e p t i o n s , a n d a w i l l i n g n e s s to s u b o r d in a te p u b lic w e lf a r e to p r i v a t e a d v a n ta g e w h ich a r e d i s h e a r t e n i n g an d r e v o l t i n g . " B a r r e t t , The G r e e n b a c k s , p . 1 8 0 . " F o r some y e a r s t h e f r a u d s a n d i m m o r a l i t i e s o f t h e p o s t w a r boom y e a r s h a d b e e n r i s i n g , a s i t w e r e , t o t h e s u r f a c e o f p o l i t i c s and o b t r u d i n g t h e m s e l v e s on t h e p u b l i c v i e w . . . / f h e r e f w e re d i s c l o s u r e s o f c o r r u p ­ t i o n a n d o f lo w o f f i c i a l m o r a l i t y w h ic h e x c i t e d t h e i n t e r e s t and I n d ig n a tio n o f even a p o stw a r e l e c t o r a t e , " L u c i u s W i l m e r d i n g , J r . , The S p e n d i n g P o w e r ; a H i s t o r y o f th e E f f o r t s of C ong ress to C o n tro l E x p e n d itu re s T ? a l e t 3 h l v e r s l t y " " p r e s s , New'TTaven, 1 9 4 3 J , p . 2 2 5 .

145 THE REFUNDING OPERATIONS S a le o f th e 5 - P e r c e n t Loan A l t h o u g h t h e R e f u n d i n g A c t was p a s s e d I n J u l y 1870# no b o n d s w e re I s s u e d u n d e r t h e a u t h o r i s a t i o n u n t i l M a rc h o f t h e fo llo w in g y e a r.

The E u r o p e a n dem and f o r f u n d s w h i c h r e ­

s u l t e d fr o m t h e w a r b e t w e e n F r a n c e a n d P r u s s i a h a d , f o r t h e t i m e , made n e g o t i a t i o n o f t h e new b o n d s I m p r a c t i c a b l e . was a n o t h e r i n s t a n c e

i n w h ic h d e la y h ad u n f o r t u n a t e

quences f o r th e T re a s u ry . t w e n t i e s w e re s e llin g - : c l o s e

As h a s b e e n p o i n t e d o u t ,

T h is

conse­ th e f i v e -

t o p a r i n E urope in F e b r u a r y I S 70.

B ecause o f th e e x te n d e d term o f th e r e f u n d in g 5 's and th e p o s s i b i l i t y o f a c a l l f o r a p a r t o f th e o ld f iv e - tw e n ty 6 p e rc e n ts, tiv e

t h e new b o n d s w e r e p r o b a b l y s u f f i c i e n t l y a t t r a c ­

a t t h a t moment t o i n d u c e a c o n s i d e r a b l e a m o u n t o f b u y i n g . The r e f u n d i n g b i l l h a d b e e n i n t r o d u c e d i n t h e S e n a t e on

J a n u a r y 11 a n d w as p a s s e d b y t h a t b o d y on M a rch 1 1 . d a t e i t w as s e n t t o t h e H o u s e , w h e re i t

"seem s to h a v e s l e p t

f o r n e a r l y t h r e e m o n th s w i t h o u t a n y a c t i o n . " p a s s e d by b o t h H o u s e s o n J u l y 14-.

It

On t h a t

2

i t w as f i n a l l y

se em s t h a t t h e c h a i r m a n

o f t h e H ouse Ways an d Means C o m m i t te e , R o b e r t C. S c h e n c k , h a d re c e n tly re tu rn e d c o u rse o f h i s

fro m E u r o p e when C o n g r e s s c o n v e n e d .

t r a v e l s h e h a d fo rm e d t h e c o n v i c t i o n

r e f u n d i n g lo a n c o u ld be n e g o ti a t e d a t 4 o r ^

^ T r e a s u r y R e p o r t . 1 8 7 1 , p . X V II. ^ S h e rm a n , o p . c l t . . V o l . I ,

p . 4-52.

In th e

t h a t th e

p e rc e n t.

146 . . . i t was t h i s o p i n i o n on h i s p a r t w h i c h led to d e la y s. The b i l l w as n o t p a s s e d u n t i l J u l y 1 &7 0 , a t t h e v e r y moment when t h e F r a n c o P r u s s i a n War o p e n e d . Had t h e b i l l b e e n p a s s e d i n M arch, q u i t e l a r g e n e g o t i a t i o n s c o u ld h a v e b e e n made i n A p r i l o f t h a t y e a r . E a r l y i n I S 70 i t was p l a i n t h a t t h e r e w e re many s t r o n g f a c t o r s to su p p o rt th e p u b lic

c re d it.

C o n g re ss had c o n firm e d

p a y m e n t o f t h e d e b t i n c o i n a n d had condem ned P r e s i d e n t J o h n s o n 's p r o p o s a l f o r r e p u d i a t i o n ,

th e w e a lth o f th e c o u n try

was r a p i d l y i n c r e a s i n g , a l l n a t i o n a l o b l i g a t i o n s h a d b e e n m et p r o m p t l y , e a c h y e a r saw a l a r g e T r e a s u r y s u r p l u s , e v e r y N o r t h e r n S t a t e w as r e d u c i n g i t s G o v e r n m e n t 's b o n d s w e re s e l l i n g 7 -p ercen t y ie ld .2

In d e b te d n e ss.

and Y et th e

in E uropean m a rk e ts a t a

The N a t i o n r a i s e d

t h e q u e s t i o n why "A m e ri­

c a n s e c u r i t i e s s t a n d l o w e r i n t h e money m a r k e t s o f t h e w o r l d th a n th o s e o f an y o th e r p o w e r, e x c e p t T urkey and E g y p t . . . lo w e r th a n even th o s e o f th e A rg e n tin e R e p u b li c ." 3 to ry e v e n ts l i k e

th e E r ie

T ra n si­

s c a n d a l s an d t h e i n e p t n e g o t i a t i o n

o f t h e A la b am a c l a i m , w h i c h w as d i s t u r b i n g t o A n g l o - A m e r i c a n re la tio n s,

w e re o f some s i g n i f i c a n c e f o r t h e m om ent.

m ore I m p o r t a n t w as t h e a t t i t u d e

But

o f some m em bers o f C o n g r e s s ,

^ B o u t w e l l , .op. c l t . . V o l . I I , p . 1 ^ 2 . o N a t i o n . J a n u a r y 2 7 , 1 S7 0 , p . 5 3 At a b o u t t h i s tim e t h e y i e l d on B r i t i s h c o n s o l s was 3 . 2 p e r c e n t a n d on F r e n c h r e n te s ^ ,5 p e r c e n t. C o m m e r c ia l a n d F i n a n c i a l C h r o n i c l e . J u n e k , I S 7 0 , V o l . X, p . 7 1 0 . ^N a tio n . ip

52-53.

147

who show ed t h a t t h e y " d o n o t c o n s i d e r t h e p u b l i c c r e d i t o r a p e r s o n d e s e r v i n g o f much c o n s i d e r a t i o n . " 1 A l t h o u g h B o u t w e l l was c o n f i d e n t t h a t t h e 5 - p e r c e n t s c o u l d be s o l d a s c o n d i t i o n s i m p r o v e d , h e p e r c e i v e d t h a t t h e 4-|—p e r c e n t s h a d l i t t l e fo r

some t i m e t o come.

ch an ce o f b e in g ta k e n by i n v e s to r s A c c o r d i n g l y , h e p r o p o s e d t o Con­

g r e s s t h a t t h e a u t h o r i z a t i o n o f 5 - p e r c e n t s be I n c r e a s e d fro m $200 m i l l i o n t o $500 m i l l i o n and t h a t q u a r t e r l y p a y ­ m ent o f i n t e r e s t be p e r m i t t e d . ^

On J a n u a r y 2 0 , 1 8 7 1 , t h e

R e f u n d i n g A c t w as a m e n d ed t o m e e t t h e s e r e q u i r e m e n t s . 3 The r e f u n d i n g p r o g r a m w a s o f f t o a s lo w s t a r t .

Upon

t h e o u t b r e a k o f t h e F r a n c o - P r u s s i a n W ar, B0u t w e l l d e c i d e d t h a t n o t h i n g w o u ld b e d o n e u n t i l E u r o p e a n a f f a i r s becam e m ore se ttle d .

No e f f o r t w as made t o s e l l t h e b o n d s u n t i l M arch

1 8 7 1 , when t h e T r e a s u r y o p e n e d i t s

books f o r s u b s c r ip tio n .

- '■ I b i d ., p . 5 3 . The N a t i o n a s c r i b e d t h e lo w s t a t e o f th e p u b lic c r e d i t not to th e p u b lic g e n e r a lly , b u t to a c e r t a i n ty p e o f p o l i t i c a l l e a d e r s h i p . I t p o in te d to " th e r a p i d i t y w i t h w h ich a t r u e a p p r e c i a t i o n o f t h e c o n d i t i o n o f c r e d i t , and o f th e v a lu e o f i t , had been d if f u s e d th ro u g h t h e c o m m u n ity b y m ere d i s c u s s i o n d u r i n g t h e l a s t t h r e e o r fo u r y e a rs ." I t p e rc e iv e d th e f a u l t to l i e in th e f a c t t h a t " t h e o r g a n i z e d mode o f e x p r e s s i n g t h e p o p u l a r w i l l on g r e a t q u e s t i o n s o f t h e day i s s i n g u l a r l y i m p e r f e c t , o w in g . . . t o t h e r i s e i n t o pow er and I n f l u e n c e , th ro u g h th e e v e n ts o f th e w a r , o f a c l a s s o f s t a t e s m e n w hose w h o le p o l i t i c a l e x p e r ­ ie n c e and a b i l i t y l i e i n th e s t i m u l a t i o n o f e m o tio n , and who a r e w a n t i n g i n t h e h a b i t s o f m in d , a s w e l l a s t h e k i n d o f k n o w le d g e , w h ic h th e b u s i n e s s o f a g r e a t n a t i o n a b s o ­ lu te ly re q u ire s ." I b i d . , p . 54. ^ T re a s u ry R ep o rt , 31 6 S t a t u t e s , 3 9 9 .

1 8 7 0 , p . V I.

148

With the a s s is ta n c e o f Jay Cooke & Company and various bank­ ing firms a sso cia ted with them some s a le s were then made. But the larg er esta b lish e d banking houses in Europe and America remained In d iffe r e n t to the refunding is s u e , e ith e r d e c lin in g or n e g le c tin g to further the s a le o f i t .

The

arrangement made by Cooke was such that almost any banking firm in the United S ta te s could p a r tic ip a te in the o ffe r in g . This made p a r tic ip a tio n by important firms u n a ttr a c tiv e , as i t did not pay them to take an a ctiv e in t e r e s t in the s a le . The o ffe r in g did not go w e ll, and between March and August only

$65

m illio n were s o ld , most of th is amount to the

national banks.^ In July some In te r e s t was shown by certain European bankers, and in August arrangement was made with Cooke & Company as the rep resen ta tiv e of bankers in Europe and the United S ta te s .

Cooke formed two syn d ica tes, one of them

European and the other American.^

I t was agreed that the

members of the syn dicates would have— der any ... for

. . . the r ig h t to subscribe for the remain­ o f the / f i r s t 7 two hundred m illio n s . . . at time previous to the f i r s t o f April /X&JZ? by subscribing for ten m illio n s at once and an average of at l e a s t f iv e m illio n s . . .

^•Treasury Report. 1S71, p. XVII; O berholtzer, op. c l t . . Vol. I I , pp. 270-272; and Boutwell, op. c l t . . Vol. T l, p. 167. ^Treasury Report. 1871, p. XVIII; Oberholt?.er, op. c l t . . Vol. I I , p. 279.

149

per month . . . su bject to the r ig h t of the n atio n al banks to subscribe for f i f t y m illio n s of d o lla r s within s ix ty days o f the 25th day of August.^ •The o ffe rin g was immediately s u c c e ss fu l, and by the end of p

August the e n tir e amount had been subscribed . cBy December 1671 p r a c t ic a lly a l l the su bscription s had been taken up ,3 and the R oth sch ild s, who had thus far re­ mained a lo o f , were now ready to Join Cooke in further nego­ t i a t io n s for the sale of the 5-P&rcent is s u e .

'Their pro­

p osals w ere made to the Treasury early in 1672, and the bankers waited in to the summer co n fid en tly expecting that k th eir o ffe r would be accepted. By tnen i t became apparent that con sideration s other than the fin a n c ia l w elfare of the country weighed h ea v ily with the Grant adm inistration.

The

reason for the delay in continuing refunding at so opportune a time was purely p o l i t i c a l .

" . . . i t became clea r that the

adm inistration feared the is s u e , and would l e t the Govern­ ment pay s ix per cent, on i t s debt in d e f i n i t e ly rather than endanger Grant's chances for a second term .” 5 There had been some c r it ic is m of the manner in which the new bonds were sold and the old ones redeemed.

Because

•‘•Treasury Report. 1871, p. XVIII. 2Idem.; Boutw ell, o p . c l t . , Vol. I I , pp. 187-188; and Oberholt?er, op. c l t . . V o l . I T , p. 279. ^Treasury Report. 1871, p. XIX. ij-O berholtzer, pp. c l t . . Vol. I I , pp. 288, 3 6 1 . ^ I b l d . , p. 3 6 1 .

150

c a lle d fiv e -tw e n tie s had to be given n inety days' n o tice o f redemption, and the sa le of the refunding bonds was the c h ie f source o f funds for th e ir payment, Boutwell had allowed the subscribers ninety days' in t e r e s t on the new bonds upon th eir d ep ositin g old bonds as a guaranty that the new ones would be taken.

In th is way su bscription s were more r e a d ily

obtained, but the Secretary was c r i t i c i z e d In some quarters for th is arrangement.

Apparently Grant and h is supporters

feared t h i s c r it ic is m more than th a t which might a r is e from fa ilu r e to continue the refunding.

In August 1872 he made

i t clear to the bankers that the operation must be postponed u n t i l a fte r November.-*of

1872,

Boutwell r e la t e s that in the autumn

when i t seemed opportune to continue the sa le of

bonds in the same manner as b efore, he consulted with the President and Cabinet and "upon th e ir advice the n eg o tia tio n s were suspended."

2

I n January 1&73 Boutwell again made arrangements to con­

tinue the s a le of the 5-percent bonds.

Now, however, there

was great r iv a lr y among the Important banking firm s, and because the adm inistration sought to p lease as many o f them as p o s s ib le , C ooke & Company p articip a ted but did not head the new syn d ica te.

There was great optimism among the bankers,

and i t was decided that s a le of the remaining

-‘•Id e m . ^ B o u tw e ll, p p . c l t . . V o l. I I ,

p . 139.

$300

m illio n

151

5 percents would fee undertaken. bonds was pushed to

a

The market price of the

permium, and preparations were made

for an exten sive newspaper campaign.

When the su bscription

books were opened in Europe and America early in February, a demand for §600 or ObOO m illio n of the bonds was generally expected.* To everyone's surprise the n eg o tia tio n was p r a c t ic a lly a fa ilu re.

Sale of the bonds was small from the o u ts e t.

Confusion as to c a l l in g the old bonds and lack o f f u l l cooperation on the part of the Treasury added to the d i f f i ­ c u lt y .

F in a lly , by the end of February some $5° m illio n had

been subscribed, and s a le s continued on a small sca le for some time th e r e a fte r .

By December 1S73 su b scrip tion s had

been made to only $ 8 ^ . 5 m illio n .

In addition to t h i s , the

$15.5 m illio n received from England in September, in payment of the Geneva Award, had been invested in refunding bonds to be held "subject to the future d is p o s it io n o f Congress." 3 Thus, in the three and on e-h alf years which had elapsed since passage o f the Refunding Act, only $J00 m illio n of the § 1 , 5 0 0 m illio n refunding a u th orisation had been so ld .^

*Oberholt?er, 0 £ . c l t . . Vol. I I , p . 2i M

d . , pp.

366.

3 7 2 , 377.

3T re a s u r y R e p o r t . 1873, PP» IX-X.

^"The f i r s t step s toward refunding have been taken very l e is u r e ly ." Commercial and Financial C hronicle. August 8 , ISfk-, V o l. XIX, p . 129.

152

At a time which seemed, p r o p itio u s , and when the hopes o f even the bankers ran high that a l l the remaining 5-percent bonds would be r e a d ily s o ld , the f a ilu r e of the operation was c e r ta in ly a harbinger o f troubled times to come.

The

in tern a tio n a l investment market was already g lu tted w ith bonds and e q u itie s of every d e s c r ip tio n .

I t was only the

fervor which sp ecu latio n and a f a l s e prosperity had engen­ dered that concealed the true s it u a t i o n .

In September the

w ild and desperate panic which seized the country extinguished any remaining hope that the balance o f the 5-per‘cent issu e could soon be so ld .

No e f f o r t was made to continue i t s nego­

t i a t i o n u n t il July o f the fo llo w in g year. A fter the v io len ce o f the panic had subsided and the long downward d r i f t of the depression s e t in, the money market ruled e a sy .

Early in March 1874- the ra te on c a l l

loans ranged between

3

&n(3- 5 percent, and on commercial

paper i t was 5 to

p e r c e n t.1

During that month c e r ta in

is s u e s o f the fiv e - t w e n t ie s sold around 120, and the 5-percent t e n - f o r t i e s around

115,

on the stock exchange.2

At about th is time the 5-percent gold bonds of 1 858 , which had matured on January 1 s t, were being re a d ily exchanged for the new 5-percent bonds, many of th ese exchanges being for E nglish a c c o u n ts.3 ^Commercial and F in an cial C h ron icle. March Vol. XVIII, p. 24-2. 2 I b ld .

. March 28, 1874-, Vol. XVIII, p.

311.

3I b id . . March 7 , 1&74-, Vol. XVIII, p. 24-2.

7

, 1674-,

1 53

That in s p i t e o f th e s e d evelopm en ts c o n d it io n s were not y e t e n t i r e l y fa v o r a b le fo r e x t e n s i v e refu n d in g i s se en in th e r e tu r n o f some $ 1 0 m i l l i o n o f bonds from Europe l a t e in March; and throughout the sp r in g a g i t a t i o n f o r exp an sion o f th e greenbacks d is tu r b e d b u s i n e s s , banking, and f o r e ig n trad e, 2

The c o n d it io n o f the European markets was watched

e s p e c i a l l y c l o s e l y , f o r many o f the bonds to be refunded were h e ld abroad.

S a le o f the new bonds th e r e had to be in

c o n s id e r a b le volume in order to p reven t an ad verse exchange b a la n c e when c a l l s fo r the o ld bonds were made.

E arly in the

summer o f 1 S7 ^ i t was th e o p in io n in f i n a n c i a l c i r c l e s th a t the European m arkets were "probably in a fa v o r a b le s t a t e fo r the r e c e p t io n o f our bonds." 2 When S e c r e t a r y B ristow assumed o f f i c e in June 187^» the u n so ld b a la n c e o f the 5 -P er*cerit lo a n was $17 S m i l l i o n .

In

J u ly he e n te r e d in t o a c o n t r a c t w it h a group o f bankers r e p ­ r e s e n t i n g f i n a n c i a l h o u ses in b oth hew York and London.3 The same g e n e r a l arrangement was made w ith them th a t had been made in 1S71 w it h the firm o f Jay Cooke & Company, which in the meanwhile had gone down in the p a n ic .

A ft e r about

2Ib ld . . A p r il ^ and May 2 , 167^, V ol. XVIII, pp. 3 3 7 , ij 4 l. 2I b i d . , J u ly 1 1, 187^, V ol. XIX, p . 2 5 . 3The c o n t r a c t in g members o f th e new s y n d ic a t e were August Belmont & Company, o f New York, on b e h a lf o f N. M. R o th s c h ild & S o n s, L t d . , o f London, and t h e i r a s s o c i a t e , and J . and W. Sellgm an & Company, o f New York, fo r th e m se lv es and t h e i r a s s o c i a t e s . See Treasury R e p o r t . 187^, pp. IX-X, for d e t a i l s o f the c o n t r a c t .

154 # 1 0 m i l l i o n in o th e r s u b s c r i p t io n s had been a llo w e d , the

s y n d ic a t e was g iv e n the r i g h t to s u b s c r ib e to th e rem aining 5 p e r c e n ts on c e r t a i n terms e x te n d in g to January 3 1 , 1875. The c o m m is s io n w as o ne f o u r t h o f o n e p e r c e n t ,

th e sy n d ic a te

t o p a y t h e c o s t o f s h i p p i n g t h e new b o n d s t o L o nd on a n d t h e c o s t o f t r a n s f e r r i n g fro m L o n d o n t o t h e T r e a s u r y t h e c a l l e d b o n d s , c o u p o n s , a n d g o l d u s e d i n p a y m e n t f o r t h e m .^

At f i r s t hope was h ig h th a t the b alance o f the ^ - p e r c e n t r e fu n d in g bonds would be r a p id ly d isp o se d o f .

By the f i r s t

o f August #25 m i l l i o n o f them had been s o l d , but t h e r e a f t e r the s a l e s f e l l o f f and came p r a c t i c a l l y to a s t a n d s t i l l in th e l a t e f a l l and w in te r .

By the end o f January 1875> when

the arrangement w it h the s y n d ic a t e was to te r m in a te , only about $55 m i l l i o n had been s o l d , $*4-5 m i l l i o n o f which was accounted fo r by the s y n d i c a t e ' s o p e r a t i o n s . 2

T his poor

showing o c c a s io n e d s u r p r is e and d isa p p o in tm e n t.

Undoubtedly

the d ep ressed c o n d it i o n s o f b u s in e s s and fin a n c e had much to do w ith t h i s slow p r o g r e s s , but th e s y n d ic a te was blamed.

It

was f e l t th a t th e sy n d ic a te had sim ply a cq u ired fo r i t s e l f a s i x months' monopoly o f the r e fu n d in g 5 p e r c e n ts and w ith l i t t l e e f f o r t had made a c o n s id e r a b le p r o f i t ,

"while to our­

s e l v e s there i s n o th in g but d isap p o in tm en t a t the I n s i g n i f i c a n t amount o f the fu n d in g o p e r a t io n s which t h i s new machinery has a ccom p lish ed ." 3

3-Idem. 2Treasurv R e p o r t s . 187*1-, p . X; and 1 8 7 5 , P P . X I - X I I , ^ C o m m e rc ia l a n d F i n a n c i a l C h r o n i c l e . Novem ber 7 . 187*4-. V o l . XIX, p . 4 8 5 .

«

155 On January 29, 1875, th e c o n tr a c t w ith the s y n d ic a t e 1

was renewed-1, w it h s l i g h t m o d if ic a tio n o f term s.

The com­

m issio n a llo w e d was changed to one h a l f o f one p e r c e n t, the s y n d ic a te to pay the ex p en ses o f p rep a rin g the new bonds as w e ll as the t r a n s f e r c o s t s a s agreed upon b e f o r e N e a r l y #123 m i l l i o n o f the 5 - p e r c e n t bonds remained to be s o l d .

C o n d itio n s in 1675 were somewhat more fa v o r a b le for refu n d ­ in g .

B u sin e ss a c t i v i t y had f a l l e n to a low l e v e l , more

money was a v a i l a b l e than the needs o f b u s in e s s r e q u ir e d , and funds tended to accum ulate in the la r g e f i n a n c i a l c e n t e r s . 3 The o b s e r v a tio n made during th e p anic t h a t " c a p it a l i s w a it in g . . .

to m igrate in c o n s id e r a b le amounts a c r o ss the

A tla n t ic " ^began to prove t r u e .

The lo n g d e p r e s s io n had o n ly

h a lf-w a y run i t s c o u r se , but i d l e l i q u i d c a p i t a l b oth a t home and abroad g r a d u a lly began to seek; a s a f e and p r o f i t a b l e in v estm en t in U n ited S t a t e s bonds.

They s o ld more r e a d i l y

now, bat s t i l l th e r a te o f s a l e was not r a p id .

A lthough the

S e c r e ta r y announced in December 1875 th a t "the funding o f th e f i v e hundred m i l l i o n o f s i x per cen t bonds in to th o se

^ D r e x e l , M organ 8c Com pany, o f New Y o r k , on b e h a l f o f J . S . M organ 8c Com pany, o f L o n d o n , w ere I n c l u d e d among t h e c o n t r a c t i n g p a r t i e s i n t h e new a g r e e m e n t . T reasu ry R e p o rt. 1875, P . XI. 2 Idem . 3i b i a . . i s 7 h , p p .

x ix - x x i.

^Commercial and F in a n c ia l C h r o n ic le . November 1 , 1S73, V ol. XVII, p . 5S 3.

156 b e a r in g f i v e p er cen t h as been a ccom p lish ed ," ^ he r e f e r r e d to th e f a c t t h a t they had been su b sc r ib e d by the s y n d i c a t e . The a c t u a l d i s t r i b u t i o n o f the bonds co n tin u ed u n t i l August 187&.2 The European Market Three f e a t u r e s o f p a r t i c u l a r i n t e r e s t in the n e g o t i a t i o n o f re fu n d in g bonds on a la r g e s c a le were the European market fo r U n ite d S t a t e s bonds, the a llow a n ce o f a commission to the firm s which o b ta in ed s u b s c r i p t i o n s , and the d i s p o s i t i o n o f the p roceed s between th e time o f th e s a l e s and th e time o f redem ption o f th e f i v e - t w e n t l e s t o which the p roceed s were r e q u ir e d by law to be a p p li e d . A la r g e amount o f the f i v e - t w e n t i e s

w as

h eld abroad.

To p rovid e funds in Europe fo r t h e i r redem ption i t was n e c e s ­ sary to s e l l new bonds in European m ark ets.

In order to g iv e

added a t t r a c t i o n to the refu n d in g i s s u e s , B outw ell had recomraend_ed t h a t th e a c t a u t h o r iz in g them perm it payment o f i n t e r e s t in London, P a r i s , B e r l i n , and F ra n k fo rt, as the s u b s c r ib e r s m ight d e s i r e . 3

As u s u a l in Congress th e r e was

h o s t i l i t y toward one a s p e c t or another o f F ederal f in a n c in g in European m arkets.

At t h i s time the o p p o s it io n ce n te r e d

on the payment o f i n t e r e s t in f o r e ig n f i n a n c i a l c e n t e r s . One se n tim en t was th a t t h i s would in v o lv e a " so rt o f n a t io n a l

^Treasury R e p o r t. 1 87 5 , PP. X I-X II. 2See Ford, o £ . c l t . . V o l. I l l , pp. 5 6 0 - 5 6 1 . ^Treasury R e p o r t. 1 6 6 9 , p . XVII.

157

d e g r a d a t i o n . 1*'1'

The p r i n c i p a l o b j e c t i o n , h o w e v e r , was t h a t

s u c h an a r r a n g e m e n t w o u ld d e l a y t h e r i s e o f New Y o rk C i t y p a s a w o rld f i n a n c i a l c e n t e r . B e c a u s e C o n g re ss d id n o t a c t upon t h i s p a r t i c u l a r p r o p o s a l, pu rp o se,

th e S e c re ta ry ,

to a c h ie v e h i s

s i m p l y d i r e c t e d " t h a t i n t e r e s t on r e g i s t e r e d b o n d s

c o u l d b e made p a y a b l e i n c h e c k s o f t h e T r e a s u r e r . " ^ p r o b l e m w h ic h B o u t w e l l a n d h i s a s s i s t a n t s

A n o th e r

e n c o u n tere d in

E u ro p ean n e g o t i a t i o n o f r e f u n d i n g bonds in v o lv e d t h e t r a n s f e r o f fu n d s in

t h e E n g l i s h money m a r k e t ,

a n o p e r a t i o n o f some

d e l i c a c y w h ic h c o u l d i n f l u e n c e t h e p r i c e o f t h e b o n d s a s w e ll a s t h e i r f u r th e r

sa le . C o m m is s io n s

The q u e s t i o n o f a c o m m is s io n t o b e a l l o w e d t h e b a n k s a n d i n v e s t m e n t h o u s e s w h ic h s u b s c r i b e d t o t h e l o a n was n o t new i n T r e a s u r y f i n a n c e , one.

but i t

was a l w a y s an e m b a r r a s s i n g

The R e f u n d i n g A c t h a d a p p r o p r i a t e d o n e h a l f o f o ne

p e r c e n t fro m t h e p r o c e e d s o f t h e b o n d s f o r t h e e x p e n s e o f p re p a rin g ,

issu in g ,

a d v e rtis in g ,

and d i s p o s i n g o f th e m .

Thus

t h e n e t c o m m is s io n m ig h t am ou nt t o a b o u t one f o u r t h o f on e p e rc e n t. S ta te s,

Ih e n F ra n c is E. S p in n e r,

T r e a s u r e r o f th e U n ite d

t r a v e l e d t h r o u g h E u r o p e e a r l y i n 1871 t o d i s c u s s t h e

p r o p o s e d l o a n w i t h b a n k e r s a n d o t h e r s who w ere f i n a n c i a l l y

■ ^B outw ell, o £ . 2 ^C o n g re ssio n a l J a n u a r y 12, 1870, p . 3 B o u tw e ll, o £ .

p it,.

V o l. I I ,

p . 141.

G l o b e . 4 1 s t C o n g ., 379. c lt.,

V o l. I I ,

2d S e s s . ,

p . 141.

158 in fo rm e d , he g a in e d th e Im p ressio n t h a t — An a l m o s t i n s u p e r a b l e d i f f i c u l t y i n t h e way o f t h e n e g o t i a t i o n o f o u r l o a n was t h i s lo w r a t e o f c o m m i s s i o n s . . . e v e r y b a n k e r a n d b u s i n e s s m a n w i t h whom I c o n v e r s e d on t h e s u b ­ j e c t gave i t a s h i s o p in io n t h a t o n e - q u a r t e r o f o n e p e r c e n t , was a l t o g e t h e r t o o s m a l l a c o m p e n sa tio n f o r th e s e r v i c e s to be r e n d e r e d and t h e r i s k s t o be in c u r r e d ,- * W i l l i a m A. R i c h a r d s o n , A s s i s t a n t S e c r e t a r y o f t h e T r e a s u r y , h a d a l s o g o n e t o E u r o p e t o p r o m o te t h e n e g o t i a t i o n o f th e bonds.

H is i m p r e s s i o n a c c o r d e d w i t h t h a t o f S p i n n e r —

t h a t t h e r a t e o f c o m m i s s i o n was t o o l o w . a g r e e m e n t w i t h them b o t h .

B o u t w e l l was i n

As a t t h a t t i m e some c o n s i d e r a t i o n

w as b e i n g g i v e n t o t h e p o s s i b l e

s a l e o f th e 4 - p e r c e n t s and

41—p e r c e n t s f o l l o w i n g t h e c o m p l e t i o n o f s u b s c r i p t i o n s t o t h e first

$2 00 m i l l i o n o f 5 - p e r c e n t s ,

B o u tw e ll e x p re s s e d

o p in io n o f b o th h i m s e l f and R ic h a rd s o n t h a t o b sta c le

bonds in E urope i s

c o m m issio n a ll o w e d ." l a r g e co m m issio n ,

even th o u g h i t

w o u ld " s e c u r e

T reasu ry o f f i c i a l s a m o u n te d t o was t h e

th e In ad eq u acy o f th e

He b e l i e v e d s t r o n g l y t h a t a s u f f i c i e n t l y seem ed " u n n e c e s s a r i l y

th e n e g o tia tio n

p o ssib le d e l a y . A p p a r e n t l y

p.

" t h e m o st s e r i o u s

i n t h e way o f n e g o t i a t i n g t h e f o u r a n d f o u r - a n d - a -

h a lf per c e n t,

la rg e ,"

it

o f th em w i t h t h e l e a s t

was n o t t h e n c l e a r t o t h e

t h a t in e f f e c t w hat t h e i r p r o p o s a l s a l e o f t h e 4 * s and 4^* 8 i n a 5 - p e r c e n t

^R eport o f th e T re a s u r e r o f th e U n ite d S t a te s , 256.

2

th e

T re a su ry R e p o rt.

1 8 7 1 , p p . X3X-XX.

1871,

159

m a r k e t a t w h a t w o u ld r e p r e s e n t a d i s c o u n t ( I n t h e f o r m o f a co m m issio n )

s u f f i c i e n t to

g iv e th e bonds a y i e l d

a c c e p t a b l e to

t h e i n v e s t m e n t s e g m e n t o f t h e money m a r k e t .

The q u e s t i o n o f c o m m i s s i o n s a n d t h e f e e l i n g I n t h e T reasu ry th a t

t h e am o u n t p e r m i t t e d h a m p e r e d t h e s a l e o f

b o n d s p e r s i s t e d f o r some y e a r s .

When S e c r e t a r y B r i s t o w

w as I n o f f i c e h e w e n t so f a r a s t o tio n

s u g g e s t an e x tre m e a l t e r a ­

in th e te r m s o f th e 4£*e (fro m r e f t e e m a b l l i t y in f i f t e e n

y e a r s to r e d e e m a b ility in t h i r t y

y ears)

as a c o m p e n sa tio n

f o r w h a t h e w as c o n v i n c e d was a much t o o lo w c o m m i s s i o n r a t e . " 1. As i n t h e d a y s o f C h a se a n d F e s s e n d e n ,

th e paym ent of

c o m m i s s i o n s f o r t h e d i s t r i b u t i o n o f b o n d s was a s e n s i t i v e p o i n t w ith C o n g ress and th e p e o p le . r e f u n d in g to o k p la c e ,

In t h e e r a i n t d i l e h

s u s p ic io n o f m a lfe a sa n c e in h ig h

o f f i c e was w i d e s p r e a d .

E ven t h e f r a c t i o n a l n e t c o m m i s s i o n

o f one f o u r t h o f one p e r c e n t r e p r e s e n t e d a l a r g e on a s u b s t a n t i a l v o lu m e o f s a l e s , w e re r e a d i l y a c h i e v e d . b a n k e r s a t any tim e ,

e sp e c ia lly i f

sum o f money th e

sa le s

P u b l i c o p i n io n , none to o k i n d l y t o

a ls o

se n se d t h a t th e bonds o f t h e i r

G o v e rn m e n t s h o u l d b e h i g h l y d e s i r a b l e w i t h o u t much i n d u c e m e n t o t h e r t h a n t h e t e r m s o f I n t e r e s t a n d t h e m a t u r i t i e s w h ic h t h e p o b lig a tio n s a c tu a lly bo re.

■^See a b o v e ; a n d T r e a s u r y R e p o r t , 1 8 7 5 , p p . X I - X I I . " P u b l i c o p i n i o n was d e c i d e d l y a d v e r s e t o . . . / f t i w p r o p o s i t i o n t o a l l o w m ore a m p le c o m m i s s i o n s an d i t was n o t l i s t e n e d t o by C o n g r e s s . " C o m m e r c ia l a n d F i n a n c i a l C h r o n i c l e . J u l y 2 5 , 1 8 7 4 , V o l . XIX, p . “ 7 4 .

160

In some q u a r t e r s t h e r e was r e s e n t m e n t t h a t t h e c o n t r a c t w ith th e

s y n d i c a t e g a v e I t a m o n o p o ly i n t h e

s a le o f th e b o n d s.

I n A u g u s t 1871 t h e C o m m e r c ia l a n d F i n a n c i a l C h r o n i c l e p o i n t e d o u t, to

"The o n l y m e th o d f o r t h e p u b l i c t o b u y f i v e p e r c e n t s i s

g e t th em f r o m t h e S y n d i c a t e . - 1

I t d e c la re d ,

a r e c a l l i n g on Mr. B o u t w e l l t o make a c a n d i d o f th e d e t a i l s c a te ."

"The p u b l i c

f u l l sta te m e n t

o f t h e a r r a n g e m e n t h e h a s made w i t h t h e s y n d i -

T h e r e was a c o n s i d e r a b l e

am ount o f f e e l i n g t h a t t h e

s y n d i c a t e h a d made a v e r y g o o d b a r g a i n w i t h t h e S e c r e t a r y a n d th a t d ire c tly

and i n d i r e c t l y i t s

s io n s , and r i s k l e s s $3 m i l l i o n

p r o f i t s fro m b o n u s ,

sp e c u la tiv e a c t i v i t i e s

a m o u n te d t o p e r h a p s

on t h e b o n d s s u b s c r i b e d f o r t h a t y e a r .

f a c t io n had been

commis­

D issa tis­

s t i r r e d u p , a n d t h e m an ag em en t o f t h e

T rea su ry had f a l l e n in p u b lic

e ste e m .^

T h is u n p o p u la r ity h a s i t s o r i g i n p a r t l y in th e f a c t t h a t m ore o f s e c r e c y h a s b e e n th r o w n a r o u n d th e n e g o ti a t i o n th a n h a s e v er been p e rm itte d in t h e p l a c i n g o f an y p r e v i o u s g o v ern m en t l o a n . A m ore p o t e n t c a u s e i s t h e a p p r e h e n s i o n t h a t p r i ­ v a te i n t e r e s t r a t h e r th a n th e p u b lic good have b e e n c o n s u l t e d i n t h e w h o le a r r a n g e m e n t s . 4 S e c r e t a r i e s B o u tw e ll, R ic h a rd s o n ,

and B risto w had s o ld

t h e b u l k o f t h e $ 500 m i l l i o n 5 - p e r c e n t r e f u n d i n g b o n d s t h r o u g h s y n d i c a t e s w h ic h r e c e i v e d a c o m m is s io n o f o n e f o u r t h

^A ugust 1 2 , 1871, V o l. X I I I ,

p. 197.

^A ugust 1 9 , 1071, V o l. X I I I , p . 229. 5 I b i d . . D e ce m b er 2 3 , 1 8 7 1 , V o l . X I I I , p . 8 2 6 . 4 Id e m .

161 t o o n e h a l f o f o ne p e r c e n t a c c o r d i n g t o

th e v a rio u s ex pen ses

w h ic h t h e y a s s u m e d I n c o n n e c t i o n w i t h t h e p r e p a r a t i o n o f t h e bonds,

th e ir

th e ir

sale.-*-

sh ip m en t,

and th e t r a n s m i t t a l o f th e p r o c e e d s o f

The $20 0 m i l l i o n o f 43?-p e r c e n t b o n d s ,

o f w h ic h was n e g o t i a t e d by M o r r i l l w i t h t h e

th e s a le

sy n d ic a te ,

was

p l a c e d on t h e b a s i s o f o n e - h a l f - o f - o n e - p e r c e n t c o m m i s s i o n . ^ The p o p u l a r s a l e o f $7 5 m i l l i o n o f 4 - p e r c e n t b o n d s b y t h e s y n d i c a t e i n 1877 was made on t h e same b a s i s ; 3 a n d i n 1 8 7 9 , b y an a r r a n g e m e n t w i t h t h e

sy n d ic a te ,

$15 m i l l i o n o f r e f u n d ­

i n g 4 - p e r c e n t b o n d s w as s o l d i n E u r o p e on t h e b a s i s o f o n e f o u r t h o f one p e r c e n t p l u s one t e n t h o f one p e r c e n t on s a l e s a b o v e $10 m i l l i o n ,

th e T re a su ry to pay th e c o s t o f tr a n s m it­

t i n g bonds and m a in ta in in g a r e p r e s e n t a t i v e s a l e o f $50 m i l l i o n

i n L o n d o n .4

The

o f 4 | —p e r c e n t r e s u m p t i o n b o n d s was made

^ T r e a s u r y R e p o r t s , 1 8 7 4 , p . X; a n d 1 8 7 5 , p . X I . 2 A c h ro n o lo g ic a l a c c o u n t, su p p le m e n tin g th e T re a s u ry R e p o r ts i n m in u te d e t a i l , o f th e n e g o t i a t i o n s , o p e r a t i o n s , s u r r o u n d i n g c i r c u m s t a n c e s , an d t h e r e a c t i o n s o f t h e i n d i ­ v i d u a l s c o n c e rn e d in th e r e f u n d in g and re su m p tio n o p e r a t i o n s , p r i n c i p a l l y w h i l e S h e rm a n was i n o f f i c e , i s r e n d e r e d i n t h e f o l l o w i n g c o l l e c t i o n o f d o c u m e n ts ; U. S . T r e a s u r y D e p a r t ­ m en t O f f i c i a l C o r r e s p o n d e n c e , A u g u s t 2 4 , 1 8 7 6 , t o O c t o b e r 1 8 , 1 8 7 9 , S p e c ie R e su m p tio n and R e fu n d in g o f N a tio n a l D e b t. 4 6 th C o n g ., 2 d S e s s . , H o u se Ex. D o c . No. 9 . For th e c o n tr a c t b e tw e e n S e c r e t a r y M o r r i l l an d th e s y n d i c a t e , see p p . 2 - 4 . 3 Ib id . . S h e rm a n , o £ . 4 S p e c ie p p . 482-483;

p p . 61-62; T re a su ry R e p o rt, 1877, p . V III ; c l t . , V o l. I , p . 574. R e su m p tio n and R e fu n d in g o f N a t i o n a l D e b t. a n d T r e a s u r y R e p o r t , 1 8 7 9 . p . XV.

and

162 t h r o u g h t h e s y n d i c a t e on t h e o n e - h a l f - o f - o n e - p e r c e n t h a s i s , the

s y n d i c a t e p a y in g t h e c o s t of p r e p a r a t i o n and transm ittal.*** fith

t h e e x c e p t i o n o f t h e $90 m i l l i o n o f r e f u n d i n g

4 - p e r c e n t s which Sherman d i s p o s e d o f t h r o u g h t h e a l l the r e s t

of th is

i s s u e was o f f e r e d d i r e c t l y t h r o u g h

n atio n al-b an k d e p o s ita rie s ,

the

T reasury,

by means o f p u b l i c a d v e r t i s e m e n t , o r , c irc u la rs."

-it f i r s t

syndicate,

and s u b - t r e a s u r i e s

a s i t was c a l l e d ,

"under

a c o m m i s s i o n o f o n e f o u r t h o f one p e r ­

c e n t was a l l o w e d o n a l l s u b s c r i p t i o n s o f h i , 000 o r m o r e . 2 ' f i t h t h e new o f f e r i n g o f t h e 4 - p e r c e n t s o n J a n u a r y 1 , a c h a n g e was made i n th at

the com m ission r a t e t o

1879,

the e x t e n t

i t w a s o n e e i g h t h o f one p e r c e n t on s u b s c r i p t i o n s o f

1 0 0 ,0 0 0 t o g l m i l l i o n , o n e f o u r t h o f one p e r c e n t o n t h o s e b e t w e e n 01 m i l l i o n a n d *10 m i l l i o n ,

and on amounts above

vlO m i l l i o n a n e x t r a o n e t e n t h o f one p e r c e n t . 3

I n t h i s way

S h e r m a n s o u g h t t o p r o m o t e c o m p e t i t i o n among t h e l a r g e r b a n k s , b u t s o much d i s c o n t e n t r e s u l t e d f r o m t h e

arrangem ent4 t h a t

i t was a b a n d o n e d a n d t h e f l a t r a t e o f o n e e i g h t h o f o n e p e r ­ c e n t f o r s u b s c r i p t i o n s o f g l , 0 0 0 o r m ore was d e t e r m i n e d

^ S p e c i e R e su m p tio n and Refunding, o f R a t i o n a l D e b t , pp. 295-296. 2I b i d . , p . 226. 5I b l d . , p . 446. 4Ibid., pp. 469-470, 490-491.

163

u p o n when t h e 4 - p e r e e n t r e f u n d i n g c e r t i f i c a t e s w e r e o f f e r e d on M arch 12,

1 8 7 9 .1 C a l l i n g t h e Old Bonds

A nother f e a t u r e

o f t h e r e f u n d i n g o p e r a t i o n s was t h e r e ­

q u i r e m e n t t h a t n i n e t y d a y s ’ n o t i c e be g i v e n i n c a l l i n g o f the o u t s t a n d i n g f i v e - t w e n t i e s . to c e a s e

for

the

The i n t e r e s t o n t h e s e was

t h r e e m onths from the d a t e of t h e n o t i c e .

Cooke’ s s y n d i c a t e ,

for

p i 34 m i l l i o n

exam ple,

it

any

iJ-though

q u ic k ly found s u b s c r i b e r s

had u n d e rta k e n to

dispose o f,

it

had

r e q u i r e d o n l y a 5 - p e r c e n t d e p o s i t from th e s u b s c r i b e r s " a s s e c u r i t y f o r t h e v a l i d i t y of t h e i r

s u b s c rip tio n s ” u n t i l the

b o n d s w e r e d e l i v e r e d t o t h e m on D e ce m b er 1 .

P

Thus, i f

b o n d m a r k e t w e r e t o d e c l i n e m ore t h a n f i v e p o i n t s three-m onth i n t e r v a l , to m eet t h e i r

the

during the

many s u b s c r i b e r s w o u l d p r o b a b l y r e f u s e

com m itm ents.

In f a c t,

fo rtie s

t o a b o u t 95 d u r i n g t h i s

alarm .

T h i s was i n d i c a t i o n

a d e c lin e o f the t e n -

t i m e c a u s e d Cooke c o n s i d e r a b l e

enough t h a t what the p u b l i c and

a p o r t io n o f the p r e s s re g a rd e d as a " r i s k l e s s ” o p e r a tio n c o u l d be f r a u g h t w i t h r i s k

fo r the in te r m e d ia r ie s .

The r e q u i r e m e n t o f n i n e t y d a y s ’ n o t i c e

fo r redem ption

o f th e f i v e - t w e n t i e s m eant t h a t f o r t h r e e m onths th e y would c o n tin u e to

bear i n t e r e s t ,

y et the

T r e a s u r y upon g i v i n g th e

1I b i d . . p . 562. ^ B o u t w e l l , 0£ .

c i t . , V ol. I I ,

2I b i d . . V ol. I I ,

p . 188.

pp. 187-188.

164

n o t i c e h ad , by r e a s o n o f p ru d en ce,

to have s u b s c r ip tio n s In

h a n d s u f f i c i e n t t o m e e t t h e b o n d s when p r e s e n t e d f o r p a y m e n t . The m a n n e r i n w h i c h t h i s r a t h e r aw kw ard c o n d i t i o n w as met p ro v ed t o be a v e ry d e f i n i t e to

t h e new b o n d s ,

a id in e n c o u ra g in g s u b s c r ip tio n

e s p e c i a l l y on t h e p a r t o f t h e b a n k s .

N a t i o n a l B a n k in g A c t h a d a u t h o r i z e d t h e

The

S e c r e ta r y to use th e

b a n k s a s d e p o s i t a r i e s f o r p u b l i c m oney o t h e r t h a n t h e c u s t o m s re c e ip ts;

and t h e R e f u n d i n g A c t r e q u i r e d t h a t “m oney r e c e i v e d

f o r t h e new b o n d s s h o u l d b e u s e d o n l y i n p a y m e n t o f t h e b o n d s o u t s t a n d i n g known a s f i v e - t w e n t y b o n d s . N a t i o n a l b a n k s m a k in g o r o b t a i n i n g s u b s c r i p t i o n s ,

an d

c o n fo rm in g w ith th e u s u a l p ro c e d u re o f d e p o s iti n g bonds w ith th e T reasu ry as s e c u r ity , am ount o f t h e i r

s u b s c r i p t i o n s f o r t h r e e m o n t h s . 8^

T reasu ry had, o f c o u rs e , c a lle d

t h u s h a d “t h e u s e o f t h e

sh o u ld m a tu re ,

The

g i v e n a s s u r a n c e t h a t “a s t h e b o n d s

t h e d e p o s i t s w o u ld b e d ra w n f r o m t h e

s e v e r a l b a n k s p r o p o r t i o n a t e l y . 8®

F o r t h e b a n k s t h i s m eant

t h r e e m o n th s o f d o u b l e i n t e r e s t on t h e am ou nt o f t h e i r s c rip tio n s,

a c i r c u m s t a n c e w h ic h u n d o u b t e d l y d i d much t o

f u r t h e r t h e s a l e o f t h e new b o n d s .

1 T r e a s u r y R e p o r t . 1 8 7 1 , p . X IX . 2Id em . 3 I b ld . ,

sub­

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165

th is ,

" t h e n e c e s s a r y l o s s t o t h e G o v e rn m e n t I n c i d e n t t o t h e

r e f u n d i n g o f t h e p u b l i c d e b t was made t h e m ean s o f s e c u r i n g s u b s c r i p t i o n s t o t h e am o u n t o f a b o u t one h u n d r e d a n d t h i r t y m illio n s o f d o lla r s ." ^

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s a le o f th e

1 8 7 6 a t t e n t i o n w as t u r n e d t o t h e bonds,

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s i m il a r i n te rm s to th e p r e c e d in g one,

w as e n t e r e d i n t o w i t h t h e s y n d i c a t e on A u g u s t 24*

p

The

o n e - h a l f - o f - o n e - p e r c e n t c o m m i s s i o n was a g a i n a l l o w e d ,

th e

s y n d i c a t e to p ay th e c o s t s o f p r e p a r i n g and t r a n s p o r t i n g th e bonds,

e tc .,® as b e fo re .

S e c re ta ry M o rrill re se rv e d

t h e r i g h t t o t e r m i n a t e t h e c o n t r a c t u p o n t e n days*

n o tic e

a t a n y t i m e a f t e r M a rch 4 , 1 8 7 7 . The im p r o v e m e n t i n

th e p u b l i c c r e d i t and a f a v o r a b l e

m oney m a r k e t f a c i l i t a t e d n e g o t i a t i o n o f t h e new b o n d s .

1 I b l d . , p . XIX . 2 I b ld . . 1876, p . X I. ®Soon a f t e r S h e rm an t o o k o f f i c e i n M arch 1877 h e a p p o in te d C h a r le s F . C onant to r e p r e s e n t th e T re a s u ry in L o n d o n a n d m anag e a l l m a t t e r s c o n c e r n e d w i t h t h e r e f u n d i n g o p e ra tio n s . "H is c o m p e n sa tio n and a llo w a n c e s , a s w e ll as t h o s e o f a l l p e r s o n s s e n t t o L ond on i n c o n n e c t i o n w i t h t h e r e f u n d i n g o f t h e p u b l i c d e b t , w ere p a i d by th e s y n d i c a t e . " S h e rm a n , 0£ . c i t . , V o l . I , p p . 5 6 8 - 5 6 9 . 4 Id em .

166

The c o u n t r y was s t i l l I n t h e g r i p o f d e p r e s s i o n ,

but Id le

fu n d s had a c c u m u la te d a s a r e s u l t o f th e g r e a t l i q u i d a t i o n a n d t h e e n s u i n g slow dow n o f b u s i n e s s a c t i v i t y .

A t t h e same

t i m e t h e r e was a l a c k o f s o u n d i n v e s t m e n t s o t h e r t h a n U n i t e d S t a te s bonds. to w a rd t h e s e ,

The a t t e n t i o n

o f i n v e s t o r s t u r n e d m ore a n d m ore

and th e y so ld q u ite r a p i d l y .

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o f t h e d o m e s t i c c a p i t a l m a r k e t was i n d i c a t e d b y t h e c o m p a ra ­ tiv e

e a s e w i t h w h ic h t h e s e 4 | - p e r c e n t r e f u n d i n g b o n d s w e r e

m a rk e te d . O d d ly , h o w e v e r ,

th e in c r e a s in g su ccess o f th e re fu n d in g

p ro g ram a p p e a rs to h av e h a d , c u s s io n s upon b u s in e s s . to o k p la c e in l a t e

at th is

tim e ,

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The s e v e r e d e c l i n e i n p r i c e s w h ic h

18 76 a n d e a r l y 1877 w as a s c r i b e d t o t h e

r a p i d en h an cem en t o f t h e p u b l i c c r e d i t w h ic h a c c o m p a n ie d t h e sa le o f a la rg e

q u a n tity o f bonds.

W ith t h i s

stre n g th e n in g

o f th e T r e a s u r y 's p o s i t i o n th e p r o s p e c t o f re s u m p tio n began t o t a k e on r e a l i t y ,

a n d t h e p re m iu m on g o l d f e l l .

As a

c o n se q u e n c e , p r i c e s in term s o f g re e n b a c k s a l s o d e c lin e d ,

and

t h i s b r o u g h t d i s a s t e r t o many b u s i n e s s e s w h ic h u n t i l t h e n h a d s u rv iv e d th e ra v a g e s o f th e lo n g d e p r e s s io n .1 By May 1 8 7 7 t h e c o n d i t i o n o f t h e m oney m a r k e t h a d become s o f a v o r a b l e t h a t " i t b ecam e a p p a r e n t t o

th e S e c re ta ry

■^William M. G k ro sv en o r, A m e r ic a n S e c u r i t i e s ; The C a u se s I n f l u e n c i n g In v e s tm e n t an d "S p ecu lat i o n a n d t h e F l u c t u a t i o n s i n V a l u e s f r o m 1873T~to 18 85 C D a lly C o m m e r c ia l B u l l e t i n , New Y o r E 7 T 8 5 F ^ p . 6 8 .

167

th a t . . .

f o u r p e r c e n t , b o n d s c o u ld be s o ld a t p a r ,

w i t h g r e a t a d v a n t a g e t o t h e G o v e r n m e n t .* 1 In o f f i c e .

In c o in ,

S h erm an w as now

A lth o u g h t h e c o n t r a c t w ith th e s y n d ic a te d id n o t

e x p ir e u n t i l Ju n e 30, w h i c h p e r m i t t e d h im t o

1877, he to o k a d v a n ta g e o f th e c la u s e te rm in a te th e c o n t r a c t .

I t w as a g r e e d

t h a t a t o t a l o f #200 m i l l i o n o f t h e 4 § ~ p e r c e n t b o n d s w o u ld b e is s u e d .^

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o f fiv e -tw e n tie s,

# 1 8 5 m i l l i o n w e re a p p l i e d t o r e d e m p t i o n

and t h e r e m a i n i n g # 1 5 m i l l i o n w e re s o l d f o r

c o i n u n d e r t h e a u t h o r i t y o f t h e R e su m p tio n A c t f o r r e s u m p tio n p u rp o ses* 2 S h e rm an h a d f u r t h e r r e a s o n s f o r t e r m i n a t i n g t h e c o n t r a c t ; A n o t h e r r e a s o n f o r t h i s s t e p w as t h a t , I n a d d i t i o n to r e f u n d in g a t a lo w e r r a t e of I n t e r e s t , I w i s h e d t o commence p r e p a r a t i o n s f o r t h e r e s u m p t i o n o f s p e c i e p a y m e n t s on J a n u a r y 1, 1 8 7 9 , a c c o r d in g t o law . T h is c o u ld o n ly be done by th e s a l e o f bonds f o r g o ld c o in . I r e s e r v e d th e re m a in d e r o f th e f o u r a n d a h a l f b o n d s, a m o u n tin g to # 1 0 0 , 0 0 0 , 0 0 0 , a u t h o r i z e d b y t h e r e f lan d in g a c t , f o r re s u m p tio n p u rp o se s i n c a s e th e f o u r p e r c e n t bonds c o u ld n o t be s o l d a t p a r In c o in . A n o th e r r e a s o n f o r th e change i n th e e x i s t i n g c o n t r a c t was t h a t i t g a v e t o t h e s y n d i c a t e a m o n o p o ly i n t h e s a l e o f b o n d s w h ile I w ish e d to s e l l th e b o n d s d i r e c t l y t o t h e p e o p l e *4

1T re a su ry R e p o rt.

1877, p . V III.

2S p e c i e R e s u m p t i o n a n d R e f u n d i n g o f N a t i o n a l D e b t . pp.

1 4 —,

^ T re a su ry R e p o rt. 1877, p. V III. 4 S h e rm a n , 0£ . c i t . , V o l . I ,

p.

571.

168

A ttem p ts t o P o p u la r iz e th e D ebt Soon a f t e r S h erm an h a d a s s u m e d o f f i c e

I n M arch 1 8 7 7 ,

he u n d e r to o k t h e g r a d u a l d e v e lo p m e n t o f a p o l i c y w h ich h i s p r e d e c e s s o r s had s c a r c e ly h ad th e o p p o r tu n ity to c o n s id e r a n d w h i c h , a t t h e t i m e t h e y w e re e n g a g e d i n r e f u n d i n g t h e d e b t , w o u ld p r o b a b l y h a v e p r o v e d i m p r a c t i c a l .

T h i s w as

t h e p o p u l a r i z a t i o n o f t h e G o v e r n m e n t* s l o a n s among i t s p e o p le .

own

One d i f f i c u l t y w h ic h h a d b e e n i n t h e way o f t h i s

was t h e f a c t t h a t , had been o f f i r s t

th e re to fo re , Im p o rta n c e ,

red e em e d w ere h e l d t h e r e .

th e s a l e o f bonds i n E urope

f o r many o f t h e b o n d s t o be

The a l t e r n a t i v e

s a l e s w o u ld h a v e b e e n t h e e x p o r t o f g o l d ,

to

such E u ro p e a n

a n d t h i s w o u ld

h a v e s u b j e c t e d t h e A m e r i c a n money m a r k e t t o e x t r e m e p r e s s u r e . The r e s u l t i n g

s t r i n g e n c y w o u ld u n d o u b t e d l y h a v e d e p r e s s e d

t h e p r i c e o f b o n d s a n d made i t

im p o s s ib le to c o n tin u e th e

re fu n d in g . B u t b y t h e t im e S h e rm a n e n t e r e d o f f i c e

th e b a la n c e o f

t r a d e h a d becom e f a v o r a b l e t o t h e U n i t e d S t a t e s a n d t h e r e was no l o n g e r t h e n e e d t o go d e e p e r i n t o c o u n trie s .

In f a c t,

d e b t w ith f o r e ig n

b y 1 8 7 8 , i t was e s t i m a t e d , o n l y #200

m i l l i o n o f U n i t e d S t a t e s b o n d s w e re h e l d a b r o a d , m any h a v i n g been r e t u r n e d and a b s o r b e d by t h e A m erican m a r k e t .1 One c i r c u m s t a n c e w h i c h made i t d i f f i c u l t t o

1 T re a su ry R e p o rt. 1878, p . X V III.

s e l l bonds

169

d i r e c t l y t o t h e p e o p l e w as t h e p r o v i s i o n t h a t t h e b o n d s m u st be s o l d f o r c o i n .

In h i s r e p o r t f o r 1 877 S herm an p o i n t e d otfc

th a t— As t h i s was n o t i n g e n e r a l c i r c u l a t i o n , i t w as i m p r a c t i c a l f o r t h e p e o p l e t o p a y i t i n t o th e T r e a s u r y f o r th e s e b o n d s. T here­ f o r e , i t b e ca m e n e c e s s a r y t o c o n d u c t a l l s a l e s t h r o u g h t h i r d p a r t i e s who c o u l d r e c e i v e b a n k - b i l l s , U n ite d S t a t e s n o te s , d r a f t s , c e r t i f i c a t e s , and o t h e r f o r m s o f c o m m e r c i a l p a p e r , and c o n v e r t them i n t o c o in .1 I n h i s r e p o r t f o r 1878 h e a g a i n r e f e r r e d

to th e r e t a r d i n g

e f f e c t o f t h e r e q u i r e m e n t t h a t p a y m e n t b e made i n c o i n ,

"th e

in c o n v e n ie n c e o f o b t a i n i n g w h ic h , t o t h e g r e a t body o f th e p e o p le o u t s i d e o f th e l a r g e c i t i e s ,

d e t e r r e d many s a l e s .

T h i s w i l l n o t a f f e c t s a l e s a f t e r r e s u m p t i o n when b o n d s c a n be p a i d f o r w i t h U n i t e d S t a t e s n o t e s . A fte r te rm in a tin g th e c o n tr a c t w ith th e

sy n d ic a te fo r

t h e s a l e o f t h e 4^—p e r c e n t b o n d s , S h e rm an p r o m p t l y s e t a b o u t th e n e g o t i a t i o n o f th e 4 f-percent l o a n . 1877,

a c o n t r a c t was a g a i n a r r a n g e d w i t h t h e

I n a c c o r d a n c e w ith Sherm an*s p l a n , ag reem en t r e q u ir e d th e

s y n d ic a te .^

a new p r o v i s i o n i n t h e

s y n d ic a te to o f f e r a t p a r t o th e

" p e o p le o f th e U n ited S t a t e s "

4 - p e r c e n t b o n d s i n d e n o m in a ­

t i o n s o f #50 a n d #100 f o r a p e r i o d o f t h i r t y

1T re a su ry R e p o rt.

On J u n e 9 ,

days b e fo re

1877, p . X I.

2 I b l d . t 1878, p p . X V II-X V III. S p e c ie R e su m p tio n

pp.

zm;

6 1 -6 2 ,

o f N a t io n a l Debt

170

g e n e r a l o f f e r i n g o f t h e b o n d s i n l a r g e r d e n o m i n a t i o n s was m ad e. S u b s c r i b e r s w e re t o h a v e t h e o p t i o n m e n ts f o r t h e s e

o f m a k in g i n s t a l m e n t p a y ­

sm a ll d e n o m in a tio n s o v e r a th re e -m o n th p e r io d .

I n t h e t i m e a l l o t t e d m ore t h a n $7 5 m i l l i o n t i o n s w as m ade, Of t h e t o t a l

in p o p u la r su b s c rip ­

th e f i n a l paym ent d a te b e in g O c to b er 16, 1 8 7 7 .

sum r e a l i z e d ,

| 5 0 m i l l i o n was a p p l i e d t o r e f u n d ­

i n g a n d t h e r e m a i n d e r t o r e s u m p t i o n p u r p o s e s . •*• W ith t h e c o m p l e t i o n o f t h i s

s a l e o f bonds i n O c to b er th e

S e c r e t a r y p r e p a r e d t o c a l l m ore o f t h e f i v e - t w e n t i e s ,

fu n d s

f o r t h e i r r e d e m p t i o n t o b e o b t a i n e d by d i s p o s i n g o f a d d i t i o n a l 4*s .

At th is

p re v e n t,

J u n c tu r e , how ever,

f o r a tim e ,

s e v e r a l e v e n t s c o m b in e d t o

f u r th e r fin a n c in g .

A g ita tio n f o r th e

r e m o n e t i z a t i o n o f s i l v e r a n d f o r t h e r e p e a l o f t h e R esum p­ t i o n A c t,

in c o m b in a tio n w ith u n f a v o r a b le p o l i t i c a l and

e c o n o m ic c o n d i t i o n s , th e

sy n d ic a te ,

p o s s ib le ,

so d i s t u r b e d t h e i n v e s t i n g p u b l i c t h a t

b e lie v in g fu rth e r

s a l e s w ere n o t th e n

d e c l i n e d t o o f f e r m ore b o n d s a t t h a t t i m e . ^

"From

t h a t t i m e f o r w a r d f o r many m o n th s t h e r e was s c a r c e l y a n y s a l e o f g o v ern m en t b o n d s a t any p r i c e . p a r t i e s f ih e

The c o n t r a c t i n g

s y n d i c a t e ^ I n f o r m e d me t h a t no b o n d s w e re t h e n

s e l l i n g i n t h e m a r k e t a n d t h a t i n New Y o r k t h e y w e r e a t r i f l e b e lo w p a r .

P r a c t i c a l l y f o r th e re m a in d e r o f th e y e a r ,

1T re a s u ry R e p o r t.

g o v ern ­

1877, pp . V III-3 X .

2 S p e c ie R e su m p tio n an d R e f u n d in g o f N a t i o n a l D e b t. p p . 1 8 l - i l 9 ; T r e a s u r y R e p o r t . 18*77. p.~~5C; S h e rm a n . o p . c l t . . V o l. I , p p . 5 7 6 -580; N oyes, o p . c l t . . p p . 3 3 -3 5 ; a n d "F o rd , 0£ . c l t . . V o l . I l l , p . 5 6 1 .

171

m e n t s e c u r i t i e s w e re g r e a t l y a f f e c t e d i n p r i c e a n d v a l u e . "•*S herm an was c o n v i n c e d t h a t i t was n o t i n t h e p u b l i c in te re s t

to c o n tin u e th e

b a n k in g s y n d i c a t e .

s a le o f re f u n d in g bonds th ro u g h a

" I c o u l d s e e n o r e a s o n why t h i s

c o u l d n o t be p e r f o r m e d b y n a t i o n a l b a n k s , b e t t e r b a n k e r s a t home o r a b r o a d . F o l l o w i n g

fu n c tio n

th a n by

th e s a le o f th e

p o p u l a r l o a n i n 1877 h e d i s p e n s e d w i t h t h e

s e r v i c e s o f th e

s y n d i c a t e and bonds w ere o f f e r e d " t o a l l a l i k e by p u b l i c a d v e rtis e m e n t.In

h i s an n u al r e p o r t he o u tlin e d th e

p o s s i b i l i t y o f a w id e d i s t r i b u t i o n

o f b o n d s i n t h e A m e r ic a n

m a r k e t a n d t h e a d v a n t a g e s w h ic h m i g h t a c c r u e fro m I t ; P r i o r t o May, 1 8 7 7 , U h i t e d S t a t e s b o n d s w e re m a i n l y s o l d t h r o u g h an a s s o c i a t i o n o f ban k ers. E x p erien c e p ro v es t h a t under th e p r e s e n t p la n of s e l l i n g to a l l s u b s c rib e rs on t e r m s f i x e d b y p u b l i c a d v e r t i s e m e n t , t h o u g h t h e a g g r e g a t e o f s a l e s may b e l e s s , t h e i r d i s t r i b u t i o n i s m ore s a t i s f a c t o r y . Under a p o p u la r lo a n th e i n t e r e s t i s p a id a t hom e, a n d t h e I n v e s t m e n t i s a v a i l a b l e a t a l l tim e s , w ith o u t l o s s , to m eet th e n e ed s o f th e h o ld e r . T h is p o lic y h a s been c a r e ­ f u l l y f o s t e r e d by o t h e r n a t i o n s , and s h o u ld be e s p e c i a l l y so i n o u r s , w h e r e e v e r y c i t i z e n e q u a l l y p a r t i c i p a t e s in t h e g o v ern m en t o f h i s c o u n try . The h o l d i n g o f t h e s e b o n d s a t hom e, i n s m a l l sums w e l l d i s t r i b u t e d , i s o f g r e a t Im p o rta n c e in e n l i s t i n g p o p u la r i n t e r e s t in

■^Sherman, o p . c i t . , V o l . I , p . 5 8 3 . p p . 599 -6 0 2 , and V o I7 ~ II, p p . 603 -6 07 . 2

S h e rm a n ,

0£ . c l t . ,

V o l. I , p . 6 01.

5 T r e a s u r y R e p o r t . 1 8 7 8 , p . XIX.

S ee a l s o V o l . I ,

172

o u r n a t i o n a l c r e d i t , and i n e n c o u ra g in g h a b i t s o f t h r i f t , an d such h o ld in g i n th e c o u n try i s f a r m ore s t a b l e a n d l e s s l i k e l y t o d i s t u r b t h e m a r k e t t h a n i t w o u ld be i n c i t i e s o r by c o r p o r a ­ t i o n s , w h e re t h e b o n d s c a n be p r o m p t l y s o l d i n q u a n titie s .1 A n o th e r p r o p o s a l,

w h ic h f o r e s h a d o w e d t h e l a t e r

e sta b lis h ­

m ent o f t h e P o s t a l S a v i n g s S y s te m , was made by S h e rm an w i t h t h e v ie w o f d i s t r i b u t i n g

t h e d e b t so w i d e l y among t h e p e o p l e

t h a t even th e p o o r m ig h t I n v e s t t h e i r

s m a ll sa v in g s*

The b e s t mode s u g g e s t e d i s , t h a t t h e D e p artm en t be a u t h o r i z e d t o i s s u e c e r t i f i ­ c a te s o f d e p o s it o f th e U n ite d S t a te s of th e d e n o m in atio n o f te n d o l l a r s , b e a rin g i n t e r e s t a t th e r a t e o f 3 .6 5 p e r c e n t , p e r annum a n d c o n v e r t i b l e a t a n y t i m e w i t h i n one y e a r a f t e r t h e i r is s u e i n t o th e fo u r p e r c e n t, bonds a u th o r iz e d by th e re fu n d in g a c t , and to be i s s u e d o n ly in exchange f o r U n ite d S t a t e s n o t e s s e n t to th e T re a s u ry by m a ll o r o th e r w is e .2 Y e t a n o t h e r m e a s u r e w h ic h h e t o o k t o d e m o c r a t i z e t h e d e b t was t h e s a l e o f

some $ 4 0 m i l l i o n o f r e f u n d i n g c e r t i ­

f i c a t e s in th e d e n o m in atio n o f #10.

In a u th o riz in g t h is

new t y p e o f o b l i g a t i o n C o n g r e s s h a d a c t e d u p o n t h e s u g g e s ­ t i o n o f th e S e c r e t a r y .3

On F e b r u a r y 2 6 , 1 8 7 9 ,

"An A c t t o

A u th o riz e th e Is s u e o f C e r t i f i c a t e s o f D e p o s it i n A id o f t h e R e f u n d i n g o f t h e P u b l i c D e b t * 4 w as p a s s e d .

1 I b i d . . p . X V III. 2 T r e a s u r y R e p o r t . 1 8 7 8 , p . XIX . 3 S h e rm a n , o jd c l t . . V o l . I I , p . 7 1 2 .

.

4 20 S t a t u t e s . 3 2 1 .

T hese

173

c e r t i f i c a t e s w e r e t o be accru ed I n t e r e s t ,

in to

" c o n v e r t ib l e a t any tim e ,

w ith

t h e f o u r p e r c en tu m b o n d s d e s c r i b e d

in th e re fu n d in g a c t . * 1 H ie s a l e o f t h e c e r t i f i c a t e s when t h e y w e re f i r s t o f f e r e d i n A p r i l was s l o w , b u t l a t e r

in

t h e m o n th ,

when t h e

4 - p e r c e n t b o n d s i n t o w h i c h t h e y w e re c o n v e r t i b l e w e re o f f e r e d a t a p re m iu m , dem and f o r t h e c e r t i f i c a t e s

in c re a se d r a p id ly .

To d i s c o u r a g e s p e c u l a t o r s who saw " a g o o d t li l r g ," t h e T r e a s u r y l i m i t e d e a c h b u y e r t o t e n c e r t i f i c a t e s a t on e p u rch ase.

As a r e s u l t t h e r e was c o n s i d e r a b l e e v a s i o n ,

c o n n iv a n c e , and c o m p la in t w ith r e g a r d to

t h e i r sa le .®

S her­

man w r o t e o f th e m i n h i s m e m o irs j T h ey w e r e s o l d i n l i m i t e d a m o u n t s t o in d iv id u a ls a t p o st o ffic e s , but as t h e y w e r e , when c o n v e r t e d i n t o b o n d s , w o r t h a p re m iu m , b a n k e r s a n d o t h e r s h i r e d men t o s t a n d i n l i n e a n d p u r c h a s e c e rtific a te s . T h i s was a p r a c t i c a l f r a u d on t h e l a w , a n d was m a i n l y c o n ­ d u c te d i n t h e c i t i e s , and w here done t h e s a l e w as d i s c o n t i n u e d . The g r e a t b o d y o f t h e c e r t i f i c a t e s w e r e t a k e n by t h e c l a s s o f p e r s o n s f o r whom t h e y w ere d e sig n e d . I n a b r i e f p e r i o d t h e y w e re s o l d , and t h e p r o c e e d s w ere i n th e tre a s u ry .4

1 Idem . ^ T r e a s u r y R e p o r t , 1 8 7 9 , p p . X V I-X V II; a n d R e p o r t o f t h e T re a s u re r o r th e u h lte d S t a t e s , 1879, p . 343. ®See R e s u m p t i o n o f S p e c i e P a y m e n ts a n d R e f u n d i n g o f N a t i o n a l D iB C p p . 7 1 ^ 7 1 5 7 ----------------------------- B ~ 4 S h e r m a n , 0£ . c i t . , V o l . I I ,

pp. 7 2 2 -7 2 3 .

174

P e r h a p s t h e g r e a t e r p a r t o f t h e s e c e r t i f i c a t e s was t a k e n b y " t h e c l a s s o f p e r s o n s f o r whom t h e y w e re d e s i g n e d , " b u t t h a t h u m b le c l a s s h a s t e n e d t o c o n v e r t th e m f o r t h e s m a l l p r e m iu m .

Of t h e $40 m i l l i o n t h u s s o l d , m ore t h a n

$37 m i l l i o n w e re e x c h a n g e d f o r b o n d s b e f o r e t h e e n a o f t h e year.

I n summing up t h e e p i s o d e , J a m e s G - l l f l l l a n ,

T re a s u re r o f th e U n ite d S ta te s ,

w ro te,

th e n

"T he o b j e c t o f

t h i s l o a n was t o f u r n i s h a n i n v e s t m e n t f o r t h e s m a l l s a v in g s o f th e p e o p le . . .

t h e o r i g i n a l p u r p o s e w as a l m o s t

w h o lly d e f e a t e d ." 1 F o l l o w i n g t h e c e s s a t i o n o f b o n d s a l e s I n 1877 t h e m a rk e t h a d re m a in e d u n f a v o r a b l e f o r f u r t h e r o f f e r i n g s f o r some m o n t h s .

By N ovem ber 2 3 , 1 8 7 8 , h o w e v e r ,

m en t h a d come a b o u t ,

some i m p r o v e ­

$ 1 0 0 m i l l i o n m ore o f t h e 4 - p e r c e n t

lo a n h a v in g been s o ld .

Of t h i s a m o u n t, n e a r l y $ 9 5 m i l l i o n

was f o r r e f u n d i n g p u r p o s e s . The R a p i d C o m p l e t i o n o f t h e R e f u n d i n g P r o g r a m The l o n g d e p r e s s i o n h a d come t o an e n d .

T hrough i t

a ll,

th e d e v elo p m e n t o f t h e c o u n tr y h a d c o n tin u e d ;

ra te

o f t h i s now a c c e l e r a t e d .

and th e

The r a p i d g r o w t h o f c o r p o r a t e

e n t e r p r i s e a t t h i s t i m e w as c l o s e l y a s s o c i a t e d w i t h t h e d e v e lo p m e n t o f a v e r y p o w e r f u l d o m e s tic c a p i t a l m a r k e t.

T le p o rt o f th e T re a s u re r o f th e U h lte d S ta te s . 1 8 7 9 , p T 3 4 S . ----------------------------------------------------------------------

175

N a t i o n a l Incom e a n d n a t i o n a l w e a l t h r o s e , liq u id c a p ita l In creased .

and s a v in g s a n d

A f a v o ra b le b a la n c e o f f o r e ig n

t r a d e and th e flo w o f f o r e i g n in v e s tm e n t fu n d s i n t o r a ilw a y c o n s tr u c tio n and in d u s tr y f u r th e r

s u p p o rte d th e g r e a t expan­

s i o n o f t h e econom y w h ic h was t a l c i n g p l a c e .

The r e s t o r a t i o n

o f b u s i n e s s c o n f i d e n c e w h ic h a c c o m p a n ie d t h e r e s u m p t i o n o f s p e c i e p a y m e n ts was a f u r t h e r s t r o n g s t i m u l u s t o a l l f o r m s o f i n d u s t r i a l and c o m m erc ial u n d e r t a k i n g s .

A t t h e same t i m e ,

t h e f a v o r a b l e e f f e c t o f r e s u m p tio n upon t h e p u b l ic

c re d it

q u ic k ly b ro u g h t to c o m p le tio n th e re fu n d in g o p e r a tio n s . The am ount o f r e f u n d i n g a c c o m p l i s h e d i n 1 8 7 9 ^ w as f a r g r e a t e r th a n in any o t h e r y e a r s in c e th e R e fu n d in g A ct had been p a s s e d .

The $4 0 m i l l i o n o f r e f u n d i n g c e r t i f i c a t e s ,

d e s c r i b e d a b o v e , w as a s m a l l p a r t o f t h e t o t a l o f o b l i g a t i o n s n e g o t i a t e d in t h a t y e a r .

U n til Jan u ary 1 s t a tte n tio n had

c e n t e r e d on t h e p r e p a r a t i o n s b e i n g made f o r t h e r e s u m p t i o n o f s p e c i e p a y m e n ts on t h a t d a t e .

S a le s o f bonds f o r g o ld in

t h i s c o n n e c tio n h ad slo w e d th e p r o g r e s s o f r e f u n d i n g .

On

J a n u a r y 1 s t t h e 4 - p e r c e n t r e f u n d i n g b o n d s w e re a g a i n o f f e r e d f o r p u b lic

su b sc rip tio n .

o f re s u m p tio n ,

" I n v ie w o f t h e p r a c t i c a l e f f e c t

th e S e c r e ta r y o f f e r e d to r e c e iv e U n ite d S ta te s

n o t e s i n paym ent f o r b o n d s s o ld ."

^■For a m i n u t e a c c o u n t o f t h e r e f u n d i n g a c t i v i t i e s i n t h i s y e a r , s e e S h e rm a n , o p . c l t . , V o l . I I , p p . 7 0 1 - 7 2 3 , a n d S p e c i e R e s u m p ti o n a n d R e f u n d l n g o f N a t i o n a l D e b t , , p p . 444-807.

2

T r e a s u r y R e p o r t . 1 8 7 9 , p . XV.

176

T h is s i m p l i f i c a t i o n o f w hat had b e f o r e b e e n , o r d i n a r i l y , a th r e e - p a r ty tr a n s a c tio n in v o lv in g th e a c q u is itio n m e n t o f g o l d , was e n o u g h i n I t s e l f th e bonds.

and pay­

to b ro ad e n th e m ark et f o r

M oreover, a c o m b in a tio n o f f a v o r a b l e c ir c u m s ta n c e s

h a d c o n t r i b u t e d t o t h e im p ro v em en t i n th e p u b l i c c r e d i t , th e su c c e ss of re su m p tio n , fu rth e r.

As a c o n s e q u e n c e ,

im m e d ia te ly a p p a r e n t,

re d e m p tio n o f th e f i v e - t w e n t i e s , made i t

enhanced i t

th e 4*s so ld r a p id ly b o th w ith in

th e U n ite d S t a te s and i n E urop e.

a b ro ad ,

and

The r e s u l t i n g c a l l s

fo r

many o f w h ic h w e re s t i l l h e l d

n e c e s s a r y e i t h e r to e x p o r t g o ld t o m eet th e

c o s t o f th em o r t o p l a c e e n o u g h b o n d s i n p r o v i d e f o r t h e i r p a y m e n t.

t h e L o ndo n m a r k e t t o

The l a t t e r c o u r s e was f o l l o w e d , a

c o n t r a c t b e i n g made w i t h c e r t a i n b a n k i n g f i r m s f o r t h e fo re ig n

sa le s.

By t h i s a r r a n g e m e n t # 1 5 m i l l i o n w o r t h w e re

s o ld .1 When t h e 4* s w e re o f f e r e d i n J a n u a r y 1879 w i t h t h e co m m issio n g ra d e d a c c o r d i n g to t h e am ount s u b s c r i b e d , 2 i n t h e r u s h t o buy bonds " th e banks and b a n k e rs . . . c o m p e tin g to s w e ll t h e s e

su b sc rip tio n s,

w ere a c t i v e l y

so a s t o g e t t h e

l a r g e r c o m m is s io n o f f e r e d f o r t h e g r e a t e r am ount o f b o n d s s o l d . "3

V o l.

A ttra c tiv e

to th e banks,

^ T reasu ry R e p o rt. I l , pp. 7Q & 7W 7 S h e rm a n , 5Ib id ..

was t h e n i n e t y - d a y

1 8 7 9 . p . XV: a n d S h erm an , o p . c l t . .

op. c l t . , V o l. I I ,

p. 708.

a ls o ,

p . 705.

177

c a l l r e q u i r e m e n t w h e r e b y "The i n t e r e s t a c c r u i n g f o r n i n e t y days a t

six per c e n t . . . ,

g a in to th e b a n k s ." 1

was a l o s s t o t h e g o v e r n m e n t b u t a

B u t when so l a r g e

w as b e i n g d i s p o s e d o f ,

a v o lu m e o f b o n d s

t h e r e q u i r e m e n t t h a t n i n e t y d a y s*

n o t i c e be g iv en in c a l l i n g in th e f i v e - t w e n t i e s l e d to a p p re h e n sio n t h a t

" th e d e p o s i t o f t h e l a r g e a m o u n ts in v o lv e d

i n r e f u n d i n g o p e r a t i o n s was t o c r e a t e a s t r i n g e n c y i n t h e m oney m a r k e t . " 2

The S e c r e t a r y h a d s u g g e s t e d t h a t t h i s p r o ­

v i s i o n b e m o d i f i e d so t h a t n o t i c e o f " n o t l e s s

th a n te n days

n o r m o re t h a n t h r e e m o n th s " c o u l d b e g i v e n , b u t C o n g r e s s fa ile d

t o a c t up on i t , ' 5

U nder th e A ct o f J a n u a ry 25,

1 8 7 9 ,4

th e S e c r e ta r y d id , ho w ev er, r e c e iv e a u t h o r i t y to exchange 4 ' s f o r u n c a l l e d f i v e - t w e n t i e s , b u t t h e am oun t s o e x c h a n g e d w as o n l y # 8 0 6 , 0 0 0 . 5 On A p r i l 4 s u f f i c i e n t s u b s c r i p t i o n s w ere r e c e i v e d t o cover a l l

of th e re m a in in g f i v e - t w e n t i e s .

o f a d d i t i o n a l s u b s c r i p t i o n s was r e j e c t e d . #1 50 m i l l i o n o f t h e 4 * s w e re o f f e r e d ,

1Ib id .,

p . 706.

2Ib id ..

p . 707.

5T r e a s u r y R e p o r t . 1 8 7 9 , p . XV. 420 S t a t u t e s .

265.

5T r e a s u r y R e p o r t .

1 8 7 9 , p . XV.

N e a r ly #61 m i l l i o n On A p r i l 16

t h i s t i m e a t a prem ium

178

o f one h a l f o f one p e r c e n t ,

t h e p r o c e e d s t o h e u s e d I n re d e e m ­

in g o u ts ta n d in g 5 -p e rc e n t t e n - f o r t i e s . th e fo llo w in g d a y .

T h e s e w e re o v e r s u b s c r i b e d

"On A p r i l 2 1 a c a l l was made f o r t h e

r e m a i n d e r o f t h e t e n - f o r t y b o n d s , a n d on t h e 2 3 d a c a l l was made f o r $ 2 6 0 ,0 0 0 ,

lo a n o f 1858,

th u s c o m p le tin g th e re d e m p tio n of

a l l o u t s t a n d i n g re d e e m a b le bonds b e a r in g I n t e r e s t a t f i v e p e r c e n t.* ^

" W ith t h i s c a l l t h e r e f u n d i n g o p e r a t i o n s w e r e

p r a c t i c a l l y a t an end f o r th e tim e . I n t h e s h o r t p e r i o d o f f i v e m o n th s fro m N ovem ber 2 3 , 1 8 7 8 , t o A p r i l 2 3 , 1 8 7 9 , m o re t h a n $ 3 7 0 m i l l i o n o f 6 - p e r c e n t b o n d s an d $193 m i l l i o n o f 5 - p e r c e n t b onds h a d been r e f u n d e d I n t o 4 -p e rc e n t bonds.

T he a n n u a l s a v i n g o f i n t e r e s t f r o m t h i s

b r i e f o p e r a t i o n was m ore t h a n $9 m i l l i o n . * By m ean s o f t h e r e f u n d i n g w h ic h t o o k p l a c e b e t w e e n 1870 and 1879, n in e d i f f e r e n t i s s u e s c o m p ris in g $ 1 ,3 9 5 m i l l i o n o f 6 - a n d 5 - p e r c e n t b o n d s w e re c o n s o l i d a t e d i n t o b e a r in g 5, 4£,

and 4 p e r c e n t,

a t a t o t a l sa v in g in an n u al

i n t e r e s t c h a r g e s o f n e a r l y $20 m i l l i o n . 4

1 I b l d . . p . XV I. 2 S h e rm an , o p . c i t . ,

V o l. I I ,

p. 723.

5 T re a su ry R e p o r t . 1879, p p . X V II-X V III. 4Ib id ..

p p . X V I II - X I X .

th re e issu e s

179

The f o l l o w i n g i s a sum m ary o f t h e r e f u n d i n g t r a n s a c t i o n s w h i c h t o o k p l a c e b e t w e e n 1 8 7 0 a n a 1879*

LOANS REFUNDED T itle

R a te (P e rc e n t)

o f L oan

L o an o f 1 8 5 8 ............................................................... T e n - f o r t i e s o f 1 8 6 4 ............................................. F i v e - t w e n t i e s o f 1 8 6 2 . . .................................. F i v e - t w e n t i e s o f M arch 1 8 6 4 ........................ F i v e - t w e n t i e s o f J u n e 1 8 6 4 . ........................ F i v e - t w e n t i e s o f 1 8 6 5 .................................... Con s o l 8 o f 1 8 6 5 ....................................................... C o n s o l s o f 1 8 6 7 ....................................................... C o n s o l s o f 1 8 6 8 . ....................................................

5 5 6 6 6

Amount R e f u n d e d $

6 6 6 6

T o t a l ...................................... A nnual I n t e r e s t c h a r g e

| 1 ,3 9 5 ,3 4 5 ,9 5 0 $ 8 1 ,6 3 9 ,6 8 4 .5 0

THE REFUNDING- ISSUES F u n d e d l o a n o f 1 8 8 1 ......................................... F u n d e d l o a n o f 1 8 9 1 ......................................... F u n d e d l o a n o f 1907 (in c lu d in g re fu n d in g c e r t i f i c a t e s )

5 4| 4

T o ta l A nnual I n t e r e s t c h a r g e . . . . A n n u a l s a v i n g i n I n t e r e s t c h a r g e s on acco u n t of th e re fu n d in g o p e r a t io n s ..

1T rea su ry R e p o rt.

1 8 7 9 , p . XIX

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A 1 ,3 9 5 ,3 4 5 ,9 5 0 $ 6 1 ,7 3 8 ,8 3 8

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CHAPTER VII DEBT REDUCTION AND TAX POLICY R e d u c t i o n o f t h e Im m ense d e b t w as a m a j o r o b j e c t i v e o f f i s c a l p o l i c y a f t e r t h e C i v i l W ar.

I t w as p o p u l a r l y

a p p r o v e d , a n d t h e r e w e re c o m p a r a t i v e l y few p e o p l e who d i d n o t fav o r i t — a t l e a s t in p r in c ip le .

The f u r t h e r a n c e o f

t h i s p o lic y d ep en d ed , o f c o u rs e , upon a c o n tin u o u s h ig h rev en u e.

B u t t a x r e d u c t i o n w as a l s o a h i g h l y d e s i r a b l e

o b je c tiv e , and i t

t o o w as made p o s s i b l e by l a r g e r e v e n u e s .

T h e s e tw o o b j e c t i v e s t h u s c o n f l i c t e d ,

f o r n e i t h e r c o u ld

be f u r t h e r e d e x c e p t a t th e expense o f th e o t h e r . SURPLUS TREASURY RECEIPTS AND THE REAL EXTENT OF DEBT REDUCTION I n e a c h f i s c a l y e a r b e t w e e n 1 8 6 6 a n d 1 8 7 9 t h e r e was a s u rp lu s of r e c e ip ts over e x p e n d itu re s .^

T hese s u r p lu s e s

^The s u r p l u s e s o f T r e a s u r y r e c e i p t s f o r t h e s e y e a r s w e re a s f o llo w s (T r e a s u r y R e p o r t , 1 9 4 6 , p . 3 6 9 ): 1 8 6 6 .... 1 8 6 7 -----1 8 6 8 .... 1 8 6 9 -----1 8 7 0 -----1 8 7 1 -----1 8 7 2 ....

# 3 7 ,2 2 3 ,2 0 3 1 3 3 ,0 9 1 ,3 3 5 2 8 ,2 9 7 ,7 9 8 4 8 ,0 7 8 ,4 6 9 1 0 1 ,6 0 1 ,9 1 6 9 1 ,1 4 6 ,7 5 7 9 6 ,5 8 8 ,9 0 5

1 8 7 3 ____ 1 8 7 4 -----1 8 7 5 -----1 8 7 6 -----1 8 7 7 ____ 1 8 7 8 .... 1 8 7 9 ____

(180)

# 4 3 ,3 9 2 ,9 6 0 2 ,3 4 4 ,8 8 3 1 3 ,3 7 6 ,6 5 8 2 8 ,9 9 4 ,7 8 0 4 0 ,0 7 1 ,9 4 4 2 0 ,7 9 9 ,5 5 2 6 ,8 7 9 ,3 0 1

181

w e r e r e a l i z e d f o r tw o r e a s o n s ;

(1 )

th e c o n se rv a tism d i s ­

p l a y e d b y t h e G o v e rn m e n t i n p r o v i d i n g r e d u c t i o n s i n t a x e s in

t h e f a c e o f a c l a m o r f o r t h e m , a n d (2 ) t h e u n p r e c e d e n t e d

p r o s p e r i t y a n d g r o w t h o f in c o m e w h i c h f o l l o w e d t h e w a r and w h ic h c a u s e d t h e re v e n u e y i e l d to be h ig h .

W ith t h e e n d ­

i n g o f th e w ar t h e r e had begun a p e r i o d o f n a t i o n a l expan­ s io n p ro b a b ly w ith o u t p re c e d e n t in a n d c o m m erc e.

th e h is to r y o f in d u s try

As t h e W est w as o p e n e d up a n d t h e g r e a t

r a i l w a y s y s te m s w ere e x te n d e d , f o r e i g n c a p i t a l an d l a b o r flo w e d in to add t h e i r p r o d u c tiv e pow er to th e d o m e s tic . T h e Un i t e d S t a t e s w as r a p i d l y r i s i n g

to f i r s t p la c e a s a

p r o d u c e r and e x p o r te r o f a g r i c u l t u r a l p r o d u c ts , and a t th e sam e t i m e i t s

I n f lu e n c e i n w o rld f in a n c e in c r e a s e d g r e a t l y .

An a b u n d a n c e o f c u r r e n c y s t i m u l a t e d t r a d e a n d s u p p o r t e d a h ig h le v e l of p r i c e s . 1

L arge T re a s u ry r e c e i p t s r e f l e c t e d

t h e g r e a t i n c r e a s e i n n a t i o n a l in c o m e an d w e a l t h . B e tw e e n 1 8 6 6 a n d 1 8 7 ? t h e d e b t w a s r e d u c e d b y $ 6 4 8 m illio n .

Of t h i s l a r g e r e d u c t i o n , $ 6 0 4 m i l l i o n w as a c c o m 2 p l i s h e d b e tw e e n 1866 an d 1 8 7 3 . S m a lle r re v e n u e s a f t e r t h e p a n i c o f 1873 slo w ed t h e p r o c e s s o f d e b t p a y m e n t, and d u r i n g t h e tw o y e a r s f o l l o w i n g 1 8 7 7 b o r r o w i n g f o r r e s u r a p -

1N oyes, F o r t y Y e a r s , p o . 1 - 5 . ^ T reasu ry R e p o rt, 1946, p . 455.

182

t i o n p u rp o ses In c re a s e d th e d e b t.

F o r t h e p e r i o d o f m o st

r a p i d d e b t r e d u c t i o n , when b e t w e e n 1 8 6 6 a n d 1 8 7 3 t h e d e b t d e c l i n e d b y $ 6 0 4 m i l l i o n , n e i t h e r t h e am o u n t o f s u r p l u s rev e n u e nor th e d e b t-re d u c tio n t o t a l g iv e s a tr u e in d ic a ­ t i o n o f th e a c t u a l r e d u c tio n t h a t had ta k e n p l a c e . T h is i s

s e e n i n t h e f a c t t h a t many o f t h e e x p e n d i ­

t u r e s made b y t h e G o v e rn m e n t f o l l o w i n g t h e t e r m i n a t i o n o f t h e w a r w ere d i r e c t l y a t t r i b u t a b l e

to th a t c a ta s tro p h e .

T h e y w e re " p r o p e r e x p e n s e s o f w a r " , a n d i n no s e n s e " o r d i ­ n a r y " e x p e n d i t u r e s , y e t t h e y w e r e made fro m c u r r e n t r e c e i p t s . Had i t b e e n n e c e s s a r y o r p o s s i b l e t o a c c o u n t f o r a l l fin a n c ia l l i a b i l i t i e s

th e

o f th e c o n f l i c t a t th e tim e o f i t s

t e r m i n a t i o n , t h e d e b t w o u ld h a v e b e e n c o n s i d e r a b l y l a r g e r . T h i s w as shown b y B o u t w e l l , w h o , w h i l e a member o f C o n g r e s s , e s t i m a t e d t h a t i n t h i s s e n s e o ne t h i r d

of th e d e b t had

a c t u a l l y b e e n p a i d b y J a n u a r y 1 , 1 8 6 8 — a p e r i o d o f two y e a r s a n d n i n e m o n th s fr o m t h e e n d o f t h e w a r . *

L a te r in

1 8 6 8 S e c r e t a r y M c C u llo e h a l s o r e f e r r e d t o t h i s l a r g e am ount o f c o n c e a l e d d e b t r e d u c t i o n a n d s t a t e d t h a t " t h e m oney e x ­ p e n d e d b y t h e War a n d Navy D e p a r t m e n t s , b e tw e e n t h e f i r s t d a y o f A p r i l , 1 8 6 5 , a n d t h e f i r s t d a y o f N o v e m b er, 1 8 6 8 , o n c l a i m s j u s t l y c h a r g e a b l e t o t h e e x p e n s e s o f w a r , a m o u n te d

1 C o n g r e s s i o n a l G lo b e , - 4 Q t h C o n g . , 2 d S e e s . , J u l y 2 1 , 1 8 6 8 , p . 42971---------------------

183

to

...

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T h is f a c t ,

In c o n ju n c ti o n w ith th e sim p le f i g u r e s o f

su rp lu s T reasu ry r e c e ip ts and o f d e b t re d u c tio n ,

e m p h a siz e s

t h e e x t r a o r d i n a r y r a p i d i t y w i t h w h i c h t h e d e b t w as b e i n g 2 p a id . U n d e r s u c h c i r c u m s t a n c e s p o l i c i e s o f d e b t m anage­ m ent a n d o f t a x a t i o n w ere n e c e s s a r i l y c l o s e l y r e l a t e d . THE TAX-REDUCTION CONTROVERSY A lth o u g h i n th e p o s t- w a r p e r i o d th e p e o p le w ere w i l l ­ i n g g e n e r a l l y t o b e t a x e d , a n d a l t h o u g h C o n g r e s s w as p ro m p t in re d u c in g th e

in te rn a l le v ie s ,

ta x re d u c tio n n e v e rth e ­

l e s s w as a m a t t e r o f c o n t r o v e r s y , n o t o n ly w i t h r e g a r d to th e n a tu r e o f th e r e d u c t io n s b u t a l s o w ith r e g a r d to th e r a p i d i t y w i t h w h ich th e y s h o u ld t a k e p l a c e and w i t h r e g a r d to

th e b e a r i n g o f such r e d u c t i o n s upon th e p ro b le m o f th e

d e b t.

T h e r e d e v e l o p e d , o n t h e o n e h a n d , a c o n f l i c t b e tw e e n

t h e dem ands o f s p e c i a l - I n t e r e s t g r o u p s and t h e r e q u i r e m e n ts o f f i n a n c i a l s t a te s m a n s h ip , a n d , on t h e o t h e r ,

th e c r y s ta l­

l i z a t i o n o f a n t i t h e t i c a l v ie w s o f c o n s e r v a t i v e s and l i b e r -

^ T r e a s u r y R e p o r t , 1 8 6 8 , p . XX. ^ M c C u llo c h r e m a r k e d o f t h e p h e n o m e n a l a m o u n t b y w h ic h t h e d e b t w as r e d u c e d ; "T hat th e r e d u c tio n sh o u ld have been com m enced w i t h i n s e v e n m o n th s fr o m t h e c l o s e o f a w a r o f u n e q u a lle d c o s t , and o o n tin u e d th ro u g h y e a rs o f g r e a t f i n a n ­ c i a l d e p re s s io n , i s ab o u t th e l a s t th in g t h a t th e a d v o c a te s o r s u p p o r t e r s o f m onarchy e x p e c te d fro m a r e p u b l i c a n gov­ e rn m e n t." Men a n d M e a s u r e s o f H a l f a C e n t u r y , p . 2 0 9 .

184

a le .

The d i r e c t b u r d e n o f s e r v i c i n g a n d r e d u c i n g t h e d e b t

w as th e b u rd e n o f t a x a t i o n a t i t s p o i n t s o f i n c i d e n c e . V iew s r e g a r d i n g t a x r e d u c t i o n v a r i e d among d i f f e r e n t b u s i n e s s g r o u p s i n a c c o rd a n c e w ith th e im p a ct o f p r e v a i l ­ i n g t a x e s upon t h e i r p a r t i c u l a r i n t e r e s t s . m a n u fa c tu re rs opposed th e

B a n k ers and

in co m e t a x a n d f a v o r e d t h e h i g h

t a r i f f r a t e s , w h ile m e rc h a n ts and I m p o r te r s o p p o sed th e p r o t e c t i v e t a r i f f a n d t e n d e d t o f a v o r t h e incom e t a x . 1 The M e r c h a n t 1s M a g a z i n e , a l t h o u g h i t

d i d n o t go s o

f a r a s t o recom m end c o m p l e t e a b o l i t i o n o f t h e in co m e t a x , p came t o r e g a r d i t w i t h d i s f a v o r . When, i n 1 8 7 0 , t h e Com­ m e r c i a l a n d F i n a n c i a l C h r o n i c l e came o u t v e h e m e n t l y f o r s u b s ta n tia l f u r th e r re d u c tio n o f ta x e s , re te n tio n ,

in p a r t a t l e a s t ,

it at firs t

o f t h e in c o m e t a x .

fav o red

I t s re te n ­

t i o n w o u ld p e r m i t t h e r e p e a l o f " a m u l t i t u d e o f o t h e r i m p o s t s w h ic h a r e f a r m ore m i s c h i e v o u s . S u g g e s t i o n was m ade t h a t t h e y i e l d fro m i t — . . . m ig h t b e a p p l i e d t o t h e r e m i s s i o n o f o t h e r d u t i e s , w h i c h a r e now a h e a v y b u r d e n u p o n t h o s e l a b o r i n g men o f t h e c o u n t r y , whose w h o le r e c e i p t s i n t h e y e a r a r e n o t g r e a t e n o u g h

• ^ R a tn e r , A m e rlo a n T a x a t i o n , p . 1 1 2 . 2 “One o f t h e t a x e s m o s t r e s e n t e d a n d o b j e c t e d t o , b e c a u s e o f i t s i n q u i s i t o r i a l c h a r a c t e r , i s th e in c o m e -ta x ." D e c e m b e r 1 8 6 9 , V o l . L X I, p . 4 4 1 . ^ F e b r u a r y 1 9 , 1 8 7 0 , V o l. X, p . 2 3 0 .

185

t o b r i n g them w i t h i n t h e r e a c h o f t h i s , w h ic h i s e m p h a t i c a l l y t h e r i c h m an’ s t a x . 1 I t u rg e d a r e d u c t i o n o f 050 m i l l i o n in c u sto m s d u t i e s a n d a f u r t h e r r e d u c t i o n o f 075 m i l l i o n i n i n t e r n a l t a x e s , a r g u i n g t h a t t a x r e d u c t i o n w o u ld i n c r e a s e p r o d u c t i o n a n d ra is e

t h e r e v e n u e s a n d t h a t t h e " d e b t w i l l be s o o n e r p a i d " , 2

I n 1 8 7 1 , h o w e v e r , when t h e p r e s s u r e o f v a r i o u s m o n ie d i n ­ t e r e s t s w as s t r o n g l y b r o u g h t t o b e a r upon th e a d m i n i s t r a ­ t i o n to p r e v e n t any p o s s i b l e r e c o n s i d e r a t i o n o f th e ta x b efo re i t s

e x p i r a t i o n , 5 t h e C o m m e rc ia l a n d F i n a n c i a l C h ro n ­

i c l e r e v e r s e d i t s e l f by s t a t i n g t h a t g e n e r a l p u b l i c o p i n i o n w as o p p o s e d t o t h e in co m e t a x a n d t h a t r e m o v a l o f t h e t a x " w i l l re m o v e o n e o f t h e m o s t s e r i o u s s o u r c e s o f d i s a f f e c ta tio n

t o w a r d s t h e g o v e r n m e n t among t h e p e o p l e " . 4

Y et i t

c o u l d h a r d l y b e s u p p o s e d t h a t s u c h a t a x w o u ld

b e o b j e c t e d t o b y v e r y many who w e re n o t s u b j e c t t o i t . w a s p a i d b y a c o m p a r a t i v e l y few p e o p l e .

it

A lth o u g h th e popu­

l a t i o n w as n e a r l y f o r t y m i l l i o n , t h e n u m b er o f p e r s o n s a s s e s s e d f o r t h e 1 8 6 6 in c o m e t a x w as o n l y 4 6 0 , 1 7 0 ; a n d f o r 1 8 6 7 a n d 1 8 6 8 , a f t e r t h e e x e m p t i o n w as i n c r e a s e d ,

^ •A p rll 1 6 , 1 8 7 0 , V o l . X, p . 4 8 7 . 2J u l y 2 , 1 8 7 0 , V o l. X I, p p . 5 - 6 . sR a tn e r, o p . c l t . , p . 134. 4J a n u a ry 7 , 1871, V o l. X I I , p . 7 .

th e re

186

w ere a p p r o x im a te ly 2 5 0 ,0 0 0 su ch t a x p a y e r s . 1

i n 1865 th e

N a t i o n h a d n o t e d t h a t t h e r e w as no u r g e n t dem and f o r r e p e a l p o f th is ta x . A g a i n , l a t e I n 1 8 6 9 , I t o b s e r v e d no p o p u ­ la r h o stility sh o u ld b e .

It

t o w a r d I t a n d p e r c e i v e d n o r e a s o n why t h e r e c o m m e n te d , "We h e a r no c o m p l a i n t o f I t f ro m

a n y b o d y , e x c e p t f r o m t h e a d v o c a t e s o f some o t h e r mode o f r a i s i n g t h e sam e am o u n t o f m o n e y . " 3 T he same i n t e r e s t s

t h a t d e c rie d th e c o n tin u a tio n o f

t h e in c o m e t a x w e r e o p p o s e d , a l s o , t o t h e p r e v a i l i n g T r e a s ­ u r y p o l i c y w h ic h s o u g h t a r a p i d r e d u c t i o n o f th e d e b t .

The

Me r c h a n t »a M a g a z i n e , i n t e r p r e t i n g p u b l i c o p i n i o n i n t e r m s o f th e s e n tim e n ts of i t s

s p e c i a l c l a s s o f r e a d e r s , avow ed,

"The p e o p le w i l l n o t s u b m it t o t h e p r e s s u r e o f h e a v i e r t a x a ti o n th a n i s n e e d fu l to pay th e i n t e r e s t o f th e d eb t a n d th e e x p e n se s o f an e c o n o m ic a l a d m i n i s t r a t i o n o f th e g o v e rn m e n t." 4

T h i s s t a t e m e n t , made i n N ovem ber 1 8 6 9 , a p ­

p e a r e d a t a t i m e when t h e many e x c i s e t a x e s o f t h e w a r a n d p o s t-w a r p e rio d had been s u b s t a n t i a l l y red u ced o r e lim i­ n a t e d 5 a n d w hen a c a m p a ig n a g a i n s t b o t h t h e in c o m e t a x a n d

^ R e p o rt o f t h e C o m m issio n er o f I n t e r n a l R e v e n u e , 1 8 6 8 , p p . 4 6 S T W 7 -------------------------------------------------------------------------2T h e N a t i o n , S e p t e m b e r 7 , 1 8 6 5 , V o l . I , p p . 2 9 7 - 2 9 8 . 3 I b i d . , Novem ber 2 5 , 1 8 6 9 , V o l .

IX , p . 4 5 2 .

4 N ovem ber 1 8 6 9 , V o l . L X I, p . 3 5 9 . 5T a u se lg , og.

c l t . , p p . 162, 1 7 1-172.

18?

th e in h e rita n c e

t a x was im m i n e n t i n C o n g r e s s . 1

a s d e b t r e d u c t i o n was t o

So l o n g

c o n t i n u e , a l a r g e r e v e n u e w as

n e c e s s a r y , a n d t h e in c o m e t a x w o u ld y i e l d a p a r t o f i t . D u rin g 1869 T re a s u ry p u r c h a s e s o f bonds had b ro u g h t a b o u t a n a p p r e c i a t i o n i n t h e i r p r i c e s on t h e o p e n m a r k e t .

In

A u g u s t t h e M e r c h a n t 1s M a g a z i n e p o i n t e d o u t t h a t n a t i o n a l s e c u r i t i e s w e r e w o r t h " 2 5 0 m i l l i o n s m o re t h a n a t t h e b e ­ g i n n i n g o f t h e y e a r " .* *

It

t o o k t h e p e c u l i a r l y n a r r o w v ie w

t h a t t h i s g a in h ad gone to s p e c u l a t o r s , b a n k e r s , and t h e i r c u s t o m e r s , a n d t h a t n o n e o f i t w as a v a i l a b l e f o r l o w e r ta x e s and th e r e l i e f o f th e b u rd en s of th e p e o p le .3 The i d e a t h a t money m i g h t b e t t e r be l e f t t o " f r u c t i f y i n t h e p o c k e t s o f t h e p e o p l e " 4 t h a n t o b e d ra w n fro m th em by h eavy t a x a t i o n in o r d e r r a p i d l y to re d u c e th e d e b t, had a c o n s i d e r a b l e num ber o f a d h e r e n t s , e s p e c i a l l y i n f i n a n ­ c i a l c i r c l e s a n d among t h e w e a l t h y .

The p h r a s e h a d o r i g ­

i n a t e d i n E n g l a n d a n d w as d e s c r i p t i v e o f V i c t o r i a n d e b t p o l l o y , 5 f o r i n E n g la n d t h e n a t i o n a l d e b t h a d come t o be

1 See R a t n e r , oj>. c l t . , p p . 1 2 1 - 1 3 0 . ^ A u g u s t 1 8 6 9 , V o l. L X I , p . 1 4 4 . 3I b i d . , p . 146. 4 Com m ercia l a n d F i n a n c i a l C h r o n i c l e , O c t o b e r 7 , 1 8 7 1 , 5S h i r r a s , S c ie n c e o f P u b lic F in a n c e , V o l. I ,

p. 74.

188

r e g a r d e d a s p e rm a n e n t.1 b e in g d eb t e x ti n c t i o n ,

The A m e r i c a n t r a d i t i o n , h o w e v e r , th o s e f a v o r in g p erm an en t d e b t o r

slo w rep a y m en t w ere In t h e m i n o r i t y .

T h e i r v i e w was t h a t

wl t h t h e g r o w t h a n d d e v e l o p m e n t o f t h e c o u n t r y t h e b u r d e n o f d e b t w o u ld b e s t e a d i l y r e d u c e d , t h a t " e v e r y y e a r l l g h t -

iT h e E n g li s h m e r c a n t i l e c l a s s e s s t r o n g l y o pposed p a y ­ m ent o f th e d e b t. I t w as " I m p o s s i b l e f o r t h e g o v e r n m e n t t o m a in ta in a s u r p lu s fu n d in th e fa c e o f such s e n tim e n t" . A d a m s, P u b l i c D e b t s , p . 2 6 0 . Hugh M c d u l l o c h , when v i s i t i n g E n g l a n d , o b s e r v e d w i t h s u r p r i s e " t h e c o m p l a c e n c y w i t h w h i c h t h e e n o rm o u s d e b t o f G r e a t B r i t a i n w a s r e g a r d e d by t h e g e n e r a l i t y o f E n g l i s h ­ m en". I t w as f e l t t h a t t h e n a t i o n a l in c o m e h a d m ore them k e p t pace w ith th e in c re a s e in th e d e b t. "V ery few , l i k e M r . G l a d s t o n e , seem ed t o r e g a r d I t a s a n i n c u m b r a n c e up on t h e p r o p e r t y o f t h e n a t i o n , f ro m w h i c h I t o u g h t t o b e r e l i e v e d , even a t th e ex p en se o f in c r e a s e d t a x a ti o n ." Men a n d M e a s u r e s o f H a l f a C e n t u r y , p . 4 7 2 . P r o f e s s o r A l v l n “ H .' H a n s e n h a s s u g g e s t e d t h a t " T h e r e a r e good g ro u n d s f o r b e l i e v i n g t h a t t h e p o s t- N a p o le o n lc d e b t e x e r c i s e d n o d e p r e s s i n g e f f e c t on t h e B r i t i s h e c o n ­ omy a n d m ay, i n d e e d , h a v e p l a y e d a n i m p o r t a n t r o l e i n t h e e c o n o m ic p r o g r e s s o f t h a t c o u n t r y i n t h e n i n e t e e n t h c e n ­ tu ry ." F i s c a l P o l i c y a n d B u s i n e s s C y c l e s (W. W. N o r to n & Com pany, " I n c . , New y’o r E , 1941) , p . 1 5 6 . 4As F r a n c i s A. W a lk e r o n c e s t a t e d , " I t h a s b e e n an A m e ric an ism t o b e l i e v e i n p a y in g o f f d e b t s " . "T h e N a t i o n a l D e b t " , L i p p i n c o t t ' s M o n th ly M a g a z i n e , S e p t e m b e r 1 8 6 9 , V o l . I V , p . 317": T h i s n a t i o n a l t r a i t h a e b e e n w i d e l y r e c o g ­ n iz e d . S e e , f o r e x a m p l e , A dam s, P u b l i c D e b t s , p p . 2 4 0 , 2 7 3 : S e lig m a n , S t u d i e s in P u b l i c F in a n c e , p p . 20 5 -2 0 7 ; T r e a s u r y R e p o r t , 1866, p . 8 ; a n d F o r d , o p . c l t . , V o l . I l l , p 1—

189

e n s th e p r e s s u r e by d i s t r i b u t i n g

i t o v e r a w id e r a r e a o f

p o p u la tio n and w e a lth " .1 D a v id A . W e l l s , a h i g h l y r e s p e c t e d e c o n o m i s t who s e r v e d a s S p e c i a l C o m m is s io n e r o f t h e R e v e n u e d u r i n g M c C u l l o c h 's term o f o f f i c e , fa v o re d a r a p i d r e d u c tio n o f ta x e s a s a m e a n s o f s t i m u l a t i n g p r o d u c t i o n , w h i c h h e b e l i e v e d w o u ld in

t u r n make p o s s i b l e a r a p i d r e d u c t i o n o f t h e d e b t .

He

sa id : . . . a r a p id re d u c tio n o f ta x a tio n , r a th e r th a n a r a p id r e d u c tio n of th e p r i n c i p a l o f th e p u b lic d e b t, i s a t p r e s e n t th e tr u e p o lic y o f t h e g o v e rn m e n t; a n d t h a t t h e a d o p ti o n o f t h i s c o u r s e , so f a r f r o m p r o t r a c t i n g t h e t i m e a t w h ic h th e n a t i o n a l d e b t can be d i s c h a r g e d , w i l l , on t h e c o n t r a r y , g r e a t l y a c c e l e r a t e i t . 2 Some f e l t

t h a t t a x a t i o n y i e l d i n g m ore t h a n e n o u g h t o

p a y t h e i n t e r e s t on th e d e b t and p r o v i d e f o r an e c o n o m ic a l a d m i n i s t r a t i o n o f t h e G o v e rn m e n t t e n d e d t o i m p o v e r i s h t h e p r o d u c tiv e pow er o f th e c o u n tr y ,

t h a t m ore h a rm t h a n g ood

w a s b e i n g d o n e by r a p i d d e b t r e d u c t i o n , a n d t h a t i t was e s s e n t i a l l y u n e c o n o m ic a l and w a s t e f u l .

■^Commercial a n d F i n a n c i a l C h r o n i c l e , O c t o b e r 7 , 1 8 7 1 , V o l . X H T 7 " P .“ 1 5 4 “ Th3,s same v i e w w as h e l d b y m any, w i t h r e g a r d t o t h e r e s u m p tio n o f s p e c ie p a y m e n ts , t h a t th e i n c r e a s i n g w e a lth o f t h e c o u n t r y w o u ld g r a d u a l l y b r i n g i t a b o u t . See, fo r e x a m p le , B a r r e t t , o p . c l t . , p . 17 2 .

R e p o r t o f th e S p e c ia l C om m issioner o f R ev en u e, Decem­ b e r I 8 60 C39tE” C o n g ., 2d S essV , s i n a f e E xT D oc.' No". 2 ) , p . 32.

190

C o n g r e s s m u st r e p e a l I n t e r n a l t a x a t i o n r a t h e r t h a n go on r e d u c i n g , a s h e r e t o f o r e , t h e n a t i o n a l d e b t . . . we m u s t a d j u s t t h e n a t i o n a l r e v e n u e c l o s e l y to th e e x p e n se s o f th e g o v e rn m e n t, l e a v ­ i n g a much s m a l l e r s u r p l u s t o b e d e v o t e d t o t h e l i q u i d a t i o n o f t h e d e b t f o r some y e a r s t o c o m e .1 A la te r c ritic

o f th e G ran t a d m i n i s t r a t io n and th e

p o l i c i e s o f S e c r e t a r y B o u tw e ll h a s e x p re s s e d v e ry c l e a r l y t h i s p o i n t o f v iew r e g a r d i n g t a x re f o r m and d e b t r e d u c t i o n : To some e x t e n t [ d e b t r e d u c t i o n ] was n o t b a d p o lic y . B u t w hen b u s i n e s s was r e a d y t o p a y 6 t o 15 p e r c e n t f o r c a p i t a l u s e d i n n a t i o n a l d e v e l o p m e n t , w hen t h e g o v e r n m e n t w a s a b l e ( a s l a t e r r e f u n d i n g o p e r a t i o n s sh o w ed ) t o b o r r o w a t 4 o r 5 , i t w as a s s u r e d l y u n w i s e t o u s e t o o l a r g e a s h a r e o f t h e n a t i o n a l in co m e f o r d e b t re d u c tio n . M oreover to c e n t r e e v e ry e f f o r t upon r e d u c tio n , to s a c r i f i c e to i t i n t e r n a l ta x re fo rm , t a r i f f re fo rm , c u rre n c y re fo rm , and e a r l y r e f u n d i n g m e a s u r e s , w as a m e a g r e a n d s t e r i l e c o n c e p tio n o f f i n a n c i a l p o l i c y . 2 F o l l o w i n g t h e p a n i c o f 1 8 7 3 t a x r e v i s i o n b ecam e a n i m p o r t a n t o b j e c t i v e o f t h o s e p o l i t i c a l f a c t i o n s w h ic h s p o k e f o r th e f a rm e r, l a b o r e r , and sm a ll b u sin e ssm a n .

F o r many

y e a r s t h e r e e n a c t m e n t o f a n Incom e t a x w as v i g o r o u s l y b u t v a i n l y s o u g h t by t h e v a r i o u s t h i r d - p a r t y m o v em en ts w h ic h r e p r e s e n t e d l a b o r and a g r i c u l t u r e . 3

B e tw e e n t h e y e a r s 1 8 7 3

C o m m e rc ia l and F i n a n c i a l C h r o n ic le , O c to b er 7 , 1871, p . 4 5 4 7 ~a n d ~DSeemT5er g 7 T 5 7 r,“ VoI7 m i , p . 7 5 8 . 2 N e v in s , H a m ilto n F i s h , p . 2 8 8 . 3 C u r r e n c y r e f o r m , o f c o u r s e , becam e t h e p a r a m o u n t i s s u e , e s p e c i a l l y w ith th e a g r a r i a n e le m e n t in th e s e farm la b o r a lin e m e n ts . S e e , f o r e x a m p l e , F a u l k n e r , A m e ric a n E c o n o m ic H i s t o r y , p p . 6 2 9 - 6 3 0 ; a n d R a t n e r , o p . c l t . , p 7 1 4 7 .

191

a n d 1 8 7 9 t h e r e w e re i n t r o d u c e d i n C o n g r e s s f o u r t e e n b i l l s p r o v i d i n g f o r a n incom e t a x .

Y et th e

s o l u t i o n f o u n d by

C o n g r e s s i n 1 8 7 5 f o r t h e d e c l i n e i n c u s to m s r e v e n u e f o l ­ l o w i n g t h e p a n i c was t o r e p e a l t h e 1 0 - p e r c e n t t a r i f f r e d u c ­ t i o n o f 1Q72 .■*• GRADUAL REDUCTION IN TAXES I n 1 8 6 6 t h e i n t e r n a l - r e v e n u e s y s t e m Im p o s e d a v a s t and c h a o tic b u rd en .

It

In c lu d e d a m o d e ra te ly p r o g r e s s iv e

In co m e t a x a n d a n I n h e r i t a n c e t a x , a c o m p r e h e n s i v e s y s te m o f e x c i s e t a x e s , a n d a g e n e r a l t a x on m a n u f a c t u r e d g o o d s at

each sta g e o f p ro d u c tio n .

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ta x a p p lie d to

a lm o st e v e ry o c c u p a tio n , and th e g r o s s r e c e i p t s

of tr a n s ­

p o r t a t i o n , c o m m u n i c a t i o n s , a n d i n s u r a n c e c o m p a n ie s w e re tax e d .

B e f o r e t h e w ar h a d e n d e d C o n g r e s s h a d b e e n " w i l l ­

in g to ta x ev ery p o s s ib le a r t i c l e a t th e h ig h e s t r a t e th a t O anyone had th e co u rag e to s u g g e s t" .~ At i t s h i g h e s t p o i n t , I n 1 8 6 6 , t h e y i e l d fro m i n t e r n a l r e v e n u e w as $ 2 3 6 m i l l i o n .

To t h e A m e r ic a n w o r k in g - m a n n e i t h e r c u r r e n c y r e f o r m n o r p r o g r e s s i v e t a x a t i o n was o f f i r s t I m p o r ta n c e . He was p r i m a r i l y I n t e r e s t e d in " h i g h e r w ages a n d s h o r t e r h o u r s " . S e e E m a n u el S t e i n a n d o t h e r s , L a b o r P r o b l e m s i n A m e r ic a ( F a r r a r & R i n e h a r t , I n c . , New f o r k , 1 9 4 0 ) , *pp. 1 5 3 -1 5 4 . " b fta tn e r, o p . c l t . , p p . 1 4 5 - 1 5 0 . 2 I b l d . , p p . 7 9 -8 8 , 8 9 - 9 0 , 9 6 -9 8 ; S h u l t z an d C a in e , F in a n c Ia l~ D e v e lo p m e n t, p p . 291-2 92 ; and T a u s s ig , T a r i f f

Mistory 7~pp. 160-1657 171.

192

It

f e l l t o $102 m i l l i o n In 1874 and I n c r e a s e d o n ly s l i g h t l y

th e re a fte r.1 The w a r - t i m e w i l l i n g n e s s o f t h e p e o p l e t o s u b m i t t o heavy ta x a tio n

c o n tin u e d In to th e p o s t-w a r y e a r s .

Remem­

b ra n c e o f th e c a rn a g e and s a c r i f i c e o f w ar, w id e sp re a d jo u rn a lis tic

comment o n t h e e n o rm o u s t o t a l o f t h e d e b t a n d

th e need f o r i t s d itio n

r e d u c t i o n , th e g e n e r a l l y p ro s p e ro u s con­

o f th e c o u n tr y , an d t h e I n n a t e good se n se o f a

p e o p l e who knew d e b t t h r o u g h p e r s o n a l e x p e r i e n c e , m u s t have s tro n g ly In flu e n c e d t h i s a t t i t u d e . 2

To t h e E u r o p e a n

f i n a n c i a l o b s e r v e r i t w as c a u s e f o r a m a z e m e n t t h a t s u c h h u g e l e v i e s o n many new s o u r c e s o f r e v e n u e c o u l d b e s o a b r u p t l y a n d so s u c c e s s f u l l y i m p o s e d . I n a n y o t h e r c o u n t r y t h e b a r e a t t e m p t w o u ld have caused a r e v o lu tio n . B ut i n A m e ric a t h e s e ta x e s a re borne a s p a t i e n t l y a s ta x e s a r e e v er b o rn e in any c o u n try . . . C o n g ress sim p ly l a i d a t a x on e v e r y t h i n g i t c o u ld t h i n k o f , an d l e t i t h i t whom i t c o u l d . Y et t h i s f i n a n c i a l d e c l= m a t l o n o f t h e p e o p l e e x c i t e s l i t t l e m u rm u rin g .® L a t e i n 1 8 6 8 S e c r e t a r y M c C u llo c h r e m a r k e d , t i c a l w ay, on t h i s a t t i t u d e

in a p r a c ­

o f th e p e o p le :

1T re a s u ry R e p o r t , 1 9 4 6 , p . 368. 2T he m a g n i t u d e o f t h e d e b t was a c l e a r a n d s i m p l e f a c t . Such m a t t e r s , how ever, a s i t s s h o r t- te r m n a t u r e , th e r e q u i r e m e n ts f o r i t s c o n v e r s io n , an d th e c h a o t i c a s s o r tm e n t and c o m p l e x i t y o f t e r m s o f t h e many b o n d a n d n o t e I s s u e s c o u l d o n l y b e w i l d e r a n d r e n d e r m ore d i s t u r b i n g t h e c o n c e p t i o n o f n a t i o n a l I n d e b t e d n e s s i n t h e m in d s o f a p a t r i o t i c p e o p l e . S e e G i b b o n 8 , The P u b l i c D e b t , p p . 3 8 - 4 1 . 3 The E c o n o m i s t , D e c e m b e r 2 2 , 1 8 6 6 , V o l . XXIV, p . 1 4 8 1 .

193

T he p e o p l e o f t h e U n i t e d S t a t e s w i l l n e v e r be so w i l l i n g t o be t a x e d f o r t h e p u r p o s e o f re d u c in g th e d e b t as a t th e p r e s e n t tim e. Now, th e n e c e s s ity f o r i t s c re a tio n i s b e t t e r under­ s t o o d and a p p r e c i a t e d t h a n i t can be a t a f u t u r e day As l a t e

a s 1870 t h e N a tio n n o t e d w i t h r e g a r d t o t h e

p u b lic a ttitu d e

t o w a r d t h e d e b t , "T h e p e o p l e h a v e n o t

show n, u n d e r t h e most tr e m e n d o u s p r e s s u r e ,

the s l i g h t e s t

sign of flin c h in g ." ^ R eflectin g th is a ttitu d e

o f t h e p e o p l e , C o n g r e s s was

a b le to red u ce th e ta x e s g r a d u a lly .

At th e f i r s t

session

f o l l o w i n g t h e e n d o f t h e w a r , a c o n s i d e r a b l e r e d u c t i o n was ach iev ed .

O th e r r e d u c t i o n s soon f o l l o w e d , ^ and i n a lm o s t

e v e r y y e a r u n t i l 18 7 2 i n t e r n a l t a x e s w e r e f u r t h e r r e d u c e d or e lim in a te d .4 in

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t h i s re g a rd t h a t a c t u a l l y a c o n s id e ra b le p a r t of the

w a r t a x e s " w e r e r e m o v e d l o n g b e f o r e s u c h a c t i o n was e x p e c t e d by t h e p e o p l e " .5

1 T r e a s u r y R e p o r t , 1 8 6 8 , p . XXI. 2 J a n u a r y 2 7 , 1 8 7 0 , V o l . X, p p .

53-54.

3

" W i t h i n t h e l a s t two y e a r s we h a v e s u r r e n d e r e d i n t e r ­ n a l t a x e s w hich m ight h a v e y i e l d e d h ad th e y n o t been r e ­ p e a l e d $ 1 2 5 , 0 0 0 , 0 0 0 . . . T h i s s h o u l d b e c o u n t e d a s some r e l i e f , a n d w h a t m o re i s p o s s i b l e m u s t now b e g r a n t e d . " C ongressional G l o b e , 4 0 t h C o n g . , 2 d S e s s . , D ecem b er 1 1 , 1 8 6 7 , p . 1 2 a . B l a i n e , Twenty Y e a r s o f C o n g r e s s , V o l. 3 2 7 ; a n d T a u s s i g , o p . ~ ~ c l t . , p p . 1 7 1 -1 7 2 . 5 I b i d . , V o l. I I , pp. 3 2 6 -3 2 7 .

I I , pp. 326-

194

By 1 8 7 2 m o s t o f t h e i n t e r n a l t a x e s h a d b e e n a b o l i s h e d . E x c e p t f o r t h e t a x e s on b a n k s a n d o n l i q u o r a n d b e e r , rem ain in g ta x e s ,

the

s u c h a s t h o s e on p a t e n t m e d i c i n e s a n d on

m a t c h e s , were o f l i t t l e

im portance.

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t a x e s w h i c h b o r e h e a v i l y on t h e p r o d u c t i v e r e s o u r c e s o f t h e co u n try — th o se tax es in

com pensation f o r w hich h ig h e r

d u t i e s h a d b e e n Imposed i n 1862 and 1864 — were e n t i r e l y abolished",-*-

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c r e a s e d b e ca u se of th e s e

which had been i n ­

i n t e r n a l l e v i e s , were n o t r e d u c e d . ^

I n t h e p o s t - C i v i l War y e a r s t h e t a x

system , e x ce p t f o r th e

i n c o m e a n d I n h e r i t a n c e t a x e s , was r e g r e s s i v e . t a x , h o w e v e r , was e n d e d i n 1 8 7 2 . b e e n r e p e a l e d two y e a r s b e f o r e . th e F ederal tax

The In co m e

The i n h e r i t a n c e t a x h a d Thus t h e e n t i r e b u rd e n o f

s y s t e m f e l l on c o n s u m p t i o n . 3

S e c r e t a r y M c C u llo c h , whose m a jo r d e b t p o l i c i e s were c o n cern ed w ith th e c o n v e rsio n and r e d u c tio n o f th e debt and th e c o n t r a c t i o n of th e

currency in p r e p a r a tio n f o r

re s u m p tio n o f sp e c ie paym ents, needed l a r g e re v e n u e s to fu rth e r h is p la n s .4

^ T au ssig,

The r a p i d r e d u c t i o n i n t h e d e b t b y

og. c l t . , p . 172.

2 Idem. ^ atn er,

o p . c l t . , p p . 128-129, 134-135.

4See T r e a s u r y R e p o r t , 18 6 5 -1 8 6 8 , p a s s i m .

195

more t h a n #206 m i l l i o n b e tw e e n A ugust 3 1 , 1 8 6 5 , a n d O cto­ b e r 3 1 , 1 8 6 6 , l e d him t o b e l i e v e , n e v e r t h e l e s s ,

t h a t Con­

g r e s s , w hich h a d a l r e a d y r e d u c e d th e i n t e r n a l t a x e s , m ight c o n s i d e r f u r t h e r r e d u c t i o n b o th o f th e i n t e r n a l t a x e s and t h e t a r i f f " i n o r d e r t h a t p r o d u c t i o n may b e i n c r e a s e d a n d new l i f e

in fu se d in to c e r t a i n branches o f In d u stry th a t

a r e now l a n g u i s h i n g u n d e r t h e b u r d e n s w h i c h h a v e b e e n im­ p o s e d upon th e m " .

He b e l i e v e d , h o w e v e r , t h a t r e v e n u e s

s h o u l d be m a i n t a i n e d a t a l e v e l s u f f i c i e n t t o p e r m i t r e d u c ­ t i o n o f t h e p r i n c i p a l o f t h e d e b t by " f o u r t o f i v e m i l l i o n s per m o n th " C o n g re s s ,

n e e d i n g no p e r s u a s i o n t o r e d u c e

t a x e s , a c t e d w i t h s u c h d i s p a t c h t h a t by 1 8 6 8 t h e c o n s e q u e n t d i m i n u t i o n o f t h e r e v e n u e c a u s e d M c C u l l o c h some c o n c e r n . ^ I n h i s f i r s t a n n u a l r e p o r t he h a d u r g e d a r e v i s i o n of the ta x s tru c tu re

t o do away w i t h t h e e r r o r s , a b u s e ,

and f r a u d which th e p r e v a i l i n g c o m p lic a te d system e n c o u r3 aged. By 1 8 6 6 h i s p r o p o s a l s f o r i m p r o v i n g t h e t e x s y s t e m

■^T r e a s u r y R e p o r t , 1 8 6 6 , p p . 6 - 7 , 2 4 . At t h i s tim e p r e s i d e n t Johnson and h i s S e c r e t a r y of th e T r e a s u r y w ere i n a g re e m e n t on d e b t p o l i c y . In h i s second a n n u a l m e s s a g e t h e P r e s i d e n t s a i d , " T h e r e se em s now t o be no g o o d r e a s o n why t a x e s may n o t b e r e d u c e d a s t h e c o u n t r y a d v a n c e s i n p o p u l a t i o n a n d w e a l t h , a n d y e t t h e d e b t be e x ­ tin g u i s h e d w ith in the n e x t q u a r te r o f a c e n tu r y ." R ichard­ s o n , M essages and P ap ers o f t h e P r e s i d e n t s , V ol. V I, p . 451. 2 Tr e a s u r y R0 p o r t , 1 8 6 8 , p p . X I I - X V . 5 I b l d . , 18 6 6 , p. 27.

196

and a d a p tin g i t sp ecific.

t o t h e n e e d s o f t h e t i m e s became more

P e r c e i v i n g t h e r e l a t i o n s h i p betw een th e d e b t

a n d t h e b u r d e n o f t a x a t i o n , he u r g e d — T hat th e burden o f tax e s sh o u ld f a l l c h i e f l y u p o n t h o s e w h o s e i n t e r e s t s a r e p r o t e c t e d by t a x a t i o n , a n d u p o n t h o s e t o whom t h e p u b l i c d e b t i s a so u rc e o f w e a lth and p r o f i t , and l i g h t l y u po n t h e l a b o r i n g c l a s s e s , t o whom t a x a t i o n a n d t h e d e b t a r e w i t h o u t s o many c o m p e n s a to r y advantages.-*To l i g h t e n t h e s e b u r d e n s h e p r o p o s e d t h a t a c a r e f u l r e v i ­ s i o n o f t h e t a r i f f be u n d e r t a k e n a n d t h a t a s soon a s p o s ­ sib le

t h e d e b t be r e f u n d e d a t a l o w e r r a t e o f i n t e r e s t . 2 T a x - r e d u c t l o n m e a s u r e s e n a c t e d b y C o n g r e s s i n Ma rch

a n d J u l y 1866 were e x p e c t e d to r e d u c e t h e a n n u a l r e v e n u e by a p p r o x i m a t e l y $105 m i l l i o n .

A lthough, a s a consequence,

T reasury r e c e ip ts d e c lin e d s u b s ta n t ia lly f o r the f i s c a l year 186?, p a te d . ^

th e y were s t i l l

somewhat g r e a t e r t h a n a n t i c i ­

A w are o f t h e w e i g h t o f t a x a t i o n u p o n t h e p e o p l e ,

M c C u l l o c h r e p e a t e d l y u r g e d economy i n e v e r y b r a n c h o f t h e G overnm ent.4

Much a s h e d i s l i k e d a p r o t e c t i v e t a r i f f , ^

he

1 I b l d . , p . 22. 2I b i d . , pp. 13-14. p.

^ R e p o rt o f t h e Com missioner o f I n t e r n a l R e v e n u e , 1 867 , 256.

t r e a s u r y R e p o r t , 1 8 6 ? , p p . X V I I I , XXI-X XII; p p . x i r r m r : -----------

and 1 868,

5M e C u l l o c h , Men a n d M e a s u r e s o f H a l f a C e n t u r y , p . 5 0 9 .

197

was r e c o n c i l e d t o t h e th o u g h t t h a t w ith "a heavy d e b t and l i b e r a l e x p e n d itu r e s - even a t a r i f f

strictly

f o r revenue

m u s t *be a h i g h t a r i f f . 1 M c C u l l o c h ' s d e b t - m a n a g e m e n t p o l i c y a s I t was r e l a t e d to

t h e q u e s t i o n o f t a x a t i o n may b e c l a r i f i e d

by t h e f o l l o w ­

i n g f a c t s and t h e p o i n t o f view w h ic h h e e x p r e s s e d w i t h r e g a r d t o th em ; B e tw e e n November 1 3 6 7 a n d N ovem ber 1 8 6 8 t h e d e b t h a d a c t u a l l y i n c r e a s e d by $ 3 5 , 6 2 5 , 1 0 2 . 8 2 . 2

During t h a t tim e ,

h o w ever, th e f o llo w in g u n u su a l and n o n - r e c u r r i n g e x p e n d i­ t u r e s had been m ade:3 Loans to th e P a c i f i c r a i l r o a d s . . . . P u r c h a s e o f A l a s k a ...................................... B o u n t i e s t o s o l d i e r s ................................. I n te r e s t accrued p rio r to , but p a i d d u r i n g , t h i f i p e r i o d ...............

$ 2 4 ,1 5 2 ,0 0 0 7 ,2 00,000 4 4 ,06 0 ,5 1 5

T o t a l .............................................

$ 7 9 ,412,515

W ithout th e s e u n u s u a l e x p e n d i t u r e s , w o u l d h a v e b e e n m o re t h a n $ 4 3 m i l l i o n .

4 ,0 0 0 ,0 0 0

surplus r e c e ip ts In view o f t h i s ,

M cC ulloch a ck n o w le d g e d t h a t t h e " s t a t e m e n t o f t h e amount o f t h e d e b t c a n n o t be r e g a r d e d a n u n s a t i s f a c t o r y o n e " . 4

1 T r e a s u r y R e p o r t , 1 8 6 7 , p . X V I I I ; a n d 1 8 6 8 , p . XVI. 2 I b i d . , p . XV II. 3Idem. 4Idem.

198

Y e t m e r e l y on t h e p r e s u m p t i o n t h a t t a r i f f r a t e s m i g h t be r e d u c e d , o r t h a t t h e e a r l y r e s u m p ti o n o f s p e c i e paym ents m ig h t c a u s e a r e d u c t i o n i n y i e l d from t h e e x i s t i n g t a r i f f , he

s t r o n g l y u r g e d t h a t i n t e r n a l t a x e s b e i n c r e a s e d . 3-

T his

w a s a t a t i m e when s u c h t a x e s w e r e s t i l l a s u b s t a n t i a l b u r ­ d e n , ^ a n d d e m a n ds f r o m c e r t a i n

s e c t i o n s o f t h e p u b l i c were

c o n t i n u a l l y b eing p re s s e d f o r f u r t h e r r e d u c t i o n s .3

Tax-

i n c r e a s e p r o p o s a l s a r e n o t l i g h t l y made by men i n p u b l i c o f f i c e , y e t s u c h a p r o p o a s l was b e i n g made by M c C u l l o c h a t a t i m e when t h e p r o s p e c t f o r c o n t i n u a t i o n o f s u r p l u s r e v e ­ n u e s was e x c e l l e n t a n d t h e t h r e a t o f p o s s i b l e d e f i c i t was rem ote. th e

Along w i t h t h i s ,

he u r g e d t h a t t h e p r i n c i p a l o f

d e b t b e r e d u c e d by $ 5 0 m i l l i o n e a c h y e a r . 4 H i s c o n c e p t i o n t h a t t h e d e b t m i g h t be a g r e a t e r b u r d e n

i n t h e f u t u r e t h a n a t t h e p r e s e n t was c o n s i s t e n t w i t h t h e co n serv atism r e f le c te d

i n h i s i n s i s t e n c e upon a c o n t i n u o u s

c o n t r a c t i o n of th e c u rr e n c y .

How I n g r a i n e d i n t h e t e m p e r a ­

m e n t o f s e c r e t a r y M c C u l l o c h was t h i s

conservatism , or p e r-

1 I b l d . , p p . XIV-XV. P

The l n t e r n a l - r e v e n u e r e c e i p t s , w h i c h w e r e g r e a t e s t i n 1866, v i z . |3 1 0 ,9 0 6 ,9 8 4 , t o t a l e d #1 9 1 ,1 8 0 ,5 6 4 in 1868. M e r c h a n t s M a g a z i n e , F e b r u a r y 1 8 6 9 , V o l . XL, p p . 1 0 3 - 1 0 5 . 3 I b i d . , F e b ru a ry 1 8 68, V ol. L V I I I , p. 113.

4Treasury R e p o r t, 186 8 , p. X I I I .

199

h ape pessim ism ,

i s re v e a le d In th e fo llo w in g sta te m e n t:

I f i t be u n d e r s t o o d t h a t t h i s d e b t i s t o be a p e r p e t u a l encum brance upon t h e p r o p e r t y and i n d u s t r y o f t h e n a t i o n , I t i s c e r t a i n l y t o be fe a re d th a t the c o lle c tio n of taxes necessary t o p a y t h e I n t e r e s t u p o n i t may r e q u i r e t h e e x e r c i s e o f pow er by t h e c e n tr e d , g o v e r n m e n t, i n c o n s i s t e n t w i t h r e p u b l i c a n i s m , and d a n g e ro u s to th e l i b e r t i e s o f th e p e o p le . The d e b t m u s t be p a i d . . . To i n s u r e i t s p a y m e n t w i t h o u t a change in the e s s e n t i a l c h a r a c t e r of th e gov­ ernm en t, ev ery y ear sh o u ld w itn e ss a r e d u c tio n o f i t s amount and a d i m i n u t i o n o f i t s b u r d e n s . ^ A l t h o u g h d i f f e r i n g w i t h M c C u l l o c h on t h e d e s i r a b i l i t y o f c o n tr a c t i o n o f the c u rre n c y , S e c r e t a r y B o u tw e ll, h i s s u c c e s s o r , was I n c o m p l e t e a g r e e m e n t w i t h him r e g a r d i n g t h e need f o r r a p i d repaym ent of the d e b t.

In f a c t ,

t o some

o b s e r v e r s d e b t r e d u c t i o n was w i t h B o u t w e l l a n o b s e s s i o n t o w hich he s a c r i f i c e d th e a t t e n t i o n a p p r o p r i a t e a s p e c ts of the p u b lic fin a n c e s .

to o th e r

A g a i n , l i k e M c C u l l o c h , he

was r e l u c t a n t t o lo w er t a x e s and f e l t

th a t th e revenue

s h o u l d a lw ay s be s u f f i c i e n t to c o n t i n u e h i s p ro g ram o f d e b t re d u c tio n .^ In C ongress B outw ell had r e p r e s e n t e d the h i g h - t a r i f f in te re sts

o f New E n g l a n d .

He was f r a n k l y a p r o t e c t i o n i s t ,

•^T r e a s u r y R e p o r t , 1 8 6 8 , p . X V I I I . ^ T r e a s u r y R e p o r t , 1 8 6 9 - 1 8 7 2 , p a s s i m ; B o u t w e l l , R e m i­ n i s c e n c e s , V o l . I I , p p . 1 3 7 - 1 3 8 , 1 4 2 - 1 4 4 , 1 8 7 - 1 8 9 ; Dewey, F i n a n c i a l H i s t o r y , p . 352; R a tn e r , o p . c l t . , p . 131; and K e v i n s , o p . c l t ., p. 288.

200

and h i s r e i t e r a t e d opin io n th a t "th e prosperous c o n d itio n o f th e c o u n tr y i s l a r g e l y due to t h e re v e n u e sy stem In a u g ­ u r a t e d d u r i n g t h e w a r , b y w h i c h m a n u f a c t u r e s a n d t h e me­ c h a n i c a r t s have been e x te n d e d and e s t a b l i s h e d " , a p p e a r s t o have been a s i n c e r e c o n v i c t i o n . 1 lie fs,

C o n t r a r y t o some b e ­

h e was n o t h o s t i l e a n d " s t r o n g l y o p p o s e d "

t o some

am ount o f t a r i f f r e d u c t i o n , 2 a l t h o u g h he f e l t t h a t su c h r e f o r m sh o u ld be u n d e rta k e n w ith g r e a t c a r e .

He u r g e d

t h a t t a x r e d u c t i o n b e s u b j e c t t o tw o c o n s i d e r a t i o n s : t h a t the country m a in ta in i t s a b i l i t y by $50 m i l l i o n a n n u a l l y a n d , o f th e revenue ness

first,

to reduce th e debt

secondly,

t h a t " i n t h e change

s y s t e m n o v i o l e n c e s h a l l be d o n e t o t h e b u s i ­

I n t e r e s t s of the c o u n try " .5

A l t h o u g h i n May 1 8 7 2 t h e

d u t i e s on t e a a n d c o f f e e w e r e a b o l i s h e d a n d i n J u n e a g e n ­ e r a l r e d u c t i o n o f t h e m a j o r p r o t e c t i v e d u t i e s by 1 0 p e r c e n t was e f f e c t e d , 4 l a t e

th a t y ear S e c re ta r y B outw ell,

in h is

r e p o r t , a n tic i p a te d f u r th e r "general re d u c tio n In the p e r­ c e n ta g e o f custom s d u t i e s " . 5

1T r e a s u r y R e p o r t , 1 8 70, p . VI. p . V I i r r ~ a n T T 8 7 2 7 " p 7 X V II.

See a l s o i b i d . ,

1871,

2C f. N evins, op, c l t . , pp. 288-289. ^Treasury R e p o rt, 1871, p. V III. 4T a u s s l g , p . 133.

op.

c l t . , pp. 179-190; and R a tn e r , op. c l t . ,

5T r e a s u r y R e p o r t , 1 8 7 2 , p . X V I I .

201 D uring B ou tw ell* s term o f o f f i c e , a t a high l e v e l ,

re v e n u e s rem ained

t h e r e was a t e n d e n c y f o r t h e c u r r e n c y

b a l a n c e I n t h e T r e a s u r y t o beco m e u n n e c e s s a r i l y l a r g e , a n d bond redem p tion s c o n tin u e d a t a h ig h r a t e . 1

The s u r p l u s

rev en u es f o r th e f i s c a l y e a rs 1870-1872, a v e ra g in g n e a rly $ 1 0 0 m i l l i o n a n n u a l l y , were d i r e c t l y a p p l i e d t o t h e r e d u c p t io n of the d e b t. B e t w e e n May 1 8 6 9 a n d O c t o b e r 1 8 7 2 t h e t o t a l p r i n c i p a l a m o u n t o f b o n d s p u r c h a s e d e x c e e d e d $ 28 5 m i l l i o n a t an a v erag e c o s t in g o ld o f 94.64 p e r c e n t . 3

In

h i e r e p o r t f o r 1869 B o u tw e ll had f a v o r e d c o n t i n u i n g t a x e s a s th e y were i n o r d e r t o I n s u r e th e s u c c e s s o f t h e r e f u n d ­ in g o p e ra tio n s th en co n tem p lated .

I n D e c e m b e r 1 8 7 0 , how­

e v e r , he c a u t i o u s l y p r o p o s e d t h a t ,

sh o u ld c o n d i t i o n s con­

tin u e fav o rab le, to

th e n e x t C ongress m ight give c o n s i d e r a ti o n

"a very m a te ria l re d u c tio n In th e re v e n u e s " .4

b e r 1871 he h a d c a s t a s i d e any r e m a i n i n g d o u b t . "th e in

By Decem­ He s t a t e d ,

t i m e h a s a r r i v e d whe n a c o n s i d e r a b l e f u r t h e r r e d u c t i o n

t a x e s can be m a d e " .5

•^Treasury R e p o r t , 1 8 6 9 , p . X V III; and 1 870, p p . V I, XV-XVI. 2I b l d . , 1870, p. I l l ; 3Ib id .,

1872, p. 28.

4 I b l d . , 1 8 7 0 , p . XVI. 5I b l d . , 1 8 7 1 , p . I I I .

1871, p . I l l ;

a n d 1 8 7 2 , p . V.

202

D u r i n g 1 8 7 1 a n d 1 8 7 2 , when p r e s s u r e was r e n e w e d f o r t h e r e p e a l o f t h e Income t a x , B o u t w e l l t o o k a f i r m for

i t s rete n tio n .

It

is

stand

s a id t h a t a t C abinet m ee tin g s

he som etim es s o u g h t t o evade g i v i n g a c l e a r s t a t e m e n t of t h e G o v ern m en t's f i n a n c i a l c o n d i t i o n l e s t th e I n f o r m a tio n i a i d th o se opposed to th e t a x . P o l i t i c a l expediency r a t h e r t h a n a s e n s e o f e q u i t y may h a v e I n f l u e n c e d h i m i n t h i s

stand,,

a l t h o u g h I t was e x a c t l y t h e o p p o s i t e o f t h a t t a k e n by P r e s ­ i d e n t G r a n t , w ho, i n s e e k i n g t h e s u p p o r t o f t h e w e a l t h y f o r h i s 1872 cam p aig n , o p po sed th e incom e t a x . ^ ab ly h is d e sire d ate

to continue th e ta x ,

set for i t s

e x p iratio n

F a r m ore p r o b ­

a t l e a s t u n t i l the

I n 1 3 7 2 , was s i m p l y a p a r t o f

h i s l a r g e r p o l ic y w ith r e g a r d to th e p u b lic f i n a n c e s . was e n t i r e l y

c o n s is te n t w ith h is c a r e f u l and, f o r

It

some y e a r s ,

r e l u c t a n t approach to a l l m a tte rs of ta x re d u c tio n ; and i t was e n t i r e l y a p p r o p r i a t e

to h is

zeal

in re d u c in g the d e b t.

B o u tw ell* s p o lic y e m p h asizin g d e b t r e d u c tio n oould have been form ed th ro u g h a p r o c e s s o f e l i m i n a t i o n and a s a g a c io u s w eighing of p o l i t i c a l e x p ed ien cy .

He knew f r o m M c C u l l o c h ' s

e x p e r ie n c e th e p o p u la r tem per w ith r e g a r d t o c o n t r a c t i o n of

the cu rren cy .

He knew t o o , t h a t - -

^N evins, o p . c l t . , % latner,

op.

p . 589.

c l t . , p . 132.

in sp ite

of the p r o t-

203

e e t a t i o n s of th e f i n a n c ia l p re s s to th e c o n tra ry and in sp ite

o f th e l e n g t h of tim e t h a t had e la p s e d s in c e th e

w a r — t h e r e was s t i l l a c o n s i d e r a b l e w i l l i n g n e s s on t h e p a r t o f t h e p e o p l e t o be t a x e d i n o r d e r t o e f f e c t d e b t red u ctio n .

He was c o n v i n c e d , f u r t h e r m o r e ,

th a t debt

r e d u c t i o n would e nhan ce t h e p u b l i c c r e d i t and t h a t t h i s d e v e l o p m e n t w o u l d i n t u r n make p o s s i b l e t h e r e f u n d i n g o f t h e d e b t on f a v o r a b l e te r m s an d i n t im e p e r m i t t h e resu m p ­ t i o n o f sp e cie p ay m ents.1 Follow ing S e c re ta ry B o u tw e ll's e le c tio n

to th e Sen­

a t e h e was s u c c e e d e d b y h i s f r i e n d a n d f o r m e r a s s i s t a n t , W i l l i a m A. R i c h a r d s o n , w h o s e p o l i c i e s w i t h r e g a r d t o t h e d e b t w e r e much t h e same a s h i s ' own.

I n 1873 t h e r e d u c ­

t i o n of the d eb t c o n tin u e d , but a t a reduced r a t e .

Be­

c a u s e o f t h e t a r i f f r e d u c t i o n s made J u s t b e f o r e t h e b e g i n ­ n ing of th a t f i s c a l y e a r,

t h e re v e n u e s had f a l l e n o f f

w h i l e t h e e x p e n s e s o f t h e Government h a d n o t d i m i n i s h e d p ro p o rtio n ately . F ollow ing th e p a n ic in th e f a l l d eclin ed s t i l l

fu rth er.

o

In s p ite

o f 1873 t h e r e v e n u e s

of the severe d ep res-

■^Treas ury R e p o r t , 1 8 6 9 , p p . X I I I - X I V ; a n d 1 8 7 2 , p . XX II2B o u tw e ll, o p . c l t . , V o l. I I , p . 223; N e v in e , o p . c i t . , p . 6 9 6; a n a T r e a s u r y R e p o r t , 1 6 7 3 , p p . V, V I l T - X .

204

sio n

i n t o w h i c h t h e o o u n t r y was s i n k i n g , d e b t r e d u c t i o n

co n tin u ed .

T rea su ry p u rc h a se s of bonds f o r the s in k in g

f u n d w e r e a m ea ns by w h i c h t h e money m a r k e t was a f f o r d e d some r e l i e f . 1

A l t h o u g h g r e a t p r e s s u r e was b r o u g h t t o

b e a r upon th e a d m i n i s t r a t i o n to a n t i c i p a t e th e payment o f t h e # 2 0 m i l l i o n l o a n o f 1 8 5 8 , w h i c h w o u l d b eco m e "redeem able" tary

o r " p a y a b le "20n J a n u a r y 1 , 1874, t h e S e c re ­

c o u l d n o t s e e h i s way c l e a r l e g a l l y t o do s o .

fe lt,

also ,

He

t h a t C o n g ress must d e t e r m i n e w h e th e r t h e

i s s u e was t o b e made " p a y a b l e " o n t h e f i r s t o f t h e y e a r . 3 The a m o u n t b y w h i c h t h e d e b t waB r e d u c e d d u r i n g t h e p a n ic to r e l i e v e th e strin g e n c y was r e l a t i v e l y

in th e m ark et, how ever,

sm a ll and i n c i d e n t a l .

Even d u r i n g t h e

d e p r e s s i o n , d e b t r e d u c t i o n was c a r r i e d on p r i m a r i l y f o r its

own s a k e .

R ichardson urged th e need f o r g r e a t econ­

omy i n t h e o p e r a t i o n s o f t h e G o v e r n m e n t a n d p r o p o s e d t h e le v y in g of a d d itio n a l ta x e s r a t h e r than " r e s o r t

to b o r­

r o w i n g money a n d i n c r e a s i n g t h e p u b l i c d e b t " . 4

F ran cis

^ T r e a s u r y R e p o r t , 1 8 7 3 , p p . XV-XVI. ^Th e r e g i s t e r e d b o n d s w e r e " r e d e e m a b l e a t t h e p l e a s u r e o f t h e U n ite d s t a t e s " a f t e r J a n u a r y 1 , 1874; t h e coupon b o n d s — t h e g r e a t e r p a r t o f t h e i s s u e — were " p a y a b l e a t any tim e a f t e r th e 1 s t day o f J a n u a ry , 1874". T h is con­ f u s i o n o f t e r m s was a p p a r e n t l y t h e r e s u l t o f s o m e o n e ' s carelessn ess. T r e a s u r y R e p o r t , 1 8 7 3 , p p . X - X I. 5 I b l d . , p p . X -X I, X III-X V I. 4 I b i d . , pp. V III-IX .

205

E.

S p in n e r, th e T rea su rer of th e U nited S ta te s , a lth o u g h

more r e a l i s t i c at

w ith re g a rd to in c r e a s in g th e ta x burden

such a tim e,

expressed the lo n g -sta n d in g T reasury a t t i ­

t u d e t o w a r d d e b t r e d u c t i o n when h e w r o t e : The f a l l i n g o f f o f t h e r e c e i p t s , a n d t h e i n ­ c r e a s e o f e x p e n d i t u r e s , h a v e p u t a c h e c k up o n t h e r a t e p e r annum a t w h i c h t h e p u b l i c d e b t was p a i d o f f i n p r e c e d i n g y e a r s . . . E i t h e r t a x a t i o n must be i n c r e a s e d , an e x p e d i e n t t h a t can h a r d l y be th o u g h t o f , o r t h e a p p r o p r i a ­ t i o n s m u s t be k e p t l a r g e l y b e l o w t h e r e c e i p t s . O therw ise th e r a p i d r e d u c t io n of th e p u b lic d e b t w i l l be a r r e s t e d , i f n o t a b a n d o n e d . * S e c r e t a r y B r i s t o w was i n o f f i c e d u r i n g t h e d e p r e s s i o n y e a r s 1Q74 a n d 1 8 7 5 .

At t h a t tim e r e c e i p t s n a r r o w ly e x ­

ceeded ex p en d itu res.

I n 1874 i t was p o s s i b l e

to reduce

t h e d e b t by $5 m i l l i o n , ^ and I n 1 87 5 by $ 1 4 m i l l i o n . ® B risto w urged th e g r e a t e s t p o s s ib le ex p en d itu re s in order to

economy i n G o v e r n m e n t

s u s ta i n th e p u b l ic c r e d i t and p e r ­

m it r e f u n d in g o f th e d e b t a t low er r a t e s o f I n t e r e s t , p o i n t ­ i n g o u t t h a t t h e r e would be a " g r e a t e r w i l l i n g n e s s o f t h e p eo p le

t o b e a r t h e b u r d e n o f t a x a t i o n when t h e y s e e t h e

govern m ent, l i k e

th e m se lv e s, i s doing i t s

b e s t to eco n o m ize".4

*RePort of th e T r e a s u r e r of th e U n ited S t a t e s ,

p p . 293-2947 ----------------------------------------------------------^Treasury R e p o rts , 1874, p. V III. 5I b i d . , 1875, p . V II. 4 I b l d . , p . IX.

See a l s o 18 74 , pp. XVII-XVIII.

1873,

206

D u rin g 1 6 7 ^ e x p e n d i t u r e s , o t h e r th a n f o r th e p u b l i c d e b t , d e c r e a s e d by a p p r o x im a te l y #2 m i l l i o n . 1 I n t h e f i s c a l y e a r I 676 th e d e b t was re d u c e d by $29 m i l l i o n . 2 ta n t iss u e .

T a x a t i o n , ho w ever, had r e c e d e d a s an im por­

S e c re ta ry M o r r i l l , th e n in o f f i c e , c e n te re d

h i s a t t e n t i o n upon c o n t i n u a t i o n o f d e b t r e f u n d i n g and th e p r o s p e c t i v e r e s u m p tio n o f s p e c i e p a y m e n ts.

At t h i s

tim e t h e f a r m - l a b o r f o r c e s in p o l i t i c s n e g l e c t e d t h e s u b j e c t o f t a x a t i o n t o c o n c e n t r a t e t h e i r e f f o r t s upon c u r r e n c y r e f o r m and d e n u n c i a t i o n o f th e R esum ption A c t s . ^ As w i t h h i s p r e d e c e s s o r , th e m a jo r o b j e c t i v e s o f S e c r e t a r y S herm an, u n t i l 1 8 7 9 , were to c o n t i n u e th e r e f u n d ­ in g o f t h e d e b t and p r e p a r e f o r t h e day o f s p e c i e resu m p ­ tio n .

A t t h i s tim e l i t t l e

m a tte rs o f ta x a tio n .

c o n s i d e r a t i o n was g iv e n t o

I n e a c h y e a r o f S h e rm a n 's a d m i n i s t r a ­

t i o n f a i r l y s u b s t a n t i a l r e d u c t i o n s i n t h e d e b t were made, a l t h o u g h b e f o r e 1SS0 t h e s e am ounts d i d n o t f u l f i l l t h e a n n u a l r e q u i r e m e n t s o f th e s i n k i n g fund.**Tax r e f o r m made no p r o g r e s s betw een 1672 and 1879, a l t h o u g h th o s e y e a r s saw th e e s t a b l i s h m e n t o f new p o l i t i c a l

^ R e p o rt o f t h e C o m p tr o l le r o f t h e C u r r e n c y . 1 67 ^, P . 3 ^ 9 . 2T re a s u r y R e p o r t . IS 7 6 , p p . I V - V I I I . ^ R a tn e r, op. c l t . . p . 1^7. li

A c c o rd in g t o T r e a s u r y a c c o u n t i n g a t t h a t tim e , th e d e b t was r e d u c e d e a c h y e a r a s f o l l o w s : 1 6 7 7 , $ 3 0 .3 m i l l i o n ; I 6 7 S, $ 2 0 .8 m i l l i o n ; and 1879, $ 6 . 8 m i l l i o n . T r e a s u r y R e p o r t . 187 7, p . I l l ; 1678, p p . I I I - I V ; an d 1679, p .

207 p a r t i e s r e p r e s e n t i n g l a b o r and a g r i c u l t u r e .

A determ ined

b l o c o f M id w e ste rn and S o u th e r n Congressmen f o u g h t f o r , b u t fa ile d to achieve,

the r e s t o r a t i o n o f th e

income t a x .

s t e a d , C o n g r e s s i n c r e a s e d t h e t a r i f f by 1 0 p e r c e n t .

In­ D uring

the lo n g d e p re s s io n , d e b t re d u c tio n co n tin u ed w hile the r e g r e s s i v e b u r d e n o f t a x a t i o n was i n c r e a s e d . THE TARIFF AND THE DEBT The h i g h t a r i f f e n a c t e d d u r i n g t h e w a r a n d r e t a i n e d t h e r e a f t e r a t t h e e x p r e s s demand o f t h e m a n u f a c t u r i n g In terests

c o n trib u te d g re a tly

to th e continuous p le th o r a

o f Government r e v e n u e a n d h en ce f a c i l i t a t e d t h e r a p i d r e d u c ­ tio n of the d e b t.

The r e l a t i o n o f t h e t a r i f f

to th e debt

was s u c h t h a t w h i l e h i g h d u t i e s p e r m i t t e d d e b t r e d u c t i o n , t h e e x i s t e n c e o f t h e d e b t was I t s e l f an e x c u s e f o r m a i n t a i n ­ ing the high t a r i f f . It

c a n n o t b e s a i d w i t h c e r t a i n t y t h a t ha d t h e r e b e en no

d e b t th e t a r i f f b u rd en would have been l i g h t e n e d o r e l i m i n a t e d . But th e e x i s t e n c e o f a l a r g e d e b t gave a s t r o n g argum ent t o h i g h p r o t e c t i o n i s t s a n d i n d u c e d many o f m ore l i b e r a l p e r s u a ­ s io n to a c q u ie sc e in the h ig h r a t e s .

The m a i n t e n a n c e o f

h ig h d u t i e s d e p en d e d upon t h e d e b t — t h r o u g h i t s

red u ctio n —

a s a m eans b y w h i c h s u r p l u s r e v e n u e s c o u l d b e d i s b u r s e d . T h i s was a t i m e when o t h e r o u t l e t s f o r G o v e r n m e n t f u n d s w e r e f e w , f o r i t was n o t y e t i n t h e m o r e s f o r G o v e r n m e n t t o s p e n d l a r g e l y on t a n g i b l e a n d I n t a n g i b l e n a t i o n a l im p ro v e m e n ts an d o t h e r w i s e c o l l e c t and pay o u t funds f o r th e g e n e r a l w e l f a r e .

208

At t h e end o f t h e war i t was g e n e r a l l y assum ed t h a t w i t h i n a r e a s o n a b l e tim e t h e t a r i f f r a t e s , w h ich a v e ra g e d 4-7 p e r c e n t on a l l d u t i a b l e c o m m o d itie s ,* would be lo w e r e d .^ By I S 7 0 t h e b e l i e f — p e r h a p s w i s h f u l — was c u r r e n t among B r i t i s h b u s in e s s m e n and f i n a n c i e r s t h a t " th e o p i n i o n i n f a v o r o f lo w e r d u t i e s i s now t h e s t r o n g e s t i n A m erica . . . t h e s e t o f t h e c u r r e n t i s a l l a g a i n s t th e t a r i f f . " 3

Such

was t h e s t r e n g t h o f t h e p r o t e c t i o n i s t b l o c i n C o n g r e s s , how­ e v e r , t h a t t h e t a r i f f a c t o f l S tA , w i t h a l l i t s f l a g r a n c l e s , was c o n t in u e d a l m o s t w i t h o u t change u n t i l t h e g e n e r a l r e v i s i o n in r a t e s In IS 8 3 .

k

Long b e f o r e t h i s r e v i s i o n was u n d e r ta k e n

t h e a t t i t u d e to w ard t h e p r e v a i l i n g r a t e s was t h a t th e y were " t h e norm al r e s u l t s o f an e s t a b l i s h e d p o l i c y . . .

They had

c e a s e d t o be t h o u g h t o f a s t h e r e s u l t s o f war l e g i s l a t i o n . " 5 Hugh M cC ulloch, who r e g a r d e d th e t a r i f f a s " t h e most i n s i d i o u s , an d i n some r e s p e c t s t h e most u n e q u a l o f a l l t a x e s , " 6 had f o r e s e e n t h i s p e r p e t u a t i o n o f t h e h i g h im p o rt d u t i e s when he w r o t e :

* T a u s s lg , o £ . c i t . , p . I 6 7 . ^"Had t h e q u e s t i o n b een d i r e c t l y p u t to a b o s t any p u b lic man, w h e th e r t h e t a r i f f o f t h e war was t o be c o n t i n u e d , t h e a n s w e r would c e r t a i n l y have b e e n i n t h e n e g a t i v e . " I b i d . . P. 173. 3The E c o n o m is t. May 28, 1870, V o l. XXVIII, p . 6 6 2 . lL

T a u s s ig , £ £ . c l t . . p p . I 6 S - I 7 0 , 1 7 3 .

^I b l d . . p p . 169- 17 0 . ^McCulloch , £ 2 . £ i t . , p . 5 0 9 .

209

The g e n e r a l t a r i f f p o l i c y i s , I a p p r e h e n d , s e t t l e d by th e n a t i o n a l d e b t . . . The n e c e s s i t i e s o f t h e governm ent w i l l g iv e t o our m a n u f a c tu r in g i n t e r e s t s a l l th e p r o t e c t i o n th e y w i l l r e q u i r e t o s h i e l d them from d e s t r u c t i v e f o r e i g n c o m p e t i t i o n . 1 More th a n tw e n ty y e a r s l a t e r he was to o b s e rv e i n h i s memoirs: T h is much must be s a i d i n p r a i s e o f t h e U n ite d S t a t e s T a r i f f Act o f 1S62, t h a t by th e h i g h d u t i e s w hich i t Im posed, and th e t a x e s on w h isk e y , to b a c c o , e t c . , e t c . , more th a n o n e - h a l f of t h e U n ite d S t a t e s d e b t h a s b ee n p a i d . . . 2

The c o u n t r y i s . . . i n d e b t e d t o th e p r o t e c t i v e t a r i f f fo r th e r a p id re d u c tio n o f th e p u b lic d e b t . . . 3 A f t e r t h e p o s t - w a r ta x r e d u c t i o n s , n e a r l y a l l o f th e G o v ern m en t's r e v e n u e was d e r i v e d from im p o rt d u t i e s and from c e r t a i n i n t e r n a l t a x e s on co n su m p tio n g o o d s.

I t was a h i g h l y

r e g r e s s i v e t a x sy ste m i n w hich t h e f i n a l i n c i d e n c e o f th e l e v i e s was upon t h e consum er r e g a r d l e s s o f h i s a b i l i t y to p a y . 1*" I t was an uneconom ic t a x s y s te m a s w e l l , f o r i n so f a r a s t h e t a r i f f p r o t e c t e d m a n u f a c tu r e r s a n d made p o s s i b l e h ig h e r

■^See l e t t e r o f A p r i l above.

1S65» t o Henry C. C a re y , c i t e d

^M cCulloch, j2£ . c l t . . p . 4-73. 3l b l d . . p . 296. He m ig ht h a v e a d d e d , o f c o u r s e , t h a t th e h eavy e x p e n d i­ t u r e s f o r I n t e r e s t paym ents and d e b t r e t i r e m e n t e n a b le d th e T r e a s u r y t o make u s e o f l a r g e t a r i f f r e v e n u e s w hich o t h e r w i s e , u n d e r th e I n d e p e n d e n t T r e a s u r y S y stem , would have become a b u r d e n and an e m b a rra s s m e n t. k-n

" I t I s im p o s s ib le , t h a t any p e r s o n i n t h e c o u n t r y can b e f r e e from t h e b u rd e n o f o u r n a t i o n a l d e b t . Whoever e a t s fo o d o r w ears c l o t h i n g p ays a s h a r e o f t h e common t a x , w hich t h e r e f o r e f a l l s on man, woman, a n d c h i l d . " G ib b o n s, o p . c l t . . p.

210 p rices i t

a l s o cau sed a t r a n s f e r o f a p a r t o f th e consum ers'

incom e t o m a n u f a c t u r e r s e i t h e r a s a p r o f i t o r a s a s u b s id y f o r an u n n e c e s s a r y i n d u s t r y o r an o th e r w is e su b m a rg in a l u n i t i n an i n d u s t r y .

As a s u b s i d y , m o re o f t e n t h a n n o t i t

w a s s i m p l y w a s t e a n d l o s s i n t h e same way t h a t a n y o t h e r i n e f f i c i e n c y o r m isplacem ent o f c a p i t a l dency of th e h ig h e r p r ic e s

is lo ss.

t o r e d u c e demand m u s t ,

The t e n ­ i n many

c a s e s , have r e s u l t e d in h ig h e r u n i t c o s t of p ro d u c tio n , th e f u l l e s t use of p ro d u c tiv e re s o u rc e s th ere b y bein g p rev e n ted . T h e t a r i f f was t h u s a f a r m ore e x p e n s i v e t a x t h a n i t s revenue y ie ld in d ic a te d .

A lthough i t

e n f o r c e d s a v i n g on a

g r e a t p a r t o f t h e p o p u l a t i o n , most o f t h e b e n e f i t o f th e s a v i n g d i d n o t a c c r u e to t h o s e whose s a c r i f i c e

it

rep resen ted .

E v e n f r o m t h e p u r e l y e c o n o m i c p o i n t o f v i e w t h i s was e x p e n ­ s i v e B a v ln g , f o r t h e d o l l a r v a l u e s o f w hich co n su m ers were d e p r i v e d g r e a t l y e x c e e d e d t h e a m o u n t o f new c a p i t a l c r e a t e d in

the p ro c e ss.

The s u b j e c t i v e c o s t o f t h i s e n f o r c e d s a v i n g

f o r th o s e consum ers a t o r n e a r th e m arg in o f s u b s i s t e n c e w a s e n o r m o u s . - 1-

■^In 1 86 9 D a v i d A. W e l l s e s t i m a t e d t h a t t h e n e t a n n u a l sa v in g o r a d d itio n to th e p ro d u c tiv e c a p i t a l of th e n a tio n w a s n o t more t h a n $ 6 0 0 m i l l i o n . R e p o r t o f t h e s p e c i a l Com­ m is s io n e r of the Revenue, 1869, p . L i t . Of t h i s h e s a i d : r B u t when we c o n s i d e r how s m a l l , e v e n u n d e r t h e most f a v o r a b l e c i r c u m s t a n c e s , i s t h e n e t s a v i n g w h ic h a n n u a l l y a c c r u e s t o any n a t i o n a s compared w i t h t h e v a l u e o f i t s a n n u a l g r o s s p r o d u c t . . . we c a n r e a d i l y u n d e r ­ s t a n d how d i f f i c u l t i t m u s t b e , o f n e c e s s i t y , f o r a p r o d u c e r s t a r t i n g w i t h o u t c a p i t a l , t o make h i s f i r s t a c c u m u l a t i o n , a n d how a s l i g h t c h a n g e i n t h e d i s t r i b u t i o n o f t h e n e t a n n u a l p r o f i t o f t h e n a t i o n may make t o t h e m a s s e s a l l t h e d i f f e r ­ e n c e t h a t e x i s t s betw een abundance and d e f i c i e n c y , a d v a n c e ­ ment and r e t r o g r e s s i o n . " I b i d . , p . L IV .

211

W ith so c o m p l e t e l y r e g r e s s i v e a t a x s y s te m t h e b u r d e n o f s e r v i c i n g and r e d u c in g t h e d e b t f e l l d i r e c t l y upon th e a g ric u ltu ral,

l a b o r i n g , and m erchant c l a s s e s .

Unhampered

b y t a x a t i o n , w e a l t h a c c u m u l a t e d t h e m ore r a p i d l y f o r t h o s e in c o n tr o l o f I n d u s tr y and fin a n c e .

To t h e e x t e n t t h a t t h e

t a x b u r d e n was t h u s u n e q u a l l y s h a r e d ,

th e ow nership o f th e

g r o w i n g c a p i t a l o f t h e c o u n t r y g r a v i t a t e d t o w a r d t h o s e whom th e t a x system f a v o r e d . to r e t a i n

I t may b e s a i d t h a t t h e d e b t h e l p e d

an u n e c o n o m i c a n d o u t m o d e d i n s t i t u t i o n ,

nam ely, a

v i c i o u s system o f t a x a t i o n f o s t e r e d f o r th e b e n e f i t o f a few a t t h e e x p e n s e o f t h e many a n d c o n c e a l e d t o a l a r g e e x t e n t by t h e e x i s t e n c e o f t h e d e b t a n d t h e n e c e s s i t i e s o f its

m anagem ent. THE SIGNIFICANCE OF DEBT REDUCTION Debt r e d u c t i o n i s

t h e c e n t r a l p ro b le m o f d e b t m anagem ent.

The m e a n s , t h e m a n n e r , a n d t h e r a t e o f r e d u c t i o n — a n d whe­ t h e r a p u b l i c d e b t sh o u ld be re d u c e d a t a l l — have alw ays been m a tte r s o f c o n tr o v e r s y .

O pinions re g a rd in g i t

r a n g e from

o ne e x t r e m e w h i c h f a v o r s a p e r p e t u a l d e b t t o t h e o t h e r w h i c h u r g e s t h a t th e d e b t be r a p i d l y re d u c e d and e x ti n g u i s h e d . In th e l a t t e r p a r t o f the n in e te e n th century th e u su a l argum ents i n d e fe n se o f p e r p e t u a l d e b t w ere:

(l)

th a t the

burden o f I t c o n tin u a lly decreased w ith th e g rad u al d e p re c ia ­ t i o n o f t h e m onetary u n i t w hich r e s u l t s

from an i n c r e a s e i n

t h e s t o c k o f s p e c i e a n d Im provem ents I n t h e m echanism s o f exchange;

and (2) t h a t th e d e b t i s ,

i n e f f e c t , re d u c e d by th e

212

e x p a n s io n o f th e economy and th e i n c r e a s i n g w e a l t h o f th e n a tio n .*

U n d e r ly in g t h e s e arg u m en ts i s th e b e l i e f t h a t t h e

paym ent o f p u b l i c d e b t d e s t r o y s c a p i t a l and ham pers t h e d e v e lo p m e n t o f t h e c o u n t r y . T hat t h i s b e l i e f i s f a l l a c i o u s I s s e e n In th e f a c t t h a t t h e paym ent o f an I n t e r n a l l y h e l d n a t i o n a l d e b t i s sim p ly a t r a n s f e r o f c a p i t a l o r c u r r e n t s a v in g s from c e r t a i n i n d i v i d ­ u a l s t o o t h e r s and i s i n no way a d e s t r u c t i o n o f c a p i t a l . I n f a c t , so f a r a s d e b t r e d u c t i o n , t h r o u g h t a x a t i o n , in d u c e s s a v i n g s , new c a p i t a l i s c r e a t e d .

I f , h ow ever, t h e means o f

o b t a i n i n g th e r e q u i s i t e re v e n u e i s o p p r e s s i v e t o c e r t a i n c l a s s e s o r r e d u c e s th e p r o f i t s o f e n t e r p r i s e below a norm al l e v e l , th e e f f e c t th e n i s h a r m f u l. But J u s t a s i t i s sound f i n a n c e t o p r e f e r t a x a t i o n to b o r r o w in g , i t i s sound t o t a x f o r t h e p u rp o s e o f r e d u c i n g th e d e b t .

I f t h e o r i g i n a l l o a n had come from c a p i t a l and

th e t a x l e v i e d t o pay i t came from c u r r e n t incom e, c a p i t a l would t h e r e b y be r e s t o r e d t o p r o d u c t i v e u s e s , f o r t h e bond­ h o l d e r s who a r e r e p a i d may r e a s o n a b l y b e e x p e c te d t o r e i n v e s t t h e i r funds.

I f , a s i n th e c a s e o f a c a p i t a l l e v y , t h e w hole

amount o f d e b t r e d u c t i o n w ere due to a t a x on c a p i t a l , o r i f th e d e b t p a i d w ere a f o r e i g n l o a n , t h e c a p i t a l o f th e c o u n tr y would n o t b e i n c r e a s e d by t h e p r o o e s s , 2

■^Adams, P u b l i c D e b t s . p p . 2*4-1-2^6. 2 B a s t a b l e , P u b l i c F i n a n c e , p . 69&.

Yet i n e i t h e r e v e n t

213

the I n te r e s t c o s t o f the debt would be reduced.

In such cases

as th e se , however, the argument that money should be l e f t "to f r u c tify in the pockets o f the people" might have J u s t if ic a ­ tio n , depending upon the ra te o f in t e r e s t paid on the p u b lic debt compared with th a t p r e v a ilin g in the loan markets. The economic e f f e c t s o f repayment o f a r e la t iv e ly small debt are unimportant i f the taxes by which the funds are pro­ cured are "Just

and eq u ita b le." But in the redemption o f a

la rg e amount o f

debt the burdeno f ta x a tio n i s l e s s apt to be

eq u itab ly d is tr ib u te d , and r e so r t i s had to poorer and more op p ressive forms o f ta x a tio n .

When, however, the bulk o f the

revenue i s obtained through a h ighly p rogressive tax on income, the more ra p id ly the debt i s reduced the le s s i s the burden placed upon the poorer c la s s e s o f people.^There are e s p e c ia lly strong arguments for the reduction o f debt in post-war p erio d s.

At such a time the p rice l e v e l

i s h ig h , y e t i t may be a n ticip a ted th at in the course o f time p r ic e s w i l l d e c lin e .

Follow ing a war, industry has become

adjusted to high ta x e s, and co n d itio n s g en era lly are prosper­ ous.

Under such circum stances repayment i s made e a s ie r and

l e s s c o s tly for

the Government. D ollars o f d ep reciated pur­

chasing power sw ell the revenue, and a surplus i s o r d in a r ily

^Dalton, P r in c ip le s o f P u blic F inance. p. 269; Harley L. L utz, P u b lic Finance. 2d ed. (D. Appleton and Company, New York and London. 1 932), pp. 6 0 5 - 6 0 6 ; A. C. Pigou, A Study in P u blic Finance (Macmillan and Co., L td ., London, 1 9 2 8 5 ),p. 290; Simeon E. Leland, "Debt Retirement and the Budget," The American Economic Review. March 1937, V ol. XXVII, No. 1, supplement, p. S i .

£14

a v a ila b le for debt redemption.

Since the economy has adapted

to heavy ta x a tio n , and because con d ition s are prosperous, the need for rapid tax reduction i s not urgent.

At such a time

there i s a measure o f v e r ity in the saying th at "an old tax i s no tax,"^

Prudent debt management should consider taking

f u l l advantage o f such a s itu a tio n b efore changing circumstan­ ces remove the opportunity.

N ev erth eless, too vigorous a

program o f debt reduction can i t s e l f be a d e fla tio n a r y force which, i f not w isely c o n tr o lle d , amy d isru p t b u sin ess and in p

crease th e burden of the remainder o f the d e b t.-

The s iz e o f the debt in proportion to the n a tio n a l wealth and income, and the nature and extent o f the taxes le v ie d in order to reduce the d eb t, determine the e f f e c t o f debt reduction on the n a tio n a l economy.

E xcessive taxation for in te r e s t and

am ortization w i l l tend to "hamper industry and check en ter­ p r is e , thus demlnlshlng the s o c ia l d iv id e n d .11^ Up to a certa in p o in t, however, taxation for debt payment tends to stim u late savin g.

Thus, the amount le v ie d should not be so large that

th is e f f e c t i s l o s t and the tendency to save i s dim inished. T

""An old tax i s sometimes said to be no tax because i t makes no disturbance o f the sta tu s quo." S h irra s, op. c l t . . Vol. I , p. 2 2 0 . ?

Seligm an, Currency I n f la t io n , p. 6 l ; S ir Josiah Stamp, Wealth and Taxable Capacity (P. S King & Son, L td ., London, 1922), p. 179; M atsushita, Economic E f f e c t s , p. 1 6 3 ; Pigou, op c l t . . pp. 29^-295; L utz, op. c l t . . p. 607: and S h irra s, o j d , c l t . . Vol. I , p. 2 2 0 , and Vol. I I , pp. S0 5 -S 0 6 .

.

^Seligm an,

c l t . , p . S.

215

The reduction o f public debt should be so managed th at i t pro­ motes rather than reduces saving, and i t should be adjusted both to the volume and th&needs o f s a v in g .1 The consensus o f ser io u s students o f finance th at p u b lic debt should be reduced even a t the expense o f r e la t iv e ly heavy taxation appears to have continued u n t il the depression era of the 1 9 3 0 's.

In the elab orate and exh au stive study o f the B r it­

ish n a tio n a l debt made by the Colwyn Committee, whose report was rendered in

1927,

i t was stated th at "not one o f our w it­

n esses has suggested th at i t i s unnecessary to make any p ro v islon for debt redemption."

Sim ilar to the premature reduc­

tio n o f in te r n a l taxes follow in g the C iv il War was the reduction o f taxes a fte r World War I .

At both tim es i t appears that the

pressure trough t to bear for tax reduction rath er than debt payment was mainly w ithin Congress, and for p o l i t i c a l reasons.^ C la s s ic a l and n e o c la s s ic a l econom ists, w ith the notable exception o f Maithus, regarded public debt as burdensome and

■^William W ithers, Retirement o f N ational D ebts, pp. 3 0 ^"A h ealth y con d ition o f debt cr ea tio n and payment would in v o lv e a loan o f savings and a payment o f savin gs." I b id . . p. 3°S* 307.

p

Great B r ita in , Treasury., Report o f the Committee on N ational Debt and Taxation ,/with Minutes o f Evidence and App en d icesj 4 v o ls . (Mis M ajesty's S ta tio n ery O ffic e , London, 19275, Re p o rt. p. 329. See a lso p. 392. •^For a d isc u ssio n o f the controversy over th is question in Congress follo w in g World War I , see Henry George Hendricks, pie Federal Debt: 1919-1930; j| Chapter in American P u b lic Finance (Mineoform Pres s . Washington. 19335, P P . 192-199.

216 h arm ful.

Some o t h e r s , h o w e v e r , f a r i n t h e p a s t a s w e l l a s i n

t h e n i n e t e e n t h c e n t u r y , sa w no h a r m i n a n a t i o n a l d e b t , o r even favored in c r e a s in g i t

a s a means o f eco n o m ic e x p a n s i o n .

The more n o t a b l e o l d e r w r i t e r s who h e l d t h e s e v i e w s w e r e B o d l n , P e t t y , M elon, S t e w a r t , and P i n t o .

I n Germany i n t h e l a t t e r

p a r t o f t h e n i n e t e e n t h c e n t u r y D i e t ? , e l , Von S t e i n , M l c h a e l i s , a n d t o some e x t e n t A d o l f W a g n e r s t r e s s e d p e c t s o f governm ent b o rro w in g .^ real

the fa v o ra b le a s ­

N evertheless,

th ere

i s no

c o u n te rp a rt in th e p a s t f o r the p re s e n t school o f thought

w h i c h m a i n t a i n s t h a t p u b l i c d e b t may b e I n c r e a s e d a l m o s t w i t h ­ o u t l i m i t and w h ich view s th e d e b t p r i m a r i l y a s an i n s tr u m e n t o f econom ic c o n t r o l . The l a r g e d e b t r e d u c t i o n w h i c h t o o k p l a c e w i t h i n e i g h t y e a r s a f t e r t h e C i v i l W ar, a n d t h e v e r y l a r g e p r o p o r t i o n o f i t w h i c h was a c h i e v e d i n t h e f i r s t

t h r e e o f t h o s e y e a r s , was

a c c o m p l i s h e d w i t h o u t harm t o b u s i n e s s .

I n s p i t e o f d e m a n ds

i n c e r t a i n q u a r t e r s f o r m o re r a p i d t a x r e d u c t i o n a t t h e e x ­ p e n se o f d e b t r e d u c t i o n , re p a y m e n t o f a l a r g e amount o f d e b t app ears to have had a h ig h ly fav o ra b le p sy c h o lo g ic a l i n f lu ­ en ce upon b u s i n e s s i n i t i a t i v e .

Even w i t h a l l

the repaym ent

t h a t had b e e n made, h o w e v er, a t t h e end o f t h e p e r i o d w i t h w hich t h i s ab le

size.

s t u d y i s c o n c e r n e d t h e d e b t was s t i l l

of co nsider­

The p a r t i t p l a y e d i n p r o v i d i n g a n o u t l e t f o r

^ S e y m o u r E . H a r r i s , The N a t i o n a l D e b t a n d t h e New E c o ­ n o m i c s ( M c G r a w - H i l l Book Company, I n c . , New i o r k a n d L o n d o n , T3W T7 PP. 5 1 -7 1 .

217

surplus customs d u tie s was to con tin u e, and the high t a r i f f along with i t . The foregoin g co n sid eration s w ith regard to debt reduc­ tio n and ta x a tio n may a s s i s t In evalu atin g the p o lic ie s o f the Treasury from I &65 to 1S79.

Although a t th is p oin t em­

p h asis has been placed upon the ta x a tio n asp ects o f debt management, i t i s to be remembered th at currency problems were even more complexly enmeshed w ith i t .

The q uestions o f

currency co n tra ctio n and expansion and the lo n g -a n tic ip a te d resumption o f sp ecie payments bore h e a v ily upon the debtmanagement p o lic ie s o f each a d m in istra tio n ,

A c le a r concep­

tio n o f the s ig n ific a n c e o f the debt and i t s management recog­ n iz e s the fa c t th at problems o f the d eb t, ta x a tio n , and the money supply are a l l c lo s e ly in te r r e la te d and th at the mone­ tary a sp ects o f the debt are o f the h ig h est importance.

CHAPTER V III THE SINKING- FUND AS A MECHANISM FOR DEBT REDUCTION

T y p ical of the i l l u s i o n

and c o n f u s i o n which c h a r a c t e r i z e d

much o f t h e f i n a n c i a l t h o u g h t i n t h i s p e r i o d was t h e n o t i o n o f the com po u n d -in terest sin k in g fund.

I t s c o n c e p t i o n and

e n a c t m e n t i n t o l a w w e r e a s much a r e v e r s i o n t o t h e w e a k e s t a s p e c t s o f e i g h t e e n t h - c e n t u r y E uropean f i n a n c e a s were th e c r e a t i o n o f p r i n t i n g - p r e s s money a n d t h e p r o p o s a l o f v a r i o u s schem es f o r r e p u d i a t i n g t h e d e b t . co n tract,

the

As a p a r t o f t h e d e b t

s in k in g fund i s a prom ise added to th e o th e r

prom ises e x p re ssed o r im p lie d in th e o b l i g a t i o n s th em selv es a n d i n t h e l e g i s l a t i o n r e l a t i n g t o them,'*form s,

I t may t a k e many

t h e s i m p l e s t o f w h i c h i s a n a n n u a l a p p r o p r i a t i o n made

when p r a c t i c a b l e f o r t h e r e d e m p t i o n o f a p a r t o f t h e d e b t .

U nd erly in g th e s in k in g -fu n d id e a I s r e c o g n itio n o f t h e human l i m i t a t i o n s s e t upon t h e a o t s o f g o v e r n m e n t s , e s p e c i a l l y w i t h r e g a r d to d e b t paym ent, "G overnm ent, b e i n g a d m i n i s t e r e d b y men, i s n a t u r a l l y , l i k e i n d i v i d u a l s , s u b je c t to p a r t i c u l a r im p u lse s, p a s s io n s , p r e j u d i c e s , v i c e s ; o f c o u rs e to in c o n s ta n c y o f view s and m u t a b i l i t y o f c o n d u ct." A l e x a n d e r H a m i l t o n , " S e c o n d R e p o r t on t h e P u b l i c C r e d i t , " P a p e r s on P u b l i c C r e d i t , Commerce a n d F i n a n c e , e d i t e d b y SamueT, McKee, J r . , ( C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k , 1 9 3 4 ) , p p . 1 4 5 - 1 4 6 .

(218)

219

A m ore c o m p l e x a r r a n g e m e n t I s t h e

s e p a r a t e l y managed fund

t o w h i c h r e q u i r e d a n n u a l a p p r o p r i a t i o n s a r e made f o r t h e p u r c h a s e o f o b l i g a t i o n s t o be h e l d i n t h e f u n d ,

the in te r e s t

u p o n th e m t o b e u s e d f o r a d d i t i o n a l p u r c h a s e s I n s u b s e q u e n t years.

To t h i s

latter

form o f s i n k i n g fu n d a lm o s t m ag ica l

p r o p e r t i e s have som etim es been a s c r i b e d t h r o u g h t h e o p e r a ­ t i o n s o f compound i n t e r e s t .

T h i s kind- o f f u n d was made

m a n d a t o r y u n d e r t h e p r o v i s i o n s o f t h e Loan A c t o f F e b r u a r y 2 5 , 1 8 6 2 .1 THE INFLUENCE OF BRITISH SINKING-FUND THEORY Great B r i t a i n had experim ented w ith s in k in g funds e a r ly in her debt c a re e r,

tw ice w ith in a c e n tu ry d is c o v e rin g t h a t

t h e y h a d no m a g i c a l a t t r i b u t e s b y w h i c h , a u t o m a t i c a l l y a n d p ain lessly ,

t h e d e b t was e l i m i n a t e d .

e s t a b l i s h e d i n 1716, a c q u i r e d by i t

b u t a f t e r some y e a r s t h e a m o u n t

but l i t t l e

exceeded th e a d d itio n a l debt

c o n t r a c t e d by t h e G overnm ent. the

Su c h a f u n d was

By 1 73 3 t h e p l a n f o r k e e p i n g

s i n k i n g f u n d i n v i o l a t e was a b a n d o n e d .

The sc hem e was

r e v i v e d when S i r W i l l i a m P i t t c o n s o l i d a t e d t h e g r e a t mass o f B r i t i s h d eb t in 1786.^

ll2

S tatu tes.

He p u t i n t o e f f e c t a s i n k i n g - f u n d

345.

^ R o b e r t H a m i l t o n , An I n q u i r y C o n c e r n i n g t h e R i s e and P r o g r e s s , t h e Redem ption an d P r e s e n t S t a t e , an d t h e M anagem ent o f t h e Nat i o n a l Pe Ft~~o? G r e a t B r i t a i n . ( b ilp h a n t, Waugh, ai.d Innes , EdirTBurgh, 1 8 1 3 ) , pp. 9 5 - 1 0 1 .

220 s y s te m p r o p o s e d by one R i c h a r d P r i c e , a d i s s e n t i n g c le rg y m a n , who was d i s t i n g u i s h e d n o t o n l y a s a m o r a l p h i l o s o p h e r b u t a s a p i o n e e r i n a c t u a r i a l s c i e n c e . ' 1' th at a re la tiv e ly

P r ic e had dem onstrated

sm a ll a n n u a l payment a llo w e d to a c c u m u la te

a t compound I n t e r e s t w o u l d e x p u n g e a h u g e d e b t i n a few g en eratio n s.^ The f a l l a c y o f t h i s a r r a n g e m e n t w a s ,

of course,

th at

i n t i m e s o f d e f i c i e n t r e v e n u e t h e G o v e r n m e n t was i n a p o s i t io n of buying in i t s o b l ig a t io n s w h ile a t th e

same

tim e a t t e m p t i n g t o s e l l y e t a g r e a t e r amount t o r a i s e needed fu n d s .3

Under s u c h c o n d i t i o n s s i n k i n g - f u n d o p e r a ­

t i o n s m erely added to the burden o f the d e b t . ^

Contem -

^ C a r l B. G o n e , " R i c h a r d P r i c e a n d t h e C o n s t i t u t i o n o f t h e U h i t e d S t a t e s , " The A m e r i c a n H i s t o r i c a l R e v i e w , J u l y 1948, V ol. L I I I , pp. 7 S6 -7 2 8 . ^Robert H a m ilto n , o p . c l t . , p .

131.

3 "From 1 7 9 3 t o 1 8 29 t h e r e was o n l y o n e y e a r ( 1 8 1 7 ) i n w h i c h money was n o t r a i s e d b y l o a n i n o r d e r t o a i d th e sin k in g fu n d ." S h lr r a s , S cience of p u b lic Finance, V ol. I I , p . 890. ^Robert H am ilton, op. c l t . , p .

152.

821 p o ra ry stu d e n ts o f fin an ce recognized the i ll u s o r y n a tu re of t h e d e v i c e ; ' 1'

a n a e v e n t u a l l y P i t t ’ s s i n k i n g fund was ab an d o n ed p a n d r e p l a c e d b y a more r e a l i s t i c o n e , "

I b i d ., p a ssim . R icardo b e lie v e d t h a t P i t t * a sin k in g f u n d e n c o u r a g e d e x p e n d i t u r e a n d , t h e r e f o r e , Mi n s t e a d o f d im in ish in g the debt g r e a tly in cre ased i t . " The Works o f D a v id R i c a r d o , e d i t e d by J . R. M cCulloch (J o h n M u rray , L o n d o n , 18(52), " E s s a y on t h e F u n d i n g S y s t e m , " p . 5 4 5 . In h i s c o r r e s p o n d e n c e R i c a r d o w r o t e , " T h e r e i s no r e a l f u n d n o r c a n t h e r e b e w h i l e we a r e i n d e b t . " R. 0 . R o b e r t s , " R i c a r d o 's T heory o f P u b l i c D e b t s ," E conom ica. A ugust 1942, V o l . IX (n e w s e r i e s ) , p . 2 6 3 . Lora W illiam G r e n v ille p o i n t e d o u t t h a t t h e r e must be a s u r p l u s from r e v e n u e s , n o t l o a n s , t o r e d u c e d e b t ; t h a t i n t i m e o f war a s i n k i n g f u n d i s h i g h l y " i n e f f i c i e n t " ; a n d h e c o n c l u d e d , "T h e r e a l s o u r c e o f a l l e r r o r on t h e s u b j e c t , i f e r r o r i t b e , h a s been th e s p i r i t and lo v e o f sy ste m ." E s s a y on t h e S u p p o s e d A d v a n ta g e s o f a S i n k i n g Fund (Jo h n M urray. London. 1 8 2 8 ), p p . 12 - 13 , 55".~ An e l a b o r a t e a n a l y s i s o f B r i t i s h s i n k i n g fu n d e x p e r i e n c e and th e f a l s e p r i n c i p l e s o f P r i c e ' s t h e o r y i s made i n J . R. M c C u l l o c h , A T r e a t i s e o n t h e P r i n c i p l e s a n d P r a c t i c a l I n f l u e n c e o f T a x a t i o n and~~the F u n d i n g S y s t e m ( L o n gm a n , Brown, G r e e n , a n d L o n gm ans, L o n d o n , 1 8 4 5 ) , p p . 449-463 e t p a s s im . P e r h a p s “ t h e most c o n c i s e c r i t i c i s m o f P r i c e ' s compoundl n t e r e s t s i n k i n g - f u n d t h e o r y w a s made i n l a t e r t i m e s b y H e n r y C. Adams: "As l o n g a s o n e h o l d s i n m in d t h e t o t a l o f t h e d e b t a n d t h e t o t a l o f t h e am o u n t a s s i g n e d e a c h y e a r t o t h e s e r v i c e o f t h e d e b t h e w i l l n o t b e m i s l e d by s i n k i n g fund c a l c u l a t i o n s . The t h e o r y a s s u m e s t h e s i n k i n g f u n d t o be p r o d u c t i v e , w hereas i t i s n o t p r o d u c t i v e . I t i s not a p r o d u c t i v e p r o c e s s t o p a s s money f r o m o n e a c c o u n t t o a n o t h e r when b o t h a c c o u n t s b e l o n g t o t h e same p e r s o n . " The S c i e n c e o f F i n a n c e ( 1 8 9 8 ) , p . 2 6 2 . A nother l a t e r w r i t e r p o i n t e d o u t t K a t "T h e S o u t h S e a B u b b l e a n d L a w ' s M i s s i s s i p p i sc hem e e a c h h a d l i k e w i s e i n v i e w . . . t h e e x t i n g u i s h m e n t o f p u b l i c d e b t by f i n a n c i a l l e g e r d e m a i n . " G e o r g e Morgan B r o w n e , The S i n k i n g F u n d . 2 d e d . ( R o b e r t s B r o t h e r s , B o s t o n , 1 8 8 0 ) , p . 4. F r a n c i s W. H i r s t , The C r e d i t o f N a t i o n s . N a t i o n a l M o n etary Commission P u b l i c a t i o n s , (Government P r i n t i n g O f f i c e , W ashington, 1910), p . 21,

222 A l e x a n d e r H a m i l t o n , I n f u n d i n g t h e R e v o l u t i o n a r y War d e b t , was I n f l u e n c e d by c o n t e m p o r a r y B r i t i s h th e o ry .

sin k in g -fu n d

He made " t h e r e d e m p t i o n f u n d o f 1 7 9 0 a r e a l s i n k i n g

fu n d a f t e r th e E n g lis h m o d e l" ;1 and " th e s in k in g fund o f 1 7 9 5 was t h e m o s t r i g i d so u g h t to f i x

it

The la w

t h e p o l i c y w i t h r e g a r d t o t h e d e b t f o r many

y e a r s t o c o m e ." of P itt.

t h a t c o u l d be d e v i s e d .

p

H a m i l t o n was f o l l o w i n g i n t h e f o o t s t e p s

In p ro p o s in g t h i s

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p re se n t debt . . .

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fo rm o f s i n k i n g f u n d " t h e w h o le o f t h e

in a p e rio d n o t e x c e e d in g t h i r t y

y e a rs ,"

a n d f o r t h a t r e a s o n t h e f u n d s h o u l d be so c o n s t i t u t e d a s "To f i x

its

d e s t i n a t i o n u n c h a n g e a b l y , by n o t o n l y a p p r o p r i ­

a t i n g i t p e rm a n e n tly , and v e s tin g i t its

un d er th e d i r e c t i o n o f co m m issio n e rs,

i n th e m a s p r o p e r t y i n t r u s t ,

b u t b y m a k in g

f a i t h f u l a p p li c a t io n a p a r t o f th e c o n tr a c t w ith th e

c re d ito r s ." ^ A

In 1803, h ow ever, u n d e r S e c r e ta r y G a l l a t i n ,

th e

E d w ard A. R o s s , " S i n k i n g F u n d s , " P u b l i c a t i o n s o f t h e A m e r ic a n E c o n o m ic A s s o c i a t i o n , 1 s t s e r i e s , 1 8 9 2 , V o l . V lT , N os. 4 -5 , p . 351. P r i c e was e s t e e m e d by many p r o m i n e n t A m e r i c a n s b o t h f o r h i s s y m p a th y t o t h e i r c a u s e i n t h e R e v o l u t i o n a n d f o r h is w ritin g s. H a m i l t o n i s known t o h a v e u s e d P r i c e * s a c t u a r i a l t a b l e s in s e t t l i n g c la im s f o r s o l d i e r s . See C o n e , 0£ . c l t . , p p . 7 2 8 - 7 2 9 . ^ o s s , 0£ . c l t . , p . 3 6 0 . 3 A l e x a n d e r H a m i l t o n , " S e c o n d R e p o r t on t h e P u b l i c C r e d i t , " P a p e r s on P u b l i c C r e d i t . Commerce a n d F i n a n c e , p . 1 5 4 . 4. "U n d e r t h e g u i d a n c e o f h i s c l e a r i n s i g h t t h i s c o u n t r y d e p a r t e d f r o m t h e p e r n i c i o u s m e th o d s o f E n g l i s h fin a n c ie rin g ." Adam s, P u b l i c D e b t s , p . 2 6 9 .

223

s i n k i n g f u n d w as r e o r g a n i z e d ,

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G a lla tin d id n o t a tte m p t

sin k in g -fu n d l e g i s l a t i o n ,

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a s a c h e c k upon t h e S e c r e t a r y o f t h e T r e a s u r y . th e

a n d new

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" m y s t if y i n g and u s e l e s s m a c h in e ry " o f th e f o r m a l ,

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d e a l w ith t h e p ro b le m o f d e b t r e d a c t i o n . T here i s d i s c l o s e d i n th e a d m i n i s t r a t i o n o f M r. G a l l a t i n t h e t r u e p o l i c y o f d e b t p a y m e n t. I t c o n s is ts in th e e s ta b lis h m e n t o f a p erm an en t a p p r o p r ia tio n fo r th e s e r v ic e o f t h e d e b t w h ic h s h a l l be i n e x c e s s o f t h e dem ands o f c u r r e n t i n t e r e s t . But su ch a p p ro ­ p r i a t i o n n e e d n o t be 1i n v i o l a b l e ' . I t need f o r m no p a r t o f a ' p r i v a t e c o n t r a c t * , n o r be reg a rd ed a s c o n s titu tin g 'p r iv a te p ro p e rty * . A g o v e r n m e n t s h o u l d a l w a y s be a t l i b e r t y i n t i m e o f a n e m e r g e n c y t o d i v e r t m oney h e l d f o r t h e p a y m e n t o f a d e b t t o t h e s u p p o r t o f new lo a n s .1 By 1817 t h e g r o w i n g d i s i l l u s i o n m e n t w i t h t h e c o m p le x sc h em e i n E n g l a n d w as p a r a l l e l e d by t h e i n s t i t u t i o n

of a

s i m p l e s y s te m o f d e b t r e d e m p t i o n i n t h e U n i t e d S t a t e s .

The

s i n k i n g f u n d e s t a b l i s h e d i n t h a t y e a r s i m p l y p r o v i d e d #10 m illio n a n n u a lly f o r th a t p u rp o se,

th e o b l ig a t io n s a c q u ire d

t o b e c a n c e l e d a n d n o a c c r u a l s o f i n t e r e s t on th e m t o b e c o n sid e re d .

" I n t h e r e d e m p t i o n p l a n o f 1817 t h e

r e a c h e s a lm o s t th e e x tre m e o f s i m p l i c i t y common s e n s e h a d t r i u m p h e d . "

1 Ib ld . . p. 268. 2

...

s in k in g fu n d

S im p lic ity and

I n f i n a n c i n g t h e C i v i l War,

R oss, op . c l t . , pp. 383—384.

224

h o w e v e r , t h e G o v e rn m e n t r e v e r t e d t o t h e m ore c o m p le x s i n k i n g fu n d a rra n g e m e n t. DESUETUDE OF THE C IV IL WAR SINKING-FUND LAW F o llo w in g th e

s u g g e s t i o n made by S e c r e t a r y C h a s e ,

C o n g r e s s h a d p r o v i d e d i n t h e Loan A c t o f F e b r u a r y 2 5 , 1 8 6 2 , f o r th e e s t a b l i s h m e n t o f a sita k in g f u n d .

C o in r e c e i v e d i n

p a y m e n t o f i m p o r t d u t i e s w as t o b e a p p l i e d f i r s t

to I n t e r e s t

on t h e d e b t a n d t h e n “ t o t h e p u r c h a s e o r p a y m e n t o f o n e p e r c e n tu m o f t h e e n t i r e

d e b t o f t h e U n i t e d S t a t e s t o be made

w ith in each f i s c a l year . . .

w h ic h i s

t o be s e t a p a r t a s a

s in k in g fu n d ,

a n d t h e i n t e r e s t o f w h ic h s h a l l i n l i k e m a n n e r

b e a p p l i e d . " 3'

I t was a c l e a r p r o v i s i o n f o r p a y m e n t o f b o t h

p r e s e n t and f u tu r e d e b t,

and a s such i t

was a p a r t o f t h e

c o n t r a c t b e tw e e n t h e G o v e rn m e n t a n d t h o s e fr o m whom i t b o rro w e d .^

U n d e r l y i n g t h e p r o v i s i o n a p p e a r s t h e same

i l l u s i o n o n t h e p a r t o f t h e S e c r e t a r y a n d C o n g r e s s w h ic h p o s s e s s e d P r i c e and P i t t t h r e e q u a r t e r s o f a c e n t u r y b e f o r e i n E n g la n d .

I t was n o t t h e o n l y i n s t a n c e i n C i v i l War f i n a n c e ,

a s h a s been se e n ,

i n w h ic h t h e d i s p r o v e d f i n a n c i a l t e c h n i q u e s

o f e a r l i e r tim e s w ere r e v i v e d . le s s

I t w a s, o f c o u r s e ,

a far

s e r i o u s m a tte r th an t h a t o f th e is s u a n c e o f f l a t p a p e r

m oney, b u t i t

was a n o t h e r e v i d e n c e t h a t t h e e x p e r i e n c e o f t h e

p a s t was unknown o r u n h e e d e d b y t h o s e i n p o s i t i o n s o f

*1 2 S t a t u t e s .

345.

% lo ss, o p . c l t . , p . 3 8 9.

225

re s p o n sib ility * D u r i n g t h e w ar t h e s i n k i n g - f u n d c l a u s e was a d e a d le tte r;

t h e r e was no c o m p l i a n c e w i t h i t s

p ro v isio n s.

In

1 8 6 5 S e c r e t a r y M c C u llo c h e x p r e s s e d t h e m a t t e r i n s i m p l e term s?

11As l o n g a s i t

i s n e c e s s a r y f o r t h e g o v ern m en t t o

b o r r o w m oney, a n d p u t i t s sa le ,

o b l i g a t i o n s upon t h e m ark et f o r

th e p u rc h a se o f th e s e o b lig a tio n s f o r th e p u rpose o f

c r e a t i n g a s i n k i n g f u n d w o u ld h a r d l y be j u d i c i o u s . H e a n t i c i p a t e d t h a t a s u r p l u s i n t h e f o l l o w i n g y e a r w o u ld make i t f e a s i b l e t h e n t o m e e t t h e p r o v i s i o n s o f t h e la w ,

but a t

t h e same t i m e h e reco m m en d ed t h e r e p e a l o f t h e s i n k i n g - f u n d c la u se ,

f o r “t h e s a f e a n d s i m p l e way o f

d e b t i s to a p p ly d i r e c t l y re c e ip ts

to i t s o over e x p e n d itu re s ."

The a n t i c i p a t e d

sin k in g th e n a tio n a l

paym ent th e e x c e ss o f

s u r p l u s becam e a r e a l i t y

r e m a i n d e r o f M c C u l l o c h 1s t e r m ,

d u rin g th e

a n d an am o u n t o f d e b t f a r

g r e a t e r t h a n t h a t r e q u i r e d f o r t h e s i n k i n g f u n d was p a i d . T h i s was s a t i s f a c t o r y d e b t m a n a g e m e n t, a n d t h e r e h a v e b e e n no p a r t i c u l a r c o m p l a i n t t h a t t h e

te c h n ic a l p ro­

v i s i o n s o f a fo rm a l fu n d h ad n o t been p u t i n t o was o d d , h o w e v e r ,

e ffe c t.3

It

t h a t M c C u llo c h , who w as a t r a i n e d l a w y e r ,

^ T re a su ry R e p o rt.

1865, p . 37.

2 Id e m . 3R o s s , 0£ .

seem s t o

c l t . . p p . 3 8 9-390.

226

a c a r e f u l b an k er,

and a f i n a n c i e r a s s e n s i t i v e to th e r e f i n e ­

m e n t s o f c r e d i t a n d good f a i t h a s a n y t h e n l i v i n g ,

h a d no

c o m p u n c ti o n i n

ig n o rin g th e c o n tr a c tu a l n a tu re o f th e

sin k in g fund.

As a m a t t e r o f p o l i c y t h i s

s ta tu to ry

d i d no h a rm ,

fo r

t h e same am o u n t o f d e b t w ould h a v e b e e n p a i d i n e i t h e r c a s e . As a m a t t e r o f p r i n c i p l e , h o w e v e r ,

th e f o o l is h te c h n ic a l

arran g em en t sh o u ld have been s e t up, f o r a lth o u g h th e b e l i e f in i t s

e f f i c a c y was - u n e n l i g h t e n e d ,

i t was a p a r t o f t h e b a r ­

g a i n w h ic h t h e G o v e rn m e n t a s b o r r o w e r h a d e n t e r e d i n t o a n d w h i c h t h e S e c r e t a r y was b o u n d t o a ssu m e some few l e n d e r s , le a st,

w o u ld w a n t kept.-*'

Had C o n g r e s s f o l l o w e d h i s

at

sugges­

t i o n and r e p e a l e d th e c l a u s e — so lo n g a s t h e p u b l i c w e l f a r e w as i n n o way s e r i o u s l y im p ro p e r l e g i s l a t i o n

c o n c e r n e d — i t w o u ld h a v e b e e n

in th e

same s e n s e t h a t t h e r e p e a l ,

d u r in g t h e w ar, o f th e p r o v is io n f o r th e c o n v e r t i b i l i t y o f t h e g r e e n b a c k s was r e p r e h e n s i b l e .

To c r i t i c i z e

M c C u llo c h

in t h i s r e s p e c t i s b u t to be rem in d e d o f h i s a b l e , c o n sc ie n tio u s,

a n d c o u r a g e o u s m anag em ent o f t h e d e b t i n

o t h e r b ro a d e r w ays.

1

When t h e s i n k i n g - f u n d p r o v i s i o n w as made p a r t o f t h e l a w i n 1 8 6 2 , " i t was a f o r m a l n o t i c e t o a l l p e r s o n s who s h o u l d l o a n t o t h e G o v e r n m e n t, o f i t s f u t u r e I n t e n t i o n , and c o n s t i t u t e s a c o n t r a c t as b in d in g as any can e v e r be made b e tw e e n i t a n d t h e p e r s o n s who h a v e l o a n e d t o t h e G o v e rn m e n t s i n c e t h a t d a t e . " B a n k er* s M ag azin e, A p r i l 1 8 8 6 , V o l . XL, p . 7 2 5 . "

22?

THE REVIVAL, OPERATION, AND REINTERPRETATION OF THE SINKING-FUND LAW The s i n k i n g - f u n d c l a u s e , p r a c t i c a l l y f o r g o t t e n , was r e ­ membered by S e c r e t a r y B o u t w e l l , 1 who, soon a f t e r h i s a c c e s ­ s i o n to o f f i c e , e s t a b l i s h e d th e f u n d . were f i r s t made f o r I t on May 1 1 , 1S69.

P u r c h a s e s o f bonds 2

I t was h i s I n t e n t i o n

t h a t th e fu nd r e p r e s e n t co m p lia n c e w ith th e s t a t u t e from th e b e g i n n in g o f h i s own te rm o f o f f i c e , f o r he d i d n o t f e e l t h a t h e was o b l i g e d " t o make any p r o v i s i o n f o r t h a t tim e t h a t e l a p s ­ ed a f t e r th e p a s s a g e o f th e a c t and p r e v i o u s to th e commence­ ment o f th e p r e s e n t a d m i n i s t r a t i o n . " - ^

Bonds p u r c h a s e d w ith

a d d i t i o n a l s u r p l u s r e v e n u e s beyond th e r e q u i r e m e n t s o f th e fu n d were p l a c e d i n a s p e c i a l f u n d , w h ile th e S e c r e t a r y recom ­ mended t o C o n g re s s t h a t t h e s e and a l l f u t u r e p u r c h a s e s be added to th e s i n k i n g fu nd " u n t i l th e g r o s s amount s h a l l con­ s t i t u t e a fu n d e q u a l t o t h a t w h ich would hav e b e e n c r e a t e d i f t h e r e h a d been no d e l a y in th e e x e c u t i o n o f t h e la w . " ^

B o u t-

w e l l was aw are o f th e i l l u s o r y n a t u r e o f th e scheme a s Con­ g r e s s had e n a c t e d i t , b u t he f e l t t h a t th e Government was bound to u n d e r t a k e i t .

He l a t e r w ro te o f t h i s p a r t i c u l a r

debt-m anag em ent p o l i c y :

^"Ross, p p . c l t . . p . 3 9 0 . ^ R e p o rt o f t h e T r e a s u r e r o f th e U n ite d S t a t e s . I S 6 9 , p . 2 3 C “^ ^T r e a s u r y R e p o r t . 1669, p . X I I I , ^Idem .

228 The s t e p t h a t I t h e n t o o k was i n o b e d i e n c e t o t h e l a w , a n d n o t fro m a n y g r e a t f a i t h i n t h e w isdom o f t h e S i n k i n g Fund p o l i c y , n o r w as i t fr o m a n y f e a r t h a t t h e G o v e rn m e n t c o u l d n o t p a y i t s d e b t s w h e t h e r a S i n k i n g F und was o r was n o t c r e a t e d . The f a i t h o f t h e G o v e rn m e n t h a d b e e n p l e d g e d to a p a r t i c u l a r p o l i c y and I th o u g h t t h a t th e ob­ s e r v a n c e o f t h a t p o l i c y was b o t h w i s e a n d J u s t . 1 In th e R e fu n d in g

A ct o f J u ly

1*4-, 1S7°> t h e s i n k i n g - f u n d

a r r a n g e m e n t was som ew hat s i m p l i f i e d , changed.

a lth o u g h n o t fu n d a m e n ta lly

T h is l e g i s l a t i o n p r o v id e d t h a t b onds a c q u i r e d f o r th e

f u n d s h o u l d be r e c o r d e d a n d t h e n c a n c e l e d a n d d e s t r o y e d a n d t h a t t h e a m o u n t o f i n t e r e s t t h a t w o u ld h a v e a c c u m u l a t e d o n th e m

e a c h y e a r s h o u l d be a d d e d t o t h e y e a r l y

q u irem en t.

A c le a r

sin k in g -fu n d r e -

s t a t e m e n t o f t h e f u n d was e s p e c i a l l y

d e s i r e d " n o t o n l y a s a m a t t e r o f c o r r e c t a c c o u n t i n g b u t m ore e s p e c i a l l y f o r t h e I n f o r m a t i o n o f t h e p e o p l e t h a t t h e y may s e e e x a c t l y how t h e s i n k i n g f u n d h a s i n c r e a s e d , a n d t o w h a t e x t e n t a n d how f a r i t

i s r e d u c i n g t h e debt.''^

T h e re a fte r in each

a n n u a l T re a su ry r e p o r t a p p e a re d a c o n c is e s ta te m e n t o f th e f u n d 's s t a t u s and i t s

p r o g r e s s d u rin g th e y e a r .

By t h e en d o f f i s c a l 1 S 7 2 t h e a m o u n t o f b o n d s p u r c h a s e d b y t h e T r e a s u r y was so f a r i n e x c e s s o f t h e s i n k i n g - f u n d r e ­ q u i r e m e n t s t h a t t h e r e h a d b e e n no t e s t o f t h e f e a s i b i l i t y o f su c h a d e v ic e in g iv in g s u p p o rt to th e p u b lic c r e d i t . its

S in ce

i n c e p t i o n i n 1 8 6 9 some $ 9 9 m i l l i o n h a d b e e n p u r c h a s e d

^ B o u tw e ll, R e m in is c e n c e s . V o l. I I ,

pp. 137-138.

^16 S t a t u t e s . 2 7 2 . -^C o n g r e s s i o n a l G l o b e . M -lst. C o n g . 2d S e s s . , J u l y 1 , 1 8 7 0 , p . 5070.

229

f o r t h e f u n d a n a $17 3 m i l l i o n i n a d d i t i o n t o t h i s h a d b e e n a c q u i r e d , ' 1' The a t t i t u d e

to w a rd th e

s in k in g fu n d of th e S e c r e t a r i e s

who f o l l o w e d B o u tw e 11 v a r i e d c o n s i d e r a b l y ,

R i c h a r d s o n s i m p ly

c a r r ie d out th e p o lic y of h is p re d e c e s s o r.

Wlndom t o o k a

v e r y s t r i c t v iew o f t h e m a t t e r , b e l i e v i n g t h a t t h e Im p o s e d upon h im " t h e i m p e r a t i v e d u t y t o s in k in g fu n d ,"

th a t i t s

s ta tu te s

tak e c a r e of th e

r e q u i r e m e n t s w e re " s e c o n d o n l y t o

t h e p a y m e n t o f I n t e r e s t on t h e p u b l i c

d e b t,"

and t h a t " I t ta k e s

preced en ce o f a l l o th e r a p p r o p r i a t i o n s . D u r i n g

th e f i s c a l

y e a r 187 5 , h o w e v e r , fe w b o n d s c o u l d b e p u r c h a s e d b e l o w p a r , a n d t h e S e c r e t a r y was n o t a l l o w e d t o p a y m o r e .

T h is Im passe

w as b r o k e n by t h e A c t o f M arch 3 , 1 8 7 5 , b y w h ic h C o n g r e s s p e r m i t t e d him t o c a l l i n a n d r e d e e m f i v e - t w e n t i e s f o r s i n k i n g fu n d p u rp o s e s .

N e v e r t h e l e s s , n o t enough bonds w ere p r e s e n te d

f o r p a y m e n t b e f o r e J u n e 30 t o m e e t t h e f u l l r e q u i r e m e n t o f t h e fu n d f o r t h a t y e a r , 2 S e c r e t a r y M o r r i l l had o c c a s io n in h i s a n n u a l r e p o r t to r e v ie w th e o p e r a t io n s o f th e

s i n k i n g f u n d fro m J u l y 1 8 6 2 t o

J u n e 1 8 7 6 , and i n d o i n g so showed, f o r t h e p e r i o d t h a t d e b t r e d u c t i o n had e x c e e d e d t h e r e q u i r e m e n t s o f t h e fund, b y $223 m illio n .

He c o n c l u d e d :

^ T r e a s u r y R e p o r t . 1 8 7 2 , p . IX , 2 T r e a s u r y R e p o r t . 1875, p . X. 3 I b l d . . p p . X -X I.

230

I t c a n t h e r e f o r e be s a i d , a s a m a t t e r o f f a c t , t h a t a l l o f th e p le d g e s and o b l i g a t i o n s o f t h e G o v e rn m e n t t o make p r o v i s i o n f o r t h e s in k in g fu n d and th e c a n c e l l a t i o n o f th e pub­ l i c d e b t h a v e b e e n f u l l y met a n d c a r r i e d o u t . T h i s was a som ew hat m o re l i b e r a l v i e w i n t h a t i t s t r e s s th e y e a rly n e c e s s ity o f bonds fo r

th e fu n d ,

if

d id not

o f a c q u i r i n g a p a r t i c u l a r am o u n t

t h e f u n d w e r e t o r e m a in i n v i o l a t e .

S e c r e t a r y S h e rm an t o o k an ev en m ore l i b e r a l a t t i t u d e . F o llo w in g th e c r i s i s of fis c a l

o f 1873,

s u r p l u s r e v e n u e s t o t h e en d

1879 w e re n o t s u f f i c i e n t t o m e e t t h e f u l l r e q u i r e -

m e n ts o f t h e f u n d .

O

B e sid e s t h i s ,

t h e T r e a s u r y was u n d e r t a l c i n g t o p r e p a r a tio n f o r re s u m p tio n . f o r a s in k in g fund w h ile o b s e r v e r s to

s e l l bonds f o r sp e c ie in

The o d d i t y o f b u y i n g i n b o n d s

s e l l i n g o t h e r bonds led

suggest th a t

s h o u l d be s u s p e n d e d , " 3

u n d e r S h e r m a n 's d i r e c t i o n

" th e c la im s o f th e

some

s i n k i n g fu n d

I n s te a d o f d o in g t h i s ,

it

was h e l d

p r o p e r t o c r e d i t re d e e m e d g r e e n b a c k s a n d f r a c t i o n a l c u r r e n c y to

t h e f u n d a n d a ssu m e them t o b e a r a h y p o t h e t i c a l r a t e o f

5 - p e r c e n t w h i l e so h e l d , 4

T h is m e re ly a m e li o r a te d th e

1 T re a s u ry R e p o r t, 1876, pp.

K -X .

2

Y et in th e l a s t f o u r o f th e s e y e a r s o f s in k in g - f u n d d e f i c i e n c i e s t h e p u b l i c c r e d i t was i m p r o v i n g , and t h e r e f u n d i n g o f t h e d e b t was c a r r i e d on a t s u c c e s s i v e l y l o w e r ra te s of in te re s t. ^R oss,

opi,

c l t . , p p . 393-394,

4 .■Idem TrmremePMaL. s u r y R e p o r t . 1 8 7 7 . pF . ■■■um mm;• a n d w

pp. I l l - I V ; and 1879, p . I v .

IV: * 1 8 7 8 .9

231

a n n u a l d e f i c i e n c i e s w h i c h w e re a l l o w e d t o a c c u m u l a t e u n t i l la rg e

s u r p l u s r e v e n u e s b e t w e e n 1880 a n d 18 82 w ip e d th em

o u t.* As S herm an c o n c e i v e d t h e m a t t e r , w e r e t o b e made " o u t o f t h e m e n t . 1,2

He b e l i e v e d

th a t i f

s i n k i n g - f u n d p a y m e n ts

s u r p lu s re v e n u e s o f th e g o v ern ­ in

some y e a r s t h e f u l l r e q u i r e ­

m e n ts o f t h e f u n d w e re n o t m e t , b u t t h a t i n o t h e r y e a r s t h e d e f i c i e n c y w e re made u p ,

"The r e q u i r e m e n t s o f t h e s i n k i n g

f u n d la w h a v e b e e n s u b s t a n t i a l l y o b s e r v e d . " ^ th is

In te rp re ta tio n ,

Sherm an I n s i s t e d ,

S u b je c t to

t h e l a w s h o u l d be s t r i c t l y a d h e r e d , t o ,

and he u rg e d " th e im p o rta n c e o f m e e tin g

t h e o b l i g a t i o n s c r e a t e d by t h e s e a c t s . " 4 o f h is p o lic y to Ig n o re th e

I t w as n o t a p a r t

s i n k i n g f u n d a s M c C u llo c h h a d

done.

1Ib ld ..

1880, p .

IV; 1 8 8 1 , p p .

Ill-IV ;

and 1882, p .

IV .

2 I b i d . , 1879, p . V I I I . 5 I b i d . . 1 8 8 0 , p . IV . 4 I b i d . , 1879, p . V I I I . V o l. I I , p p . 8 7 6 -8 7 7 .

See a l s o S h e rm a n , R e c o l l e c t i o n s ,

232

COMMON SENSE AND THE SINKING FUND S h e r m a n 's c o n s t r u c t i o n lo n g a f t e r h i s

o f th e sin k in g -fu n d

term o f o f f i c e

in th e T re a s u ry .

la w p r e v a i l e d T hat i t

was

" c o n s o n a n t w i t h common s e n s e a n d sound finance"'** i s a p p a r e n t . I t d id n o t , h o w ev er, r e p r e s e n t a s t r i c t

f u l f i l l m e n t o f th e

c o n t r a c t b e tw ee n th e G overnm ent and i t s

c re d ito rs .

w as i n it. its

The f a u l t

t h e la w I t s e l f r a t . e r t h a n i n t h e a d m i n i s t r a t i o n o f

A l l t h a t t h e S e c r e t a r i e s o f t h e T r e a s u r y c o u l d do u n d e r p r o v i s i o n s was t o r e d u c e t h e d e b t by t h e am ount t h a t

su rp lu s rev en u es p e rm itte d . a p p ro p ria tio n to

th e s in k in g fu n d a c la im upon th e rev en u e

p r i o r in Im p o rta n c e to

th a t of o th e r a p p ro p ria tio n s ,

h a v e g i v e n m ore v a l i d i t y le g is la tio n .^

I f C o n g r e s s h a d made t h e a n n u a l

It is

it

m ig h t

to th e c o n t r a c t u a l n a t u r e o f th e

e a s y to

su p p o se, h ow ever,

r e d u c t i o n o f some o t h e r d e s i r e d a p p r o p r i a t i o n r e s o r t w o u ld be h a d t o b o r r o w i n g ,

th a t i f

a

w e re t h r e a t e n e d ,

and t h e p o s i t i o n

of th e

d e b t w o u ld be i n no way i m p r o v e d t h r o u g h t h e o p e r a t i o n s o f th e fund under such c ir c u m s ta n c e s . T h is h a s been th e

e x p e r i e n c e w i t h t h e f o r m a l m e c h a n ism

o f su ch f u n d s , n o t o n ly d u r i n g and a f t e r th ro u g h o u t h i s t o r y .

t h e C i v i l W ar, b u t

T h e i r n a t u r e c a n h a r d l y be made c o n s i s ­

t e n t w ith p r a c t i c a l f i s c a l p o l ic y in tim e s of d im in ish e d

■^Hoss, o p . c l t . , 2 Ib id .,

p . 393.

p p . 3 9 3-395.

233 revenues.

It

is

t h i s f a c t t h a t m akes t h e

o f t h e f o r m a l s i n k i n g f u n d an I l l u s i o n .

stric t

re q u ire m e n ts

What t h e e s t a b l i s h ­

m e n t a n d c o n t i n u a n c e o f s u c h a f u n d may do t o e n h a n c e t h e p u b l i c c r e d i t u n d e r f a v o r a b l e c i r c u m s t a n c e s i s m ore t h a n c o u n t e r b a l a n c e d try t h e p r a c t i c a l f a i l u r e

o f th e

arran g em en t

w hen t h e G o v e r n m e n t ’ s c r e d i t m o st n e e d s s u p p o r t . has re p e a te d ly

shown t h a t i t

f i n a n c i e r s who w ould r e l y sa id th a t

is a fa lse

upon i t .

"no f i n a n c i a l t a s k h a s

le d to c o s t ly m is ta k e s ,

as th e

E x p erien c e

a id to th o se

P r o f e s s o r R oss h a s w e ll

so b e f o o l e d s t a t e s m e n a n d

sin k in g o f p u b lic

d e b t." ^ *

U n d e r t h e c l e a r and s i m p l e p l a n o f d e b t r e d u c t i o n w h ic h G a l l a t i n a d v o c a te d — a p erm an en t a p p r o p r ia tio n

fo r debt

r e d u c t i o n w h ic h i n tim e o f e m e r g e n c y may be d i v e r t e d t o o t h e r n e e d s — t h e a d v a n t a g e s o f t h e f o r m a l s i n k i n g f u n d may be had w ith o u t i t s

d isa d v a n ta g e s.

T h is s im p le s o r t o f fu n d ,

w hen s u s p e n d e d I n t i m e o f e m e r g e n c y , a u t o m a t i c a l l y m akes a v a ila b le ta x a tio n .

a d d i t i o n a l f u n d s b e f o r e r e s o r t i s h a d t o new As S h i r r a s h a s p o i n t e d o u t ,

th is is a b e n e fit

e n jo y e d by a c o u n tr y w h ic h s y s t e m a t i c a l l y r e d u c e s i t s

1I b l d . , p . 396. 2 S c ie n c e o f P u b l i c F in a n c e . V o l. I I ,

p.

854.

p

d e b t . 6'

CHAPTER IX

THE EXEMPTION 01' GOVERNMENT SECURITIES FROM TAXATION To many p e o p l e i t

seem ed u n j u s t t h a t t h e b u r d e n o f

d e b t s e r v i c e a n d d e b t r e d u c t i o n w as n o t s h a r e d b y t h e w e a l t h and in c o m e w h i c h t h e G o v e r n m e n t 's o b l i g a t i o n s re p re se n te d .

n.s i t w as g e n e r a l l y c o n c e i v e d , o n t h e b a s i s

of ju d ic ia l In te rp re ta tio n s,

S t a t e s and m u n i c i p a l i t i e s d i d

n o t have th e power to t a x e i t h e r th e p r i n c i p a l o r th e i n t e r e s t o f th e F e d e ra l d e b t.

T h u s t h e d e b t b e ca m e e n t i r e l y

f r e e o f t a x a t i o n u pon t h e t e r m i n a t i o n o f t h e i n h e r i t a n c e t a x I n 1 870 an d t h e incom e t a x i n 1 8 7 2 . When, u p o n t h e s u g g e s g t io n o f S e c r e ta r y B o u tw e ll, C o n g r e s s made t a x e x e m p t a l l b o n d s

■ ^ftetner, A m e ric a n T a x a t i o n , p p . 2 0 , 6 7 - 6 8 , 7 0 , 7 7 n , 8 6 , 128-135. The in co m e t a x w as a d o p t e d i n t h e A c t o f A u g u s t 5 , 1 8 6 1 (1 2 S t a t u t e s . 3 0 9 ) . In co m e f r o m U n i t e d S t a t e s s e c u r i t i e s w a s f a v o r e d w i t h t h e s p e c i a l lo w r a t e o f 1 . 5 p e rc e n t. T h i s p r e f e r e n c e w as c o n t i n u e d u n t i l p a s s a g e o f t h e A c t o f J u n e 3 0 , 1 8 6 4 ( 1 3 S t a t u t e s . 2 8 1 ) , w hen t a x r a t e s w e r e made t h e same f o r a l l incom e r e g a r d l e s s o f i t s so u rce. 2 T reasu ry R e p o rt. 1869, p . 17.

(234)

235

a u t h o r i z e d by th e R e fu n d in g Act o f 1 8 7 0 ,1 i t e s t a b l i s h e d a p o l i c y w hich c o n tin u e d u n t i l th e t h e Se c o nd L i b e r t y L o a n a n d t h e Aar I . 2

l i m i t e d exem ptions o f

s u b s e q u e n t l o a n s o f ’For I d

B u t t h e d e b t b u r d e n was n o t a s e x t r e m e l y s h i f t e d

a s many o p p o n e n t s o f t a x e x e m p t i o n a s s e r t e d . fe a tu re other

inducem ents,

or le s s

favorable

G o v e r n m e n t , w o u ld h a v e b e e n n e c e s s a r y l o a n s , and th e

W ithout t h i s term s

to t h e

to n e g o t i a t e th e

d i r e c t b u r d e n o f d e b t would have b e e n co n ­

sid erab ly g re a te r. THE TAX-K3CEMPTI0N CONTROVERSY The d e s i r e

of in v e s to r s fo r the tax -ex em p tio n p r o v i­

s io n a p p e a rs t o have been due, w ithout i t

in p a r t,

to th e fe a r th a t

F e d e r a l and S t a t e t a x a t i o n m i g h t a t some t i m e

become c o n f i s c a t o r y . ^

Both th e a d v a n ta g e s and d i s a d v a n t a g e s

When t h e b i l l was b e i n g d e b a t e d i n C o n g r e s s , S e n a t o r S h e r m a n e x p l a i n e d t h a t t h e b o n d s s h o u l d be made e n t i r e l y t a x e x e m p t b e c a u s e t h o s e h e l d i n E u r o p e v/ould be f r e e f r o m t a x a t i o n an y w ay , incom es u n d e r 1 1 ,0 0 0 were a l r e a d y ex em p t, t h e b o n d s t h e n h e l d b y n a t i o n a l b a n k s w e r e t a x a b l e , an d i n t h e o p i n i o n o f t h e F i n a n c e C o m m i t t e e t h e a m ou n t o f t a x e s r e c e i v e d w o u l d be r e l a t i v e l y s m a l l c o m p a r e d w i t h t h e g a i n _ t o th e Government i n b e in g a b l e t o s e l l th e bonds a t a low er r a t e . C o n g r e s s i o n a l G l o b e . 4 1 s t C o n g . , 2d L e s s . , F e b ru a ry 28, 1870, p . 1591. £ Love, F e d e r a l F i n a n c i n g , p p . 218-219. "Should a governm ent r e s e r v e t h e r i g h t to t a x i t s own b o n d s , t h e u n c e r t a i n t y a t t a c h i n g t o s u c h p r o p e r t y w o u l d d e p r e s s i t s p r i c e . . . I t m a y be s a i d t h a t t h e p u r c h a s e r s pay t h e i r ta x in th e enhanced p r ic e th e y pay for the bond." Adams, P u b l i c L e h t s , p p . 2 2 2 - 2 2 3 . U n d e r some c i r c u m s t a n c e s t a x a t i o n b y t h e i s s u i n g g o v e r n m e n t may be a f o r m o f p a r t i a l r e p u d i a t i o n . S h i r r a s , S c ien c e o f T u b lie F in a n c e . V ol. I I , p . 863.

236

o f t a x exem ption were o v e re m p h asiz ed

I t was,

certain ly ,

a

f a r l e s s i m p o r t a n t m a t t e r a t a t i m e when t h e S t a t e s r e l i e d a l m o s t e n t i r e l y on t h e p r o p e r t y t a x ,

and b e f o r e

th e perm anent

a d o p t i o n o f an income t a x by t h e F e d e r a l G o v e r n m e n t an a s p e c t o f debt-m anagem ent p o l i c y , a s ig n if ic a n t issue

in

it

as

became, n e v e r t h e l e s s ,

the c o n tr o v e r s y betw een v a r i o u s

c l a s s e s and i n t e r e s t s . One o f t h e d e m a n d s w h i c h t h e f a r m i n g a n d w a g e - e a r n i n g c l a s s e s made a s t h e y f o u n d e x p r e s s i o n f o r t h e i r

view s i n

p o l i t i c a l o r g a n i z a t i o n was f o r t a x a t i o n o f G o v e r n m e n t b o n d s . 3 S tro n g o p p o s itio n to th e jo u rn alistic

e x e m p t i o n was a l s o e x p r e s s e d by t h e

r e p r e s e n t a t i v e s o f v a r i o u s c o m m erc ial and

fin an cial in te re s ts , lis h e d w ealth,

f o r i t was m a i n l y i n d i v i d u a l s o f e s t a b ­

and f i n a n c i a l i n s t i t u t i o n s w i t h c o n s e r v a t i v e

p o r t f o l i o s , whose i n t e r e s t s w e r e f a v o r e d by t h i s f e a t u r e

of

R o b e r t A. Love i s o f t h e o p i n i o n t h a t t h e i n f l u e n c e o f t a x e x em p tio n on th e s a l e o f bonds h a s p r o b a b l y been o v e r ­ e s t i m a t e d , b u t t h a t a t t h e b e g i n n i n g o f a war " t h e e x e m p t i o n may . . . re m o v e o b s t a c l e s t o p u r c h a s i n g b y a c t i n g a s a n i n s u r ­ a n c e a g a i n s t f u t u r e t a x e s o f un kn o w n p r o p o r t i o n s . " He s a y s , h o w e v e r, " S in c e t h e bonds a r e s o l d on a o n e - p r i c e b a s i s , i t a p p e a r s t h a t t h i s s i t u a t i o n w ould l o g i c a l l y r e s u l t i n a p o r t i o n o f th e p u r c h a s e r s e n jo y in g a s u r p l u s over and above the n e c e s s a ry inducem ent. For t h i s re a s o n a l l o f th e g o v e rn ­ m e n t’s l o s s i s n o t e f f e c t i v e i n produe i n - d e s i r e d r e s u l t s . A c c o r d i n g l y , t a x e x e m p t i o n and p r o g r e s s i v e t a x a t i o n a r e d e c i d e d l y n o t t o be c o n s i d e r e d a s t e a m - m a t e s . " Op. c i t . , p p . 21 9, 2 l 9 n , and 22 0n. V ol.

2L u t z , P u b l i c F i n a n c e , I I , pp. 799-801.

p.

580;

3 B u c k , The A g r a r i a n C r u s a d e , p .

a nd S h i r r a s , 89.

op.

c it.,

237

the d e b t.

I n t h e Com mercial and F i n a n c i a l C h r o n i c l e o b j e c ­

t i o n w a s made t o t h e p r o v i s i o n o f t h e R e f u n d i n g ^.ct w h i c h exem pted Government o b l i g a t i o n s so rt."

1

"from t a x a t i o n o f every

The same o p i n i o n was e x p r e s s e d i n t h e m e r c h a n t *s

M agazine and Com mercial R e v ie w : T h i s u n w i s e a n d u n j u s t e x e m p t i o n w i l l do more t o make t h e n a t i o n a l d e b t o d i o u s , a n d e n d a n g e r i t s u t t e r r e p u d i a ti o n , th a n a n y th in g e ls e w hat­ ever. The c h a n g e s h o u l d , t h e r e f o r e , b e made s o o n a s i t c a n be l e g a l l y and h o n o r a b l y done.'"' Al e a d i n g c o n t e m p o r a r y

econom ist, w r itin g

i n s i s t e d t h a t t h e good f a i t h o f t h e w ith regard

to e x i s t i n g o b l i g a t i o n s ,

Government

in 1866, be p r e s e r v e d

but p o in ted out th a t

m o s t o f t h e d e b t w o u l d f a l l due w i t h i n t h r e e y e a r s and a l l o f i t w i t h i n sev en y e a r s and t h a t C ongress m ig h t r e a d i l y provide for

its

conversion in to

" b o n d s n o t ex em p t f r o m

general ta x a tio n ." B e tte r f a r to pay a high r a t e o f i n t e r e s t , i f need b e , t h a n h a v e so l a r g e a s h a r e o f i n d i v i d u a l i n ­ come, an d c o n s e q u e n t l y o f a b i l i t y t o p a y t a x e s , escape i t s p ro p er r e s p o n s i b i l i t i e s . T his i s d e s i r ­ ab le n o t o n ly as a m a tte r o f p o l i c y , in rem oving a p ro m in en t cause of p o p u la r d i s s a t i s f a c t i o n , w h i c h majr s o o n e r o r l a t e r e n d a n g e r t h e s e c u r i t y o f t h e D e b t i t s e l f b u t a s an e c o n o m i c a l a d v a n t a g e t o the co u n try .^

1A u g u s t 2 6 , 1871, V o l . X I I I , p . 261. 2 J u l y 1 8 6 5 , V o l . L I I I , p. 3 2 . (7

Amasa , / a l k e r , " T a x a t i o n o f G o v e r n m e n t B o n d s , " M e r c h a n t ’ s M a g a z i n e , J u n e 1 8 6 6 , V o l . L IV, p p . 4 0 9 - 4 1 0 . 4Ibid., p. 410.

238

The r e l a t i v e

im po rtan ce o f ta x exem ption in term s o f th e

t o t a l eco nomy w a s d e m o n s t r a t e d b y t h i s

same a u t h o r i t y :

The n a t i o n a l d e b t , i f i n c l u d e d i n t h e n a t i o n a l v a l u a t i o n w o u l d i n c r e a s e i t 20 p e r c e n t . , o r f r o m 15 t o 18 b i l l i o n s . T h is would re d u c e th e r a t e o f t a x a t i o n b y o n e - s i x t h o r 16 2 / 3 p e r c e n t . ; t h a t i s i f o n l y p r o p e r t y was t a x e d , t h e r a t e w o u l d be 2 p e r c e n t . , i f p r o p e r t y and n a t i o n a l s t o c k s , t h e r a t e w o u ld b e 1 . 6 6 . S h o u l d t h e n a t i o n a l d e b t be e x e m p t e d f r o m t a x a t i o n t h e r e w i l l b e ISO m i l l i o n s o f income t h a t w i l l go u n t a x e d , a n d t h a t . . . i s a l a r g e s h a r e o f t h e n e t In c o m e o f t h e w h o l e n a t i o n . . . THE ADVANTAGES OF TAX EXEMPTION I t was n o t , d istrib u tio n

h o w e v e r , m e r e l y a q u e s t i o n o f m ore e q u i t a b l e

of the d e b t b u rd e n .

Nor was t h e e s t a b l i s h m e n t

o f ta x exem ption as a c h a r a c t e r i s t i c o f F e d e r a l f i n a n c i n g th e achievem ent o f s e l f i s h p r e s s u r e debt-m anagem ent p o l i c i e s o f the lin g co n sid eratio n s of th is p o licy :

g ro u p s a c t i n g upon th e

Government.

in flu e n c e d the

Three c o n t r o l ­

a d o p t i o n an d c o n t i n u a t i o n

th e d i r e c t c o s t of Government b o r r o w in g ,

the

r a p i d l y ex p an d in g m arket f o r U n ited S t a t e s bonds in Europe, and the p r e j u d i c e

t o th e s o v e r e i g n t y o f th e F e d e r a l Govern­

m ent i f S t a t e s and m u n i c i p a l i t i e s were f r e e g atio n s.

Two s e p a r a t e

w hether the

to t a x i t s

q u e s t io n s were in v o lv e d :

Government s h o u ld t a x i t s

o b li­

the f i r s t ,

own o b l i g a t i o n s ;

the

s e c o n d , w h e t h e r t h e S t a t e s a n d o t h e r p o l i t i c a l u n i t s m i g h t be p e r m i t t e d to t a x

them.

1Ibid., p. 409

239

The c o s t o f b o r r o w i n g was a n i m p o r t a n t c o n s i d e r a t i o n . When S e c r e t a r y B o u t w e l l b e g a n h i s r e f u n d i n g p r o g r a m w i t h t h e o f f e r of 5 -p e rc e n t co n so ls, th eir

sale

c o u n try .^

t h e r e was w i d e s p r e a d d o u b t t h a t

c o u l d be e f f e c t e d a t t h i s

rate,

even

w ith in the

Y e t t a x a t i o n o f b o n d s w o u l d c e r t a i n l y make n e c e s ­

sa ry a higher r a t e

o f i n t e r e s t on f o r t h c o m i n g i s s u e s .

In

1865 S e c r e t a r y X cC u llo ch e s t i m a t e d t h a t i f l o c a l t a x a t i o n w e r e a l l o w e d t h e r a t e w o u l d h a v e to- b e a t l e a s t 8 p e r c e n t . Four y ears l a t e r ,

2

i n a r g u i n ^ t h e same q u e s t i o n , B o u t w e l l

p o in te d out t h a t i f

Government o b l i g a t i o n s were s u b j e c t to

lo cal tax atio n -. . . t h e a m ou n t o f t h e t a x e s i m p o s e d b y t h e l o c a l a u t h o r i t i e s w i l l be a d d e d t o t h e i n t e r e s t t h e G o v e r n m e n t w i l l be r e q u i r e d t o p a y , a nd t h u s t h e n a t i o n w i l l be c o m p e l l e d t o p r o v i d e f o r t a x e s im posed by t h e l o c a l a u t h o r i t i e s . ^ I t was e v i d e n t a l s o t h a t d i f f e r e n t t a x r a t e s

in d iffe re n t

S t a t e s would p r e v e n t a g e n e r a l d i s t r i b u t i o n o f th e d e b t except a t a very high r a te

of i n t e r e s t . 4

B o t h S e c r e t a r i e s made a c l e a r

d i s t i n c t i o n betw een S t a t e

and l o c a l t a x a t i o n and F e d e r a l t a x a t i o n i n

t h is co n n ectio n .

X c C u l l o c h s u g g e s t e d t h a t C o n g r e s s m i fch t c o n s i d e r F e d e r a l

^Com m ercial and F i n a n c i a l C h r o n i c l e , F e b r u a r y 11, L la rch 1 1 , 1 8 7 1 , V o l . X I I , p p . 1 6 7 , 2 9 2 ; a n d N a t i o n , J a n u a r y 2 7 , 1 8 7 0 , V o l . X, p p . 5 2 - 5 3 . 2

T rea su ry R e p o r t , 1665, p . 26.

5 I b i d . , 1 8 6 9 , p . XVII.

4Ibid., 1865, p. 26.

240

ta x a tio n to counterbalance p o ssib le

in eq u ities re su ltin g

from S t a t e t a x e x e m p tio n ,^ and B o u tw e ll was n o t op posed t o s u b je c tin g to the A m ericans.2

in co m e t a x i n t e r e s t o n a l l b o n d s h e l d b y

A ith b o t h Government bonds and n a t i o n a l b a n k s

f r e e from t a x a t i o n b y th e S t a t e s r e v e n u e was d e n i e d t h e m . ^

a c o n sid e ra b le source of

To c o m p e n s a t e th em a n d y e t m a i n ­

t a i n uniform in v estm en t d e s i r a b i l i t y fo r

the bonds in e v ery

S t a t e , E c C u l l o c h p r o p o s e d t h a t t h e d e b t e v e n t u a l l y be en tirely to

funded i n t o

6- p e r c e n t bonds,

t h e o w n e r s and 1 p e r c e n t on t h e

p a id to the S ta te s

a c c o rd in g to

5 p e rc e n t to

be p a i d

t o t a l o u t s t a n d i n g t o be

th e ir p o p u latio n . 4

T his

s u g g e s t i o n was n o t a c t e d u p o n . 5 J u s t a s i m p o r t a n t a s t h e m a t t e r o f c o s t was t h e f a c t t h a t E u r o p e h a d become a n i m p o r t a n t m a r k e t f o r U n i t e d S t a t e s bonds.

T his m eant t h a t bonds b e a r i n g i n t e r e s t s u f f i c i e n t to

make t h e m a t t r a c t i v e d esirab le

outside

in

t h e d o m e s t i c m a r k e t w o u l d be h i g h l y

t h e U n i t e d S t a t e s , w h e r e no t a x a p p l i e d .

T h u s , b o n d s a t t h e h i g h e r r a t e w o u l d be s o u g h t b y E u r o p e a n s , and th e re v e n u e from th e t a x w o u ld be l o s t .

^Idem . 2 I b i d . , 1869, p . X V II. rz

^Love,

ojd.

c i t .. p.

112.

^ T r e a s u r y R e p o r t . 1 8 6 7 , p . XXXI. 5 The p r o p o s e d p a y m e n t was r i d i c u l e d a s a " p u e r i l e device . . . p re p o s te ro u s . . . a b s u rd ." H e r c h a n t ’s m a g a z i n e , J a n u a r y .1868, V o l . L V I I I , P . 2 5 .

241

T h ey w o u ld b e r a p i d l y t r a n s f e r r e d t o o t h e r c o u n t r i e s , i n t o th e h an d s o f f o r e i g n c a p i t a l ­ i s t s , and t h u s a t l a s t th e b u rd e n o f p a y in g a h i g h r a t e o f i n t e r e s t w o u ld b e l e f t u p o n t h e p e o p le o f t h i s c o u n tr y w i t h o u t c o m p e n sa tio n or a lle v ia tio n . A n o th e r c o n s i d e r a t i o n w h ich s t r e n g th e n e d th e p o s i t i o n o f t h o s e who f a v o r e d t a x e x e m p t i o n r e f e r r e d e i g n t y o f t h e F e d e r a l G o v e r n m e n t. sta te d

it

to

th e s o v e r ­

S e c r e t a r y B o u tw e ll

th u s: I n a s m u c h a s t h e a b i l i t y t o b o r r o w money m ay, u n d e r some c i r c u m s t a n c e s , b e e s s e n t i a l t o t h e p r e s e r v a t i o n o f txie g o v e r n m e n t , t h e p o w e r s h o u l d n o t , e v e n i n t i m e s o f p e a c e an d p r o s ­ p e r i t y be q u a l i f i e d by an y c o n c e s s io n to th e S t a t e s o f t h e r i g h t t o t a x t h e m ean s by w h ic h th e n a t i o n a l g o v ern m en t i s m a i n t a i n e d . The r i g h t to use i t s la w f u l pow ers f r e e o f any co n ­ d i t i o n , r e s t r i c t i o n , o r c la im o f a n o t h e r , i s an e s s e n t i a l c o n d i t i o n o f s o v e r e i g n t y , and t h e n a t i o n a l g o v ern m en t s h o u ld n e v e r s u r r e n d e r o r q u a l i f y i t s pow er i n t h i s p a r t i c u l a r # *

M ore t h a n a d e c a d e l a t e r a n e c o n o m i s t w r i t i n g f o r a s t a n d a r d w o r k o n p o l i t i c a l econom y r e f e r r e d t o

th e ta x a ­

t io n o f F e d e ra l bonds by th e S ta te s a s — . . . a f o o l i s h p r o p o s i t i o n , a n d o ne t h a t w o u ld p r a c t i c a l l y g i v e t o t h e s t a t e s t h e r i g h t t o n u l l i f y b y t a x a t i o n t h e pow er o f th e n a t i o n a l g o v e r n m e n t t o b o r r o w m oney#’3 S i n c e i n t a n g i b l e p r o p e r t y w as n o t t a x e d u n d e r t h e g e n e r a l p r o p e r t y t a x , t h e m a t t e r o f e x e m p tio n fro m S t a t e

■^T r e a s u r y R e p o r t . 1 8 6 5 , p . 27# 8Ib id .. 3F o rd, p . 559#

1 8 6 9 , p . X V II# " R e f u n d i n g o f t h e P u b l i c D e b t , " V ol# I I I ,

t a x a t i o n w a s o f a c a d e m io o r p s y c h o l o g i c a l , r a t h e r t h a n fin a n c ia l,

sig n ific a n c e .

The r e a l i m p o r t a n c e o f t h e t a x -

e x e m p t i o n i s s u e came t o t h e f o r e

some f i f t y

y ears l a t e r ,

w hen F e d e r a l i n c o m e - t a x r a t e s becam e h i g h l y p r o g r e s s i v e . T hen t a x e x e m p t i o n becam e a n e x c e e d i n g l y v a l u a b l e p r i v i l e g e . W h atev er th e m e r i t s o f t a x e x e m p tio n ,

th e f a c t

re m a in e d t h a t i t p r e v e n t e d a c o n s i d e r a b l e p a r t o f th e i n t a n g i b l e p r o p e r t y an d t h e in co m e o f t h e c o u n t r y f r o m s h a rin g th e b u rd en o f th e d e b t.

CHAPTER X MONETARY POLICY IN RELATION TO p O T T M aa B m rc r

tb g w - i m q ~

D e b t m anagem en t w as u n a v o i d a b l y c o n c e r n e d w i t h s u c h m a t t e r s a s c o n t r a c t i o n and e x p a n s io n o f th e c u r r e n c y , use o f p r i v a t e

c re d it,

th e l e v e l o f p r i c e s ,

th e

th e r e l a ti o n

o f t h e v o lu m e o f money t o t h e f u n d i n g a n d r e p a y m e n t o p e r a ­ tio n s ,

th e r e t u r n to

s p e c i e p a y m e n ts, t h e r e l a t i v e b u rd e n

o f th e d e b t upon th e p e o p le ,

an d — i n m ore g e n e r a l t e r m s —

t h e f i n a n c i a l w e l f a r e o f t h e w h o le e c o n o m y .

In h ere n t in

t h i s c l o s e r e l a t i o n s h i p o f t h e d e b t , t h e money s u p p l y , t h e l e v e l o f p r i c e s was t h e p o s s i b i l i t y b urd en o f th e d e b t,

o f m o d ify in g th e

b o th Im m e d ia te ly and f o r th e f u t u r e ,

th ro u g h d e b t an d m o n e ta ry p o l i c i e s .

As t h e s e p o l i c i e s

a f f e c t e d t h e am oun t o f i n t e r e s t p a i d on t h e d e b t , a ffe c te d

and

as th ey

t h e in c o m e s o f t h e p e o p l e o u t o f w h i c h t h e i n t e r e s t

p a y m e n ts w e r e m e t, a n d a s t h e p u r c h a s i n g p o w e r o f t h e p e o p l e was i n c r e a s e d o r d e c r e a s e d , lig h te r o r h e a v ie r.

t h e b u r d e n o f t h e d e b t was made

A t t h e e n d o f t h e w ar t h e r e s u m p t i o n o f

s p e c i e p a y m e n t s was r e g a r d e d a s t h e m o s t I m p o r t a n t m ean s f o r rem o v in g th e I n f l a t i o n a r y p a r t o f th e d e b t b u rd e n . At f i r s t ,

In o r d e r to p r e p a r e f o r r e s u m p tio n ,

(243)

and

244

g r a d u a l l y t o b r i n g down p r i c e s fro m t h e r e l a t i v e l y h i g h l e v e l a t w h ic h t h e y c o n t i n u e d a f t e r

th e w ar,

a p o lic y of c a re fu l

c o n t r a c t i o n o f t h e c u r r e n c y was u n d e r t a k e n .

In c o n j u n c t i o n

w ith t h i s and w ith th e p r e lim in a r y fu n d in g o p e r a t io n s th e T reasu ry

so u g h t to m a in ta in a firm c o n t r o l o v e r th e e n t i r e

money m a r k e t .

When s t r o n g o p p o s i t i o n t o c o n t r a c t i o n d e v e l o p e d ,

C o n g ress f o r c e d th e T r e a s u r y to abandon th e p r i n c i p a l f e a t u r e of th e p o lic y ,

n a m e ly , r e d u c t i o n o f th e g re e n b a c k c i r c u l a t i o n .

W ith a c h a n g e I n t h e a d m i n i s t r a t i o n , c o n t r a c t i o n w e re r e j e c t e d .

a l l a sp e c ts of

E m p h a s is t h e n f e l l u p o n d e b t

r e d u c t io n r a t h e r th an m o n etary p o l ic y .

At tim e s c u rr e n c y

e x p a n s i o n i n s t e a d o f c o n t r a c t i o n was a l l o w e d t o t a k e p l a c e , a n d t h e g o a l o f r e s u m p t i o n was p u t i n t o

th e d i s t a n t f u t u r e .

The c o n t r a c t i o n p o l i c y h a d h e l d i n f l a t i o n

in ch ec k , b u t th e

l a t e r p o l i c i e s o f th e T re a su ry ten d ed to en co u rag e i t . A f t e r t h e g r e a t d e f l a t i o n o f p r i c e s r e s u l t i n g fro m t h e p a n i c i n 1 8 7 3 s e r i o u s a t t e n t i o n was a g a i n g i v e n t o t h e p r o b l e m o f re s u m p tio n .

T h r o u g h o u t t h e w h o le p e r i o d a h e a t e d c o n t r o v e r s y

o v e r th e q u e s tio n w h e th er to c o n tr a c t o r expand th e c u rr e n c y i n f l u e n c e d t h e G o v e r n m e n ts p o l i c i e s , h a m p e r e d a n d d e l a y e d re s to ra tio n

o f th e p a p e r c u rre n c y to i t s

f u l l v a lu e ,

and

w eakened th e p u b l i c c r e d i t . A g a in st th e back g ro u n d o f n a ti o n a l e x p a n sio n , a l t e r n a t i o n o f p r o s p e r it y and d e p re s s io n ,

th e

and th e g r e a t

i n d u s t r i a l a n d c a p i t a l d e v e l o p m e n t w h ic h was t a k i n g p l a c e , t h e p r o p e r o b j e c t i v e o f G o v e rn m e n t m o n e t a r y p o l i c y was

245 tw o f o ld *

first,

t o m i t i g a t e t h e e v i l e f f e c t s w h ic h t h e s i z e

a n d c h a r a c t e r o f t h e d e b t p r o d u c e d on t h e and c r e d i t , fin a n c ia l

and se c o n d ly ,

s ta b ility

s u p p l y o f money

so f a r a s p o s s i b l e ,

to m a in ta in

an d e n c o u ra g e sound b u s i n e s s d e v e lo p m e n t.

The c i r c u m s t a n c e s u n d e r w h i c h t h e s e o b j e c t i v e s w e re p u r s u e d , a n d t h e d e v i a t i o n s f r o m th em ,

a re c o n s id e re d in t h i s and th e

fo llo w in g c h a p te r , THE CURRENCY K i n d s a n d A m ounts o f C u r r e n c y T e c h n i c a l l y , b e t w e e n 1865 a n d 187 9 t h e c u r r e n c y o f t h e c o u n try in c lu d e d g o ld and s i l v e r c o in , c e rtific a te s , n o te s,

g o ld and s i l v e r

f r a c t i o n a l c u r r e n c y and c o in , n a t l o n a l - b a n k

c e r t if i c a t e s of d e p o sit,

n o te s (g reen b ac k s),

l e g a l - t e n d e r U n ite d S t a te s

and o th e r l e g a l - t e n d e r o b l ig a t io n s

w h ic h h a d b e e n i s s u e d d u r i n g a n d s h o r t l y a f t e r t h e w a r . As a r e s u l t o f t h e s u s p e n s i o n o f s p e c i e p a y m e n ts b y t h e b a n k s a n d t h e n by t h e T r e a s u r y , a n d t h e p a s s a g e

so o n

a f te r w a r d o f th e L e g a l-T e n d e r A ct o f F e b ru a ry 25, 1862, g o l d c o i n c e a s e d t o c i r c u l a t e a s common c u r r e n c y .

Its

t h r e e p r i n c i p a l r e m a i n i n g u s e s w e re f o r p a y m e n t o f c u s t o m s d u tie s,

p a y m e n t o f i n t e r e s t on t h e G o v e r n m e n t1 s b o n d s ,

s e ttle m e n t o f i n te r n a t i o n a l b a la n c e s. as cu rren cy ,

In s te a d o f se rv in g

g o l d was a co m m o d ity b o u g h t a n d s o l d a t a

p re m iu m i n t e r m s o f t h e G o v e rn m e n t* s p a p e r m o ney. 1873,

and

t h e s i l v e r d o l l a r was p r a c t i c a l l y an unknow n

U n til

246 c o in .1

The g o l d c e r t i f i c a t e ,

th e a c tu a l m e ta l, tra n s fe r,

b e in g a T re a su ry r e c e i p t f o r

a f f o r d e d g r e a t co n v en ien c e in h a n d lin g ,

and s t o r a g e .

L ik e t h e m e ta l i t s e l f ,

i t was s u b j e c t

t o t h e sam e e c o n o m ic l a w w h ic h o p e r a t e d t o rem o v e g o l d c o i n fro m g e n e r a l c i r c u l a t i o n . come i n t o

u se u n t i l 1 8 7 8 .^

The s i l v e r c e r t i f i c a t e

d id n o t

W a rtim e a n d p o s t - w a r l e g a l -

t e n d e r o b l i g a t i o n s o t h e r t h a n g r e e n b a c k s w e re a l l re d e e m e d o r c o n v e rte d in to 1868.

b onds and 3 - p e r c e n t lo a n c e r t i f i c a t e s by

C e r tif ic a te s of d e p o sit,

in e f f e c t r e c e i p t s

fo r

g r e e n b a c k s d e p o s i t e d w i t h t h e T r e a s u r y , w e re i s s u e d i n l a r g e d e n o m in a tio n to banks f o r u se in t h e i r s e t t l i n g c le a rin g -h o u se b a la n c e s .3

r e s e r v e s and in

Thus t h e p r i n c i p a l

c i r c u l a t i n g m e d i a t h r o u g h o u t t h i s p e r i o d w e re n a t i o n a l bank n o te s , g reen b ack s,

and f r a c t i o n a l c u rre n c y and c o i n .4

On A u g u s t 3 1 , 1 8 6 5 , when t h e d e b t was a t i t s h i g h e s t p o in t,

t h e f o l l o w i n g k i n d s a n d a m o u n ts o f c u r r e n c y a n d o f

^"Between 1797 a n d 1 8 0 6 i t h a d b e e n e x p o r t e d b y s p e c u ­ la to rs. From 1 8 0 6 t o 1 8 3 6 n o n e w e re c o i n e d . A f t e r 1836 i t s m in t r a t i o was s u c h t h a t i t commanded a p rem iu m o v e r g o l d , i t s c i r c u l a t i o n a s money t h e r e b y b e i n g p r e v e n t e d . S ee W h i t e , Money a n d B a n k i n g , p . 3 6 . 2 W illia m F . D e K n lg h t, H i s t o r y o f th e C u rre n c y o f th e C o u n try an d o f t h e L o an s o f t h e U n ite d S t a t e s fro m tE e £ a h T i e a t ~ P e r l o d~ t o 7u5ie“ ^ 7 I ^ 6 T a o ^ r H ¥ e n ' t _ p F I H t l E F ' O f f i c e , W a sh in g to n ,^189677 p . 1 0 9 . 5I b l d . . p . 108. 4 B e f o r e t h e w a r t h e c u r r e n c y o f th* U n i t e d S t a t e s h a d c o n s i s t e d o f g o ld , s u b s id i a r y m e ta l c o in s , and S t a t e bank n o te s .

24?

i n t e r e s t - b e a r i n g l e g a l - t e n a e r o b l i g a t i o n s , w h ic h t o

some

e x t e n t c i r c u l a t e d a s c u r r e n c y , w e re o u t s t a n d i n g : ^ U n i t e d S t a t e s n o t e s ( l e g a l t e n d e r ) ............. F i v e p e r c e n t n o t e s ( l e g a l t e n d e r ) ................ C o ra p o u n d -in te re st n o te s ( l e g a l t e n d e r ) . . F r a c t i o n a l c u r r e n c y ................................................... N a t i o n a l - b a n k n o t e s .................................................. S t a t e - b a n k n o t e s ..........................................................

$ 4 3 3 ,1 6 0 , 5 6 9 ,0 0 3 3 ,9 5 4 ,2 3 0 .0 0 2 1 7 ,0 2 4 ,1 6 0 .0 0 2 6 ,3 4 4 ,7 4 2 .5 1 * 1 7 1 ,3 2 1 ,9 0 3 .0 0 x 7 8 ,8 6 7 ,5 7 5 .0 0

T o t a l ...........................................

$ 9 6 0 ,6 7 3 ,1 7 9 .5 1

F o r t h e f i r s t f o u r ite m s i n t h i s t a b u l a t i o n , s e e T re a s u ry R e p o r t . 1867, p p . I l l - 1 7 . O th e r a n a ly s e s o f th e c u r r e n c y f o r a b o u t t h i s t i m e h a v e b e e n made b y M i t c h e l l and by S h u ltz and C a in e . M itc h e ll* s ta b u la tio n i s as of J u n e 3 0 , 1 8 6 5 , i s m ore m i n u t e , a n a i n c l u d e s t h e t o t a l am ount o f o u t s t a n d i n g c e r t i f i c a t e s o f I n d e b t e d n e s s and t h e 7 . 3 - p e r c e n t n o t e s , b o t h o f w h ic h h e r e c o g n i z e s a s c o n t r i ­ b u t i n g o n l y i n a m e a s u r e t o t h e v o lu m e o f c i r c u l a t i o n . See M itc h e ll, A H is to r y o f th e G reen b ack s, p . 179. In th e a n a l y s i s made by S h u l t z a n d C a i n e t h e v a r i o u s e l e m e n t s o f t h e c u r r e n c y a r e i t e m i z e d a s o f J u n e 30 f o r t h e y e a r s 1865 -1880, an d f o r s e l e c t e d y e a r s t h e r e a f t e r . See S h u ltz a n d C a i n e , F i n a n c i a l D e v e lo p m e n t o f t h e U n i t e d S t a t e s , p p . 350, 3 7 ?; H ere th e p u rp o s e i s t o p r e s e n t c u rr e n c y f i g u r e s a s o f A u g u s t 3 1 , 1 8 6 5 — t h e d a t e on w h ic h t h e d e b t was a t i t s h i g h e s t — o r a s n e a r t h a t day a s p o s s i b l e , and to t a b u l a t e o n l y t h o s e e l e m e n t s o f t h e c u r r e n c y w h ic h w e re p r i m a r i l y so u s e d o r w h i c h , t h r o u g h t h e i r e m p lo y m e n t a s b a n k r e s e r v e s , p e r m i t t e d m ore o f t h e g r e e n b a c k s t o c i r c u l a t e . The t o t a l am o u n t p a s s i n g f r o m h a n d t o h a n d a t a n y o ne t im e w as much l e s s t h a n t h e t o t a l shown h e r e , f o r l a r g e a m o u n ts w e re h e l d by b a n k s , t r u s t c o m p a n ie s, s a v in g s b a n k s , a n d i n s u r a n c e c o m p a n i e s , and m ore t h a n $ 5 6 m i l l i o n w as h e l d i n t h e T re a s u ry , a s o f O c to b e r 1, 1865. S ee R e p o r t o f t h e Comp­ t r o l l e r o f th e C u rre n c y , 1865, p p . 6 3 -6 4 . ♦As o f O c t o b e r 1 , 1 8 6 5 . R e p o r t o f t h e C o m p t r o l l e r o f th e C u rre n c y , 1865, p p . 6 3 -^ 4 . x Idem

248

In a d d i t i o n to

th e s e c u rre n c y Ite m s,

$ 1 5 0 m i l l i o n I n g o l d c o i n was o u t s t a n d i n g ,

a p p ro x im a te ly m o st o f i t

b e i n g e i t h e r h o a r d e d o r t r a d e d a s a c o m m o d i ty .1 d e p o sits,

a l s o an i m p o r t a n t fo rm o f c u r r e n c y ,

B ank

c o n trib u te d

i n c r e a s i n g l y t o t h e money s u p p l y a s t h e u s e o f b a n k c h e c k s w as e x t e n d e d a n d t h e m e c h a n is m f o r t h e i r c l e a r a n c e

an d

c o l l e c t i o n b e ca m e m ore e f f i c i e n t . B a n k -N o te . C o in ,

a n d " D e p o s i t 11 C u r r e n c y

By 1 8 6 5 S t a t e - b a n k n o t e s w e re r a p i d l y b e i n g w i t h d r a w n from c i r c u l a t i o n Ju n e 30,

a n d r e p l a c e d by n a t i o n a l - b a n k n o t e s .

$143 m i l l i o n

On

w o r t h o f th e m was s t i l l i n c i r c u l a ­

tio n ,

b u t a y e a r l a t e r t h e i r t o t a l h a d d w i n d l e d t o $20 p m illio n . I n s u b s e q u e n t y e a r s t h e few t h a t r e m a i n e d u n r e d e e m e d c o u l d h a r d l y be c o n s i d e r e d a p a r t o f t h e c u r r e n c y . The a c c o u n t o f t h i s f e a t u r e o f C i v i l War f i n a n c e ,

w h e re b y

t h e n a t i o n a l b a n k i n g s y s te m w as e s t a b l i s h e d a n d t h e S t a t e b an k n o t e s w ere ta x e d o u t o f e x i s t e n c e n a tio n a l-b a n k n o te s ,

i s w e l l know n.

t o b e r e p l a c e d by

A lth o u g h t h i s

tra n si­

t i o n f r o m o n e k i n d o f c u r r e n c y t o a n o t h e r r e s u l t e d i n some i n c r e a s e i n t h e t o t a l am ou nt i n c i r c u l a t i o n ,

it

w as l a r g e l y

a d is p la c e m e n t o f one k in d o f c u rr e n c y by a n o th e r .

1 S h u ltz and C a in e , 2 Id em .

0£ .

c l t .,

p.

350.

Much

249 m ore s i g n i f i c a n t w a s t h e r e l a t i o n s h i p o f t h e new f o r m o f t h e c u r r e n c y to th e d e b t . In t h i s r e g a r d

tw o i m p o r t a n t c h a r a c t e r i s t i c s

n a t i o n a l - b a n k n o t e s may be o b s e r v e d . s e c u r e d by b o n d s o f t h e G o v e r n m e n t . w as d e p e n d e n t u p o n t h e

T hey w e r e ,

of th e of co u rse,

M o re o v e r, t h e i r w o rth

s t a t u s o f th e p u b lic c r e d i t b o th

b e c a u s e o f t h e b o n d s w h ic h s e c u r e d t h e i r i s s u e a n d b e c a u s e , s p e c i e p a y m e n ts b e i n g a l m o s t e v e r y w h e r e s u s p e n d e d , re d e e m a b le o n ly in g re e n b a c k s , n e c e s s a r i l y d e te rm in e d

t h e y w ere

t h e c h a n g i n g v a l u e o f w h ic h

th e v a lu e o f th e n a tio n a l- b a n k n o te s .

T h e y w e r e s e c u r e d by o n e fo rm o f d e b t a n d made r e d e e m a b l e i n a n o th e r. The n a t i o n a l - b a n k n o t e s w e r e w i d e l y r e c o g n i z e d a s a fo rm o f c u rren cy f a r

s u p e r i o r to th e b e w ild e r in g a s s o r tm e n t o f

S t a t e - b a n k n o t e s w h ich th e y r e p l a c e d .

Among t h e v a r i o u s

m e r i t s a s c r i b e d t o th e m a t t h e t i m e o f t h e i r a u t h o r i z a t i o n , an Im p o rta n t one to

S e c r e t a r y C hase and th e f i n a n c i a l

c o m m i t t e e s o f C o n g r e s s was t h a t

th e n a tio n a l b an k s,

in g th e re q u ire m e n ts f o r t h e i r is s u a n c e ,

i n m e e t­

would b e o b l i g e d t o

a c q u i r e a l a r g e a m o u n t o f G o v e rn m e n t b o n d s .

C hase e s t i m a t e d

t h a t a m a r k e t f o r p e r h a p s 8250 m i l l i o n o f w a r b o n d s w o u ld th u s be c r e a t e d .3

p

A t o t a l o f 8300 m i l l i o n o f n a t i o n a l - b a n k

M a ss a c h u se tts and C a l i f o r n i a c o n tin u e d to pay th e i n t e r e s t on t h e i r b o n d s i n g o l d . T reasu ry R e p o rt, 1867, p . XXIX. 2A c t s o f F e b r u a r y 2 5 , 1 8 6 3 , a n d J u n e 3 , 1 8 6 4 ( 1 2 S t a t u t e s , 6 6 5 , a n d 13 S t a t u t e s , 9 9 . )

3 Treasury R ep o rt, 1862, pp. 1 7 -2 0 .

250 n o te s had been a u th o r iz e d ,

b u t i t w as n o t u n t i l 1 866 t h a t

t h e c i r c u l a t i o n o f t h i s am ount w as a p p r o x i m a t e d . h a d b e e n a p p o r t i o n e d by S t a t e s a c c o r d i n g t o

The n o t e s

th e ir n a tio n a l-

b a n k c a p i t a l a n d t h e i r p o p u l a t i o n a s shown i n t h e 1860 c e n ­ sus.

W ith t h e r a p i d g r o w t h o f p o p u l a t i o n i n t h e W e st,

h ow ever, a change in t h i s

a r r a n g e m e n t b ecam e n e c e s s a r y .

w as b r o u g h t a b o u t b y t h e A c t o f J u l y 1 2 ,

It

1 8 7 0 ,^ w h i c h

a u t h o r i z e d an a d d i t i o n a l $ 5 4 m i l l i o n f o r b a n k s i n S t a t e s and t e r r i t o r i e s

" h a v in g l e s s th a n t h e i r p r o p o r tio n ,"

p r o v id e d f o r th e w ith d r a w a l o f $25 m i l l i o n c irc u la tio n

fro m t h o s e S t a t e s w h e re i t

and.

in e x c e ss

e x is te d .

By 1873

n e a r l y $340 m i l l i o n w o r t h o f th e m was i n c i r c u l a t i o n . 2 Two o t h e r p r o v i s i o n s o f t h i s t h e v o lu m e a n d t h e n a t u r e

same e n a c t m e n t a f f e c t e d

o f th e c u r r e n c y .

One was f o r t h e

re d e m p tio n o f th e 3 - p e r c e n t lo a n c e r t i f i c a t e s

i n an am ount

e q u a l to th e a d d it i o n a l n a tio n a l- b a n k n o te s a u th o r iz e d . The o t h e r m et t h e d e s i r e o f C a l i f o r n i a n s f o r a b a n k - n o t e c i r c u l a t i o n e x p r e s s l y r e d e e m a b l e i n g old. c o i n .

I t p e rm itte d

t h e o r g a n i z a t i o n o f n a t i o n a l b a n k in g a s s o c i a t i o n s f o r t h i s p u rp o s e and a u th o r i z e d th e s e banks to

issu e

su c h n o t e s up

t o 80 p e r c e n t o f t h e am ou nt o f F e d e r a l b o n d s d e p o s i t e d by th e m w i t h t h e T r e a s u r y *

T h e y w e re r e q u i r e d t o k e e p a

^16 S t a t u t e s , 2 5 1 . 2

S h u ltz and C ai n e ,

o jd

.

c l t . , p. 356.

251

reserve

o f g o l d o r s i l v e r c o i n e q u a l t o 25 p e r c e n t o f t h e i r

o u tstan d in g c irc u la tio n .

The n o t e s w e r e t o Hb e a r up o n t h e i r

f a c e t h e p ro m is e o f th e a s s o c i a t i o n t o which th e y a r e i s s u e d t o p a y th em . . .

in go ld c o in of th e U n ite d S ta te s.'*

No

l i m i t was p l a c e d u p o n t h e t o t a l a m o u n t o f t h e s e n o t e s , a l t h o u g h o n e b a n k i n g a s s o c i a t i o n c o u l d i s s u e no more t h a n $1,000,000."*' m illio n

A l t o g e t h e r t h e r e were i s s u e d a b o u t 8 5 . 5

o f th e s e n a tio n a l- b a n k n o te s redeem able in g o ld .

p

An i m p o r t a n t m o d i f i c a t i o n i n t h e n a t i o n a l - b a n k i n g c u r r e n c y was i n t r o d u c e d

i n t h e ? i e s u m p t i o n A c t , ^ when a l l

t h e e x i s t i n g l i m i t a t i o n s o n t h e maximum a m ou n t o f n o t e i s s u e w ere removed and e v e r y n a t i o n a l bank m s a llo w e d to issu e notes

to any a g g r e g a t e amount, p r o v i d e d i t

w ith the T reasury th e r e q u i s i t e as

secu rity .

despcsLted

amount o f Government bo n d s

The S e c r e t a r y o f t h e T r e a s u r y was r e q u i r e d t o

r e d e e m a n a m o un t o f g r e e n b a c k s e q u a l t o 80 p e r c e n t o f t h e a d d i t i o n a l n a t i o n a l - b a n k n o t e s t h a t m ight be issu ed .,

so

long

a s more t h a n $300 m i l l i o n o f t h e g r e e n b a c k s w e r e o u t s t a n d i n g . The r e l e a s e

o f t h e n a t i o n a l banks from r e s t r i c t i o n

upon t h e

a m o u n t o f t h e i r n o t e I s s u e s d i d n o t b r i n g a b o u t an i n c r e a s e in the c i r c u l a t i o n ,

fo r d e p ressed b u s in e s s c o n d itio n s had

r e d u c e d demand f o r l o a n s a n d c u r r e n c y ,

and th e h i g h e r p r i c e

l l 6 S t a t u t e s . 251. g S h u ltz and C a in e , op. c l t . , p. 356. Act o f J a n u a r y 1 4 , 1875 (18 S t a t u t e s , 2 9 6 ) .

252

l e v e l f o r G o v e r n m e n t bone"s r e n d e r e d n o t e i s s u e l e s s a t t r a c t i v e t o many b a n k e r s . in c i r c u l a t i o n in 1875,

Some § 34 1 m i l l i o n w o r t h was

a nd o n l y § 3 0 1 m i l l i o n i n 1 8 7 7 . 1

A l t h o u g h b e t w e e n 1862 a n d 1879 t h e c u r r e n c y c o n s i s t e d o f i n c o n v e r t i b l e p a p e r p r o m is e s to pay s p e c i e a t u n specified fu ture the r e a l it,

tim e,

gold i n d i r e c t l y

standard of v a lu e.

and i t

some

c o n t i n u e d t o be

T h e r e was a f r e e m a r k e t f o r

was c o n t i n u a l l y q u o t e d i n t e r m s o f g r e e n b a c k s .

The p r i c e o f e a c h i n t e r m s o f t h e o t h e r may be s a i d t o h a v e flu ctu ated ,

b u t g o l d was f a r

t h e more s t a b l e c o m m o d i ty a n d

p a p e r p r o m i s e s t h e m o re e r r a t i c . The v a l u e o f t h e l a t t e r d e p e n d e d f r o m d a y t o how much

d a y on

men v a l u e d t h o s e p r o m i s e s and how much t h e y

d e s ire d to a c q u ire gold.

Why a p a r t i c u l a r p r i c e was p a i d

f o r g o ld a t any p a r t i c u l a r tim e i s a q u e s t i o n t h a t c an n o t O be an sw e red w ith any a c c u r a c y . I t s purchase did not n e c e s s a r i l y r e p r e s e n t a f l i g h t from p a p e r n o t e s ,

fo r gold

was n e e d e d t o meet i n t e r n a t i o n a l d e b i t b a l a n c e s a n d f o r custom s d u t i e s .

The s u p p l y o f g o l d w h i c h r e a c h e d t h e

m a r k e t came f r o m t h e m i n e s a n d f r o m t h e T r e a s u r y b o t h a s i n t e r e s t p a y m e n t s on t h e G o v e r n m e n t ' s b o n d s a n d t h r o u g h s a le s of su rp lu s h o ld in g s . 1 2

P s y c h o l o g i c a l and s p e c u l a t i v e

S h u l t z and C a i n e , o p . c i t . , S ee M i t c h e l l ,

pp.

374-375.

G o ld , P r i c e s , and Wages, p . 2 8 1 .

253 In flu e n c e s a ls o c o n trib u te d to the gold-greenback f l u c t u a ­ tio n s. A so m ewhat m i n o r ,

but n e v erth eless

sig n ifican t,

p a rt of

t h e c u r r e n c y was t h a t f o r m o f i t w h i c h c i r c u l a t e d i n d e n o m i n a ­ tio n s of less

th an one d o l l a r .

Hie C o i n a g e A c t o f 1 3 5 3 h a d

p ro v id e d f o r th e m in tin g o f f r a c t i o n a l s i l v e r c o in s o f such w i g h t t h a t t h e i r b u l l i o n v a l u e was so m ewhat l e s s t h a n face v alu e.

W ie n , d u r i n g t h e w a r ,

su fficie n tly

in term s of s i l v e r

more a s b u l l i o n latio n .

than as c o in ,

th eir

the greenbacks d e p re c ia te d

so t h a t

s i l v e r c o i n was w o r t h

s i l v e r d i s a p p e a r e d from c i r c u ­

The r e s u l t i n g d e a r t h o f s m a l l c o i n s l e d t o t h e u s e

of postage

stam ps and th en p a p e r c u r r e n c y i s s u e d i n

p arts of a d o lla r,^

The a m o un t i n c i r c u l a t i o n

i n c r e a s e d u r i n g and a f t e r th e w ar. t o t a l o u t s t a n d i n g was a l i t t l e

fractio n al

tended to

On A u g u s t 3 1 ,

1865,

the

more t h a n $26 m i l l i o n . "

The R e s u m p t i o n A c t h a d d i r e c t e d , t h e S e c r e t a r y t o m i n t s i l v e r c o in s o f th e q u a l i t y s p e c i f i e d i n th e Coinage Act o f 1 8 5 3 ( l e g a l t e n d e r t o t h e a m o un t o f f i v e d o l l a r s ) ex change them f o r t h e f r a c t i o n a l c u r r e n c y ,

and to

b u t i t was n o t

u n t i l 1877 t h a t g r e e n b a c k s h a d s u f f i c i e n t l y a p p r e c i a t e d so t h a t

silv er

i n t h e new c o i n s was w o r t h l e s s a s b u l l i o n

than as c u rren cy .^

At t h e

same t i m e t h e v a l u e o f s i l v e r

^■J. L a u r e n c e L a u g h l l n , The H i s t o r y o f B i m e t a l l i s m i n t h e U f t l t e d S t a t e s (D . A p p l e t o n a n d Company, New Y o r k , l 5 § 6 ) , p p . 5 2 -3 5 , issued. 2 T r e a s u r y R e p o r t . 1 8 6 7 , p . IV . 3 " . . . th e 345.6 g r a i n s o f s i l v e r i n th e s u b s i d i a r y c o in a g e were e q u i v a l e n t to 9 6 .9 c e n t s i n g o l d . " L a u g h l ln , op. c i t . , p. 89.

254

was d e c l i n i n g .

B e f o re 1873 t h e s i l v e r

was w o r t h more t h a n a g o l d d o l l a r ,

in the o ld d o l la r

b u t b y t h e e n d o f 1877

i t was w o r t h o n l y 9 2 c e n t s i n t e r m s o f gold.-*-

S ecretary

B r i s t o w r e s i s t e d t h e d e m a n d s made up o n h im b e f o r e t h a t t i m e to b e g in im m ediately th e i s s u e of s i l v e r c o in . p r o v i d e d f o r t h e i s s u e o f $40 m i l l i o n ,

p

The a c t h a d

a n d t h i s am o u n t was

i n c r e a s e d t o $50 m i l l i o n

in

subsequent leg islatio n .* -5

Thus

r e s u m p tio n o f payment i n

s i l v e r of t h a t p a rt of th e paper

c u r r e n c y r e p r e s e n t e d by f r a c t i o n n o t e s p r e c e d e d a n d a i d e d i n t h e p r e p a r a t i o n f o r r e s u m p t i o n o f g o l d p a y m e n t s on t h e rem ainder of th e c u rre n c y . As o n e g r e a t c u r r e n c y p r o b l e m a p p r o a c h e d s o l u t i o n i n the r e v a l o r iz a t i o n of the greenbacks, and s i l v e r c e r t i f i c a t e s

an o th er a ro se.

S ilv er

w e r e t o become an i m p o r t a n t p a r t o f

t h e t o t a l c u r r e n c y and in a l a t e r p e r i o d were to h a v e a p r o f o u n d I n f l u e n c e upon b o t h m o n etary an d f i s c a l p o l i c y . The s i l v e r c o n t r o v e r s y h a d b e g u n w e l l b e f o r e 1 8 7 9 ,

although

s i l v e r was a n i n s i g n i f i c a n t p a r t o f t h e c u r r e n c y b e f o r e t h e tu r n of the decade.

N evertheless,

its

was so v i g o r o u s l y d e b a t e d l o n g b e f o r e

e m p lo y m en t a s money the a c tu a l use o f i t

4

t h a t t h e i n v e s t i n g p u b l i c a t home a nd a b r o a d was f o r e w a r n e d and d i s t u r b e d .

t r e a s u r y R e p o r t , 1 8 7 7 , p . XXI. 2 I b i d . , 1 8 7 5 , p . XXVII. 3 Sherman, R e c o l l e c t i o n s .

Vol.

I,

pp.

539,

543.

^ H e p b u r n , H i s t o r y o f C o i n a g e and C u r r e n c y , p p . 2 9 4 - 2 9 6 .

255 The b a c k g r o u n d o f t h e c o n t r o v e r s y c a n b e b r i e f l y T h r o u g h an o v e r s i g h t i n

stated .

th e d r a f t i n g o f th e b i l l which even­

t u a l l y became t h e C o i n a g e A c t o f 1 8 7 3 , no p r o v i s i o n was made fo r th e m in tin g of stan d ard s ilv e r d o l l a r s . dem onetize th e co in ag e.

i

silv er d o lla r.

However,

It

sim ply d is c o n ti n u e d i t s

in th e R e v ised S t a t u t e s

S t a t e s , a d o p te d in Ju n e 1874,

T his d id n o t

of the U n ite a

a l l s i l v e r was l i m i t e d i n i t s

l e g a l - t e n d e r p o w e r by t h e f o l l o w i n g p r o v i s i o n : The s i l v e r c o i n s o f t h e U n i t e d S t a t e s s h a l l be a l e g a l t e n d e r a t t h e i r n o m i n a l v a l u e f o r any amount n o t e x c e e d i n g f i v e d o l l a r s i n a ny one paym ent. I n t h e same y e a r t h a t t h e C o i n a g e A c t was p a s s e d ,

the

price of s ilv e r

b r o k e b e l o w p a r i t y w i t h g o l d . T h i s was a

co n tin u atio n of

the s e c u l a r d e c l i n e w hich had begun i n A

**

1859.

When t h e B i a n d - A l l l s o n S i l v e r A c t

th e veto o f P r e s id e n t H ayes,

was p a s s e d over

th e value o f a s i l v e r d o lla r

i n t e r r a s o f g o l d was 93£ c e n t s .

By t h e

end o f t h e y e a r i t

had d eclin ed to

5 a p p r o x i m a t e l y 86 c e n t s .

com prom ise w i t h

the p o p u la r s u p p o r t e r s o f f r e e c o in a g e

silv er.

I t made t h e s i l v e r

1L au g h lln ,

d o llar f u ll

op. c l t . , p p .

T h i s a c t was

92-95.

1878 (20 S t a t u t e s , 2 5 ) .

^T reasury R ep o rt. 1878, p . XIV.

of

l e g a l te n d e r and

^ S e c tio n 3586. 3 L au g h lln , op. c l t . , p . 251. 4A c t o f F e b r u a r y 2 8 ,

a

256

p r o v i d e d f o r t h e p u r c h a s e a n d c o i n a g e o f n o t l e s s t h a n $2 m i l l i o n a n d n o t more t h a n

m i l l i o n o f s i l v e r a m onth.

the C on g ressio n al e le c tio n s th a t year " fre e d om in atin g i s s u e .

s i l v e r " was t h e

A lthough i t s p ro p o n en ts d id n o t

o b t a i n a c l e a r - c u t m andate from th e e l e c t o r a t e , apparent th a t the r e a l

s t r e n g t h of th e

In

then

i t was

s i l v e r movement was

" th e c o n v ic ti o n o f l a r g e m asses o f th e p e o p le t h a t

the

c o m m u n ity h a s n o t e n o u g h money. The p o t e n t i a l i t i e s o f e v e n t h i s l i m i t e d d i r e c t i v e

to

c o i n s i l v e r w e r e a p p a r e n t t o S e c r e t a r y Sh e rm an when h e r ec o m m e n d e d t h a t t h e t o t a l a m o u n t s h o u l d n o t e x c e e d $50 m i l l i o n s

2

. . . i t i s in d is p e n s a b le e i t h e r th a t the s i l v e r c o in be l i m i t e d i n am ount, o r t h a t i t s b u l l i o n v a l u e be e q u a l t o t h a t o f t h e g o l d d o lla r.3 No e f f o r t h a s b e e n s p a r e d t o p u t t h i s c o i n i n c irc u la tio n . Owing t o i t s l i m i t e d c o i n a g e i t h a s been k e p t a t p a r; but i t s f r e e coin ag e w o u l d so o n r e d u c e i t s c u r r e n t v a l u e t o I t s b u l l i o n v a lu e , and th u s e s t a b l i s h a s i n g l e s ilv e r sta n d ard .4 Toward t h e end o f 1 8 7 8 t h e r e was c o n c e r n t h a t t h e s i l v e r a rra n g e m e n t m ig h t hamper th e r e s u m p tio n o f s p e c ie paym ents.

The S e c r e t a r y was c a u t i o n e d t o g i v e t h e p u b l i c

^ F . W. T a u s s i g , "T he S i l v e r S i t u a t i o n i n t h e U h i t e d S t a t e s , " P u b l i c a t i o n s o f t h e A m e r i c a n E c o n o m ic A s s o c i a t i o n , 1 s t s e r . , V o l. V I I , n o . 1, J a n u a r y , 18§2, p . i l . ^ T r e a s u r y R e p o r t , 1 8 7 8 , p p . XIV-XV. gI b l d . ,

p . XV.

4 I b id . , 1879, p . XIV.

25?

t h e i r c h o i c e o f e i t h e r g o l d o r s i l v e r when n o t e s w e r e p r e s e n te d fo r redem ption,

and n o t to a tte m p t to f o r c e s i l v e r

i n t o c i r c u l a t i o n , i n t h i s way.

The new c u r r e n c y p r o b l e m —

t h a t o f th e coinage of l e g a l - t e n d e r

s i l v e r — th re a te n e d to

p r e v e n t th e s o l u t i o n o f th e l o n g - s t a n d i n g problem of resum ption,

p r o f e s s o r W hite,

in g a t t h a t tim e, r e f e r r e d

an a u t h o r i t y on money a n d b a n k ­

t o t h e B l a n d - A l l i s o n A c t a s “t h e

most m is c h i e v o u s p i e c e o f l e g i s l a t i o n t h a t c o u ld h a v e been d e v i s e d to e m b a rra ss and j e o p a r d i z e t h e I n t e n d e d r e s u m p tio n o f s p e c ie paym ents. D eposit c u rre n cy , t h a t i s ,

bank d e p o s i t s t r a n s f e r a b l e

by m ea n s o f c h e c k s , b e c a m e an i n c r e a s i n g l y i m p o r t a n t p a r t of the c u rre n c y supply.

The i n e l a s t i c n a t u r e o f t h e g r e e n ­

b a c k s and. t h e n a t i o n a l - b a n k n o t e s e n c o u r a g e d g r e a t e r u s e o f bank c h e c k s . cen ters,

The c o n c e n t r a t i o n o f p o p u l a t i o n I n u r b a n

im proved co m m u n icatio n , and c h e a p e r p o s ta g e r a t e s

a l s o f a c i l i t a t e d t h e t r a n s f e r o f b a n k d e p o s i t s by t h i s 2 means. As a r e s u l t , l e s s h a n d - t o - h a n d c u r r e n c y k a s r e q u i r e d in a g iv en p e r io d of tim e f o r th e t r a n s a c t i o n

of a p a r t i c u l a r

v o lu m e o f b u s i n e s s . A ctu ally ,

w e l l b e f o r e t h e C i v i l W ar, d e p o s i t s h a d

■^Horace W h i t e , " A f t e r S p e c i e R e s u m p t i o n — W hat?" The I n t e r n a t i o n a l R e v i e w , November 1 8 7 8 , V o l . V, p p . 8 3 3 - 6 3 5 . 2 W a l t e r E a r l S p a h r , The C l e a r i n g and C o l l e c t i o n o f C h e c k s ( T h e B a n k e r s P u b l i s h i n g C o . , New Y o r k , 1 9 2 6 ) , p . 64.

258 exceeded bank-note c u rre n c y .1 rap id ly .

A f t e r t h e war t h e y i n c r e a s e d

The e x t e n t o f t h i s r i s e

in th e t o t a l d e p o s i t s of

a l l banking o r g a n i z a t i o n s in fo llo w s

t h e U n i t e d S t a t e s was a s p (in m illio n s of d o lla rs)* 1 8 6 5 ............. . . . . $ 698.0 1 8 7 0 ......................... 1 , 0 6 4 . 5 1 8 7 5 ......................... 1 , 7 9 7 . 2 1 8 7 9 ......................... 1 , 9 4 6 . 3

T h e r e was a l a r g e p o t e n t i a l

source o f d e p o s it cu rren cy

in th e b a n k in g system in th e e a r l y y e a rs a f t e r t h e war, f o r t h e r e s e r v e s o f a l l t h e b a n k s e x c e e d e d by a b o u t o n e t h i r d the a c tu a l re s e rv e requirem ents.

On t h e b a s i s o f t h i s

excess,

a l a r g e e x p a n s i o n o f b a n k d e p o s i t s was c o n t i n u a l l y p o s s i b l e , f o r each d o l l a r o f r e s e r v e c o u ld s u p p o rt about f o u r d o l l a r s of deposit currency.

O ve r a p e r i o d o f y e a r s t h e s e

excess

r e s e r v e s s t e a d i l y d e c l i n e d u n t i l i n 1873 t h e y were f a i r l y clo se to a c tu a l req u irem en ts.^

By t h e A c t o f J u n e 2 0 ,

1874,4

h o w e v e r , b a n k i n g r e s e r v e s r e c e i v e d a t r e m e n d o u s b o o s t when i t was p r o v i d e d t h a t t h e am o u n t o f a b a n k ' s o u t s t a n d i n g n o t e s n e e d no l o n g e r be i n c l u d e d i n c o m p u t i n g t h e

reserve.

T h i s a c t i o n r e l e a s e d some $ 4 4 m i l l i o n o f g r e e n b a c k s . ®

1

Id e m .

^ I b i d ., pp. 84-85. ^ M a r g a r e t G. M y e r s , The New Y o r k Money M a r k e t . V o l . I : " O r i g i n s a n d D e v e l o p m e n t " " " ( C o l u m b i a U n i v e r s i t y p r e s s , New York, 1931), p p . 2 3 5 -2 3 6 . 4 18 S t a t u t e s , p t .

3, 1 2 3 .

®Myers, op. c l t . , pp. 2 3 5 -2 3 7 .

259

The d e v e l o p i n g u s e o f t h e b a n k c h e c k e c o n o m i z e d t h e u s e o f c u rre n c y and e n a b le d banks to t r a n s a c t t h e i r d a i l y b u s i n e s s w i t h a s m a l l e r amount o f t i l l v i d e d an e l a s t i c

money.

I t a ls o pro­

f o r m o f c u r r e n c y itfiich c o u l d e x p a n d a n d

c o n t r a c t a c c o rd in g to

the req uirem ents of b u s in e s s .

The

e f f e c t o f Government m o n e t a r y p o l i c y upon t h e volume o f d e p o s it c u rre n c y to o k p la c e through i t s

i n f l u e n c e upon b a n k

reserves. Government

D ebt

as

C urrency

The l e g a l - t e n d e r i n t e r e s t - b e a r i n g o b l i g a t i o n s s e r v e d more a s a form o f i n v e s t m e n t th a n d i r e c t l y a s c u r r e n c y . Yet th e 5 - p e r c e n t n o t e s ten d ed to e n t e r c i r c u l a t i o n

follow ­

i n g I n t e r e s t - p a v m e n t d a t e s a n d w e r e t h e n r e a b s o r b e d by b a n k s a n d i n v e s t o r s a s i n t e r e s t on t h e m a g a i n a c c ru e d # '* D e ce m b er 1 8 6 5 , h o w e v e r ,

By

t h e s e had been redeem ed o r c o n v e r te d

in to co m p o u n d -in tereat n o te s . The

c o m p o u n d -in te re st

n o te s

a s i n t e r e s t on them a c c r u e d .

te n d e d

to

c i r c u la t e

B eing e l i g i b l e

as

a

le s s

part

o f

t h e banks* r e s e r v e s , so u s e d ,

t h e l a r g e d e n o m i n a t i o n s e s p e c i a l l y were 2 th ere b y f r e e in g greenbacks f o r c i r c u l a t i o n . In th e

p o st-w a r c o n v e rsio n o p e r a t i o n s th e exchange of th e s e l e g a l t e n d e r n o t e s f o r t h e f i v e - t w e n t y b o n d s was r e g a r d e d a s a

•*'lpt,e a s u r y R e p o r t . 1 8 6 5 , p . 1 8 ; B o l l e s , F i n a n c i a l H i s t o r y . p p . 1 2 4 - 1 2 5 ; a n d Dewey, F i n a n c i a l H i s t o r y , p . 3 1 2 , M e r c h a n t * s M a g a z i n e , F e b r u a r y 1 8 6 6 , V o l . LIV, p , 12 6 ; a n d C o m m e r c i a l a n d F i n a n c i a l C h r o n i c l e , S e p t e m b e r 1 5 , 1 86 6 , V o l. I l l , p . 32T.

260 s t e p in the d i r e c t i o n of c u rre n c y c o n tr a c t i o n . one e s t i m a t e ,

by t h e

A ccording to

en d o f 18 6 5 n o t more t h a n 5 p e r c e n t o f

t h e s e were i n a c t i v e c i r c u l a t i o n . 1 redem ption o r co n v ersio n i n to

N evertheless,

th eir



b o n d s h a d t h e e f f e c t o f con ­

t r a c t i n g t h e c u r r e n c y t o a much l a r g e r e x t e n t t h a n t h e am o u n t i n d i c a t e d b y t h e i r c i r c u l a t i o n ,

for le g a l-te n d e r

n o t e s h ad t o b e draw n i n b y t h e b a n k s t o t a k e t h e p l a c e o f t h e c o m p o u n d -in te re st n o te s in t h e i r

reserves.

I t was t h i s c o n ­

s i d e r a t i o n w h i c h i n f l u e n c e d C o n g r e s s i n M a rch 186 7 a n d J u l y 1868 to a u t h o r i z e th e 3 - p e r c e n t l o a n c e r t i f i c a t e s t o be used in c o n v ersio n o f the l e g a l- te n d e r com p o u n d -in terest n o tes,

fo r the c e r t i f i c a t e s ,

u n l ik e th e f i v e - t w e n t y bonds,

could, a l s o be u s e d a s a p a r t o f t h e banks* r e s e r v e s .

T h es e

two e n a c t m e n t s , a s h a s b e e n shown, w e r e p r i m a r i l y a n t i c o n t r a c t i o n c u rre n c y m easures r a t h e r than c o n v e rs io n leg islatio n ,

a s t h e y m ight h a v e seemed.

The l a s t

c o m p o u n d - i n t e r e s t n o t e s becam e due on O c t o b e r 1 6 , Eecause of the

s u b s t i t u t i o n of the c e r t i f i c a t e s

$ 75 m i l l i o n o f t h e m ,

o f the 1868.

for

some

t h e i r e l i m i n a t i o n b o th as d e b t and as

a c t u a l and p o t e n t i a l c u r r e n c y t h u s d i d n o t r e d u c e t h e c u r r e n c y t o t a l b y t h e a m o u nt w i t h d r a w n . A n o t h e r e l e m e n t i n t h e c u r r e n c y was t h a t p a r t o f t h e s h o r t - t e r m n o n - i e g a l - t e n d e r d e b t w hich, a l t h o u ^ i i t

pp.

R e p o r t o f the C o m p tro lle r o f the Currency, 66-67.

bore

1865,

261 i n t e r e s t a n d was p r i m a r i l y a medium f o r i n v e s t m e n t , from hand to hand to

some e x t e n t ,

as i f

it

passed

were c u r r e n c y .

Some p a r t o f t h e 7 . 3 - p e r c e n t n o t e s and t h e o n e - y e a r 6 - p e r c e n t c e rtific a te s

o f i n d e b t e d n e s s w e r e u s e d i n t h i s way,

j u s t w hat volume o f them a t d i f f e r e n t e stim ate d .1

t i m e s c a n n o t be

At one p o i n t t h e 7 . 3 - p e r c e n t n o t e s h a d a c t u a l l y

b e en d i s p e r s e d to s o l d i e r s and s a i l o r s them a s p a y . ^

They w ere a l s o u s e d t o

o b l i g a t i o n s t o many c o n t r a c t o r s . ^ p a y a d e b t t h e r e was l i t t l e

w i l l i n g to a c c e p t se ttle

lon g -d eferred

To a p e r s o n who w i s h e d t o

d i f f e r e n c e w hether he s o ld a

s m a l1 -d e n o m in a tio n Government o b l i g a t i o n f u n d s o r sim ply t r a n s f e r r e d i t accept i t .

alth o u g h

to o b ta in th e needed

to a c r e d i t o r w i l li n g to

Some r e a d e r s may r e c a l l

the

s i m i l a r use

o c c a s i o n a l l y o f s m a l l - d e n o m i n a t l o n L i b e r t y bonds d u r i n g and a f t e r W o r l d War I , A n o t h e r p a r t o f t h e d e b t vdiich s e r v e d a s c u r r e n c y was th e U nited S ta te s n o te s ,

?b450 m i l l i o n o f w h i c h h a d b e e n

a u t h o r i z e d by C o n g r e s s i n 1862 and 1 8 6 3 . i n d e f i n i t e m a t u r i t y a n d b o r e no I n t e r e s t .

T h ey w e r e o f These " g r e e n b a c k s , •

a s t h e y came t o be k n ow n , w e r e l e g a l t e n d e r i n p a y m e n t o f a l l d eb ts,

p u b l i c and p r i v a t e ,

w ith in the U nited S ta te s ,

^ M i t c h e l l , H i s t o r y o f t h e G r e e n b a c k s , p . 1 7 8 f f ; and B a r r e t t , T he G r e e n b a c k s , p p 7 T 3 2 - 1 3 3 . 2 T r e a s u r y R e p o r t , 1864, p . 21. 3 Comm e r c i a l a n d F i n a n c i a l C h r o n i c l e , O c t o b e r 7 , 1 8 6 5 , V ol. I , p . 449.

262 e x c e p t d u t i e s on i m p o r t s a n a i n t e r e s t

on t h e p u b l i c d e b t .

At t h e t i m e o f t h e i r a u t h o r i z a t i o n t h e y w e r e r e g a r d e d a s a te m p o r a r y o b l i g a t i o n o f th e Government t h a t would be p r o m p tly r e p a i d a s s o o n a s t h e e x i g e n c i e s o f w a r t i m e f i n a n c e were passed.

They w e re c o n s i d e r e d a s much a p a r t o f t h e F e d e r a l

d e b t a s any o t h e r o b l i g a t i o n o f th e G overnm ent.

That they

w e r e p u r e l y a n d s i m p l y a f o r m o f f l a t money— a f o r c e d l o a n from a l l

t h e p e o p l e — a n d t h a t t h e i r i s s u a n c e was c o n t r a r y t o

th e te a c h in g s of f i n a n c ia l ex p erien ce both in t h i s co u n try and a b ro ad ,

were

se c o n d a ry c o n s i d e r a t i o n s even in

o f some who w e r e I n f o r m e d i n m a t t e r s o f f i n a n c e . *

t h e m in d s The war

e m e r g e n c y h a d b e e n t h e d o m i n a t i n g c o n s i d e r a t i o n when t h e y were i s s u e d . The r o l e econom ic l i f e ,

t o be p l a y e d by t h e g r e e n b a c k s i n t h e n a t i o n a l t h e c o n t r o v e r s i e s w h i c h t h e y e n g e n d e r e d , a nd

th e ir perp etu atio n , currency,

were not

e v en t o

t h i s day,

as a p a rt of the

f o r e s e e n when t h e y f i r s t p a s s e d f r o m h a n d

t o h a n d a s a c o n v e n i e n t medium o f e x c h a n g e ,

g rad u ally

d e p r e c i a t i n g i n te rm s o f g o l d and o f o t h e r d e s i r a b l e goods. T hese g re e n b a c k s were t h e p r i m a r y p roblem o f m o n e ta ry p o lic y in th e

post-w ar e ra .

THE RELATION OF THE INDEPENDENT TREASURY TO THE NATIONAL BANKS AND THE MONEY MARKET Two c i r c u m s t a n c e s w h i c h made t h e e f f e c t o f d e b t - m a n a g e m e n t o p e r a t i o n s on t h e money m a r k e t d i r e c t , s o m e t i m e s aw k w ard t o c o n t r o l ,

stro n g ,

were t h e n a t u r e o f t h e

and

263 In d e p e n d e n t T r e a s u r y sy ste m and t h e u n i t The T r e a s u r y w a s ,

in a very r e a l sen se,

T h e r e was no c e n t r a l b a n k .

system o f b a n k in g . its

own b a n k e r .

The G o v e r n m e n t ' s m o n e t a r y

p o l i c i e s were n e c e s s a r i l y a d a p t e d t o t h e l i m i t a t i o n s and req u irem en ts of these

in stitu tio n s.

^lie n C o n g r e s s h a d p e r m a n e n t l y e s t a b l i s h e d t h e

B idependent

T r e a s u r y i n 1 8 4 6 , ^ t h e c u m b e rso m e s y s t e m was j u s t i f i e d by t h e n a t u r e o f th e S t a t e b a n k in g system , c a t " was o f t e n

ap p lied .

p

to which th e term " w ild

The a c t c o m p l e t e l y

Government from t h e b a n k s and c o m m itted i t sp ecie.

" I t made t h e g o v e r n m e n t d i s t i n c t l y

e s s e n t i a l l y and a c t u a l l y ,

to the use o f its

req u ired th at

" a l l p u b lic

s h o u l d s a f e l y k e e p t h e p u b l i c money c o m m i t t e d t o

t h e i r charge w ithout d e p o s itin g i t

in b a n k s."4

law a l s o p e r m i t t e d th e i s s u e o f T r e a s u r y n o t e s , T rea su ry in e f f e c t ists

own b a n k e r ,

even to th e f u r n i s h i n g o f th e

p arap h ern alie of o f f i c e - r o o m . I t o fficers

s e p a ra te d the

a bank of issu e .®

S ince the i t made t h e

S tr ic t co n stru ctio n ­

of th e C o n s titu tio n 6 i n s i s t e d th a t the Independent

T r e a s u r y s y s t e m was t h e o n l y l e g a l way i n w h i c h t h e G o v e rn m e n t's fu n d s c o u ld be h a n d l e d .7

19 S t a t u t e s . 59. 2 K ln ley , Independent T re a su ry , pp. 5Ib id ..

p.

4Ib id ..

p . 43.

8-39.

42.

5I b i d . , p. 42. fi

"No Money s h a l l b e d r a w n f r o m t h e T r e a s u r y , b u t i n C o n s e q u e n c e o f A p p r o p r i a t i o n s made b y L a w ." A r t i c l e I , S e c t i o n 9 . 7

K in le y , 0£ . c l t . ,

p . 36.

264

When t h e T r e a s u r y s u s p e n d e d s p e c i e p a y m e n t s e a r l y i n 1862,

t h e most i m p o r t a n t f e a t u r e o f t h e law— t h e p r o v i s i o n

t h a t t h e T r e a s u r y r e c e i v e and d i s b u r s e o n l y negated.The

specie-*.w as

N a t i o n a l B anking A ct l i b e r a l i z e d

the

system

by p e r m i t t i n g t h e d e p o s i t w i t h n a t i o n a l b a n k s o f Government r e c e i p t s o t h e r th a n t h o s e from cu sto m s,

by p e r m i t t i n g th e

u se o f banks a s f i n a n c i a l a g e n t s o f t h e Governm ent,

a n d by

m aking n a t i o n a l - b a n k n o t e s r e c e i v a b l e a t p a r i n a l l p a r t s of th e c o u n try ,

e x c e p t f o r c u s t o m s d u t i e s a n d i n t e r e s t on

th e p u b lic d e b t.2

How C h a s e r e f u s e d

to t a k e a d v a n t a g e o f

t h e m o d i f i c a t i o n o f th e law which a llo w e d c e r t a i n w ith banks,

a n d how d u r i n g t h e e a r l y

p recip itated

the

d ep o sits

war b o r r o w i n g t h i s

s u s p e n s io n o f s p e c i e paym ents h a s been

recounted. Thus,

a t a t i m e when an e n o r m o u s F e d e r a l d e b t was i n

p ro ce ss of b ein g co n v erted , refu n d e d ,

a n d p a i d down,

g r e a t m ass o f i n c o n v e r t i b l e p a p e r money se e m e d t o

and a

d efy every

e f f o r t made t o w a r d t h e r e s u m p t i o n o f s p e c i e p a y m e n t s ,

there

loom ed i n t h e b a c k g r o u n d o f a l l t h e G o v e r n m e n t 's f i s c a l o p e r a ­ t i o n s and a l l

the a c t i v i t i e s

comm unity t h e p r i m i t i v e

o f th e b u sin e ss and f i n a n c i a l

Independent T reasu ry .

In i t s

place

t h e n a t i o n a l - b a n k i n g system m ig h t w e l l have s e r v e d e f f i c i ­ e n t l y and s a f e l y a s b a n k e r t o t h e Government,

F in ley ,

op. c l t . , pp.

^ Ib ld . . pp.

69-70.

67-68.

but

trad itio n

265

and I n e r t i a p rev en ted t h i s . su b ject

to c e r ta in

The n a t i o n a l b a n k s ,

lim itatio n s

(notably

too,

were

lack of c e n t r a l i ­

z a tio n and th e i n f l e x i b i l i t y o f t h e i r n o te i s s u e s ) ,

but they

r e p r e s e n t e d a v a s t i m p r o v e m e n t upon S t a t e b a n k i n g a n d t h e conglom eration of S ta te bank-note i s s u e s . Under th e

In d e p e n d e n t T r e a s u r y sy stem th e T r e a s u r y and

s u b - t r e a s u r i e s w e re a g r e a t money r e s e r v o i r i n t o w h i c h f lo w e d f u n d s from a l l

p a r t s of the c o u n try .

The o u t w a r d

c o u r s e o f t h e s e f u n d s was d i r e c t e d by t h e a p p r o p r i a t i o n s and a u t h o r i z a t i o n s o f C o n g re ss and th e p o l i c i e s of

the T rea su ry .

L a r g e r e c e i p t s and d i s b u r s e m e n t s ,

i n f l e x i b l e n a tu re of the cu rren cy , of

of the S e c re ta ry the

and t h e r i g i d r e q u i r e m e n t s

t h e I n d e p e n d e n t T r e a s u r y l a w , made t h e f i s c a l o p e r a t i o n s

o f t h e G o v e r n m e n t a m a j o r d i r e c t i n f l u e n c e i n t h e money m arket.

T axation,

borrow ing, m in tin g ,

spending,

and debt

p a y m e n t d i d much t o d e t e r m i n e t h e s u p p l y o f money a n d c r e d i t a v a ila b le fo r b u s in e s s t r a n s a c tio n s w ith in the c o u n try and w ith o th e r n a tio n s . T reasury reduced the

C u r r e n c y drawn i n t o

the

s u p p l y i n t h e money m a r k e t , a n d T r e a s u r y

e x p en d itu res in creased i t . Because o f t h i s ,

t h e b u s i n e s s and f i n a n c i a l l i f e

c o u n t r y was p e c u l i a r l y d e p e n d e n t u p o n t h e T r e a s u r y , b alan ce,

esp ecially at

A larg e

seasons of high b u sin e ss a c t i v i t y ,

m e a n t a t i g h t money m a r k e t and d a n g e r t o t h e many so u n d f i r m s ,

of the

solvency of

f o r t h e b a n k s c o u l d l e n d o n l y up t o t h e

lim it of th e ir reserves.

T h e s e r e s e r v e s w e r e r e d u c e d when

266 th e T reasu ry balance In c re a s e d .

To h o l d I d l e I n t h e T r e a s u r y

i n t i m e s o f s t r i n g e n c y money w h i c h o t h e r w i s e m i g h t h a v e in c r e a s e d bank r e s e r v e s ,

deprived b u sin e ss of a t l e a s t four

t i m e s a s much i n c r e d i t a c c o m m o d a t i o n n e e d e d f o r t h e c o m p l e ­ tio n of tra n sa c tio n s.

On t h e o t h e r h a n d , when a n o v e r ­

a b u n d a n c e o f c u r r e n c y and t h e r e s u l t i n g e n l a r g e d c r e d i t p y r a m i d e x e r t e d an upw ard p r e s s u r e sp ecu latio n ,

on p r i c e s and e n c o u r a g e d

T reasu ry p o lic y w ith r e s p e c t

b u r s in g funds could encourage o r r e s t r a i n

to h o l d i n g and d i s ­ the in f la tio n a r y

tren d . T h e r e was a t e n d e n c y f o r f u n d s t o a c c u m u l a t e i n t h e T reasury,

f o r i n eac h y e a r a f t e r 1865 o r d i n a r y r e c e i p t s

exceeded o rd in a ry e x p e n d itu re s. resp o n sib ility

T his p la c e d a s e rio u s

up o n t h e S e c r e t a r y ,

y e t he c o u ld n o t

o r d e r t h e d i s b u r s e m e n t o f money i m m e d i a t e l y a s i t av ailab le.

sim ply

becam e

B o t h r e c e i p t s and e x p e n d i t u r e s w e r e i r r e g u l a r ,

th e form er b u lk in g l a r g e s t

in th e

s p r i n g a n d summer, when

c u s t o m s d u t i e s w e re l a r g e ,

t h e l a t t e r b e i n g g r e a t e s t on

I n t e r e s t d a t e s a t t h e h a l f - and q u a r t e r - y e a r p o i n t s . t h is reason i t

was n e c e s s a r y i n

For

some p e r i o d s t o b u i l d up

the T reasury b alance in a n tic ip a tio n of la rg e disbursem ents later.

Thus i t

was d i f f i c u l t

t o m an age t h e a v a i l a b l e

b a l a n c e i n a m an ne r t h a t w o u l d m e e t t h e r e q u i r e m e n t s o f p r u d e n t f i n a n c e a n d a t t h e same t i m e p r e v e n t s t r i n g e n c y

267

i n t h e money m a r k e t . 1

A u g m e n t i n g t h i s p r o b l e m was t h e

t e n d e n c y o f t h e c o n v e r s i o n and r e f u n d i n g o p e r a t i o n s , c h an n e lin g funds through th e T reasury,

in

tem p o rarily to

d e p r i v e t h e b u s i n e s s comm unity o f t h e i r u s e . Since,

in t h i s p e rio d ,

an i m p o r t a n t p a r t o f T r e a s u r y

o p e r a t i o n s was c o n c e r n e d w i t h t h e m an ag em en t o f t h e d e b t , th e p o l i c i e s fo rm u lated w ith r e s p e c t to i t

w e re n e c e s s a r i l y

c o n d i t i o n e d by t h e c l o s e r e l a t i o n s h i p o f t h e I n d e p e n d e n t T re a su ry to a l l th e c r e d i t i n s t i t u t i o n s o f the c o u n tr y . B eside i t s r e g u l a r f i s c a l f u n c tio n s , engaged,

t h e T r e a s u r y was

u n d e r t h e r e q u i r e m e n t s o f t h e l a w , i n an "im m e n se

b anking b u s in e s s .* ^ The d e p o s i t o f G o v e r n m e n t f u n d s w i t h n a t i o n a l b a n k s c o u l d h a v e b e e n made t o p l a y a s i g n i f i c a n t p a r t i n t h e T r e a s u r y ' s r e l a t i o n s w i t h t h e money m a r k e t . s u c h d .e p o s i ts were r e s o r t e d

At a f e w t i m e s

t o a s a m ea ns o f f a c i l i t a t i n g

M yers, o p . c i t . , p p . 353-3 5 4 . Many p e o p l e s u p p o s e d t h a t i f no s u r p l u s w e r e h e l d i n t h e T r e a s u r y , no s t r i n g e n c y i n t h e money m a r k e t c o u l d o c c u r . The f a c t i s , h o w e v e r , t h a t t h e m o s t u s u a l c a u s e o f s t r i n g e n c y was n o t t h e a c c u m u l a t i o n o f f u n d s i n t h e T r e a s u r y , b u t t h e d e v e l o p m e n t o f "som e s u d d e n o r u n u s u a l demand f o r money e n t i r e l y i n d e p e n d e n t o f T r e a s u r y c o n d i t i o n s and o p e r a t i o n s . " See 0 . M. W. S p r a g u e , H i s t o r y o f C r i s e s Under t h e N a t i o n a l Banking S y stem , N a t i o n a l M onetary C o m m i s s i o n P u b l i c a t i o n ( S. Doc. No. 5 3 8 , 6 1 s t C o n g . , 2 d S e s s . , 1 9 1 0 ), p . 397.

2

W l n t h r o p M. D a n i e l s , The E l e m e n t s o f P u b l i c F i n a n c e ( H e n r y H o l t a n d Com pany, New Y o r k , 1 8 0 9 ) , p . 3 1 6 . "There i s no m ore n a t u r a l o r n e c e s s a r y c o n n e c t i o n b e t w e e n c o l l e c t ­ i n g p u b l i c money a n d b a n k i n g t h a n b e t w e e n r u n n i n g a g r o c e r y s t o r e and b a n k in g ." Idem.

268 th e

s a l e o f bonds and th e s a l e o f g o ld ,

and In c o n n e c tio n

w ith th e p r e p a r a t i o n f o r re s u m p tio n of s p e c ie p aym ents.

In

t h e s e i n s t a n c e s t h e d e p o s i t s were i n c r e a s e d i n o r d e r t o p r e ­ v e n t u n d u e s t r a i n on t h e money m a r k e t ; c u la r need fo r

a n d when t h e p a r t i ­

th e m h a d p a s s e d t h e y w e r e a g a i n d raw n down.

Even u n d e r t h e awkward l i m i t a t i o n s o f t h e I n d e p e n d e n t Treasury

system ,

d e p o s i t s m i g h t h a v e b e e n a l l o w e d t o accum u­

l a t e u n t i l th e y were a s u b s t a n t i a l p o r t i o n o f t o t a l bank d ep o sits* ^

As s u c h ,

the d e li b e r a t e

in c re a se or d ecrease in

t h e i r am o u n t by t h e T r e a s u r y w o u l d h a v e r e n d e r e d t h e money m arket e a sy or person.

strin g en t p ra c tic a lly at

I t was d u e o n l y i n p a r t

t h e command o f one

to th e r e s t r i c t i o n s of th e

Independent T re a su ry t h a t none o f th e S e c r e t a r i e s used t h i s m ea n s o f m o n e y - m a r k e t c o n t r o l t o a n y g r e a t e x t e n t one i n s t a n c e )

o r as a con tin u o u s p o lic y .

(except in

Throughout th e

p o st-w a r p e rio d th e t o t a l of T rea su ry d e p o s its w ith th e banks was s m a l l . 2

I n 1 8 6 7 , f o r e x a m p l e , when t h e T r e a s u r y ' s b a l a n c e o f c o i n a n d c u r r e n c y r a n g e d above #170 m i l l i o n , t o t a l d e p o s i t s in n a t i o n a l b a n k s w e r e a r o u n d $ 55 0 m i l l i o n . T r e a s u ry R e p o r t , 1867, p . XXXIII ; a n d W i l l i a m Graham S u m n e r , A H i s t o r y o f A m e r i c a n C u r r e n c y ( H e n r y H o l t and Com pany, New Y o r k , 1 8 8 4 7 7 P . 2 1 2 . *Trom | 58 m i l l i o n I n 1 8 6 5 t h e y d e c l i n e d t o $ 13 m i l l i o n i n 1 8 7 0 a n d #10 m i l l i o n i n 1 8 7 5 . I n some y e a r s b e t w e e n t h e y w e r e l e s s t h a n #10 m i l l i o n . In t h e s p r i n g o f 1879 d e p o s i t s w e r e p e r m i t t e d to r i s e t o #251 m i l l i o n a s a p r e c a u t i o n a r y m easure, f o r t h e phenom enal s a l e o f r e f u n d i n g bonds a t t h a t tim e would o t h e r w i s e h a v e d r a i n e d t h e money m a r k e t . T h e re a fte r the * d e p o s i t s d e c l i n e d to a r e l a t i v e l y s m a ll amount. See S p a h r , o p . c i t . , p p . 8 4 - 8 5 ; M y e r s , 0£ . c l t . . p . 3 5 5 ; T r e a s u r y R e p o r t . T o 7 9 , p p . XV-XVII: a n d R e p o r t o f t h e T r e a s u r e r o f t h e U n i t e d S t a t e s , 1 9 0 3 , p p . 1 2 2 - 1 ^ 7 ^ 3 0 ^ 4 1 ; ------------------------------------------------

269

T h e re were s e v e r a l r e a s o n s f o r t h i s

situ atio n .

i n t e r n a l - r e v e n u e r e c e i p t s c o u l d be d e p o s i t e d , at

th e tim e c o l l e c t e d .

Funds c o u ld n o t ,

Only

and t h e s e o n ly

u n d e r t h e l a w , be

drawn from t h e T r e a s u r y and p l a c e d w ith t h e b a n k s .

A lthough

i n t e r n a l r e v e n u e s w e r e an I m p o r t a n t p a r t o f a l l r e v e n u e a n d am ounted to a l a r g e acquired d a ily ,

if

sum o v e r a p e r i o d o f t i m e , ^ t h e a m o u n t s t h e y were d e p o s i t e d w i t h t h e b a n k s d u r i n g

a p e rio d of strin g e n c y or p anic, h e lp ap p reciab ly . b u i l t up,

w o uld h a v e b e e n t o o s m a l l t o

On t h e o t h e r h a n d ,

if

l a r g e d e p o s i t s were

t h e w i t h d r a w a l o f even a p a r t o f them w ould be d i s ­

c o m fo rtin g to

t h e b a n k e r s who h a d p u t t h e f u n d s t o u s e .

Thus

t h e d e p o s i t o f I n t e r n a l - r e v e n u e r e c e i p t s w i t h t h e b a n k s "was r e g a r d e d a s an e x c e p t i o n a l m e a s u r e o n l y t o b e e m p l o y e d i n p e cu lia r

em erg en cies."^

When I t was t h e S e c r e t a r y * s i n t e n t i o n t o c o n t r a c t t h e c u rre n c y and r e s t r a i n c r e d i t expansion,

the d e p o sit of

sur­

p l u s f u n d s w i t h t h e b a n k s would h a v e v i t i a t e d t h i s p o l i c y . When c o n t r a c t i o n

was no

l o n g e r an o b j e c t i v e ,

s u rp lu s revenue

was r e l e a s e d f r o m t h e T r e a s u r y by t h e p u r c l a s e o f b o n d s .

T his

^Customs were t h e l a r g e s t s o u r c e o f r e v e n u e . I n 18 61 an d 1862 t h e y had y i e l d e d o v e r 94 p e r c e n t of th e t o t a l r e c e i p t s o f t h e G o v e r n m e n t , b u t i n no y e a r b e t w e e n 1866 a n d 1 8 7 9 d i d t h e y e x c e e d 60 p e r c e n t o f i t . Roy A. F o u l k e , N a t i o n a l T h r i f t a n d t h e P u b l i c D e b t (Dun & B r a d s t r e e t , I n c . , 1945), pp. 23-25.

2

A. P i a t t A n d r e w s , "The U n i t e d S t a t e s T r e a s u r y an d t h e Money M a r k e t , " The A m e r i c a n E co n om ic A s s o c i a t i o n , P a p e r s a n d D i s c u s s i o n s o f t h e T w e n t i e t h A n n u a l M e e t i n g . A p r i l 1 9 0 8 , 3d l e r " . ' , V o l. 1X7 W7 T T & rm .--------------------------

870

m ig h t a s e a s i l y h a v e b een done by d e p o s i t i n g t h e s u r p l u s w i t h t h e b a n k s and d raw in g a g a i n s t them, in g t h e volume o f c i r c u l a t i o n ,

thereby

a t no t i m e r e d u c ­

f o r even t h e l a g betw een

r e c e i p t a n d e x p e n d i t u r e a s money p a s s e d t h r o u g h t h e T r e a s u r y to

some e x t e n t l e s s e n e d t h e c u r r e n c y s u p p l y . 0

D o ub t a s t o t h e l e g a l i t y from c e r t a i n

of d e p o s itin g funds d e riv e d

sources r e s t r a i n e d the S e c re ta r ie s

o f bank d e p o s i t a r i e s , money m a r k e t i n

in t h e i r use

when t h e c r i t i c a l c o n d i t i o n o f t h e

t h e a u tu m n o f 1 8 7 2 made i t

d e s ira b le for the

T r e a s u r y t o s e l l g o l d t o m e e t t h e n e e d s o f b a n k e r s an d im porters,

B o u t w e l l s e t a p r e c e d e n t by a r r a n g i n g f o r t h e

d e p o s i t o f t h e p r o c e e d s i n New Y o r k b a n k s . ^

When Slier man

was p r e p a r i n g f o r r e s u m p t i o n o f s p e c i e p a y m e n t s , h e o b t a i n e d th e o p in io n o f the A tto rn e y G en eral t h a t

th e R e fu n d in g Act

a n d t h e R e s u m p t i o n A c t b o t h g a v e h i m p o w e r t o l e a v e on d e p o s i t w i t h b a n k s th e p r o c e e d s o f bond sales.** t h e s a l e o f b o n d s was f a c i l i t a t e d easy.

By so d o i n g

a n d t h e money m a r k e t k e p t

B e c a u s e t h i s p r o c e d u r e was a l s o f o l l o w e d i n

o f 1879,

the sp rin g

t h e g r e a t wave o f demand f o r t h e l a s t o f t h e

refunding is s u e s created l i t t l e

distu rb an ce

m arket.*5

" S i y e r s , —oMpl. . c l t . , p p . 3 5 5 - 3 5 6 . w

2Ib id ..

p p . 356-357.

^ T r e a s u r y R e p o r t . 1 8 7 9 , p p . XV-XVII.

i n t h e money

271

SECRETARY MCCULLOCH’S CUREENCY-CONTEACTION POLICY A f te r a m ajor war f in a n c e d l a r g e l y by b o rro w in g , m i n i s t r a t i o n fac ed a p e c u l i a r l y d i f f i c u l t problem .

th e ad­

The q u e s ­

t i o n was w h e t h e r t o c o n t r a c t t h e c u r r e n c y a nd t h e r e b y d i s ­ courage s p e c u l a t i o n , re d u c e th e p r i c e p u b lic

c re d it,

and r e s t o r e

lev el,

s tre n g th e n the

th e v a lu e o f the c u r r e n c y ,

accept­

in g as a consequence w hatever b u s i n e s s r e c e s s i o n m ight r e s u l t , o r w h e t h e r t o l e t e x c e s s i v e p u r c h a s i n g , po w e r e x e r t i t s u n til

i t brought about i t s

own c o r r e c t i o n . ^

discernm ent in p u b lic o f f i c e ,

force

E v en f o r men o f

i t was a d i f f i c u l t

q u estio n .

A p o l i c y o f c o n t r a c t i o n , no m a t t e r how sound, was c e r t a i n t o encounter stro n g o p p o s itio n , fo r

c u rin g the i l l s

of i n f la ­

t i o n a r y borrow ing r e q u ir e d a m edicine too b i t t e r f o r a la r g e p a r t o f t h e p o p u l a t i o n and t h e i r r e p r e s e n t a t i v e s i n t h e ment to

sw allow .

Govern­

The e x p e d i e n t way w a s e i t h e r t o do n o t h i n g

o r to co n tin u e to i n f l a t e ,

for

t i o n resem bled p r o s p e r i t y ;

and w i t h g o v e rn m e n ts , b o r r o w i n g i s

e a s i e r th an repaym ent.

the e a r ly stag es o f the i n f l a ­

2

^■"The war b e i n g e n d e d t h e f i n a n c i a l q u e s t i o n t o o k t h i s f o r m : S h a l l we w i t h d r a w t h e p a p e r , r e c o v e r s p e c i e , r e d u c e p r i c e s , l e s s e n i m p o r t s , a n d l i v e e c o n o m i c a l l y u n t i l we h a v e made up t h e w a s t e a n d l o s s o f w a r , o r s h a l l we k e e p t h e p a p e r a s money, e x p o r t a l l o u r s p e c ie w h ich h a s h i t h e r t o b e en h e ld i n a n t i c i p a t i o n o f r e s u m p t i o n , b u y f o r e i g n g o o d s w i t h i t , a nd go o n a s i f n o t h i n g h a d h a p p e n e d ? ” S u m n e r , o £ . c i t . , p . 2 1 1 . 2

I t i s t h i s w hich u n d e r l i e s th e a lm o st u n i v e r s a l e x p e r i ­ ence t h a t governm ents e v e n t u a l l y debase th e c i r c u l a t i n g m edi­ um a n d r e p u d i a t e t h e i r d e b t s . S e e H a r r y S c h e r m a n , The P r o m ­ i s e s Men L i v e By (Random H o u s e , New Y o r k , 1 9 3 8 ) , C h a p t e r s

x in -r v T ii.

272 S e c r e t a r y M c C u l l o c h ’ s s t a n d was c l e a r a n d f i r m . been seen , h is

As h a s

two i m m e d i a t e m a j o r o b j e c t i v e s w e r e t h e r e d u c ­

t i o n a n d c o n v e r s i o n o f demand a n d s h o r t - t e r m d e b t a n d c o n ­ t r a c t i o n o f the greenbacks.

These s t e p s ,

c o n t i n u i n g n a t i o n a l p r o s p e r i t y an d t h e p u b lic c r e d i t, nam ely,

in c o n ju n c tio n w ith

s tre n g th e n in g of the

he r e g a r d e d a s t h e m e a n s t o t h a t g r e a t e r e n d ,

the resum ption o f sp e c ie p a y m e n ts.1

In h is conver­

s i o n a n d d e b t - r e d u c t i o n o p e r a t i o n s he e n c o u n t e r e d r e l a t i v e l y little

d i s a g r e e m e n t and o p p o s i t i o n .

currency c o n tra c tio n , alto g eth er,

during h is

H is s t r i c t p o l i c y o f

term o f o f f i c e ,

t h e g r e e n b a c k s was r e t i r e d .

p44 m i l l i o n w o r t h o f

The c i r c u m s t a n c e s w h i c h s u r ­

rounded t h i s o p e r a t i o n and th e n a tu r e and e f f e c t o f the s i t i o n to i t

2

h o w e v e r, soon drew s t r o n g o p p o s i t i o n ,

oppo­

a re s e t f o r t h below .

The L o s t O p p o r t u n i t y t o Resume S p e c i e P a y m e n t s F o r a s h o r t tim e a f t e r

the w ar, b e fo r e

the

issu es of

c o n t r a c t i o n v e r s u s i n f l a t i o n w e r e c l e a r l y d r a w n , t h e r e was a n o p p o r t u n i t y t o resume s p e c i e p ay m en ts. th a t w ith in a reasonable p e rio d a f te r

The w a r t i m e b e l i e f th e r e t u r n o f peace the

g r e e n b a c k s w o u l d become r e d e e m a b l e i n g o l d s t i l l

c o n tin u ed .

3

V a r io u s i m p o r t a n t econom ic c l a s s e s w i t h i n t h e c o u n t r y — b u s i ­ nessm en,

lan d lo rd s,

lending c a p i t a l i s t s ,

a nd w a g e - e a r n e r s —

1 S ee T r e a s u r y R e p o r t s t 1 8 6 5 - 1 8 6 8 , p a s s i m . % - c C u l l o c h , Men a n d M e a s u r e s , p p . 2 0 8 - 2 0 9 . Noyes, F o r ty Y e a r s , p p . 7 -1 1 .

273 w e r e i n a s u f f i c i e n t l y f a v o r a b l e p o s i t i o n to t i o n i n 18 65 a n d 1 8 6 6 , people

and a t t h i s

endure resum p­

t i m e s e n t i m e n t among t h e

g e n e r a l l y was s t r o n g f o r r e s u m p t i o n a t th e e a r l i e s t

p o ssib le

date*''"

E a r l y i n D e c e m b e r 18 6 5 t h e H o u se o f R e p r e s e n t a t i v e s r e ­ s o l v e d , w i t h o n l y o n e member v o t i n g

in o p p o sitio n ,

th at—

. . . th e p u b l i c d e b t c r e a t e d d u r in g the l a t e r e b e l l i o n was c o n t r a c t e d u p o n t h e f a i t h and h o n o r o f t h e n a t i o n ; t h a t i t i s s a c r e d and i n v i o l a t e , a n d m u s t a nd o u g h t t o b e p a i d , p r i n c i p a l a n d i n ­ t e r e s t ; and t h a t any a tte m p t to r e p u d i a t e , o r in any manner to im p a ir or s c a l e th e s a i d d e b t, s h o u l d be u n i v e r s a l l y d i s c o u n t e n a n c e d by t h e p e o p l e , and p r o m p t l y r e j e c t e d by C o n g re s s i f p r o ­ p o sed .2 Two w e e k s l a t e r , h is

when M c C u l l o c h o f f i c i a l l y

announced

i n t e n t i o n to resum e s p e c i e paym ents a s soon a s p o s s i b l e

a n d s o u g h t a u t h o r i t y from C o n g re ss t o s e l l bonds i n o r d e r t o 3 c o n t i n u e t h e c o n t r a c t i o n o f t h e c u r r e n c y on a l a r g e s c a l e , t h e H o u s e o f R e p r e s e n t a t i v e s r e s o l v e d b y a v o t e o f 14 4 t o 6 — T h a t t h i s Hous e c o r d i a l l y c o n c u r s i n t h e v i e w s o f th e S e c r e ta r y of the T rea su ry in r e l a t i o n to th e n e c e s s i t y o f a c o n tr a c t i o n o f the c u rre n c y , w ith a view to a s e a r l y a r e s u m p t i o n o f s p e c i e paym ents as the b u s in e s s i n t e r e s t s of th e c o u n try w i l l p e rm it; a n d we h e r e b y p l e d g e c o o p e r a t i v e a c t i o n t o t h i s e nd as s p e e d ily as p r a c t i c a b l e . 4

B a rre tt, pp. 9-11.

0£ .

c i t . , pp. 112-131;

and Noyes,

2

C o n g r e s s io n a l G lo b e , 3 9 th C ong., 1865, p . 10.

o£. c i t . ,

1 s t D e s s . , D e ce m ber 5 ,

^T re a s u ry R e p o r t , 1865, p . 12-14 . C o n g r e s s i o n a l G lobe, 3 9 th C ong., 18, 1865, p . 75.

1 s t S e s s . , D e ce m ber

274 T h i s was t h e h i g h p o i n t i n t h a t s e r i e s o f p e a k s and v a l l e y s o v e r w hich th e c o u rs e o f th e p u b l i c

c re d it ran.

The

G o v e r n m e n t ' s 6 - p e r c e n t b o n d s , w h i c h e a r l i e r h a d s o l d a s lo w a s 3 8 i n E u r o p e a n m a r k e t s , r a n g e d a b o v e 60 a n d w e r e b e i n g a c ­ q u ir e d in i n c r e a s i n g am ounts by E n g l i s h , in v e s to rs .''"

A t t h e same t i m e ,

t h e Oo l d v a l u e o f t h e g r e e n ­

backs had a p p r e c i a t e d s u b s t a n t i a l l y , t u a t i o n had narrov;ed.

German, a nd D u t c h

and t h e i r ran g e o f f l u c -

2

Two u n d e r l y i n g r e q u i r e m e n t s w hic h h a d t o be m e t b e f o r e s p e c i e p a y m e n t s c o u l d be r e s u m e d were t h a t

the a b n o rm a lly

h i g h l e v e l o f p r i c e s in t h e U n i t e d S t a t e s be lo w e re d t h a t the b alan ce o f tr a d e la tte r

The

A rapid f a l l

e s p e c i a l l y th o se o f w h o le sa le co m m o d ities, betw een

J a n u a r y and J u l y 1 865, tim e

tu rn in favor of the c o u n try .

d e p en d e d , o f c o u r s e , upon th e f o r m e r .

in p r i c e s ,

and

3

se em e d t o c o n f i r m t h e b e l i e f t h a t w a r ­

i n f l a t i o n had ended. I n 18 6 5 a n d 1866 M c C u l l o c h d i d n o t p e r c e i v e t h a t f o r e i g n

b o r r o w i n g w o u l d h a v e made r e s u m p t i o n r e a d i l y p o s s i b l e a t t h a t very tim e . other

The B r i t i s h e s p e c i a l l y ,

and the n a t i o n a l s o f

c o u n t r i e s t o o , w e r e a b l e an d w i l l i n g

to le n d ,

and i f

1

C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , J a n u a r y 6 , 1 8 6 6 , V o l . I I , p . 2 ; a n d C h a r l e s F . S p e u r e , ’’S e l l i n g A m e r i c a n Bonds i n E u r o p e , " A n n a l s o f t h e i u n e r i c a n Academy o f P o l i t i ­ c a l a n d S o c i a l S c i e n c e . S e p t e m b e r 1 9 0 7 , V o l . XXX, p . 2 7 1 . ^ M itch ell,

G old, P r i c e s , and A ages, pp . 1 3 -1 4 .

^Mitchell, History of the Greenbacks. pp. 341-342.

275 the proceeds of th e ir fo r resu m ption ,

the

l o a n s h a d b e e n known t o b e e a r m a r k e d

g r e a t e s t o b s ta c le to t h e i r

confidence

i n A m e r i c a n c r e d i t w o u ld i m m e d i a t e l y h a v e b e e n o v e r c o m e . 1 The s a l u t a r y r e s u l t s

of f o r e ig n borrow ing a t t h i s

would have b e e n v e r y g r e a t . u n s t a b l e p a p e r m o n ey , funding,

tim e

The d i s r u p t i n g e f f e c t s o f a n

t h e h i g h r a t e s o f c o n v e r s i o n and r e ­

ana the e x c e s s iv e

i n t e r e s t c o s t o f the d e b t f o r

m an y y e a r s , m i g h t a l l h a v e b e e n a v o i d e d h a d n o t M c C u l l o c h f s m erc an tilistic

v iew point

2

p r e v e n t e d him from p e r c e i v i n g t h a t

t h e e x ch a n g e o f m n e r i c a n s e c u r i t i e s f o r E u ro p ea n g o l d ^ would have been a h ig h ly p r o f i t a b l e

tran sactio n

through th e f i n a n ­

c i a l b e n e f i t s a t t e n d a n t up o n t h e e n h a n c e m e n t o f t h e p u b l i c c re d it. The t i m e w a s r i p e

fo r resu m p tio n .

p h a tic a lly reso lv ed in favor of i t ,

th e p eople e x p ec te d i t ,

and o p p o s i t i o n had n o t y e t c r y s t a l l i z e d its

c o u n ter-in flu en ce.

M cC ullochf s i n f l u e n c e ,

C o n g r e s s h a d em­

and begun t o e x e r t

Under su c h c i r c u m s t a n c e s , the n a t i o n a l p r e ju d ic e

a g a in st bor­

ro w in g a b ro a d c o u ld p r o b a b l y have b een overcom e, a few y e a r s l a t e r

under S e c re ta r y B o u tw ell.

much i n t e n d e d t o c r i t i c i z e

J.

B a rre tt,

ojd.

and w i t h

It

a s i t was i s n o t so

the S e c r e t . r y f o r a p r o v i n c i a l

c i t . , pp.

138-158.

■o

^ E c o n o m i s t , . r ; r i l 1 4 , I 8 6 0 , V o l . XXIV, p p .

439-441.

° I t was e x a c t l y t h i s p r o c e d u r e . . h i c h was e v e n t u a l l y f o l l o w e d i n 1 8 7 8 when S h e r m a n p r e p a r e d f o r r e s u m p t i o n .

276

a t t i t u d e w hich p r e v e n t e d him from p e r c e i v i n g t h e a d v a n t a g e s in fo re ig n borrow ing a t d em o n strate ag ain t h a t ju n ctu res,

so o p p o r t u n e a t i m e , b u t r a t h e r t o t h e c o u r s e o f e v e n t s may,

at certain

d e p e n d up on t h e p o i n t o f v i e w a n d t h e r e s u l t i n g

d e c i s i o n s o f o n e o r a f e w men. th e r a p i d change in p u b lic th en d e fe a t h i s p o lic y

it,

s e n t i m e n t w h i c h was t o h a m p e r a n d

of currency c o n tra c tio n .

c ip a te w ith confidence, se em e d t o j u s t i f y

M cCulloch c o u l d n o t f o r e s e e

a t a t i m e when a l l

th at

He d i d a n t i ­

circu m stan ces

t h i s p o l i c y would be f o l l o w e d o u t

a n d r e s u m p t i o n a c h i e v e d by J u l y 1 8 6 8 . ^ The A n t i c i p a t e d E f f e c t o f C o n t r a c t i o n T h o s e who w e r e m o s t u n c o m p r o m i s i n g l y i n f a v o r o f c u r ­ rency c o n tr a c tio n a d m itte d the b e li e f p ain fu l process,

t h a t i t w o u l d be a

t h a t r e a d j u s t m e n t o f t h e esonomy t o a s o u n d

c o n d i t i o n w o u l d n e c e s s a r i l y i n v o l v e some i n j u r y t o b u s i n e s s a n d c a u s e some s u f f e r i n g .

They c o n s i d e r e d i t

the l e s s e r of

two e v i l s . That t h e c o u n t r y can p o s s i b l y be r e s t o r e d t o a s o u n d f i n a n c i a l c o n d i t i o n w i t h o u t much s u f f e r i n g , i s n o t f o r a moment t o be s u p p o s e d . No g r e a t war i n m odern t i m e s was e v e r c l o s e d w ith o u t a pow erful and d i s t r e s s i n g r e a c t i o n . The d e l i r i u m o f s p e c u l a t i o n m u s t b e f o l l o w e d by p ro stratio n . That i s u n a v o id a b le . The o n l y q u e s t i o n f o r s e n s i b l e men t o c o n s i d e r i s , how t h e shock o f r e t u r n i n g p eace s h a l l be m et?2

•^T r e a s u r y R e p o r t , 1 8 6 6 , p . 2 5 . 2

B ankers1 M agazine, September 1867, V o l. XXII, p . 170.

27?

. . . t h e man who i s b u r d e n e d w i t h d e b t i s i n i m m i n e n t d a n g e r . . . t h e r e a r e two maxims w h i c h may w i t h a d v a n t a g e be a d o p t e d by o u r b u s i n e s s m en . The f i r s t i s t o make a r r a n g e m e n t s so a s " t o ^ e t o u t o f d e b t , " a nd a s f a r a s p o s s i b l e " t o k e e p o u t ; " and th e s e c o n d i s t o " s t i c k t o l e g i t i m a t e b u s i n e s s , " a nd a v o i d t h e s p e c i o u s , s e d u c t i v e , p e r i l o u s p a t h s or s p e c u la tio n .^ I t i s one o f t h e e m b a r r a s s m e n t s o f o u r s i t u a ­ t i o n t h a t ,;e c a n n o t r e s t o r e o u r f i n a n c e s t o a h e a lth y c o n d itio n w ithout producing e f f e c t s in p j u r i o u s to th e b u s in e s s i n t e r e s t s of the c o u n tr y . The e v i l s t o be c a u s e d b y t h e a p p r e c i a t i o n o f c u rre n c y are b u t the o th e r s i d e — the r e v e r s e of t h e e v i l s t h a t h a v e b e e n c a u s e d by i t s d e p r e c i a ­ tio n . and i t i s w orthw hile to in c u r th o se e v i l s , f o r n o man c a n v e n t u r e t o . i v e w h o le so m e c r e d i t , a nd n o o ne c a n t h o r o u g h l y know how he s t a n d s , w h i l e the in s tru m e n t o f re c k o n in g s u f f e r s d a i l y f l u c t u a ­ t i o n s and i s alw ays l i a b l e t o g r e a t e r o n e s , ^ M cCulloch f e a r e d the consequences i f

of c o n tr a c t i o n than

i t were n o t u n d e r t a k e n .

to prevent a fin a n c ia l it,

l e s s the e f f e c t s

c risis,

th at

is

4

"It

is,

in p a rt,

c e r t a i n t o come w i t h o u t

t h a t t h e S e c r e t a r y recom m ends c o n t r a c t i o n . "

He h e l d

t h a t a l t h o u g h p r i c e s m i g h t f a l l t o a l o w e r l e v e l c*nd G o v e r n ­ m ent r e v e n u e s m ig h t be t e m p o r a r i l y r e d u c e d , t h e p o o r e r c l a s s e s w o u l d be b e n e f i t e d ,

th e consum ers and

the pub lic

cred it

^Com mercial and F i n a n c i a l C h r o n i c l e . Septem ber 1 6 , I 8 6 0 , V ol. I , p . 353. 2

Nev/comb, A C r i t i c a l E x a m i n a t i o n o f Our F i n a n c i a l P o l i c y , p . 144. E c o n o m i s t , A p r i l M,

18 6 6, V o l . XXIV, p . 4 4 1 .

4Kugh M c C u l l o c h , Our N a t i o n a l a n d F i n a n c i a l F u t u r e ; Ad­ d r e s s a t F o r t , / a y n e . I n d i a n a . O c t o b e r l l . 18 65 ( F o r t 7 / a y n e , 1 8 6 5 ) , p p 7 " T 4 -T 5 l 5 Treasury Report. 1865, p. 12,

278

stren g th en ed ,

a nd t h e b u s i n e s s o f t h e c o u n t r y p l a c e d u p o n

a so u n d b a s i s . 1

In

h i s m e m o i r s he w r o t e :

I have no doubt t h a t a l l o f the U n ite d S t a t e s n o t e s m ig h t have b e e n g r a d u a l l y w ith d ra w n from c i r c u l a t i o n w ith o u t p re ju d ic e to le g itim a te b u sin e ss.^ He u n d e r s t o o d t h e n a t u r e autom atic

o f t h e money m a r k e t a n d t h e

l i m i t a t i o n s w hich i t

p l a c e d up o n a t o o r a p i d r e ­

d u c t i o n i n t h e amount

of the

greenbacks.

sio n ed th e com plete

e l i m i n a t i o n o f t h e s e n o t e s , he knew t h a t

i t m ust be a c c o m p lis h e d g r a d u a l l y .

Though he e n v i ­

O o n t r a c t i o n was b u t one

s t r a n d o r L is debt-m anagem ent p o l i c y : Nor i s t h e r e a n y r e a s o n t o a p p r e h e n d , b y a n y p o l i c y t h a t C o n g r e s s may a d o p t , s o r a p i d a r e d u c ­ t i o n o f p r i c e s a s to p ro d u ce v e r y s e r i o u s embar­ rassm ent to tra d e . The g o v e r n m e n t c u r r e n c y c a n o n l y , t o any c o n s i d e r a b l e e x t e n t , be w ith d ra w n by a s a l e o f b o n d s , a n d t h e demand f o r b o n d s w i l l be s o a f f e c t e d b y t h e s t a t e oX t h e m a r k e t t h a t a r a p i d c o n t r a c t i o n w i l l be d i f f i c u l t , i f n o t im­ p o s s i b l e , even i f i t were d e s i r a b l e . * '1 M c C u l l o c h was w e l l a w a r e o f t h e

se n sitiv ity

of the

money m a r k e t t o T r e a s u r y p o l i c i e s a n d o f t h e g r e a t c a r e w hich had t o be e x e r c i s e d i n t h a t r e l a t i o n s h i p furtherance

l e s t the

o f one p a r t o f h i s p r o a r a m be t o t h e d e t r i m e n t o f

the w hole:

1I b j d . , pp. 11-12. 2Men a n d M e a s u r e s o f H a l f a_ C e n t u r y , p . 2 1 2 . ^T reasury R eport,

1865, p . X II.

279 . . . i t was h i g h l y i m p o r t a n t t h a t t h e n e c e s ­ s i t y o f an e a r l y r e t u r n t o s p e c i e paym ents s h o u l d n e v e r be l o s t s i g h t o f . A t t h e same t i m e , i t se e m e d t o t h e S e c r e t a r y t h a t a r e t u r n t o t h e t r u e m e a s u r e o f v a l u e , h o w e v e r d e s i r a b l e , was n o t o f s u f f i c i e n t im p o rta n c e to j u s t i f y th e a d o p tio n o f such m easures as m ig h t p r e v e n t fu n d in g , and i n j u r i ­ o u s ly a f f e c t th o s e b ra n c h e s o f i n d u s t r y from w hich r e v e n u e was t o be d e r i v e d , much l e s s s u c h m e a s u r e s as m ig h t, by e x c i t i n £ a la rm , p r e c i p i t a t e th e d i s ­ a s t e r w h i c h s o many a n t i c i p a t e d a n d f e a r e d . The I n c r e a s e d H e ed f o r C u r r e n c y a n d t h e xteflunda-nt S u p p l y o f I t The t r u e

guide to a p o l i c y w hich c o n te m p la te d c o n t r a c ­

t i o n o f t h e p a p e r c u r r e n c y was t o be f o u n d i n

the e x te n t to

w h i c h — so f a r a s c o u l d b e e c t i m a t e d - - t h e c i r c u l a t i o n

sup­

p o r t e d sound b u s i n e s s a c t i v i t y . The h i g h p r i c e money m a r k e t f o r

le v e l had m u ltip lie d

funds.

s t e e p l y d u rin g the

t h e demand i n t h e

P r i c e s o f a l l com m odities had r i s e n

ar n o t only as th e r e s u l t o f the g re a t

q u a n ti t y o f d e p r e c i a t e d c u rr e n c y w hich had e n te r e d c i r c u l a t i o n , b u t a l s o b e c a u s e of

t h e s c a r c i t y w h i c h w a r t i m e c o n s u m p t i o n ana.

1Ibid., 1867, p. V.

280

t h e d i s p l a c e m e n t o f m an po w er h a d e f f e c t e d . 1 risen ,

Wages h a d a l s o

a l t h o u g h l e s s r a p i d l y t h a n c o m m o d i ty p r i c e s . 2

of high p r ic e s ,

Because

th e r e s u l t i n g i n c r e a s e i n the c o s t of l i v i n g

r e q u i r e d more c u r r e n c y s i m p ly t o m eet th e n e e d s o f o r d i n a r y hand-to-hand c i r c u l a t i o n . m o n e y - m a r k e t w i s e , was t h e d u ctio n ,

Much m ore i m p o r t a n t t h a n t h i s , g rea t in crease

i n the

costs of p ro ­

e s p e c i a l l y o f raw m a t e r i a l s and l a b o r ,

s e q u e n t h i g h v a lu e o f goods i n p r o c e s s , in the channels of d i s t r i b u t i o n . a c tiv ity ,

as w e ll as the

and t h e

con­

in in v e n to rie s,

and

The h i g h l e v e l o f b u s i n e s s

h i g h p r i c e s a t w h i c h i t was c a r r i e d

o n , h a d g r e a t l y i n c r e a s e d t h e demand f o r c u r r e n c y a n d b a n k loans.

Because o f the f l u c t u a t i n g , v a lu e o f th e p a p er c u r ­

r e n c y and b e c a u s e of th e g e n e r a l u n c e r t a i n t y ,

a larg er

A c o m p a r is o n o f w h o l e s a l e p r i c e s o f t h e more i m p o r t a n t c o m m o d i t i e s a t t h e P o r t o f New Y o r k b e f o r e a n d a f t e r t h e war shows t h e c h a n g e 'which h a d t a k e n p l a c e : 1859

' h e a t , per b u s h e l ............................................ .......... § 1 .2 5 wheat f l o u r , per b a r r e l .............. Cotton, per pound............................ P i g i r o n , per t o n ............................................ M o l a s s e s , per g a l l o n ................................. Lard, per pound ................................................... ................................. Hs> Pork, per b a r r e l .............................. B u t t e r , per pound ............................................ R ic e , per pound ...................... ............................ Cheese, per pound ............................................ Tool f l e e c e , per pound ..........................

1865 • • • . • • • . • • • . • • • . ♦ • • . • • • • • • . • • • •

• • • •

• • • •

§2.70 10.00 1.20 63.00 1 .4 3 .23 4 3.00

.5o .13. .20 .95

From C o m m e r c i a l a n d F i n a n c i a l C h r o n i c l e , J a n u a r y 6 , 1 8 6 6 , V ol. I I , pp. 2 -3 . ^Mitchell, Gold, Prices and Wages, p. 102.

281 p e r c e n t a g e o f b u s i n e s s was t r a n s a c t e d o n a c a s h b a s i s ,

and

co m m erc ial c r e d i t t e r m s were f o r s h o r t e r p e r i o d s t h a n b e f o r e th e w ar.

This a l s o i n c r e a s e d t h e n e ed f o r c u r r e n c y . 1

7/hat t h e r e a l c u r r e n c y r e q u i r e m e n t s o f t h e c o u n t r y w e r e was f i n a l l y a m a t t e r o f e s t i a a t e

and j u d g m e n t .

There

vms, h o w e v e r, c o n s i d e r a b l e e v i d e n c e t h a t th e a p p r o x i m a t e l y $90 0 m i l l i o n o f a c t u a l a n d p o t e n t i a l c u r r e n c y f a r e x c e e d e d the needs of b u sin e ss it

and t h a t a r a t h e r

c o u ld ta k e p l a c e w i t h o u t harm .

larg e c o n tra c tio n of

E a r l y i n 1866 a l e a d i n g

f i n a n c i a l j o u r n a l comm ented: . . . we h a v e n i n e h u n d r e d m i l l i o n s o f p a p e r c u rre n c y a f l o a t a t p r e s e n t , though the c o u n try h a s n e v e r b e e n a b l e i n t i m e s o f p e a c e t o u s e m ore th a n 200 m i l l i o n s "without th e m ost m i s c h i e v o u s r e s u l t i n g i n f l a t i o n ; and t h e u t m o s t am ount on w h ich a s p e c i e b a s i s c o u l d be k e p t a f l o a t w ould n o t p r o b a b l y e x c e e d t h e a v e r a g e a m o u n t o f 300 m illio n s.2 A p a r t o f t h i s a m o u n t was l e g a l - t e n d e r i n t e r e s t - b e a r i n g d e b t , much o f w h i c h was p r i v a t e l y h e l d f o r

investm ent, b u t

a l l o f which c o u ld s e r v e as bank r e s e r v e s ,

thereby en la rg in g

th e c r e d i t b ase and in d u c in g s p e c u l a t i o n .

E sp ecially s ig n if i­

cant at th is

t i m e a n d f o r some y e a r s a f t e r was t h e

fac t th at

bank r e s e r v e s rem a in e d s u b s t a n t i a l l y above r e q u i r e m e n t s . 1868 t h e a v e r a g e

fly ers, V ol.

c o u n t r y - b a n k r e s e r v e was 24 p e r c e n t ,

the

o p . c i t . , p . 315.

^ Com mercial and F i n a n c i a l C h r o n i c l e , J a n u a r y 6 , 1866, I I , p. 3.

In

2 82 minimum r e q u i r e m e n t b e i n g 15 p e r c e n t ; f i f t e e n redem ption c i t i e s

a v e r a g e d 31 p e r c e n t ,

r e q u i r e m e n t b e i n g 35 p e r c e n t . c a sh p o r t i o n of the r e s e r v e s l e g a l r e q u i r e m e n t s .1

and r e s e r v e s i n the t h e minimum

In b o th ty p e s of banks the a s a p p r o x i m a t e l y tv/ice t h e

T h i s was a n u n u s u a l c o n d i t i o n .

It

was du e i n p a r t p e r h a p s t o t h e n e w n e s s o f t h e n a t i o n a l b a n k p

i n g s y s t e m , " b u t much m o r e , p r o b a b l y ,

to th e c o n se rv a tis m of

b a n k e r s , b u s i n e s s m e n , a n d s p e c u l a t o r s a t a t i m e when a p o s t v/ar r e c e s s i o n was w i d e l y a n t i c i p a t e d . ' -'

C e r t a i n l y i t was an

i n d i c a t i o n of the superabundance o f c u rre n c y . The r e d u n d a n t c u r r e n c y a n d t h e p o t e n t i a l c r e d i t s u p p l y i n c o n s e q u e n c e o f th e e x c e s s o f b ank r e s e r v e s were a c o n t i n u a l tem p tatio n to s p e c u la tiv e a c t i v i t y .

If

the excess curren cy

c o u l d be w i t h d r a w n b e f o r e i t -was t o a n y g r e a t e x t e n t e m p l o y e d i n s u c h a wa y,

t h e c o n t r a c t i o n w o u l d h a v e no a p p r e c i a b l e

e f f e c t upon t h e r a t e

of pro d u ctio n .

C o n tr a c tio n d u rin g the

c o u r s e o f a s p e c u l a t i v e boom, h o w e v e r , w o u l d h a v e a g e n e r a l ­ i z e d e f f e c t o f m aking f u n d s s c a r c e r and d e a r e r b o th f o r s p e c u l a t i o n and f o r b u s i n e s s .

F u rth e r c o n tr a c t i o n of the c u r ­

r e n c y m i g h t be e x p e c t e d when demand h e l d o v e r f r o m t h e war

^M yers, o p . c i t . ,

pp. 235-236.

2C f . i b i d . , p . 235. '-'See, f o r e x a m p l e , T r e a s u r y R e p o r t , 1 8 6 5 , p p . 1 1 - 1 2 ; Commercial and F i n a n c i a l 'C h r o n i c l e , S ep tem b er 16, 1865, V ol. I , p . 3 5 3 ; 5 c o n o m l s t , A p r i 1 1 4 , 1 8 6 6 , V o l . XXIV, p . 4 4 1 ; S u m n e r , o p . c i t . , p . 2 1 3 ; a n u Newcomb, o p . c i t . , p . 1 4 4 .

283

p e r i o d was f i l l e d

a n d p r o d u c t i o n was o n c e t ^ a i n g a u g e d t o

m eet o n ly c u r r e n t re q u ire m e n t,; o f the p o p u l a t i o n .

Means f o r

t h e e x p a n s i o n o f c a p i t a l f a c i l i t i e s w o u l d p r o p e r l y be e x ­ p e c t e d t o come f r o m s a v i n g s a n d f r o m t h e i m p o r t a t i o n o f f o r ­ e ig n in v e stm e n t funds r a t h e r th a n th ro u g h a tr a n s m u ta tio n of liq u id c a p ita l in to fix ed c a p ita l. T r e a s u r y C o n t r o l o v e r t h e Money M a r k e t T h r e e i m p o r t a n t m eans by w h i c h M c C u l l o c h r e t a i n e d c o n t r o l o v e r t h e money m a r k e t \ t i l e

he c o n t i n u e d t o r e t i r e

green­

b a c k s were th e m a in te n a n c e o f th e te m p o r a r y l o a n d e p o s i t s , the m aintenance of a la r g e c u rre n c y b a la n c e , ous r e t e n t i o n

ju d ic i­

and s a l e o f T r e a s u r y g o l d .

The t e m p o r a r y l o a n d e p o s i t s , p la c e d w ith the

e a r l ie r describ ed ,

were

T r e a s u r y c h i e f l y by t h e b a n k s a s a c o n v e n i e n t ,

liq u i d in v estm en t fo r id le c it

and t h e

funds.

I n th e f i v e m onths o f d e f i ­

im m e d ia te ly a f t e r t h e o a r , M cC ulloch had a llo w e d t h e s e d e ­

p o sits

t o i n c r e a s e b y 854 m i l l i o n t o a t o t a l o f $107 m i l l i o n . ' * '

T hereafter,

a s t h e d e b t was r e d u c e s and t h e s h o r t - t e r m p a r t

o f i t placed in p ro cess of co nversion,

he p e r m i t t e d t h i s p a r t

o f the d e b t s t e a d i l y to i n c r e a s e to $149.5 m i l l i o n in June 2 1866. F i n a n c i a l com m entators c r i t i c i z e d t h i s i n c r e a s e i n t h e amount o f w hat were p r a c t i c a l l y c a l l l o a n s t o th e

^T re a s u ry R e p o r t , 1867, p . I I I . 2

Bolles,

0 £.

cit., p. 91n.

284 T reasury.

Each s te p ta k e n t o c o n t r a c t th e c u rr e n c y ,

su p p o sed , w ould t i g h t e n

i t was

t h e money m a r k e t s o m e w h a t , a n d b a n k s

w o u l d b e i n d u c e d t o d r a w down t h e s e d e p o s i t s w i t h t h e T r e a s ­ ury.

The g r e e n b a c k s t h u s p a i d

t o t h e m w o u l d t h e r e b y be

returned to c ir c u la tio n .1 T his p o l i c y ,

so w i d e ly c r i t i c i z e d

in fin a n c ia l c irc le s ,

a t t e s t s b o t h t o M c C u l lo .e h ’ s t h o r o u g h c o m p r e h e n s i o n o f t h e natu re

a n d s e n s i t i v i t y o f t h e money m a r k e t a n d t o h i s s k i l l

i n m a n a g i n g the d e b t .

He made no d e c l a r a t i o n w i t h r e g a r d t o

the d e p o s i t s e x cep t to s t a t e

his a n tic ip a tio n

t h a t soon th e

n e e d f o r na n y k i n d o f t e m p o r a r y l o a n s " w o u l d be p a s t . * "

Pru­

d e n t l y he a l l o w e d t h e

to

increase

a v a ila b le balance in

as th e tem porary lo an s in c r e a s e d .

the T reasury

I t was c e r t a i n l y

n o t i n f l a t i o n a r y to a c c e p t f r e e l y th e d e p o s i t o f bank fu n d s a n d h o l d them i d l e lik e the

in the T reasu ry .

The a m o u n t o f t h e m ,

t h e e x c e s s o f b a n k i n g r e s e r v e s , was p l a i n e v i d e n c e o f s u p e rflu ity of currency.

T h ey , t o o , w e r e i n a way a

b a r o m e t e r o f t h e money m a r k e t , t h e m was r e d u c e d f r o m

.'/hen t h e r a t e o f i n t e r e s t on 3 5 t o 4 p e r c e n t a s o f May 1 , 1 8 6 6 , the

d e p o s i t s c o n tin u e d to

increase.

^ C o m m e r c i a l an d F i n a n c i a l C h r o n i c l e , O c t o b e r 7 , 1 8 6 5 , M a rch 3 , a n d A p r i l 2 1 , 1 8 6 6 , V o l . I , p . 4-49, V o l . I I , p p . 2 5 7 , 4 8 2 ; a n d M e r c h a n t ’ s M a g a z i n e , November 1 8 6 5 , M arch 1 8 6 6 , V o l . L I I I , p p . 2 3 5 - 2 3 6 , V o l . L IV , p . 2 3 0 . 2T r e a s u r y R e p o r t , 1865, p . 21. 3

Com mercial and F i n a n c i a l C h r o n i c l e , A p r i l 21, 1866, V ol. I I , p . 482.

I n t h i s -way a l a r g e amount, o f f u n d s w a s h e l d o u t o f t h e money m a r k e t , v.he. e t h e y w o u l d have c o n s t a n t l y t e m p t e d t h e b a n k e r s t o p u t them t o w o rk .

T his

coined t i m e f o r

the S ec­

r e t a r y t o c a r r y o u t other p a r t s o f h i s p ro g ra m — to r e d u c e t h e volum e o f g r e e n b a c k s a n d r e d e e m a n d c o n v e r t o t h e r ary p a rts

of the d e b t.

He may h a v e f e l t

th t

under le s s f a ­

v o r a b l e c o n d i t i o n s o p i n i o n would t u r n a g a i n s t h i s p o licy ,

a s he s o o n saw i t

in fla tio n ­

general

d o , a n d t h a t i t was w i s e r t o p u r s u e

th e r e d u c t i o n o f g r e e n b a c k s and t o e l i m i n a t e

th a t p a rt of

t h e s h o r t - t e r m d e b t w h i c h m i g h t o t h e r w i s e be c o n t i n u e d . payment o f the

te m p o r a r y d e p o s i t s , which g e n e r a l o p i n i o n h e l d

s h o u l d be d o n e f i r s t , be d e l a y e d . serve

The

M oreover,

c o u l d f o r t h a t v e r y r e a s o n m ore s a f e l y th e s e tem p orary lo an d e p o s i ts could

as a s a f e t y valve i f ,

through m is c a lc u la tio n or b e ­

c a u s e o f some u n f o r e s e e n e v e n t ,

the p r e s s u r e

of c o n tractio n

s h o u l d m o re t h a n t a k e up t h e s l a c k a n d c a u s e a c t u a l s t r i n ­ g e n c y i n t h e money m a r k e t .

I n su c h an e v e n t , b a n k e rs c o u ld

s i m p l y d r a w down t h e i r b a l a n c e s w i t h t h e T r e a s u r y a n d r e ­ sto re d ep leted re s e rv e s .

T h i s same p r o t e c t i o n w o u l d be a f ­

f o r d e d i n c a s e s p e c u l a t o r s c o m b i n e d t o h o a r d c u r r e n c y and thereby depress s e c u rity p r i c e s . B u i l d i n g up a n d m a i n t a i n ! n e, a l a r g e c u r r e n c y b a l a n c e i n t h e T r e a s u r y was a l s o a p a r t o f M c C u l l o c h Ts m o n e t a r y p o l i c y . E a g e r a s he

was

t o redeem and c a n c e l g r e e n b a c k s and to r e d u c e

other p a rts

of the d e b t,

a la rg e T reasu ry balance

g ave him

t h e m e a n s t o do s o a t t h e m o s t f a v o r a b l e t i m e s , was a

286

p r o t e c t i o n a g a i n s t t h e m as s o f s h o r t - t e r x a d e b t ,

and a l s o

s e r v e d a s a d e f e n s e a g a i n s t t h o s e who m i g h t c o n s p i r e t o make currency sc a rc e .

I n the sim ple p ro c e d u re o f p u r c h a s in g

Government o b l i g a t i o n s power to i n c r e a s e

the

in t h e open m a rk e t th e S e c r e t a r y had s u p p l y o f c u r r e n c y a n d c r e d i t when i t

s e e m e d t o h im d e s i r a b l e . A t t h e e n d o f t h e war t h e T r e a s u r y h a d h a d d i f f i c u l t y i n m a i n t a i n i n g a n y b a l a n c e t o m e e t t h e demands u p o n i t , by t h e

end o f a u g u s t 1865 T r e a s u r y c a s h amounted t o

m illio n .

I n June 1866 i t s t o o d a t |lw 2 m i l l i o n ,

low ing fo r gold c e r t i f i c a t e s o u t s t a n d i n g . the

same b a s i s ,

i t was a b o v e $ 1 60 m i l l i o n ,

h e l d so m e w hat e x c e e d i n g t h a t o f c u r r e n c y . the b a la n c e ,

but

‘.88

after a l­

A year l a t e r ,

on

th e amount o f c o in On J u n e 1 ,

t h o u g h r e d u c e d t o $113 m i l l i o n , was s t i l l

1868, far

m o r e t h a n a d e q u a te ." * ' T h i s p o l i c y — s o l o n g a s i t was a c o n t i n u o u s o n e — o f holding a large

b a l a n c e o f c u r r e n c y i n t h e T r e a s u r y , was a l ­

m o s t a s e f f e c t i v e a r e s t r a i n t on u n w a r r a n t e d b u s i n e s s e x ­ p a n s i o n a n d s p e c u l a t i o n a s was t h e r e t i r e m e n t o f g r e e n b a c k s , for

cash held

too, lik e

the

i n t h e T r e a s u r y was s i m p l y o u t o f u s e .

It,

t e m p o r a r y l o a n d e p o s i t s , was a g a u g e o f t h e r e ­

dundancy o f th e

c u rr e n c y , and a s a f e t y v alv e sh o u ld s e r i o u s

s t r i n g e n c y d e v e l o p i n t h e money m a r k e t , t i g h t e n i n g up t h e

c u rren cy supply c o n tin u ed ,

•^Treasury Reports. 1866-1868.

the p r o c e s s o f c o m p l a i n t was

287 made t h a t t h e l a r g e b a l a n c e d e p r i v e d b u s i n e s s o f m u c h - n e e d e d money a n d c r e d i t ,

t h a t a p a r t o f th e c a s h should be used t o 1 r e d u c e d e b t and s a v e i n t e r e s t . M oC ulloch, how ever, was c o n ­ v i n c e d t h a t c u r r e n c y i n o i r o u l a t i o n w a s m ore t h a n s u f f i c i e n t f o r the n eeds o fb u s in e s s .

H is broad c o n c e p tio n o f d e b t

m a n a g e m e n t h a d n o r e g a r d f o r a s m a l l and t e m p o r a r y s a v i n g i n t e r e s t a t t h e s a c r i f i c e o f one

in

i m p o r t a n t means— so r e l e v a n t

to h i s w hole p o l i c y — by w h ich th e i n f l a t i o n a r y f o r c e of the d e b t was h e l d i n c h e c k : He / t h e S e c r e t a r y b a s r e g a r d e d a s t e a d y m a r k e t a s o f m o re i m p o r t a n c e t o t h e p e o p l e t h a n t h e s a v i n g o f a few m i l l i o n s o f d o l l a r s i n th e way o f i n t e r e s t ; an d o b s e r v a t i o n and e x p e r i e n c e have a s s u r e d him t h a t in o rd er to secure t h is s te a d in e s s / o f the b u s i n e s s o f the o o u n t r y 7 i a a n y c o n s i d e r a b l e d e ­ g r e e , w h i l e b u s i n e s s i s c o n d u c t e d on a p a p e r b a s i s * t h e r e m u st be power i n t h e T r e a s u r y t o p r e v e n t s u c ­ c e s s f u l com binations to b rin g about f l u c t u a t i o n s f o r p u rely sp ecu lativ e p u rp o se s.2 I t w a s a l s o a p a r t o f M c C u l l o c h 1s p o l i c y t o m a i n t a i n a larg e

gold b a la n c e in the T re a s u ry .

dundance o f g o ld , how ever, t h i s re a so n the

T h e r e w a s no s u c h r e ­

a s t h e r e was

T re a s u ry ’s supply o f i t

o f c u r r e n c y , and f o r h a d t o be g a u g e d

c a r e f u l l y t o t h e n e e d f o r t h e m e t a l i n b a n k in g and commerce. A l t h o u g h e a r l y r e s u m p t i o n o f s p e c i e p a y m e n t s w a s Mc­ C ulloch ’s g r e a t

o b j e c t i v e , he co u ld n o t

g o l d i n t h e way

and to

th e e x t e n t t h a t

a t t e m p t to a c c u m u l a t e S h e r m a n was l a t e r t o d o .

H i e r o h a n t ’ s M a g a z i n e . Ma roh 1 8 6 7 , V o l . L VI, p . 2 3 7 . 2T re a su ry R e p o rt. 1866, p . 9.

288 He r a d i z e d , o f c o u r s e ,

t h a t a l a r g e s to c k o f gold

in the

T r e a s u r y would f a c i l i t a t e r e s u m p t i o n , b u t he was a l s o aware t h a t g o l d w a s s c a r c e a n d t h e demand f o r i t

in siste n t.^

In

th e y e a r s 1864 t h r o u g h 1868 th e a v e r a g e y e a r l y s a l e of T r e a s u r y g o l d w a s $47 m i l l i o n , w h i c h , b e c a u s e o f t h e p r e m i u m , p y i e l d e d a b o u t #70 m i l l i o n i n g r e e n b a c k s . The m o n e y - m a r k e t e f f e c t o f T r e a s u r y g o l d s a l e s was t o r e d u c e t h e a m o u n t o f c u rre n cy in c i r c u l a t i o n .

F or a tim e a f t e r the w a r,

th e

sale

o f g o l d was n e c e s s a r y t o p r o v i d e c u r r e n c y f o r t h e T r e a s u r y ’ s 3 o rd in ary e x p en d itu res. I t was n e c e s s a r y , t o o , to s e l l g o ld i n o rd e r to o b t a i n g re e n b a c k s f o r

t h e p u r o h a s e and r e d e m p t i o n

o f the s h o r t - t e r m and f l o a t i n g d e b t . N e v e r t h e l e s s , a l a r g e b a la n o e o f gold

in the T reasury

w a s deemed h i g h l y d e s i r a b l e b y t h e S e c r e t a r y . m e n t o f c o n t r o l o v e r t h e money m a r k e t , i t

As a n i n s t r u ­

supplem ented the

l a r g e g r e e n b a c k b a l a n o e w h ich he s t r o v e t o m a i n t a i n . e x i s te n c e o f a l a r g e gold r e s e r v e r e s t r a i n e d

The m e r e

sp ecu lativ e ac­

t i v i t y a n d d i s c o u r a g e d c o m b i n a t i o n s w h i c h w o uld o t h e r w i s e h a v e so u g h t to m a n ip u la te the

m ark ets.

o f g o l d t e n d e d t o t, i v e s t a b i l i t y

T i m e l y and j u d i c i o u s s a l e s t o t h e money m a r k B t and t o

b u s i n e s s g e n e r a l l y by " p r e v e n t in g v i o l e n t f l u c t u a t i o n s i n

! * • D o o » No. 1 2 4 , 3 9 t h G o n g . , 1 s t S e s s . , p p . 1 - 3 . 2H. E x .

Do

c

.

No. 8 4 , 4 0 t h C o n g . , 3d S e s s . ,

ST reasury R ep ort. 18 6 5 , p . 3 7 .

p assim .

289 the c o n v e r t ib l e v alu e o f the c u r r e n c y ." 1 s u r e d i n v e s t o r s t h a t the i n c o n ti n u i n g to pay th e te n d e d to b o l s t e r

M oreover,

T r e a s u r y would have

no d i f f i c u l t y g i n t e r e s t on i t s b o n d s i n g o l d . T his

t h e t>ii>lie c r e d i t a t a t i m e when t h e s a l e

o f c o n v e r s i o n b o n d s was o f u r g e n t i m p o r t a n c e . in stan ce,

A gain,

in th is

th e l o s s o f i n t e r e s t o c c a s i o n e d by a l a r g e g o l d r e ­

s e r v e se em e d t o t h e S e c r e t a r y a s m a l l p r i c e b e n e fits derived. In a l e t t e r for

i t reas­

to pay f o r

the

3

r e p l y i n g t o a House r e s o l u t i o n

4

w hich asked

i n f o r m a t i o n on s a l e s o f e p ld by t h e T r e a s u r y , M cC ulloch

d e f i n e d h i s p o l i c y a n d e x p l a i n e d how i t w a s b e i n g c a r r i e d

out.

He w r o t e : I t h a s b e e n my p u r p o s e , e i t h e r b y h o l d i n g o r s e l l ­ i n g , t o k e e p t h e m a r k e t s t e a d y . . . My i n s t r u c t i o n s , g i v e n a t v a r i o u s t i m e s t o M r. Van Dyck / t h e A s s i s t ­ a n t T r e a s u r e r a t New Y o r k ^ , h a v e b e e n t o make no s a l e s e x c e p t fo r the purpose o f su p p ly in g th e T re a s­ u ry w ith c u rre n c y , o r f o r m eeting th e n e c e s s a r y de­ mands o f c o m m e r c e , o r p r e v e n t i n g s u c c e s s f u l c o m b i n a ­ t i o n s e i t h e r to im p a ir th e n a t i o n a l c r e d i t o r to produce s e rio u s f l u c t u a t i o n s in p r i c e s . 5

1T re a su ry R e p o r t. 1868, p p . X L II-X L III. See a l s o H. E x . D o c . No. 1 2 4 , 3 9 t h C o n g . , 1 s t . S e s s . , p a s s i m . 2T re a s u ry R e p o r t . 1868, p . XLII. " I b i d ., p. X L III. ^ C o n g r e s s io n a l G lo b e , 3 9 th C ong., 1866, p . 2857.

1 s t S e s s . , May 2 8 ,

5H. Ex. D o c . No. 1 2 4 , 3 9 t h C o n g . , 1 s t S e s s . , p . 2 . Se e a l s o s t a t e m e n t w i t h r e g a r d zo T r e a s u r y g o l d s a l e s i n H. Ex. Doc. No. 134, 3 9 t h C o n g ., 1 s t . S e s s . , p . 3 .

290 I n c r e a s i n g O p p o s i t i o n and t h e End o f the C o n tra c tio n P o licy As a l r e a d y s e e n ,

t h e h ig h p o i n t of

t r a c t i o n p o l i c y was i n D ecem ber 1 8 6 5 . tio n

to i t

thought h eld

it

vinced

stead ily

ith regard

increased.

to c o n t r a c t i o n .

trac tio n ,

/. s f e a s i b l e ,

feered th a t

it

the con­

From t h e n on o p p o s i ­

T h e r e w e re s e v e r a l s c h o o l s o f

to be a m a t t e r o f p r i n c i p l e , th at i t

favor far

Some, l i k e M c C u l l o c h , and t h e y v.ere a l s o c o n ­

Meny, h o w e v e r , •-ho f a v o r e d c o n ­

m i g h t be c a r r i e d

in o p p o r tu n e ly , w ith s e r i o u s d is tu r b a n c e

out too r a p i d l y o r

to b u s i n e s s and f i ­

nance th ro u g h th e s h r i n k i n g of the c r e d i t

su p erstru ctu re,

d o n e w e r e a p p r e h e n s i v e o f t h e p o w e r o f money m a n a g e m e n t i n t h e h a n d s o f o ne o f f i c i a l 1 a n d would d e f i n i t e l y l i m i t t h e am o u n t o f c o n t r a c t i o n . w hatever,

Jtill

o t h e r s w a n t e d no c o n t r a c t i o n

and some e v e n s o u g h t an e x p a n s i o n of

the c u r r e n c y .

T h e s e l a s t r e p r e s e n t e d a m ovem ent t h a t grew r a p i d l y

" S e l d o m i n the h i s t o r y o f n a t i o n s h a s a n y i n d i v i d u a l s t a t e s m a n b e e n e n t r u s t e d w i t h g r e a t e r power i n t i m e o f p e a c e t h a n i s a t t h i s moment w i e l d e d by t h e S e c r e t a r y o f th e T r e a s ­ ury, He c a n e x p a n d o r c o n t r a c t the c u r r e n c y , end t h u s p r o d u c e r e s u l t s vvhich t h r i l l i n e v e r y n e r v e and f i b r e o f t h e b o d y p o litic , H i s m o v em en ts t o u c h s o c i e t y a t a l l p o i n t s , and f o r e v i l or good a r e o v e r a c t i n g on th e p r o d u c t i v e powers and i n d u s t r i a l development of o a r p e o p l e . " C o m m e r c i a l and F i n a n ­ c i a l C h r o n i c l e . Septem ber 2, 1865, V o l. I , p . 289. " 3 o c o m p l e t e and s o p e r v a d i n g i s the p o w e r w i e l d e d b y th e T r e a s u r y o v er th e f i n a n c i a l system o f t h e c o u n tr y t h a t e v e r y new o r d e r w i t h i t s p r o b a b l e e f f e c t s a nd i n d i c a t i o n s o f f u t u r e p o l i c y , i s e a r n e s t l y c a n v a s s e d among o u r b u s i n e s s m e n . " I b i d , , Decem ber 2 6 , 1 8 6 5 , V o l . I , p . 7 7 0 .

291 in to a strong

i n f l a t i o n p a r t y w h i c h d re w t o i t s e l f v a r i o u s

c l a s s e s and i n t e r e s t s ,

esp ecially

those of a g r i c u l t u r e .

In

t h e West t h e demand f o r more o u r r e n o y was l o u d l y r a i s e d . T h i s demand w a s a s s o c i a t e d w i t h t h e c o n t i n u i n g d e c l i n e i n th e p r i c e s of a g r i c u l t u r a l co m m odities. g o o d s t o f a r m e r s and th e

fallin g

The h i g h c o s t o f

p r ic e s of farm p ro d u cts

f o s t e r e d a f e a r of c u rre n c y c o n t r a c t i o n ,

and

t h i s f e a r was

e x p l o i t e d by i l l - i n f o r m e d o r i l l - i n t e n t i o n e d p o l i t i c i a n s . The c o n t r a c t i o n - i n f l a t l o n c o n t r o v e r s y was t o a l a r g e e x t e n t sectio n al: W est.

the com m ercial E a s t a g a i n s t th e a g r i c u l t u r a l

The D e m o c r a t i c P a r t y became

tio n ists.

the p a r ty o f th e i n f l a ­

E a r l y i n 1866 t h e t r e n d o f t h o u g h t i n C o n g r e s s

t u r n e d more a nd m o r e away f r o m t h e c o n t r a c t i o n i d e a . m em b ers d e n o u n c e d i t v i g o r o u s l y .

Some

O thers ex p ressed a s to n is h ­

m e n t t h a t a n y o n e s h o u l d p r o p o s e t a k i n g up t h a t p a r t of t h e d e b t which b o r e no i n t e r e s t and r e p l a c i n g i t w i t h b earin g bonds.

in te rest-

To t h e m t h i s was s i m p l y u n b u s i n e s s l i k e . 1

Instead of f u lf illin g

i t s p r o m i s e s made i n Deoem be r

1865, C o n g ress, i n th e Act o f A p r i l 12, 1866, l i m i t e d th e r a t e of c u r r e n c y c o n t r a c t i o n by forbidding; t h e r e t i r e m e n t of m o r e t h a n $10 m i l l i o n

in th e

follow ing

s i x m o n t h s and p e r m i t

t i n g a maximum w i t h d r a w a l o f $ 4 m i l l i o n i n e a c h m o n t h t h e r e after.

g

T h is was a m o d i f i c a t i o n r a t h e r t h a n a r e v e r s a l o f

^See N o y e s , o p . c l t . . p p . 1 1 - 1 3 . 2 14 S t a t u t e s . 3 1 .

292 p o l i c y , b u t i t m o r e e f f e c t i v e l y c h e c k e d c o n t r a c t i o n .than t h e actu al lim its

set in d icate.

The r e a s o n f o r t h i s was t h a t t h e

w i t h d r a w a l o f t h e g r e e n b a c k s c o u l d be p r u d e n t l y u n d e r t a k e n o n l y a t t h o s e s e a s o n s when t r a d e was s l a c k .

I n t h e a u tu m n

and s p r i n g , w h e n n e e d f o r c u r r e n c y w a s g r e a t e s t ,

the w ithdraw ­

a l o f t h e l e g a l - t e n d e r n o t e s would have in d u c e d s t r i n g e n c y i n t h e money m a r k e t , i f n o t f o r r e a s o n s o f r e a l s h o r t a g e a t l e a s t f o r p s y c h o l o g i c a l r e a s o n s and b e c a u s e o f ment i t would g i v e to currency fo r

the encourage­

some i n t e r e s t s t o " l o c k u p " o r h o a r d

sp ecu lativ e purposes.

Thus i t w a s p o s s i b l e t o

r e t i r e o n l y a p a r t o f th e amount p e r m i t t e d by t h i s l e g i s l a ­ tio n . M c C u l l o o h e x p r e s s e d h i s d i s a p p o i n t m e n t t h a t t h e House r e s o l u t i o n f o r c o n t r a c t i o n w a s " n o t s u s t a i n e d by c o r r e s p o n d ­ in g l e g i s l a t i o n " and t h a t he was " p r e v e n t e d from t a k i n g th e first

i m p o r ta n t s t e p tow ard e r e t u r n to s p e o ie

p aym ents."

L a t e i n 1866 h e p o i n t e d o u t t h a t d u r i n g t h a t y e a r " t h e r e d u c ­ t i o n o f t h e s e n o t e s and o f t h e n o t e s o f t h e b e e n n e a r l y b a l a n c e d by t h e

S ta te banks h as

in c re a s e of th e c i r c u l a t i o n of

t h e n a t i o n a l b a n k s ; and s p e c i e commands a b o u t t h e same p r e ­ mium i t

d i d when th e l a s t

t r e a s u r y r e p o r t was p r e p a r e d . " ^

As a n i n d i c a t i o n o f t h e

changing a t t i t u d e

tow ard resum p­

t i o n t h i s l i m i t a t i o n upon c o n t r a c t i o n was s i g n i f i c a n t , b u t i t d id n o t Im pair c o n fid e n c e .

I n May 1 8 6 6 , h o w e v e r ,

^•T reasury R ep ort. 1866, p p . 8 - 9 .

the

293 f i n a n c i a l p a n ic i n London a s s o c i a t e d w i t h th e O verendGurney f a i l u r e had i n t e r n a t i o n a l r e p e r c u s s i o n s w h ic h , f o r a t i m e , were f e l t i n th e

A m erican m a r k e t s . ^

I n some q u a r t e r s

blam e f o r th e r e s u l t i n g d i s r u p t i o n o f b u s i n e s s was p l a c e d on M e C u llo c h 's c o n t r a c t i o n p o l i c y .

But th r o u g h o u t th e r e s t

o f t h e y e a r , e x c e p t i n t h e m o n th o f N o v e m b e r , when f o r a b r i e f p e r i o d some s t r i n g e n c y was f e l t c u r r e n c y was a b u n d a n t .

a

in the

lo a n m ark et,

The Novem ber s t r i n g e n c y was a t t r i ­

b u t e d to the c o n t i n u a t i o n o f c o n t r a c t i o n and to th e

sale of

b o n d s a nd g o l d b y t h e T r e a s u r y a t a t i m e when s e a s o n a l d e 3 mand f o r f u n d s w a s a t i t s h e i g h t . T h e r e was s t i l l a d e s i r e to p lac e

t h e c u r r e n c y upon a sound b a s i s ,

i t m ig h t be done i n o f v a rio u s schem es.

b ut the w ish th a t

some p a i n l e s s w ay l e d t o t h e

I n t h e l a t t e r p a r t o f 1 8 66 t h e Commer­

c i a l and F i n a n c i a l C h r o n i c l e comm en ted t h a t p u b lic

proposal

p r e s s teeming w i t h

it

found " t h e

a l l kinds of v is io n a r y p r o j e c t s

f o r r e s t o r i n g the c u r r e n c y x v ithout c o n t r a c t i o n . " 4 The t r e n d a g a i n s t t h e S e c r e t a r y ' s avow ed p o l i c y o f c o n tra c tio n co n tin u ed .

As h a s b e e n o b s e r v e d , C o n g r e s s ,

in

^Noyes, o£. o l t . . p . 15. 2 S u m n e r , o p . o l t . , p . 2 1 2 ; a n d C o m m e r c i a l and F i n a n c i a l C h r o n i c l e . D e ce m b er 1 , 1 8 6 6 , V o l . I l l , p . 6 7 6 . 3Idem .

4September 1 5 , 186 6 , V o l. I l l , p . 3 2 1 .

294 M a r c h 1 8 6 7 , in. o r d e r t o c o u n t e r a c t a n y d e f l a t i o n a r y e f f e c t o f th e re fu n d in g o f the l e g a l - t e n d e r co m p o u n d -in te rest n o t e s , p ro v id ed f o r the i s s u e

of 3 - p e r c e n t c e r t i f i c a t e s

w hich were e l i g i b l e a s a p a r t o f b a n k r e s e r v e s ,

and r e q u i r e d

th e m t o be u s e d i n t h e p r e l i m i n a r y f u n d i n g o p e r a t i o n s . o f t h e s e c e r t i f i c a t e s were a u t h o r i z e d i n J u l y 1868. move was s i m p l y a m eans t o n e u t r a l i z e e arlie r

More

T his

the e f f e c t of the

l e g i s l a t i o n a u th o r iz in g c o n t r a c t i o n o f the g r e e n ­

backs . * O p p o s i t i o n to t h e p o l i c y o f c o n t r a c t i o n g a in e d g ro u n d in 1867.

Many p e o p l e h a d b e g u n t o f e a r t h a t a r e d u c t i o n i n

t h e a m ou n t o f g r e e n b a c k s w o u l d l e a d t o t r a d e r e c e s s i o n , i n j u r y t o b u s i n e s s , and u n e m p l o y m e n t . W e s t , demand i n t e n s i f i e d

for

E sp e cially in the

in f la tio n a r y m easures.

g

1 8 6 7 t h e r e w a s some i n c r e a s e i n s p e c u l a t i v e a c t i v i t y ,

D uring but

c o n v e r s i o n and t h e c o n t i n u e d r e d u c t i o n o f t h e g r e e n b a c k s were re s tra in in g in flu en ces.

N evertheless,

s p e c u la tio n absorbed

some o f t h e e x c e s s p a p e r c u r r e n c y , aod p r e s s u r e w a s f e l t i n th e lo an m ark ets.

There was a s to c k - m a r k e t c r i s i s e a r l y i n

^ B l a i n e , T w en ty Y e a r s o f C o n g r e s s . V o l . I I , 2

3

H epburn, o p . c l t . . p p . 209-210.

Sumner, o £ . c l t . . p . 2 1 3 .

p. 327.

295 1 8 6 7 , some b u s i n e s s f a i l u r e s o c c u r r e d d u r i n g tb e the r a t e

summer, a n d

on 6 0 - d a y c o m m e r c i a l p a p e r t e n d e d t o r a n g e b e t w e e n

8 and 10 p e r c e n t . ^

The p a p e r c i r c u l a t i o n o f t h e c o u n t r y h a d

b e e n r e d u c e d by #65 m i l l i o n d u r i n g t h e f i s c a l y e a r 1 8 6 7 . But a s tbs

2

amount o f c u r r e n c y d e c r e a s e d , b a n k l o a n s i n c r e a s e d .

B e t w e e n J a n u a r y 1 , 1 8 6 6 , and J a n u a r y 1 , 1 8 6 8 ,

the lo a n s o f

n a t i o n a l banks r o s e by #118 m i l l i o n , w h ile d e p o s i t s g a in e d 3 o n l y #18 m i l l i o n . Commodity p r i c e s w e r e s u b s t a n t i a l l y l o w e r i n 1 8 6 7 . a tim e,

in order to p r o te c t

the m ark e t from to o r a p i d an

a c c u m u la tio n o f c u r r e n c y i n the the sale

For

T r e a s u r y , M cC ulloch suspended

o f c o n v e r s i o n b o n d s f o r c a s h and d i s p o s e d o f th e m

o n ly in exchange f o r th e 7 .3 - p e r o e n t n o t e s . 4 t h e money m a r k e t a g a i n b e c a m e s t r i n g e n t .

I n t h e autum n

The g e n e r a l c o n ­

t r a c t i o n p o l i c y o f t h e T r e a s u r y was b e i n g f e l t , o f sen tim en t a g a in s t i t

and t h e t r e n d

aco elerated .

The p o i g n a n c y o f t h e

s i t u a t i o n was h e i g h t e n e d by t h e

f a c t t h a t u n t i l e a r l y 1868 t h e f u l l im p a c t o f c o n t r a c t i o n h a d b e e n o u s h l o n e d by t h e

ste a d y expansion o f th e n a tio n a l-

b a n k - n o t e c i r c u l a t i o n , w h io h h a d r i s e n fro m #213 m i l l i o n on

^ Idem. 2 U p t o n , Money i n P o l i t i c s , p .

131.

s S e e S u m n e r , oj>. c i t . , p p . 2 1 2 - 2 1 3 . ^ C o m m e r c i a l and F i n a n c i a l C h r o n i c l e . A u g u s t 1 0 , 1 8 6 7 , V o l . V, p . 1 6 6 .

896

J a n u a r y 1 , 1 6 6 6 , t o # 8 9 4 m i l l i o n on J a n u a r y 1 , 1 8 6 6 .

S ince

t h i s l a t t e r a m o u n t w a s by t h e n c l o s e - t o t h e a u t h o r i z e d l i m i t , the c o n tra c tio n in o th e r p a r ts of be p a r t l y o f f s e t by f u r t h e r n o tes. ^

i n c r e a s e i n th e amount of t h e s e

i t was r e a l i z e d i n the

t i o n c o n tin u e d a t the e v e n more e f f e c t i v e low ering p r i c e s .

t h e c u r r e n c y c o u ld no l o n g e r

money m a r k e t t h a t i f c o n t r a c ­

same r a t e a s t h e r e t o f o r e ,

i n re d u c in g the

i t would be

c u r r e n c y s u p p ly and

T h at t h e p o s t - w a r r e a d j u s t m e n t was n e c e s ­

s a r i l y a p a i n f u l p r o c e s s became more an d m a r e a p p a r e n t : A t t h i s j u n c t u r e o u t c r i e s were r a i s e d a g a i n s t c o n t r a c t i o n b y t h o s e who w e r e e n g a g e d i n t h e move­ ment o f e x p a n s io n , th o u g h , i n r e g u l a r b u s i n e s s , c r e d i t was s t i l l k e p t i n th e n a rro w b o u n d s t o w h ich i t had b e en re d u c e d d u r i n g the war . . . ... at la st, strew i t s term ined

t h e c o u n t r y w a s on t h e r o a d t o r e s u m p t i o n b u t th e w recks o f f o r t u n e s t h r e a t e n e d to pathw ay. C o n g r e s s b ecame a l a r m e d a n d d e ­ to p o stp o n e the e v i l s i t c o u ld n o t a v o i d . 3

I n f l u e n c e d by t h i s s e n t i m e n t , a r e s o l u t i o n was p a s s e d i n C o n g ress e a r l y i n 1868 to revoke the a u t h o r i t y o f th e S e c r e ­ t a r y t o c o n t i n u e c o n t r a c t i o n of t h e g r e e n b a c k s , a n d t h i s was f o l l o w e d a few w e e k s l a t e r b y a f o r m a l e n a c t m e n t . 4

^-See S u m n e r , o p . o l t . , p . 2 1 2 . 2Sumner, o p . o l t . , p . 213. ^U pton, o p . o l t . . p . 131. ^C ongressional 1868, p p . 6 7 4 -6 f 5 . o f F e b ru ary 4, 1868, and c a n c e l l a t i o n o f

G l o b e . 4 0 t h C o n g . , 2d S e s s . , J a n u a r y 2 2 , T h is r e s o l u t i o n was f o l lo w e d by the A ct w hich f o r m a l ly suspended th e r e t i r e m e n t U nited S t a t e s n o t e s . 15 S t a t u t e s . 3 4 .

297 T h is was th e end o f th e M oCulloch p l a n . It w as th e end o f a l l s e r i o u s d e b a t e upon r e s u m p ti o n , fo r a t le a st six years. I t w a s a l s o , and v e r y l o g i c a l l y , the b e g in n in g o f the fiat-m o n e y p a r t y and o f th e p l a n t o p a y th e G o v e r n m e n t s bonded d e b t, w herever p r a c t i c a b l e , i n n o te s . A lth o u g h a t o t a l o f $450 m i l l i o n o f g r e e n b a c k s had b e e n au th o rized ,

$50 m i l l i o n was r e q u i r e d b y la w t o b e h e l d t o i n ­

s u r e p r o m p t p a y m e n t o f t h e t e m p o r a r y l o a n d e p o s i t s made w i t h the T r e a s u r y . rep aid ,

By 1 8 6 7 , a l l o f t h e s e d e p o s i t s h a v i n g b e e n

I t w a s g e n e r a l l y u n d e r s t o o d t h a t t h e maximum g r e e n ­

b a c k a u t h o r i z a t i o n was $ 4 0 0 m i l l i o n . o f g r e e n b a c k s had been i n which

the

T his l i m i t

made c l e a r i n t h e

t o the

amount

A c t o f Ju n e 5 0 ,

1864,

f o l l o w i n g p r o v i s i o n was m ad e :

. . . n o r s h a l l th e t o t a l amount of U nited S t a t e s n o t e s i s s u e d , o r t o be i s s u e d , e v e r e x o e e d f o u r h u n d r e d m i l l i o n s o f d o l l a r s , a n d su c h a d d i ­ t i o n a l sum n o t e x c e e d i n g f i f t y m i l l i o n s o f d o l ­ l a r s , a s may b e t e m p o r a r i l y R e q u i r e d f o r t h e r e ­ dem ption of te m p o rary l o a n s . d D uring M o C u lloch’s term o f o f f i c e le a v in g the

$44 m i l l i o n w a s r e t i r e d ,

t o t a l o u t s t a n d i n g a t $365 m i l l i o n when t h e i r f u r ­

t h e r r e t i r e m e n t was p r o h i b i t e d . At f i r s t ,

after

t h e w a r , f e a r o f a r e o e s s i o n had i n ­

h ib ite d sp ecu lativ e ex cesses.

Then t h e S e c r e t a r y ’ s f i r m l y

d e c l a r e d p o l i c y of c o n t r a c t i o n d id s o . c o n t r a c t i o n was f o r b i d d e n ,

By t h e t i m e f u r t h e r

t h e amount a c c o m p l i s h e d — i n c o n ­

j u n c t i o n w i t h t h e r e d e m p t i o n and c o v e r s i o n o f s h o r t - t e r m d e b t and t h e p o l i c y o f m a i n t a i n i n g a l a r g e

% oyes, op. c l t . . p. 2 13 S t a t u t e s . 2 1 8 .

16.

Treasury b alan ce—

298 had m a t e r i a l l y l e s s e n e d the r e d u n d a n c y .

When i n F e b r u a r y

1868 C o n g re ss f o r b a d e f u r t h e r w i t h d r a w a l o f g r e e n b a c k s ,

the

a c t i o n was r e g a r d e d a s a r e v e r s a l o f t h e c o n s e r v a t i v e p o l i c y w h i c h t h e S e c r e t a r y hv,d f u r t h e r e d s i n c e h e m i g h t c o n t i n u e t o do t o s t a b i l i z e

the w ar.

W hatever

t h e economy and d i s ­

c o u r a g e s p e c u l a t i o n be ca m e a m i n o r c o n s i d e r a t i o n c o m p a r e d t o t h e avowed p o l i c y o f C o n g r e s s w h i c h i n d e f i n i t e l y p o s t p o n e d resu m p tio n o f s p e c ie paym ents. soon r e c o g n i z e d .

The s i g n i f i c a n c e o f t h i s was

Then g r a d u a l l y b e g a n t h a t o r g y o f s p e c u l a ­

t i o n t o w hich an e x c e s s i v e

irre d e e m a b le c u rr e n c y i s alw ays

c o n d u c i v e and w h i c h M o C u l l o c h t h r o u g h h i s p o l i c i e s h a d s t a v e d o ff fo r th ree y e a rs.

CHAPTER XI MONETARY POLICY IN RELATION TO D5BT MANAG-ELIEfff: ~ I 5 6 9 ~ l 8 7 § ~ ~

SECRETARY BOUTWELL'S GREENBACK POLICY E ven w i t h t h e

s u b s ta n tia l co n tractio n

w h ich h a d ta k e n p l a c e u n d e r M cC ulloch, of

of the c u rre n c y

i n 1869 r e s u m p tio n

s p e c i e p ay m en ts seemed a s f a r o f f a s e v e r .

B e f o r e th e war

t h e m a i n t e n a n c e o f s p e c i e p a y m e n t s by t h e T r e a s u r y h a d b e e n a rela tiv e ly

sim ple m a t t e r .

r e c e i p t s and a l l i t s

Then a l l o f t h e T r e a s u r y * s

e x p e n d i t u r e s were in g o l d .

When n o t e s

o r b o n d s w e r e a t t i m e s s o l d t o make u p a d e f i c i e n c y i n t h e revenues,

g o l d was r e c e i v e d i n p a y m e n t f o r t h e m .

no m as s o f c i r c u l a t i n g n o t e s , in g paym ent.

A lthough,

T h e r e was

such a s t h e g r e e n b a c k s ,

i n t h e decade b e f o r e t h e war,

aw ait­ the

b a l a n c e o f i n t e r n a t i o n a l p a y m e n t s was a g a i n s t t h e U n i t e d S tates,

t h i s was made up f o r b y t h e f l o w o f f o r e i g n i n v e s t ­

m ent f u n d s i n t o

t h e c o u n t r y an d t h e e x p o r t a t i o n o f w h a t e v e r

g o l d was n e c e s s a r y t o c o m p l e t e t h e b a l a n c e .

The r i c h y i e l d

o f t h e C a l i f o r n i a m i n e s p r o v i d e d more t h a n e n o u g h s p e c i e t o b a la n c e i n t e r n a t i o n a l p aym ents, and t h e

stock of specie

w ith in the co untry

B e f o r e t h e war t h i s

ste a d ily increased.

(299)

300

s t o c k e x c e e d e d by n e a r l y 20 p e r c e n t t h e t o t a l b a n k - n o t e c irc u la tio n ,1 When S e c r e t a r y B o u t w e l l a s s u m e d o f f i c e , was v e r y d i f f e r e n t .

the

situ atio n

B e tw e e n 18 6 4 a n d 1 8 73 t h e h i g h l e v e l

o f p r i c e s — o w in g i n l a r g e p a r t t o t h e i n f l a t i o n

of the

c u r r e n c y — r e s u l t e d i n an a v e r a g e a n n u a l e x c e s s o f i m p o r t s o f a b o u t $105 m i l l i o n , 2

Only a p a r t o f t h i s

b e c o u n t e r - b a l a n c e d by t h e e x p o r t o f g o l d . 3

e x c e s s could The r e m a i n d e r

h a d t o b e met by f o r e i g n i n v e s t m e n t i n A m e r i c a n s e c u r i t i e s . 4 E ven w i t h t h i s , a lo w l e v e l . had i t

th e gold s to c k of th e c o u n try had d e c lin e d to

The e s t i m a t e d t o t a l

o f 8189 m i l l i o n i n 1 8 6 9 , 5

a l l been a v a i l a b l e t o t h e Governm ent, would have been

f a r from a d e q u a t e c o v e r a g e f o r t h e c u r r e n c y i n c i r c u l a t i o n . The l a r g e g o l d r e c e i p t s f r o m c u s t o m s d u t i e s w e r e m a i n l y d i s ­ b u r s e d . a s i n t e r e s t on t h e d e b t ,

most o f t h e r e m a in d e r b e in g

^Se'e R e p o r t o f t h e C o m p t r o l l e r o f t h e C u r r e n c y , 1 9 1 9 , p p.34 -3 5. 2 F. D. Gra ham , " I n t e r n a t i o n a l T r a d e u n d e r D e p r e c i a t e d Paper. The U n i t e d S t a t e s , 1 8 6 2 - 7 9 , " Q u a r t e r l y j o u r n a l o f E co no m ic s." F e b r u a r y 1 9 2 2 , V o l . XXXVI, p p . 2 3 1 -2 3 5 7 3 Id e m . 4 - . . . b y t h e r e m i t t a n c e o f b o n d s we h a v e s i m p l y d e f e r r e d payment and must h e r e a f t e r e x p o r t p r o d u c t s t o m eet t h e s e o b l i g a t i o n s . - R e p o r t o f t h e S p e c i a l Com m issioner 2 1 t h e R e v e n u e , 1 8 6 9 , p . XXXK pp.

% e p o rt of th e C om ptroller o f th e C urrency, 34-35.

1919,

301

s o ld to p re v e n t a s e r io u s

shortage of th e m etal.^

The s i t u a t i o n h a d c h a n g e d s i n c e t h a t b r i e f p e r i o d J u s t a f t e r t h e war when C o n g r e s s s o l e m n l y vowed t o r e s u m e s p e c i e p a y m e n t s a t an e a r l y d a t e , ascendant,

when t h e n a t i o n ' s c r e d i t was

and w he n , b e c a u s e o f t h e s e f a c t o r s ,

r e s u m p t i o n c o u ld be b o r r o w e d a b r o a d .

gold f o r

The c l a m o r f o r I n f l a t i o n

had b l i g h t e d th e improvement in p u b l i c c r e d i t ,

and,

even w ith

t h e v a s t a m ou n t o f d e b t r e d u c t i o n an d r e a s s u r a n c e s f r o m Congress,

i t s r e v i v a l was s l o w .

The y e a r s o f B o u t w e l l ' s a d m i n i s t r a t i o n w e r e h i g h l y p r o s ­ p e r o u s f o r American I n d u s t r y . p o l i c y had been abandoned,

The c u r r e n c y - c o n t r a c t i o n

money a n d c r e d i t w e re a b u n d a n t ,

s p e c u l a t i o n was r i f e , lucky,

the c le v e r,

a n d f o r t u n e s w e r e made w i t h e a s e b y t h e p and t h e r a p a c i o u s . By 1 8 6 9 s t o c k s p e c u ­

l a t i o n b y m eans o f b o r r o w e d money was a b s o r b i n g t h e r e d u n d a n t currency,

a n d r a t e s on c a l l

and s h o r t - t e r m l o a n s r o s e .

was some s t r i n g e n c y t h r o u g h o u t t h a t y e a r ,

There

b u t b y 1 8 70 t h e

h i g h money r a t e s h a d a t t r a c t e d f u n d s t o New York f r o m a l l p a r t s o f the c o u n try .

Because o f t h i s

fact,

borrow ers could

p r o v i d e t h e m s e l v e s w i t h money a t b e t w e e n 4 a n d 6 p e r c e n t

■^or d e t a i l s o f T re a su ry gold s a l e s , as w e ll as th e a t t i t u d e s o f M oCulloch and B o u tw e ll to w a rd them, se e th e f o l l o w i n g s H. E x . p o c . No. 1 2 4 , 3 9 t h C o n g . , 1 s t S e s s . ; H. E x . P o o . No. 1 3 4 , 3 9 t h C o n g . , 1 s t S e s s . ; H. R e p t . No. 1 4 , 39tET~Cong., 2 d S e s s . ; H. E x . D oc. No. 8 4 , 4 0 t h C o n g . , 3d Sess. 2 N evins, H am ilton F i s h , p p . 6 3 8 -6 4 0 .

302 d u r i n g most o f t h e year.^-

As t h e boom d e v e l o p e d ,

demand f o r f u n d s f o r r a i l r o a d c o n s t r u c t i o n it

a large

arose,

a n d much o f

was m et b y s p e c u l a t i v e p u r c h a s e s o f s e c u r i t i e s

on b o r r o w e d

money r a t h e r

t h a n from s a v i n g s .

f o r l o n g - t e r m d e b t and e q u i t i e s ;

L iq u id a s s e t s were exchanged a nd t h e v o l u m e o f t h e l o a n s

and d e p o s i t s o f t h e ban k s acco m p an ied t h e upward c o u r s e of p th e expansion. I n t e n t upon th e r e d u c t i o n and r e f u n d i n g o f th e d e b t,

and

c o n v i n c e d t h a t a n y e a r l y a t t e m p t a t r e s u m p t i o n w o u l d be fu tile,

B o u t w e l l was n e v e r t h e l e s s o b l i g e d t o g i v e c o n s i d e r a b l e

a t t e n t i o n to th e m onetary a s p e c t s o f T re a s u ry p o l i c y , c u r r e n c y was s t i l l

th e g r e a t n a ti o n a l problem .

for

the

He d i d n o t

s h a r e M c C u llo c h * s v i e w t h a t c o n t r a c t i o n o f t h e g r e e n b a c k s c o u l d b r i n g a b o u t an e a r l y r e s u m p t i o n o f s p e c i e p a y m e n t s . "The a b i l i t y o f t h e c o u n t r y t o r e s u m e s p e c i e p a y m e n t s w i l l n o t be due t o an y s p e c i a l l e g i s l a t i o n upon t h a t

s u b j e c t , b u t to

th e co n d itio n of i t s

fin an c ia l re la ­

in d u strie s,

t i o n s t o o t h e r c o u n t r i e s . 1,3

and to i t s

When t h e c r e d i t o f t h e U n i t e d

S t a t e s c o u ld be e s t a b l i s h e d in Surope, e x c lu s iv e o f e v id e n ce s of borrow ing,

and A m erican e x p o r t s ,

eq u alled im p o rts,"

specie

■^Sumner, H i s t o r y o f A m e r i c a n C u r r e n c y , p p . 2 1 6 - 2 1 7 . 2 Clem ent J u g l a r , A B r i e f H i s t o r y o f P a n i c s , t r a n s l a t e d a n d e d i t e d b y DeCourcy~W. Thom, 3d e d . ”TG-, P . P u t n a m ' s S o n s , New Y o r k a n d L o n d o n , 1 9 1 6 ) , p p . 17, 1 2 4 , 1 2 7 - 1 2 8 . ^T r e a s u r y R e p o r t , 1869,

p. X III.

303

p a y m e n t s may b e r e s u m e d w i t h o u t e v e n a t e m p o r a r y e m b a r r a s s ­ ment to th e b u s i n e s s o f th e c o u n t r y . " ^ B o u t w e l l b e l i e v e d t h a t t h e c o u n t r y was " n o t p r e p a r e d t o s u s ta in the p o lic y of c o n tra c tio n

...

,* b u t t h a t by r e f u s i n g

t o a dd t o t h e a m o u n t o f p a p e r i n c i r c u l a t i o n a n d by a l l o w i n g th e

"in flu en ce of e x is tin g n a tu ra l causes"

course,

to tak e t h e i r

"our f i n a n c i a l c o n d itio n w i l l g r a d u a l ly Im prove."

p

T h e s e " n a t u r a l c a u s e s " h e p e r c e i v e d t o be t h e g r o w t h o f pop u latio n ,

th e i n c r e a s i n g use o f th e

by th e South and W est,

the

o u t s t a n d i n g p a p e r money

" r e v i v a l o f o u r f o r e i g n comm erce,"

t h e i n c r e a s e d use o f Am erican v e s s e l s i n f o r e i g n t r a d e , g r e a t e r e f f i c i e n c y and economy i n i n t e r n a l t r a n s p o r t a t i o n , a n d t h e e m p lo y m e n t o f " t h o s e m e a s u r e s w h i c h e n c o u r a g e Am erican m a n u fa c tu re s . . . lik e p ro d u cts,"3

a nd d i s c o u r a g e t h e i m p o r t a t i o n o f

Of t h e two— M c C u l l o c h a n d B o u t w e l l — t h e

l a t t e r was a s t a u n c h p r o t e c t i o n i s t , m erc sn tillstic

b u t b o t h were d e f i n i t e l y

in t h e i r view s.

B o u t w e l l , h o w e v e r , was n o t o p p o s e d t o c o n t r a c t i o n a s a p a r t o f a l a r g e r p o l i c y which c o n t e m p l a t e d g r a d u a l r e t u r n t o c o n d i t i o n s u n d e r w h i c h r e s u m p t i o n w o u l d be e a s i l y p o s s i b l e . He r e c o g n i z e d t h e r e l a t i o n s h i p b e t w e e n t h e

1 I b l d . . p . XIV. 2Ib ld .,

1872,

p . XXII.

5 I b l d . . p p . XXII-X XIV.

sta te

of the

304 p u b l ic c r e d i t and th e o v e rs u p p ly of c u r r e n c y .

Ih h i s r e p o r t

f o r 18 6 9 h e s a i d * The d e p r e c i a t i o n o f t h e c u r r e n c y i s d ue t o two c a u s e s — f i r s t , a n e x c e s s i v e I s s u e ; a n d s e c o n d ly , to th e want o f f a i t h in th e g o v e rn ­ m ent; and t h e e x t e n t o f th e i n f l u e n c e o f t h e f i r s t - n a m e d c a u s e c a n n o t be a s c e r t a i n e d u n t i l t h e seco n d i s removed s u b s t a n t i a l l y . 1 •

«

«







I t i s p r o b a b l e t h a t some d e c r e a s e i n t h e volume o f p a p e r w i l l u l t i m a t e l y be n e c e s s a r y , and I , t h e r e f o r e , r e s p e c t f u l l y s u g g e st t h a t t h e S e c r e t a r y o f t h e T r e a s u r y be c l o t h e d w i t h a u t h o r i t y to red u ce th e c i r c u l a t i o n of U n ited S t a t e s n o t e s i n a n a m o u n t n o t e x c e e d i n g two m i l l i o n s o f d o l l a r s i n any one m o n th .2 A lthough he c o n tin u e d

to b e l i e v e t h a t th e v a lu e o f th e

d e p r e c i a t e d c u r r e n c y would e n h a n c e w i t h t h e d e v e l o p m e n t o f t h e c o u n t r y , h e came t o

s t r e s s more a n d m ore t h e e f f e c t

t h a t a r e d u c t i o n i n t h e amount o f i t w ould h a v e upon i t s value; A l l l e g i s l a t i o n . . . which i n i t s e f f e c t s s h a l l ten d to d im in ish th e m arket v a lu e of c o i n , w i l l be f o u n d , upon a n a l y s i s , t o c o n t a i n a p l a n f o r c o n t r a c t i n g t h e volume o f p a p e r c u r r e n c y ; a nd a l l l e g i s l a t i o n . . . w h i c h d o e s n o t c o n t a i n such a p l a n , w i l l p ro v e i n e f f e c ­ tu a l.3 B u t s i n c e h e was c o n v i n c e d t h a t t h e p e o p l e w o u l d n o t a c c e p t a p o l i c y o f c o n t r a c t i o n , h e b e l i e v e d t h a t t h e r e m u st

t r e a s u r y R e p o r t. 1869, p . X I I I . 2 Ib id ..

p p . XV-XVI.

5 Ib id ..

1872, p . XX II.

305 b e " a s t u r d y r e f u s a l t o ad d t o t h e p a p e r I n c i r c u l a t i o n , it

i s of the

same v a l u e ,

same t i m e h e u r g e d t h a t

su b stan tially ,

a s c o i n . - "1'

u n til

At t h e

t h e g r e e n b a c k p a r t o f t h e c u r r e n c y be

made more f l e x i b l e by g i v i n g t h e S e c r e t a r y pow e r t o i n c r e a s e o r d e c r e a s e t h e a m o un t o f i t

w ith in c e rta in l i m i t s .

the n a tio n a l-b a n k -n o te c ir c u la tio n , a p r o f i t from i t ,

"it

As f o r

sin c e the banks d e riv e d

c a n n e v e r be w i s e t o a l l o w b a n k s . . .

to

i n c r e a s e o r d i m i n i s h t h e v o lu m e o f t h e c u r r e n c y i n t h e c o u n t r y a t th e ir p leasu re."

In p ro p o sin g th a t the greenback c i r c u la ­

t i o n b e made m ore f l e x i b l e , h e d i d n o t r e c o g n i z e t h e t r u e f l e x i b i l i t y w hich b a n k in g Im p a rte d to t h e d e p o s i t c u r r e n c y o f th e co untry.

In t h i s

c o n n ec tio n he m erely s t a t e d t h a t the

i n c r e a s i n g u s e o f bank c h ec k s and c e r t i f i c a t e s

of deposit

d e l a y e d t h e t i m e when t h e g r o w t h o f t h e c o u n t r y w o u l d make t h e g r e e n b a c k c i r c u l a t i o n no l o n g e r r e d u n d a n t a n d w o u l d b r i n g its

v a lu e to a p a r i t y with g o l d .^ What B o u t w e l l b e l i e v e d a n d w h a t h e d i d c o n c e r n i n g t h e

g r e e n b a c k s were q u i t e

d ifferen t.

I n t h e summer o f 18 6 9 o n l y

$314 m i l l i o n o f t h e $356 m i l l i o n o u t s t a n d i n g a c t u a l l y c i r c u ­ lated .

The r e s t r e m a i n e d i d l e i n t h e T r e a s u r y .

h a d p e r m i t t e d t h e amount i n c i r c u l a t i o n m illio n .

D uring b r i e f

By 1 8 7 2 he

to I n c r e a s e

t o $346

s t r i n g e n c i e s i n 1869 a n a 1 8 7 1 h e h a d

a l s o r e i s s u e d $ 1 .5 m i l l i o n w hich had been p r e v i o u s l y r e t i r e d .

1 Idem. 2 I b i d . . p p . X X I -X X I I .

306

In t h e f a l l

s t r i n g e n c y o f 1872 R i c h a r d s o n , a c t i n g f o r B o u t w e l l ,

c au se d - t h e T r e a s u r y t o greenbacks.^d iffic u lty .

i s s u e $ 5 m i l l i o n more o f t h e c a n c e l l e d

W i t h d r a w i n g t h e s e o v e r i s s u e s was d o n e w i t h In f a c t ,

t h e w ith d ra w a l o f th e §5 m i l l i o n i s s u e d

i n 1 87 2 " k e p t t h e m a r k e t s t r i n g e n t , throughout the w in te r ." "

and r a t e s e x c e s s i v e

In s p ite of h is

ex p ressed co n v ic­

t i o n s a s to m onetary p o l i c y B outw ell sim p ly fo llo w e d th e p a th of l e a s t r e s i s t a n c e .

In h i s h a n d s t h e g r e e n b a c k s were expan­

sib le but c e rta in ly not fle x ib le . SECRETARY RICHARDSON AND THE PANIC OF 1873 In p r in c ip le ,

S e c re ta r y R ichardson favored resu m p tio n .

When h e t o o k o f f i c e h e b e l i e v e d t h a t t h e r e was a. g r o w i n g d e s i r e o f th e p eople f o r i t ,

and he d e c l a r e d t h a t e i t h e r t h e

v o l u m e o f c u r r e n c y m u s t be reduced- o r t h e a m o un t o f c o i n in creased .

He s h a r e d t h e o p i n i o n o f c o n s e r v a t i v e f i n a n c i e r s

t h a t any l a r g e a u g m e n ta tio n o f t h e amount o f l e g a l - t e n d e r n o t e s would i n j u r e and c o n s t i t u t e

th e G o v e rn m e n t's c r e d i t ,

a breach of public f a i t h . ^

he d id n o t a d h ere in p r a c t i c e

d .e la y r e s u m p t i o n , But,

l i k e B outw ell,

to what he h e l d a s p r i n c i p l e .

1

D e tra c to r s o f th e a d m in is tra tio n claim ed t h a t t h is was d o n e t o i n f l u e n c e t h e f a l l e l e c t i o n s i n t h e W e s t . N evlns, o p . c l t . , p . 696. 2 N o y e s , F o r t y Y e a r s , p . 16: a n d S um ne r, o p . c i t . . p . 218. -----

5 T reasury R ep o rt, 1873, pp. XVIII-XIX.

30? D u r i n g h i s t e r m o f o f f i c e h e r e i s s u e d 5 26 m i l l i o n o f t h e g r e e n b a c k s w hich M cCulloch had r e t i r e d . handed a c t,

and o f d o u b tf u l l e g a l i t y ,

T h i s was a h l ^ i -

f o r w i t h no a u t h o r i t y

f r o m C o n g r e s s t o do so h e h a d t h u s i n c r e a s e d t h e p u b l i c d . e b t. H i s b e l i e f t h a t t h e c o u n t r y m u st " g r o w up"

t o r e s u m p tio n and

t h a t t h e b a l a n c e o f t r a d e m u st t u r n i n f a v o r o f t h e U n i t e d S t a t e s b e f o r e r e s u m p t i o n c o u l d b e a c h i e v e d was t h e t h a t o f h i s predecessor.-*-

same a s

As f o r t h e p o s s i b i l i t y o f e a r l y

r e s u m p t i o n , by S ep tem b er 1874 b o t h h e and t h e P r e s i d e n t were o o f t h e o p i n i o n t h a t i t m i g h t s o o n be a c c o m p l i s h e d . " R i c h a r d s o n c o n t i n u e d B o u t w e l l 1s d e b t - r e d u c t i o n p o l i c y . In h i s

z e a l t o p a y down t h e d e b t ,

how ever, h e allow ed th e

T r e a s u r y b a l a n c e t o d e c l i n e to a low l e v e l . a v e ra g e d o n ly $12.5 m i l l i o n . 3

A l l o f t h e $43 m i l l i o n

f o r f i s c a l 1 8 7 3 was u s e d t o r e d u c e t h e d e b t , more b e s i d e s . 4 p o sitio n

D u r in g 1872 i t surplus

a n d $7 m i l l i o n

The T r e a s u r y was i n an e x t r e m e l y p o o r

t o come t o t h e a i d o f t h e m a r k e t when a c r i s i s

d e v e lo p e d in Septem ber 1873.

The s t o r y o f t h e g r e a t p a n i c

w h i c h t h e n e n s u e d h a s b e e n r e c o u n t e d many t i m e s .

H ere i t s

1 I b l d . , p . XXIV. 2 N evlns, op . c l t . , p. 702. 3 K in le y , Indep en d en t T re a s u ry , pp. 181-182. 4 C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , D e c e m b e r 6, 1 873, V o l. XVII, p . 7 4 9 .

308 m o n e y - m a r k e t a s p e c t s c a n be t r a c e d I n a f e w w o r d s ; I n 1 8 7 3 , t h e f a r m e r s * movem en t a g a i n s t th e r a i l r o a d s im paired co n fid en ce in r a i l ­ r o a d b o n d s a s an i n v e s t m e n t . When t h e c r o p movement b e g a n a g a i n t h e de mand o f t h e c o u n t r y b a n k s l e d t o a demand f r o m t h e c i t y b a n k s u p o n t h e b r o k e r s , and p r e c i p i t a t e d a p a n i c upon t h e s t o c k e x c h a n g e . The f a i l u r e of s e v e r a l l a r g e banking h o u se s engaged in t h e s a l e o f r a i l r o a d bonds I n c r e a s e d th e ex citem en t. The c l o s i n g o f t h e s t o c k e x c h a n g e , and su sp en sio n o f th e c i t y banks, o b lig e d th e c o u n try banks to c o n t r a c t t h e i r l o a n s , and brought the In d u stry of the co u n try to a stand­ still.! A great

s u p e r s t r u c t u r e o f c r e d i t had b e en r a i s e d , upon

th e b a s i s of a paper c u rre n c y is s u e d in n e e d s o f I n d u s t r y and commerce. c re d it,

r a t h e r than o f s a v in g s ,

c a p i t a l goods, re a c h e d I t s r e s e r v e s beh in d i t th e ir n atu re

excess of the tru e

The u s e o f much o f t h a t f o r the c o n s tr u c tio n of

f u r t h e s t l i m i t when t h e money

c o u l d s u p p o r t no m o r e .

What w e r e by

s h o r t - t e r m f u n d s had been e n g a g e d t o a c q u i r e

l o n g - t e r m d e b t and slo w ly d e v e lo p in g e q u i t i e s .

When t h e

money r e s e r v e s o f t h e b a n k s w e r e t h u s f u l l y e m p l o y e d ,

the

a d d e d demand u po n th e m f r o m t h e I n t e r i o r o f t h e c o u n t r y f o r f u n d s t o h a r v e s t a n d move t h e c r o p s b r o u g h t a d a y o f r e c k o n i n g t h e i n e v i t a b i l i t y o f w h i c h h a d b e e n o b s c u r e d by the a r t i f i c i a l

l i q u i d i t y of the

s to c k and bond m a r k e t s .

The T r e a s u r y was n o t p r e p a r e d f o r t h i s pow erless to h e lp .

Even i f

it

■^Sumner, op. o l t . , p . 2 1 8 .

ev en tu ality

haa been a b le ,

a nd was

and had i t s

309

a c t io n been e f f e c t i v e ,

th e l o n g - d e l a y e d r e a d j u s t m e n t which

f o l l o w e d th e p a n i c would have been m e re ly p o s t p o n e d . The p a n i c b e g a n on S e p t e m b e r 1 8 .

W ithin l e s s

than a

w eek t h e S e c r e t a r y h a d e x p e n d e d a l a r g e p a r t o f t h e T r e a s u r y b a l a n c e in p u r c h a s i n g Government o b l i g a t i o n s ; P u r c h a s e s o f b o n d s w e r e commenced on t h e m o r n i n g o f t h e 2 0 t h o f S e p t e m b e r , and w e r e c o n t i n u e d ton t i l t h e 2 4 t h , when i t became e v i d e n t t h a t t h e a m o un t o f f e r i n g f o r p u r ­ c h a s e was i n c r e a s i n g t o an e x t e n t b e y o n d t h e power o f t h e T r e a s u r y to a c c e p t , and t h e p u r c h a s i n g was c l o s e d a f t e r b o n d s t o t h e amount o f a b o u t t h i r t e e n m i l l i o n d o l ­ l a r s had been b o u g h t, and w i t h o u t th e u se o f any p a r t o f th e f o r t y - f o u r m i l l i o n s , g e n e r a l l y known a s t h e r e s e r v e . * These p u r c h a s e s i n the c r i s i s . resources,

th e open m arket d id n o t h i n g to s t a y

The p u b l i c knew t h e l i m i t

and so no c o n f i d e n c e was a r o u s e d by t h e S e c r e ­

t a r y ' s g r e a t w i l l i n g n e s s t o do a l l At such a c r i s i s suspended,

of the T re a s u ry 's

t h a t he p o s s i b l e c o u l d .

i n E n g l a n d t h e Ba nk A c t w o u l d h a v e b e e n

t h e r e b y p e r m i t t i n g t h e Bank o f E n g l a n d t o

supply

a n u n l i m i t e d a m o u n t o f f u n d s t o a l l who p r e s e n t e d g oo d c o lla te ra l.

There,

was o f t e n s u f f i c i e n t

j u s t t h e f a c t t h a t t h i s c o u l d be done to a lla y the fe a r

th a t breeds p an ic.^

B u t no c o m p a r a b l e m e a n s e x i s t e d i n t h e U n i t e d S t a t e s .

The

u s e o f c l e a r i n g h o u s e c e r t i f i c a t e s was a p a l l i a t i v e b u t n o t a s u b s t i t u t e f o r th e p r o t e c t i o n and e l a s t i c i t y which a w i s e l y

^ T r e a s u r y R e p o r t , 1 8 7 3 , p . XV. 2Adams, P u b l i c D e b t s , p p . 2 1 5 - 2 1 6 .

310 e m p o w ered g o v e r n m e n t b a n k o r c e n t r a l b a n k m i g h t h a v e p r o v i d e d * The i n t e n s e e x c i t e m e n t a n d f i n a n c i a l d i s t r e s s p r o m p t e d a l l k i n d s o f s u g g e s t i o n s a n d d em ands a s t o w h a t t h e T r e a s u r y s h o u l d do t o e n d t h e d e v a s t a t i o n a n d r u i n w h i c h was t a k i n g p lace.

The S e c r e t a r y was u r g e d t o b u y f o r e i g n e x c h a n g e o r

lend a g a in st i t ,

t o p r e p a y b o n d s n o t y e t m a t u r e d , ito I s s u e

m o re U n i t e d S t a t e s n o t e s . ^ proceeded to

fo llo w .

T his l a s t

e x p ed ien t R ichardson

G r e e n b a c k s w e r e t a k e n from t h e s o - c a l l e d

" r e s e r v e ” and u s e d b o t h t o p u r c h a s e b o n d s a n d t o m e e t c u r r e n t expenses of th e T re a su ry .^ A f a v o r a b l e c o n s e q u e n c e o f t h e p a n i c was t h e c h a n g e i n t h e b a l a n c e o f I n t e r n a t i o n a l p aym ents which o c c u r r e d l a t e i n 1873.

As a r e s u l t o f t h e d r a s t i c

d e c lin e in p r i c e s and th e

d i m i n i s h e d b u y in g power o f t h e p e o p l e , im ports d ecrea se d g r e a t l y . 3

e x p o r t s I n c r e a s e d and

The o u t f l o w o f g o l d f e l l b e l o w

t h e amount b e i n g p r o d u c e d w i t h i n t h e c o u n t r y . "

For the

f i s c a l y e a r 1874 e x p o r t s e x c e e d e d i m p o r t s by | 1 8 m i l l i o n . 5 T h e re a fte r the

excess of e x p o rts in c re a s e d ,

g rad u ally at

•^Treasury R e p o r t , 1873, p a s s im . 2 H e p b u r n , H i s t o r y o f C o i n a g e a n d C u r r e n c y , p . 221; B a r r e t t , The G r e e n b a c k s , p 7 1 7 6 ; AdamsT^P u S l l c D e b t s , p p . 2 1 5 - 2 1 6 ; a n d C o m m e r c i a l and F i n a n c i a l C h r o n i c l e , D e c e m b e r 6 , 1 8 7 3 , “ v o l . X V I I, p . 7 4 9 ^ ^ T r e a s u r y R e p o r t . 1873, p . X X III. 4 I b l d . . 1 8 7 4 , p p . X X I-X X II; a n d H. M i s c . D o c . . 5 0 th C o n g ., 1 s t . S e s s . , Appendix p . 5

T reasury R ep o rt, 1875, p . XXXVII.

No. 8 7 ,

311

first, it

then ra p id ly ,

u n til

i n t h e f i s c a l y e a r s 1 8 7 8 a n d 1879

e x c e e d e d $250 m i l l i o n . ^ -

T h is developm ent d id n o t r e s u l t

i n t h e s h i p m e n t o f an e q u a l am ount o f g o l d t o t h e U n i t e d S tates,

f o r a c o n s i d e r a b l e p a r t o f t h e b a l a n c e was o f f s e t b y

b o o k - c r e d i t a d j u s t m e n t s and t h e r e t u r n flo w of Government se cu ritie s.

N evertheless,

t h e t\*ro e s s e n t i a l c o n d i t i o n s f o r

resu m p tio n had been f u l f i l l e d :

p r i c e s were lo w and t h e

b a l a n c e o f t r a d e was f a v o r a b l e .

I t was f i v e y e a r s , h o w e v e r ,

b e fo re resum ption co u ld tak e p la c e ,

fo r a n o th er consequence

o f t h e p a n i c a n d e n s u i n g d e p r e s s i o n was a w i d e s p r e a d r e v i v a l and i n t e n s i f i c a t i o n o f i n f l a t i o n

sentim ent.

VETO OF THE INFLATION BILL F ollow ing the p a n ic , upon C o n g re ss to

e n o r m o u s p r e s s u r e was b r o u g h t

give r e l i e f

the people In g e n e r a l.

to b u sin e ss i n t e r e s t s

M an y w i l d

p r o p o s e d , a n d t h e r e was w i d e s p r e a d i n t h e a m ount o f t h e g r e e n b a c k s .

fin an cial

and to

schem es were

demand f o r an I n c r e a s e "More t h a n s i x t y

b ills,

r e s o l u t i o n s and p r o p o s i t i o n s w e r e i n t r o d u c e d i n t h e S e n a t e in r e s p e c t to banks,

th e currency,

t h e p u b l i c d e b t and n a t i o n a l

a l l b e a r i n g upon t h e f i n a n c i a l c o n d i t i o n o f t h e

country. The p r o p o n e n t s o f an a b u n d a n t c u r r e n c y

1 I b l d . . 1 8 7 8 , p . XXXI; a n d 1 8 7 9 , 2

d i f f e r e d among

p . XXIX.

Sherman, R e c o lle c t i o n s , V o l. I , p . 490.

31 £

them selves as to

t h e most s u i t a b l e f o r m o f I t .

them a g r e e d , h o w ev er,

Most o f

t h a t th e n a t i o n a l - b a n k i n g system

s h o u l d be do ne away w i t h a n d t h a t on e f o r m o f c u r r e n c y s h o u l d be I s s u e d d i r e c t l y b y t h e G o v e r n m e n t . ^ s i m p l y an i n c r e a s e I n t h e amount o f g r e e n b a c k s , payment I n s p e c ie p o s tp o n e d i n d e f i n i t e l y .

Some a d v o c a t e d w ith t h e i r

O thers w anted

p r i n t i n g - p r e s s money w i t h n o p a r t i c u l a r l i m i t t o t h e a m o u n t . A n o th er school o f th o u g h t urged th e use o f ir r e d e e m a b le l e g a l - t e n d e r n o t e s made e x c h a n g e a b l e f o r 3 . 6 5 - p e r c e n t b o n d s , t h e bonds to be e x c h a n g e a b le f o r su ch n o t e s and t h e i n t e r e s t on t h e b o n d s t o be p a i d w i t h t h e l a s t method,

same k i n d o f n o t e s .

T his

which G a r f i e l d c a l l e d a form o f " f i n a n c i a l

p e r p e t u a l m o t i o n , " r e c e i v e d much e a r n e s t b u t u n e n l i g h t e n e d co n sid eratio n .

2

A f t e r s e v e r a l m onths o f c o n s i d e r a t i o n ,

th e S enate

F i n a n c e C o m m i t t e e d e c i d e d u p o n a m e a s u r e f i x i n g t h e maximum

A t a h e a r i n g b e f o r e t h e H o u s e C o m m i t t e e on B a n k i n g a n d C u r r e n c y o n two b i l l s w h i c h p r o p o s e d t o s u b s t i t u t e U n i t e d S t a t e s n o t e s f o r t h e a p p r o x i m a t e l y £350 m i l l i o n o f n a t i o n a l - b a n k n o t e s th e n o u t s t a n d i n g , tw e n ty -s e v e n m onetary and f i n a n c i a l a u t h o r i t i e s t e s t i f i e d . I t was t h e c o n c l u s i o n o f t h e c o m m ittee t h a t such a s u b s t i t u t i o n "would r e q u i r e e i t h e r an i n c r e a s e o f t h e p u b l i c d e b t t o t h a t am ount, or a w i t h d r a w a l o f b o n d s , t o be r e p l a c e d b y U n i t e d S t a t e s n o t e s . I t i s n o t p e r c e i v e d how t h e T r e a s u r y w o u l d b e b e n e f i t e d b y an i n c r e a s e o f t h e p u b l i c d e b t , a n d i t i s n o t b e l i e v e d t h a t o u r I n t e r e s t - b e a r i n g b o n d s c o u l d b e e x c h a n g e d f o r an a d d i ­ t io n a l issu e of U nited S ta te s n o te s except a t a g re a t d is ­ a d v a n ta g e in th e t r a n s a c t i o n i t s e l f and to th e s e r i o u s d e tr im e n t of th e p u b lic c r e d i t , " H. R e n t . No. 3 2 8 , 4 3 d C o n g ., 2d S e s s . 2 J a m e s A. G a r f i e l d , "The C u r r e n c y C o n f l i c t , " The A t l a n t i c M o n t h l y . F e b r u a r y 1 8 7 6 , V o l . XXXVII, p p . 2 I S - 2 2 3 .

313

amount o f t h e g r e e n b a c k s a t $382 m i l l i o n , outstanding.

t h e amount th e n

I t a ls o p ro v id e d f o r t h e i r g ra d u a l redem ption

e i t h e r in c o in o r in 5 - p e r c e n t bonds, S ecretary of the T re a su ry .1

a t the o p tio n of the

The c o r r e c t l e g a l l i m i t

amount o f t h e s e n o t e s was a m a t t e r o f c o n t r o v e r s y .

to th e Senator

Sherman c l e a r l y p r e s e n t e d t h e i s s u e s I n v o l v e d i n d e t e r m i n ­ i n g upon a l e g a l maximum.

He s a i d *

On t h e o ne h a n d i t i s i n s i s t e d by S e n a t o r s who co m p ose t h e m a j o r i t y o f t h e c o m m i t t e e on f i n a n c e t h a t t h e l e g a l l i m i t o f U n i t e d S t a t e s n o te s i s $356,000,000; t h a t th e amount which h a s been a l r e a d y i s s u e d , o f w h a t i s known a s t h e $ 4 4 , 0 0 0 , 0 0 0 r e s e r v e , was u n l a w f u l l y i s s u e d , a l t h o u g h u n d e r g r e a t p r e s s u r e o f c i r c u m s t a n c e s and w ith o u t any i n t e n t i o n on t h e p a r t o f t h e s e c r e t a r y t o do m ore t h a n h e t h o u g h t h e h a d a l a w f u l r i g h t t o do. On t h e o t h e r h a n d i t i s i n s i s t e d by o t h e r S e n a t o r s t h a t t h e l e g a l l i m i t o f U nited S t a t e s n o te s i s $ 400,000,000; a n d h e r e i s a m a r g i n o f fe'44 m i l l i o n upon w hich t h e r e i s a d i s p u t e o f law a s to t h e power o f t h e s e c r e t a r y t o i s s u e i t . That d i s p u t e o u g h t t o be s e t t l e d a t o n c e . I t is a q u e s t i o n t h a t o u g h t n o t t o be i n d o u b t a moment, b e c a u s e t h e p o w e r t o i s s u e t h a t $ 44 m illio n p lac es i t in the d i s c r e t io n of the S e c re ta ry of the T reasury e i t h e r to advance o r t o low er th e v a lu e o f a l l p r o p e r t y i n the U n ite d S ta te s , o f a l l d e b ts in the U n ited S t a t e s , o f e v e r y t h i n g t h a t i s m e a s u r e d by U nited S ta te s n o te s ." T his

b ill,

was so r a d i c a l l y

1 Sherman, p

a f t e r i t was r e p o r t e d by t h e c o m m i t t e e , amended i n t h e S e n a t e

o jd .

c l t ., V ol. I,

th at i t s n atu re

p . 495.

C o n g r e s s i o n a l G l o b e , 43d C o n g . , M arch 2 4 , 1 8 7 4 , p p . 2 3 6 6 - 2 3 8 7 .

1 st S ess.,

a nd

314 p u r p o s e were c o m p l e t e l y c h an g e d . was s e t a t $400 m i l l i o n ,

The maximum o f g r e e n b a c k s

$18 m i l l i o n more t h a n e s t a b l i s h e d

a f t e r t h e r e i s s u e o f $26 m i l l i o n b y B o u t w e l l a n d R i c h a r d s o n . In a d d i t i o n t o t h i s p e rm a n e n t I n c r e a s e i n t h e c i r c u l a t i o n ,

it

a u t h o r i z e d $4 6 m i l l i o n more I n n a t i o n a l - b a n k - n o t e c i r c u l a t i o n , w h ic h would h av e r a i s e d .n400 m i l l i o n .

the t o t a l o f t h a t c u rre n c y a ls o to

The m e a s u r e ,

very a p p ro p ria te ly ,

c a l le d the '• in f la tio n b i l l . " paym ents,

it

came t o b e

11I n s t e a d o f a r e t u r n t o s p e c i e

p r o v i d e d f o r an e x p a n s i o n o f an i r r e d e e m a b l e

c u r r e n c y . I n

th is

form i t

r e a d i l y p a sse d b o th th e Senate

and th e House.

P r e s i d e n t G rant,

though n o t s h a rin g th e

extrem e view s of t h e i n f l a t i o n i s t s ,

h a d e n c o u r a g e d th e m t o

s u p p o s e t h a t h e w o u l d c o u n t e n a n c e an i n c r e a s e i n t h e currency.

In h i s a n n u a l m essage o f December 1,

1873, he

had sa id ; In view o f the g r e a t a c t u a l c o n t r a c t i o n t h a t h a s ta k e n p la c e in th e c u rre n c y and th e co m p arativ e c o n tr a c tio n c o n tin u o u s ly going o n, d u e t o t h e i n c r e a s e o f p o p u l a t i o n , in c r e a s e o f m an u fa cto rie s and a l l th e in d u s­ t r i e s , I do n o t b e l i e v e t h e r e i s t o o much o f i t now f o r t h e d u l l e s t p e r i o d o f t h e y e a r . ^ When, a t a C a b i n e t m e e t i n g , he t o l d o f h i s f i r s t to

in clin atio n

s i g n t h e b i l l a n d h i s more m a t u r e d e c i s i o n t o v e t o i t ,

"The C a b i n e t i n f l a t i o n i s t s

■^Sherman, 0£ .

c l t ..

s a t stu n n e d a s G rant announced

V ol.

I, p .

504.

^ R ic h a rd s o n , M essages and P a p e r s o f th e P r e s i d e n t s , V o l. V II, p . 245.

315

th is v o lte-face.

T h e r e was n o t a s u f f i c i e n t m a j o r i t y i n

Congress to o v e rrid e th e v e to . G r a n t 1s I n d e c i s i o n i n m a t t e r s o f t h e c u r r e n c y m i r r o r e d t h a t o f th e p eo p le a t l a r g e .

H is f i n a l d e te r m i n a ti o n to

v e t o t h e i n f l a t i o n b i l l was r e a c h e d a f t e r tio n

i n which he had f i r s t

of i t .

2

sought to J u s t i f y h i s a p p ro v a l

An a b l e g e n e r a l , now P r e s i d e n t ,

d iffic u lt

studious r e f l e c ­

t o o k t h e more

c o u r s e and c o u r a g e o u s l y r e v e r s e d h i m s e l f .

amount an d q u a l i t y o f t h e n a t i o n ' s c u r r e n c y , of i t s

The

the p ro sp ect

e v e n t u a l p a y m e n t i n g o l d f o r w h i c h i t was a p r o m i s e ,

t h e v a l u e o f t h e d o l l a r a t home a n d a b r o a d , of th e p u b lic

cred it,

a nd t h e

a l l d e p e n d e d u po n t h e d e c i s i o n o f

t h i s o ne man who, a t t h i s J u n c t u r e , had. s t u d i e d ap p lied c a re fu l reaso n in g ,

th e problem ,

and r e a c h e d a d e c i s i o n c o n t r a r y

t o h i s more i m m e d i a t e p e r s o n a l i n t e r e s t .

Thus, d u r i n g th e

m o st s c a n d a l o u s a d m i n i s t r a t i o n i n A m e r i c a n h i s t o r y , appeared t h a t ra re

sta te

there

t r i n i t y o f v i r t u e s w h i c h m u st c h a r a c t e r ­

i z e m o n e y - m a n a g e r s — p r o b i t y , w isd o m , a n d c o u r a g e . THE RESUMPTION ACT A p a r t o f the support fo r the i n f l a t i o n f r o m R e p u b l i c a n s who h a d s e e n i n i t

a l a s t d e s p e ra te chance

^ D ia r y o f H a m ilto n F i s h , A p r i l 21, N e v i n , 0£ . c i t . , p . 7 1 2 . 2Ib id ..

p . 712.

b i l l h a d come

1 874,

quoted in

316

to f in d fa v o r w ith a d e p re ss io n -rid d e n p o p u latio n t o th ro w o u t t h e a d m i n i s t r a t i o n In power. d e f e a t e d i n November 1 8 7 4 ,

In ten t

O verw helm ingly

t h o s e m em bers o f C o n g r e s s

c a n n i l y d e t e r m i n e d t h a t t h e r e was " n o t h i n g t o r i s k move I n s o u n d - m o n e y l e g i s l a t i o n ,

by a

a n d p o s s i b l y much t o g a i n . * - 1-

The r e s u l t was t h e R e s u m p t i o n A c t o f J a n u a r y 1 4 ,

1875.

p

The d e b a t e a n d c o m p r o m i s e w i t h r e g a r d t o t h e r e s u m p t i o n b i l l t o o k p l a c e i n t h e S e n a t e F i n a n c e C o m m i t te e r a t h e r t h a n on t h e f l o o r o f e i t h e r

th e S e n a te o r th e House.

was r e p o r t e d t o t h e S e n a t e on D e c e m b e r 2 1 , only b r i e f l y d eb ated , o f 32 t o 1 4 . it

The b i l l

1 8 7 4 , a n d was

p a s s i n g w i t h o u t amendment b y a v o t e

On J a n u a r y 7 ,

1875,

a f te r b rie f d iscussion,

p a s s e d t h e H o u s e b y a v o t e o f 136 t o 9 8 .

On J a n u a r y 14

t h e P r e s i d e n t * s m e s s a g e h e a r t i l y a p p r o v i n g t h e b i l l was s e n t to th e S enate.*5 The f i r s t

two s e c t i o n s o f t h i s

enactm ent p ro v id e d f o r

t h e r e p l a c e m e n t o f f r a c t i o n a l c u r r e n c y by f r a c t i o n a l s i l v e r and r e p e a l e d t h e m in t c h a r g e f o r c o in a g e o f g o l d b u l l i o n . A p a r t of the

th ird

s e c t i o n r e m o v e d t h e l i m i t on t h e amount

o f n a t i o n a l - b a n k n o t e s w h i c h m i g h t be i s s u e d .

■^Noyes,

op. c l t . .

^18 S t a t u t e s , p t . ^Sherman,

pp. 20-21. 3,

296.

op. c l t . . V ol.

I , pp.

507-518.

The S e c r e t a r y

317

o f t h e T r e a s u r y was r e q u i r e d t o r e d e e m U n i t e d S t a t e s n o t e s e q u a l t o 80 p e r c e n t o f t h e a m ou n t o f t h e a d d i t i o n a l n a t i o n a l - b a n k n o t e s i s s u e d u n d e r t h i s p r o v i s i o n u n t i l # 3 00 m i l l i o n o f th e m w e r e o u t ­ standing.

The o b j e c t h e r e was t o s u b s t i t u t e n a t i o n a l - b a n k

c u rre n cy fo r a p a rt o f the greenbacks. s e t J a n u a r y 1,

1879,

The r e m a i n d e r o f t h e a c t

a s t h e d a t e when " t h e T r e a s u r y s h a l l r e d e e m

in c o in th e U n ited S t a t e s l e g a l te n d e r n o te s then out s ta n d in g * ; it

gave th e S e c r e t a r y o f th e T re a s u ry a u t h o r i t y to u se f o r

re s u m p tio n p u rp o s e s any u n a p p r o p r ia te d

surplus revenues;

ana i t

p e r m i t t e d th e s a l e f o r re s u m p tio n p u r p o s e s o f any o f t h e bonds a u th o r iz e d by th e R e fu n d in g A ct. D uring th e p r e p a r a t i o n o f t h i s l e g i s l a t i o n in com m ittee, one a lm o st in s u p e r a b l e d isa g re e m e n t a r o s e .

T h i s h a d t o do w i t h

t h e m e a n i n g o f t h e t e r m Mr e d e e m M i n t h e a b o v e - q u o t e d p h r a s e . S h e r m a n ' s w o r d s b e s t d e s c r i b e t h i s i m p a s s e a n d t h e way i n w h i c h it

was c i r c u m v e n t e d ; The m o s t s e r i o u s d i s p u t e was up on t h e q u e s t i o n w hether U n ite d S t a te s n o te s p r e s e n te d f o r redem ption and red eem ed c o u ld be r e i s s u e d . On t h e o n e s i d e i t was u r g e d t h a t , b e i n g r e d e e m e d , t h e y c o u l d n o t b e r e i s s u e d w i t h o u t an e x p r e s s p r o v i s i o n o f l a w . The i n f l a t i o n i s t s . . . re fu s e d to vote fo r the b i l l i f any s u c h p r o v i s i o n was i n s e r t e d , w h i l e t h o s e who f a v o r e d c o i n p a y m e n ts were e q u a l l y p o s i t i v e t h a t t h e y would v o t e f o r no b i l l t h a t p e r m i t t e d n o t e s o n c e r e d e e m e d t o be r e i s s u e d . T h i s a p p e a r e d t o be t h e r o c k up on w h i c h t h e p a r t y i n power was t o s p l i t , I h a d no d o u b t u n d er e x i s t i n g law , w ith o u t any f u r t h e r p r o v i s i o n , b u t t h a t U n i t e d S t a t e s n o t e s c o u l d be r e i s s u e d . I t was f i n a l l y a g r e e d t h a t no m e n t i o n s h o u l d be made b y me f o r o r a g a i n s t .th e r e i s s u e o f n o t e s , and t h a t I must n o t commit e i t h e r s i d e i n p r e s e n t i n g t h e b i l l . - * -

1 Sherman, o £ . c l t . , V o l. I , p . 510.

318

PREPARATION FOR RESUMPTION AND THE FORCES OPPOSED TO IT

How t h e p r o v i s i o n s o f t h e R e s u m p t i o n A c t f o r a r e t u r n to

s p e c ie paym ents

m ight he Im plem ented re m a in e d a q u e s­

t i o n f o r some t i m e . passage of the a c t,

In t h e f i r s t

two y e a r s f o l l o w i n g

n o t h i n g was d o n e t o p r e p a r e f o r t h e

c r i t i c a l day.

S e c r e t a r i e s B r i s t o w and M o r r i l l b o th wanted

changes in th e

law b e f o r e a t t a c k i n g t h e p ro b le m .

S e c re ta ry B risto w urged C ongress to a b o lis h th e l e g a l t e n d e r q u a l i t y o f t h e g r e e n b a c k s a n d t o make t h i s c h a n g e e f f e c t i v e w e ll in advance o f th e resu m p tio n d a te .

He

s u g g e s te d t h a t a v e r y lo n g - te r m bond i s s u e be a u t h o r i z e d i n t o which

t h e g r e e n b a c k s m i g h t be c o n v e r t e d a n d t h a t t h e

S e c r e t a r y be g iv e n a u t h o r i t y of t h e n o t e s a m onth.

to redeem and c a n c e l | 2

m illio n

He p o i n t e d o u t t h a t " O n l y t h e e x c e s s

o f t h e n o t e s above t h e n e e d s o f b u s i n e s s would s e e k su ch conversion . . .

The p r e s e n t a b u n d a n c e an d c h e a p n e s s o f b o t h

c u r r e n c y and c a p i t a l p r e s e n t s a f a v o r a b l e o p p o r t u n i t y f o r th e w ith d ra w a l and re d e m p tio n o f a c o n s i d e r a b l e p a r t o f th e o utstan d in g le g a l-te n d e r

n otes,

t h e r e b y m a k i n g e a s y and

e f f e c t u a l t h e r e d e m p t i o n now p l e d g e d . " ^ L ike B r is t o w ,

S ecretary M o rrill b eliev ed th a t

p r o v i s i o n s o f th e re s u m p tio n a c t were i n a d e q u a t e .

1 Treasury R ep o rt, 1875, p p. XDC-XX.

the He

319

s u g g e s t e d t h a t C o n g r e s s empower t h e S e c r e t a r y t o f u n d t h e n o te s In to lon g -term bonds.

He a l s o p r o p o s e d t h a t ,

as

" t h e v o lu m e o f c u r r e n c y I s l a r g e l y i n e x c e s s o f t h e r e a l demands o f l e g i t i m a t e b u s i n e s s , "

some o f t h e g r e e n b a c k s

m ight be w ithdraw n from c i r c u l a t i o n .

He d i d n o t f a v o r a n y

a t t e m p t t o a c c u m u l a t e g o l d i n a s u f f i c i e n t a m o u n t t o m eet w h a t h e b e l i e v e d m i g h t b e a l a r g e demand f o r I t , h eld ,

besides,

th at

and he

" to accum ulate / g o l d / in advance of

t h a t t i m e w o u l d be a t t e n d e d w i t h n e c e s s a r y l o s s o f i n t e r e s t , w o u l d b e l i k e l y t o d i s t u r b money e x c h a n g e , th e funding of our n a tio n a l

and em barrass

se cu ritie s.

Almost a l l th e f i n a n c i a l p r e p a r a t i o n s f o r r e s u m p tio n , a s w e l l a s a l a r g e p a r t o f t h e r e f u n d i n g o p e r a t i o n s , were a c c o m p l i s h e d d u r i n g S e c r e t a r y S h e rm an 1 s t e r m o f o f f i c e . He h a n d l e d b o t h p r o j e c t s w i t h s k i l l a n d f i n e s s e .

H is long

e x p e r i e n c e and know ledge i n m a t t e r s o f p u b l i c f i n a n c e , a c q u i r e d i n th e House and S e n a te ,

s t o o d him i n good s t e a d

when h e s u c c e e d e d t o t h e S e c r e t a r y s h i p .

There th e v a c i l l a ­

t i o n s which h a d som etim es c h a r a c t e r i z e d h i s a c t i o n s in C o n g r e s s were r e p l a c e d by a f i r m a n d d e t e r m i n e d p o l i c y w hich w as f o r t i f i e d a n d f u r t h e r e d b y h i s s k i l l h is

in n e g o t i a t i o n and

z e a l to o b t a i n e v e r y p o s s i b l e a d v a n ta g e f o r t h e Govern­

ment i n d i s p o s i n g o f i t s

o b lig atio n s.

1 I b ld . , 1876, p p . X II, XV, XVII.

When h e a s s u m e d o f f i c e

320 i n M a rch 1 8 7 7 ,

he was s u f f i c i e n t l y o p t i m i s t i c

to b e lie v e

t h a t a s u r p l u s o f re v e n u e s m ight p e rm it th e a c c u m u la tio n of gold w ith o n ly a l i m i te d necessary.

s a l e o f bonds f o r g o ld b e in g

H i s p o l i c y was t o c o n t i n u e t h e r e f u n d i n g

o p e ra tio n s and a t th e

same t i m e , b y m ea ns o f b o t h b o n d

s a l e s and s u r p l u s r e v e n u e s ,

g r a d u a l ly to accum ulate a

r e s e r v e o f specie.^The s a l e o f t h e 4§—p e r c e n t l o a n w h i c h h a d b e e n n e g o ­ t i a t e d w ith t h e s y n d i c a t e by S e c r e t a r y M o r r i l l in August 1 8 7 6 was l i m i t e d b y Sherman t o a t o t a l o f $ 2 00 m i l l i o n , o f w h i c h , by a g r e e m e n t , resum ption p u rp o se s.

$15 m i l l i o n p r o v i d e d g o l d f o r

I n t h e s p r i n g o f 1877 c o n d i t i o n s i n

t h e money m a r k e t h a d become so f a v o r a b l e t h a t 4 - p e r c e n t b o n d s c o u l d t h e n be o f f e r e d .

Of t h e $ 7 5 m i l l i o n w o r t h

s o l d d u r i n g t h e summer, $25 m i l l i o n was f o r r e s u m p t i o n . ^ At t h i s p o i n t , h o w e v e r , t h e p r o g r e s s b e i n g made i n p r e p a r a t i o n fo r resum ption as w e ll as in re fu n d in g th e d e b t was s u d d e n l y h a l t e d b y a r e s u r g e n c e o f i n f l a t i o n i s m in C ongress. forces,

The i n f l a t i o n i s t s a g a i n m a r s h a l l e d t h e i r

t h i s tim e to a tte m p t r e p e a l of th e R esum ption Act

and rem onetize

silv er.

A g i t a t i o n f o r s u c h m e a s u r e s so

1S p ecie R esum ption and R efu n d in g o f N a t io n a l D e b t: L e t t e r o f S h e r m a n t o M e s s r s . N. M. R o t S l c h l l d & S o n s , A p r i l 6, 1 8 7 7 , p p . 1 4 - 1 5 . 2

Treasury R e p o r t. 1877, pp. V III-IX .

321

d i s t u r b e d c o n f i d e n c e t h a t f o r many m o n t h s no more b o n d s c o u l d be s o l d ,

and t h e i r m arket p r i c e

The c a u s e o f t h e

f e l l som ewhat b e l o w

s i l v e r a d v o c a t e s was f o r t i f i e d by t h e

f i n d i n g ’s a n d c o n c l u s i o n s o f t h e M o n e t a r y C o m m i s s i o n o f 1 8 7 6 . The m a j o r i t y o f t h e c o m m i s s i o n h e l d t h a t r e s u m p t i o n was n o t p o s s i b l e a s l o n g a s g o l d was t h e and t h a t

"sole m e ta llic le g a l- te n d e r "

the double s ta n d a r d w ith u n r e s t r i c t e d co in a g e should

be a d o p te d .

One m i n o r i t y o p i n i o n p r o p o s e d t h a t t h e c o o p e r a ­

t i o n o f o t h e r n a t i o n s be s o u g h t b e f o r e in th e U n ite d S t a te s .

A nother m in o r ity p o in te d o u t t h a t in

r e c e n t y e a r s t h e r e h a d b e e n "no l a c k , a b u n d a n c e , o f m o n ey " ;

s i l v e r was r e m o n e t i z e d

th at

bur r a th e r a super­

s i n c e 186 9 t h e G o v e r n m e n t h a d

d i s p o s e d o f more s u r p l u s g o l d t h a n "was n e c e s s a r y t o r e d e e m a l l the le g a l- te n d e r n o te s o u ts ta n d in g ." it

r a i s e d the q u e s tio n ,

has kept i t s those n o tes

In v iew o f t h i s ,

"how c a n i t be s a i d t h a t C o n g r e s s

s o l e m n l y p l e d g e d w ord t h a t i t would r e d e e m ' a t t h e e a r l i e s t p r a c t i c a b l e p e r i o d 1? " ^

1 S p e c i e R e s u m p t i o n and R e f u n d i n g o f N a t i o n a l D e b t , p p . 181-213; T r e a s u r y R e p o r t " , 1877, p.~~IXT S h e r m a n . o p . c l t . , V o l. I , p p . 5 7 6 -5 8 3 ; Noyes, o p . c l t . , p p . 3 3 - 3 5 ; and F ord, "R efunding o f th e P u b lic D e b t ,* V ol. I l l , p* 561# ^U. S. M o n e t a r y c o m m i s s i o n , R e p o r t a n d A c c o m p a n y in g D ocum ents o f t h e U h l t e d S t a t e s M o n e ta ry Commission O r g a n i z e ! ? u n d e r J o i n t R e s o l u t i o n o f A u g u s t 15, 1 8 7 6 (Government P r i n t i n g O f f i c e , W ash ing to n, 1 87 7), V o l. I , p p . 127, 138, 156, 158.

322 I n D e c e m b e r 1877 P r e s i d e n t H a y e s ,

in h i s f i r s t

annual

m e s s a g e , c l e a r l y p r e s e n t e d t h e i s s u e s w h i c h t h e movement f o r f r e e coinage of s i l v e r r a i s e d w ith r e s p e c t to th e c u rre n c y , the debt,

and th e p u b l i c c r e d i t ; ^ I f t h e U n i t e d S t a t e s Government were f r e e from a p u b lic d e b t, i t s l e g i s l a t i v e d e a lin g w ith the q u e s t i o n o f s i l v e r c o in a g e would be p u r e l y s o v e r e i g n and g o v e rn m e n ta l . . . But i n t h e a c t u a l c irc u m sta n c e s of the n a tio n , w ith a v a s t p u b lic d e b t d i s t r i b u t e d v e r y w i d e l y among o u r own c i t i z e n s and h e ld i n g r e a t am ounts a l s o ab ro a d , th e n a tu r e of th e s i l v e r - c o i n a g e m easure ^ jh e B land b il3 jf, as a f f e c t i n g t h i s r e l a t i o n of th e Government t o t h e h o l d e r s o f t h e p u b l i c d e b t, becomes an e le m e n t, i n any p ro p o s e d l e g i s l a t i o n , of the h ig h e s t concern. The o b l i g a t i o n o f t h e p u b lic f a i t h tran scen d s a l l q u estio n s o f p r o f i t or p u b lic advantage o th e rw is e .

I f th e U nited S ta te s had the un q u estio n ed r i g h t to pay i t s bonds in s i l v e r c o in , th e l i t t l e b e n e f i t from t h a t p r o c e s s would be g r e a t l y o v e rb a la n c e d by th e i n j u r i o u s e f f e c t o f such p a y m e n t i f made o r p r o p o s e d a g a i n s t t h e h o n e s t c o n v ic tio n s of th e p u b lic c r e d i t o r s . •











*



To r e q u i r e t h e p u b l i c c r e d i t o r s t o t a k e i n repaym ent any d o l l a r o f l e s s com m ercial v a lu e w o u l d be r e g a r d e d b y t h e m a s a r e p u d i a t i o n o f th e f u l l o b l i g a t i o n assumed. •



*

*









Any a t t e m p t t o p a y t h e n a t i o n a l i n d e b t e d n e s s i n a c o in a g e o f l e s s com m ercial v a lu e th a n th e money o f t h e w o r l d w o u l d i n v o l v e a v i o l a t i o n o f t h e p u b l i c f a i t h and work I r r e p a r a b l e i n j u r y t o th e p u b lic c r e d i t .

R i c h a r d s o n , M essages and P a p e rs o f t h e p r e s i d e n t s , V ol. V II, pp. 462-463.

323

A few m o n t h s l a t e r S e c r e t a r y S h e rm an h a d t h e o p p o r t u n i t y to defend th e R esum ption Act a g a i n s t I t s

threatened, r e p e a l in

a way t h a t was b o t h e m p h a t i c and e f f e c t i v e .

He a p p e a r e d

b e f o r e s e v e r a l C o n g r e s s i o n a l c o m m i t t e e s and showed I n d e t a i l the f e a s i b i l i t y of resum ption,

t h u s o v e r c o m i n g much s k e p t i ­

c i s m and g a i n i n g f a v o r f o r h i s p l a n . 1

When q u e s t i o n e d b e f o r e

the

S e n a te F i n a n c e C om m ittee, he d e c l a r e d t h a t t o r e p e a l t h e

act

"would be an e v i d e n c e o f n a t i o n a l w e a k n e s s ,"

a c t was " a d e c l a r a t i o n o f p u b l i c p o l i c y , a ct of February,

t h a t the

commenced w i t h t h e

1 8 6 2 , r e p e a t e d by C o n g r e s s s e v e r a l t i m e s ,

n o t a b l y In 1866, n o t a b l y a g a i n i n 1869, p assage of th e resum ption a c t , "

and a g a i n b y t h e

and t h a t " I t o u g h t t o be

adhered t o . " 2 T h i s was so u n d o p i n i o n , r e s p e c t e d an o f f i c i a l i t

a n d f r o m so e x p e r i e n c e d a n d

carried, w eight.

But Sherman,

I n t e n t u p o n r e s u m p t i o n and p r e s s i n g t h e a d v a n t a g e o f b e i n g heard,

sh re w d ly drew t o i t s

s u p p o r t t h o s e who c a r e d , more

fo r the re m o n e tiz a tio n of s i l v e r than th e re p e a l o f th e R esum ption A c t.

In th e course of the in te rv ie w he

asserted :

1Sherman,

o£. c l t . ,

V ol.

II,

pp. 629-635.

^U. S. S e n a t e , C o m m i t t e e on F i n a n c e , I n t e r v i e w o f t h e C o m m i t t e e on F i n a n c e w i t h t h e Hon . J o h n S h e r m a n , S e c r e t a r y o f th e T r e a s u ry i n R e g ard to t h e R e p e a l o f th e R esum ption A c t , M a rch 1 9 , 1 5 7 8 ( G o v e r n m e n t P r i n t i n g O f f i c e , W a s h i n g t o n , 18V8 ) , p . 3 .

324 R e s u m p t i o n c a n b e m a i n t a i n e d more e a s i l y u p o n a d o u b le s t a n d a r d th a n upon a s i n g l e s t a n d a r d . . . I t h i n k i t c a n be m a i n t a i n e d b e t t e r u p on a b i- m e ta llic , or a lt e r n a t iv e standard, than upo n a s i n g l e o n e , and w i t h l e s s a c c u m u l a t i o n of g o ld . I n t h i s way r e m o n e t i z a t i o n o f s i l v e r would r a t h e r a i d r e s u m p t i o n . ^ I t was a n o t h e r e x a m p l e o f S h e r m a n ' s c o m p r o m i s e t a c t i c s , w h e re in h e so u g h t t o f u r t h e r one g r e a t

o b jectiv e a t the

expense o f a n o th e r. A s h o r t tim e l a t e r ,

how ever, he e x p la in e d to a n o th e r

C o n g re s s io n a l com m ittee t h a t h i s p o s i t i o n

on t h e m a t t e r

had been m isu n d e rsto o d by th e p r e s s and t h a t he w ished to mekie c l e a r h i s b e l i e f

th at i f

the

s i l v e r b i l l made t h e

G o v e r n m e n t ' s b o n d s p a y a b l e i n t h a t m e t a l i t was n o t g o o d 2 p o licy . I n f a c t , h e was t h e n u n a b l e t o s e l l b o n d s e i t h e r i n E u r o p e o r a t home b e c a u s e o f t h i s p e n d i n g l e g i s l a t i o n ; The r e a s o n why I c a n n o t s e l l b o n d s , i s because th ey have got th e im p ressio n in Europe t h a t t h i s s i l v e r b i l l i s g o in g to d e r a n g e m a t t e r s , and t h a t b e l i e f b r o u g h t b a ck upon us (a s t h e s e g e n tle m e n say) s e v e n t y f iv e m illio n of bonds. As a m a t t e r o f c o u r s e t h e y came i n t o c o m p e t i t i o n w i t h t h e S e c r e t a r y in s e l l i n g bonds; and as lo n g as th e y had t h e i r bonds to s e l l , under a s c a r i n g m ark e t, I c o u ld n o t s e l l bonds u n l e s s th e r a t e o f i n t e r e s t was r a i s e d . ° The s i l v e r q u e s t i o n h a d b e e n t e m p o r a r i l y s e t t l e d i n F e b r u a r y 1878 b y t h e c o m p r o m i s e p r o v i s i o n s o f t h e B l a n d -

1 I b ia . . p . 9. 2 H. M i s c . Doc. No. 3Ib id .,

p. 11.

48,

45th C ong.,

2d S e s s . , p . 8 .

/

325

A l l i s o n A ct,

w h e r e b y f r e e c o i n a g e o f s i l v e r was p r e v e n t e d .

I n A p r i l S herm an a g a i n u n d e r t o o k t o s e l l b o n d s f o r r e s u m p ­ tio n purposes.

A y e a r b e f o r e he h ad r e s o l v e d to

more o f t h e 4^—p e r c e n t i s s u e ,

s e l l no

b u t t h e u n c e r t a i n money m a r k e t

and t h e c o n s e r v a t i v e a t t i t u d e o f t h e b a n k e r s c o n v in c e d him t h a t t h e 4 | - p e r c e n t s m u s t a g a i n be o f f e r e d t o p l a c e " r e s u m p t i o n b ey o n d p e r a d v e n t u r e . " I On A p r i l 1 1 , 1 8 7 8 ,

a c o n t r a c t was made w i t h t h e same

b a n k in g s y n d i c a t e w hich had been p a r t i e s o f June 9,

to the c o n tra c t

1877, whereby th e p o p u la r s a l e of 4 ' s had been

n eg o tiated .

T his c o n t r a c t p ro v id e d f o r th e

s a l e o f $50

m il l io n o f 4£~ p ercen t bonds f o r resu m p tio n p u rp o s e s . Sold a t 101^,

l e s s o n e - h a l f - o f - o n e - p e r c e n t com m ission,

y ie ld e d th e T rea su ry $50,500,000 in go ld c o in .

they

The

$ 5 , 5 0 0 , 0 0 0 p a i d i n t h e H a l i f a x a w a r d was r e c o v e r e d by t h e s a l e o f a n e q u i v a l e n t a m o un t o f 4 - p e r c e n t s f o r r e s u m p t i o n p u rp o se s.3 I t w i l l b e r e c a l l e d t h a t one p r o v i s i o n o f t h e Resurnp-

S p e c ie R esu m p tio n and R e fu n d in g o f N a t i o n a l D e b t; L e t t e r s o f S h e rm an to F a E n s t o c k , A p r l l ~ T 6 , 1 8 7 7 , p . 26, a n d M arch 2 5 , 1 8 7 8 , p . 2 8 6 ; l e t t e r t o P r e s i d e n t H a y e s , A p r i l 9, 1878, p . 293. For d e t a i l s o f the n e g o ti a t i o n s and th e f i n a l c o n t r a c t , see p p . 288-296. 2Ib id ..

pp. 288-296.

^T reasury Repor t . 1878, p . IX.

326

t l o n A c t h a d r e q u i r e d a r e d u c t i o n i n t h e a m ount o f t h e g r e e n b a c k s a s a d d i t i o n a l n a t i o n a l - b a n k n o t e s were i s s u e d u n t i l t h e t o t a l o f g r e e n b a c k s was r e d u c e d t o # 30 0 m i l l i o n . T h i s was a d e f i n i t e

a id in p r e p a r i n g f o r re s u m p tio n ,

fo r the

s m a l l e r th e amount o f g re e n b a c k s t h e l e s s g o ld would be n e c e s s a ry to i n s u r e

t h e i r paym ent.

rescinded,

by t h e A c t o f May 3 1 , 1 8 7 8 ,

however,

Congress fo rb ad e r e tir e m e n t t h a t da te .'* ' $ 346,681,016.

\vhen

o f any more o f t h e n o t e s a f t e r

T h i s a c t i o n f i x e d t h e am ount i n c i r c u l a t i o n a t "Upon t h e p r i n c i p l e o f s a f e t y u p o n w h i c h t h e

D e p a r t m e n t was a c t i n g , the

T h i s p r o v i s i o n was

th a t fo rty per cent,

o f c o i n was

s m a l l e s t r e s e r v e up on w h i c h r e s u m p t i o n c o u l d p r u d e n t l y

be commenced,

i t b e ca m e n e c e s s a r y t o I n c r e a s e t h e c o i n

r e s e r v e t o $ 1 3 8 , 0 0 0 , 0 0 0 . *2 The y e a r 1878 was n o t a p r o s p e r o u s o n e , a l t h o u g h t h e b a l a n c e o f t r a d e i n f a v o r o f t h e U n i t e d S t a t e s was v e r y larg e.

I t was a t r a n s i t i o n

p e r i o d betw een t h e g r e a t

d e p re s s io n and the r e t u r n of p r o s p e r i t y .

I n many f i e l d s

o f b u s i n e s s t h e p o i n t o f d e e p e s t d e p r e s s i o n was n o t p a s s e d

*20 S t a t u t e s , 8 7 . t r e a s u r y R e p o r t , 1 8 78 , p . IX . See a l s o l e t t e r t o t h e P r e s i d e n t o f t h e S e n a t e , May 1 7 , 1 8 7 9 , Sp e c i e R e s u m p t i o n and R efunding of N a tio n a l D eb t, pp . 702 -7 0 3 .

327

u n t i l l a t e i n 1878,

The nu m ber o f b u s i n e s s f a i l u r e s d u r i n g

t h e y e a r was g r e a t e r t h a n i n a n y y e a r p r e v i o u s , 1

In th e

s p r in g th e s e c u r i t i e s m arkets had advanced as c o n fid e n c e in t h e ach iev e m e n t o f re s u m p tio n grew.

In t h e autum n,

when s u c c e s s o f t h e r e s u m p t i o n p r e p a r a t i o n s

just

se em e d a s s u r e d ,

t h e m a r k e t was d i s t u r b e d by p e c u l i a r a n d c o n t r a d i c t o r y o r d e r s i s s u e d from th e T r e a s u r y w ith r e g a r d t o t h e d i s b u r s e ­ m e n t o f s i l v e r a nd t h e r e d e m p t i o n o f g r e e n b a c k s , some p e r s o n s w e r e I n c l i n e d t o

so t h a t

su sp ec t t h a t the S e c r e ta r y

m ight a tte m p t to resum e w ith s i l v e r r a t h e r th a n g o l d . A p p r e h e n s i o n i n c r e a s e d i n O c t o b e r when o r d e r s w e r e g i v e n f o r t h e t r a n s f e r o f g o l d h e l d by t h e b a n k s f o r t h e T r e a s u r y t o t h e T r e a s u r y ' s own v a u l t s . reactio n

set in ,

A s tro n g m arket

and f o r a b r i e f tim e th e p r o b a b i l i t y of

s u c c e s s f u l r e s u m p t i o n was t h r e a t e n e d .

Sherman, p e r c e i v i n g

th e d a n g e r, h a s te n e d to o f f e r gold in exchange f o r bonds to any amount.

T his ended the s t r i n g e n c y ,

g o l d , which had begun t o r i s e ,

and th e p r i c e of

again d e c lin e d ,^

C o n d i t i o n s w e r e now p r o p i t i o u s f o r r e s u m p t i o n .

In

November a new C o n g r e s s more f a v o r a b l e t o i t was e l e c t e d ,

1 W i l l i a m M. G r o s v e n o r , A m e r i c a n S e c u r i t i e s ( D a i l y C o m m e r c i a l B u l l e t i n , New Y o r k , 1 6 6 5 ) , p p . 6 8 - 6 9 , 9 9 , 2Ib id .. 3

pp. 101-102.

^G rosvenor, op. c l t . . p . 103,

328

By t h e l a t t e r p a r t o f t h a t m o n th t h e the

s a le o f resum ption bonds,

revenues,

sums o b t a i n e d t h r o u g h

to g e th e r w ith the s u r p lu s

b ro u g h t th e t o t a l o f c o in In th e T re a s u ry ,

excess of co in l i a b i l i t i e s ,

In

t o n e a r l y ^142 m i l l i o n .^

I n t e r e s t p a y m e n t s on J a n u a r y 1 ,

Heavy

1 8 7 9 , r e d u c e d t h i s amount

s o m e w h a t , b u t on t h a t d a t e t h e r e s e r v e f o r r e s u m p t i o n was P m ore t h a n ^ 1 3 3 m i l l i o n . " A c t u a l r e s u m p t i o n commenced a t t h e t i m e f i x e d by l a w ,

w i t h o u t a n y m a t e r i a l demand f o r

c o i n a n d w i t h o u t d i s t u r b a n c e t o p u b l i c o r p r i v a t e b u s in e s s . THE EFFECT OF DEBT AND MONETARY POLICY UPON INFLATION In co n clu d in g t h i s

survey of the i n t e r r e l a t i o n s h i p of

m o n e ta ry p o l i c y and d e b t m anagem ent,

the e f f e c t o f the

c o m b i n e d p o l i c i e s u po n t h e money s u p p l y a n d t h e p r i c e l e v e l may now b e s u m m a r i z e d . Under M cC ulloch, d u r i n g t h e p r e l i m i n a r y f u n d i n g o f the d eb t,

in fla tio n

was r e s t r a i n e d a n d t o o r a p i d d e f l a t i o n

av o id ed .

T h i s was t h e r e s u l t o f a d e l i b e r a t e l y p l a n n e d

p o l i c y f i r m l y c a r r i e d o u t by m a k i n g u s e o f a l m o s t e v e r y d e v i c e w h ich t h e T r e a s u r y c o u l d employ. borrow abroad a f t e r

The f a i l u r e

t h e war l o s t t h e o p p o r t u n i t y t h e n t o

r e s u m e s p e c i e p a y m e n t s an d t h e r e b y q u i c k l y r e s t o r e 1

T reasury R ep o rt. 1878, p . IX.

2 I b i d . . 1879, p . IX. 3

Idem.

to

the

329 econom y t o a n o r m a l c o n d i t i o n .

The p o l i c y o f c o n t r a c t i o n

d i d n o t go f a r e n o u g h a n d l a s t l o n g e n o u g h t o a c h i e v e t h i s same g o a l , restrain

’f t i i l e i t

c o n tin u e d , however,

its

e f f e c t was t o

s p e c u l a t i o n , h o l d b u s i n e s s and f i n a n c e t o a c o n ­

se rv a tiv e outlook,

and k e e p i d l e t h e l a r g e e x c e s s r e s e r v e s

in the ban k in g system .

These r e s e r v e s ,

under a le s s s t r i c t

T r e a s u r y p o l i c y , w o u ld so o n h a v e b e e n m u l t i p l i e d i n t e r m s of d e p o s it c u rre n cy to

s w e l l t h e money s u p p l y a n d r a i s e

p rices. At t h e

same t i m e ,

su ffic ie n tly flex ib le ,

t h e c o n t r a c t i o n p o l i c y was mad,e when c i r c u m s t a n c e s r e q u i r e d ,

p r e v e n t t o o h a r s h an i m p a c t on t h e m a r k e t s .

to

M cCulloch

m a i n t a i n e d a c a r e f u l c o n t r o l o v e r t h e money s u p p l y . h i s p o l i c i e s be ca m e known a n d u n d e r s t o o d , e f f e c t u p on c o n d i t i o n s .

As

th ey had a double

They ten d e d t o p r e v e n t s t r i n g e n c y

and p a n ic a s w e ll as to r e s t r a i n

in fla tio n .

I t was known

t h a t h e was d e t e r m i n e d t o d e c r e a s e t h e a m o un t o f money i n c ircu latio n ,

b u t i t was a l s o

r e a d y t o come p r o m p t l y t o need a ro se . sta b ility .

s o o n u n d e r s t o o d t h a t h e was

t h e a i d o f t h e m a r k e t s when

J u s t t h e e x p e c t a t i o n o f t h i s a i d made f o r In h i s

c o n v e r s i o n o p e r a t i o n s he to o k c a r e

to

p r e v e n t t o o much money f ro m a c c u m u l a t i n g a s b o n d s w e r e sold.

I n t e r e s t paym ents and d e b t r e d u c t i o n p i e c e d fu n d s

In th e m ark et,

b u t t h e e f f e c t o f t h i s was o f f s e t when

n e c e s s a r y by c o n t r a c t i o n .

The r e l a t i v e

sta b ility

a c h i e v e d e n a b l e d h im t o f u n d t h e d e b t r a p i d l y .

thus

The

330 resu ltin g

Improvem ent in t h e p u b l i c c r e d i t

stren g th en ed

b u sin ess confidence. The p o l i c y o f d e p o s i t i n g v e r y l i t t l e

of the T r e a s u r y 's

f u n d s w i t h t h e n a t i o n a l b a n k s s u p p o r t e d c o n t r a c t i o n so f a r as i t

d i m i n i s h e d t h e a m ount o f c u r r e n c y a v a i l a b l e

p u b lic.

to the

M aintaining la rg e T reasury b alan ces of cu rren cy

and g o ld n o t o n l y h e l d e x c e s s c u r r e n c y o u t o f u s e b u t p e r ­ m itted the S e c re ta ry e ith e r

to draw i n c u r r e n c y by t h e

s a le of gold o r to d is b u rs e

it

o b lig atio n s.

i n t h e p u r c h a s e o f Government

C o n tr o llin g th e flow of funds through the

T r e a s u r y was a t e m p o r a r y way o f r e s t r a i n i n g i n f l a t i o n , funding of the

w hile

l e g a l - t e n d e r p a r t o f t h e d e b t was i n t e n d e d

to e f f e c t a perm anent r e d u c t io n in th e c i r c u l a t i o n . A f t e r M c C u l lo c h 's terra o f o f f i c e ,

th e problem s of the

d e b t a n d t h e money s u p p l y w e r e b o t h l e s s a c u t e , ,

f o r the

d e b t h a d b e e n f u n d e d a n d a s u b s t a n t i a l am o u n t o f c u r r e n c y had been w ithdraw n.

The i n c r e a s i n g i n f l a t i o n

during

B o u t w e l l ' s a d m i n i s t r a t i o n was n o t d ue t o a f e a r paper currency,

of the

b u t t o an e x p a n s i o n o f t h e d e p o s i t c u r r e n c y

f o r which t h e l e g a l - t e n d e r n o t e s s e r v e d a s a b a s e . a m o u n t o f th e m r e m a i n i n g i n c i r c u l a t i o n was s t i l l

The ex cessiv e.

The p o l i c y o f r e f u n d i n g t h e d e b t c o n t r i b u t e d t o b u s i n e s s optim ism in th e y e a r s b e fo r e t h e p a n i c . d e b t r e d u c t io n and th e p e r i o d i c

E xpend itures fo r

disbursem ent of I n t e r e s t

c o n t i n u e d t o make f u n d s a v a i l a b l e f o r new I n v e s t m e n t a n d a s p u r c h a s i n g p ower g e n e r a l l y .

I «

The weak m o n e t a r y p o l i c i e s

!

331

o f B o u tw e ll and R ic h a r d s o n e n co u rag ed o v e re x p a n s io n and sp ecu latio n . in creased,

Bank r e s e r v e s d e c l i n e d s t e a d i l y a s d e p o s i t s

and p r i c e s

and p r o p e r t y v a lu e s r o s e .

The s l a c k i n t h e money and c r e d i t

s u p p l y was b e i n g

t a k e n up n o t b y a p o l i c y o f c o n t r a c t i o n b u t by an u n w h o l e ­ some o v e r e x t e n s i o n

of b u s i n e s s com m itm ents.

T his s i t u a t i o n

was e n c o u r a g e d b y t h e w i l l i n g n e s s w i t h w h i c h t h e S e c r e t a r i e s p e rm itte d the greenback c i r c u la t i o n l i m i t and even b e y o n d .

to expand to

its

leg al

The p o l i c y o f k e e p i n g t h e T r e a s u r y

b a l a n c e a t a c o m p a r a t i v e l y low l e v e l a s d e b t r e d e m p t i o n was speeded a ls o c o n tr ib u te d to the I n f l a t i o n , The p a n i c o f 18 7 3 e n d e d o ne i n f l a t i o n a n d b r o u g h t f o r t h demand f o r a n o t h e r .

F o r some t i m e a f t e r t h e p a n i c

t h e v o l u m e o f d e b t r e d u c t i o n was s m a l l a n d h a d l i t t l e o n t h e money m a r k e t , The i n s t i t u t i o n

f o r t h e r e was a p l e t h o r a o f f u n d s .

o f f r e e b a n k c u r r e n c y was f o l l o w e d by a

d e c lin e in bank-note c i r c u l a t i o n . the currency,

effect

Yet p r o p o s a l s t o i n c r e a s e

pay th e debt w ith g re e n b a c k s,

s i l v e r w e r e made on a l l

sides.

and m o n e tiz e

The s e r i o u s c o n s i d e r a t i o n

g i v e n t h e s e demands d e l a y e d t h e r e v i v a l o f b u s i n e s s c o n f i ­ dence and endangered th e p ro s p e c t of a r e t u r n

to a sp e c ie

b a s i s fo r the c u rre n c y . So l o n g a s t h e r e was no f i r m p o l i c y by w h i c h t h e v o l u m e o f t h e c u r r e n c y was a d j u s t e d t o t h e n e e d s o f b u s i n e s s , its

f l u c t u a t i n g v alu e c o n sid e ra b ly in c re a se d b u sin e ss r i s k ,

e s p e c i a l l y w ith r e g a r d t o f u t u r e com m itm ents.

The

332

u n c e r t a i n t y r e s u l t i n g from a p o o r c u r r e n c y p o l i c y , la c k o f any r e a l p o lic y ,

or th e

th u s added to th e c o s t o f t r a n s ­

a c t i n g b u s i n e s s , which i n t u r n i n c r e a s e d t h e p r i c e s o f goods.

Not o n l y was p u r c h a s i n g po w e r r e d u c e d b y t h i s

higher c o st,

b u t t h e c o u n t r y was p l a c e d a t a d i s a d v a n t a g e

in e x changing i t s F in ally ,

p ro d u cts fo r those of o th e r n a ti o n s .

th e ach iev e m e n t o f re s u m p tio n and th e c o m p le tio n

of th e r e f u n d i n g program , th e l a t t e r a t a g r e a t in te rest, It

saving o f

r e t u r n e d t h e economy t o a s o u n d e r b a s i s .

s h o u l d be o b s e r v e d t h a t d u r i n g t h e g r e e n b a c k p e r i o d

t h e e c o n o m ic e f f e c t s o f a p o l i c y w h i c h f a i l e d

to p re v e n t

wide f l u c t u a t i o n s i n t h e v a l u e o f th e c u r r e n c y w ere h i g h l y com plex.

P r i c e s w ere g e n e r a l l y h i g h e r b e c a u s e o f t h e

u n c e r ta in ty and a lso because of th e d e p r e c ia tio n currency,

in the

b u t th e c h a n g in g v a lu e o f th e g re e n b a c k s in term s

o f g o o d s a n d s e r v i c e s a l s o r e f l e c t e d an I n v o l v e d p a t t e r n o f o p p o s i n g f o r c e s and i n t e r e s t s .

The v a r y i n g p r i c e s o f

g o o d s " w e r e t h e a d j u s t m e n t s w h i c h men u s i n g p r i c e s a s t h e b a sis of t h e i r

e c o n o m i c r e l a t i o n s were c o n s t r a i n e d

by c i r c u m s t a n c e s b e y o n d t h e i r c o n t r o l . " ^

t o make

D i f f e r e n t e c o n o m ic

c l a s s e s w e r e e f f e c t e d i n d i f f e r e n t ways by c h a n g i n g p r i c e s , and t h e y i n t u r n I n f l u e n c e d o t h e r p r i c e c h a n g e s .

Professor

M itc h e ll says o f the d a ta a c q u ire d in h i s e x te n s iv e of t h i s

s u b j e c t t h a t t h e y were " i n a l l c a s e s . . .

■^Mitchell, Gold, P r ic e s , and Wages, p. 281.

the

study

333

r e s u l t a n t s o f complex s e t s of o p p o s in g f o r c e s . The vo lum e o f c u r r e n c y a l o n e d i d n o t d e t e r m i n e t h e l e v e l of p ric e s.

The s u p e r s t r u c t u r e o f c r e d i t w h i c h i t

perm itted ,

a s w e ll as th e r a p i d i t y of t u r n o v e r o f b o th c u r r e n c y and p riv a te instru m en ts of c r e d it,

was more s i g n i f i c a n t .

The

s c a r c i t y o r a b u n d an c e o f goods and t h e i r c o s t o f p r o d u c t i o n were a l s o p r i c e - m a k i n g f o r c e s . was t h e a t t i t u d e o f t h e p e o p l e .

In flu en cin g a l l th ese fa c to rs T h e i r d e c i s i o n s t o make

e f f e c t i v e t h e p u r c h a s i n g power a t t h e i r d i s p o s a l , n o t t o u s e t h e money a n d c r e d i t a v a i l a b l e t o t h e m , th e f o r c e of demand.

determ ined

U n d e r l y i n g t h i s was t h e c o l l e c t i v e

e x p e c t a t i o n o f what t h e f u t u r e m ight h o l d . p ro tect th eir

to use or

In terests

W hether sim p ly to

or i n t h e h o p e o f g a i n ,

th e actio n s

of t h e p e o p le e x p r e s s e d t h e i r view o f f u t u r e p r o s p e c t s and thus in flu e n ce d p r ic e s .

A n tic ip a tio n of co n tin u in g i n f la ti o n

c o u ld be enough t o c o n t i n u e i n f l a t i o n .

The p s y c h o l o g i c a l

i n f l u e n c e o f a sound and d e te r m in e d m o n etary p o l i c y t h r o u ^ i o u t t h e g r e e n b a c k p e r i o d would h a v e b e e n h i g h l y b e n e f i c i a l to

t h e whole economy. The e f f e c t s o f d e b t m anagem ent a n d m o n e t a r y p o l i c y

u p o n t h e f o r m a t i o n and f l o w o f c a p i t a l f u n d s and u po n t h e production, d is tr ib u tio n ,

and c o n s u m p t i o n o f w e a l t h a r e

d e a l t w ith in th e fo llo w in g c h a p te r .

1 Ib ld . , p. 282

CHAPTER XII THE EFFECT OF DEBT POLICIES ON CAPITAL FUNDS

I t h a s b e e n s e e n how d e b t m a n a g e m e n t a s a n e x p r e s s i o n o f m onetary p o l i c y i n f lu e n c e d the c u rre n c y su p p ly and the s h o r t - t e r m use o f c r e d i t , le v e l,

a n d how,

the c o s t o f p ro d u c tio n ,

money w e r e a f f e c t e d .

through th e s e ,

the p ric e

and th e p u r c h a s i n g power o f

At l e a s t a s I m p o r ta n t were th e e f f e c t s

o f d e b t p o l i c y upon t h e p r i c e o f g o l d an d upon th e d o m e s tic and i n t e r n a t i o n a l flow o f c a p i t a l n ific an t of a ll,

funds.

P e rh a p s most s i g ­

a t the tim e as w e ll a s f o r the f u t u r e ,

was t h e e f f e c t o f t h e d e b t ,

in c o n ju n c tio n w ith ta x a tio n ,

upon th e a c c u m u la t i o n and d i s t r i b u t i o n o f w e a l t h . EFFECT ON THE INVESTMENT MARKET Debt p o l i c y a f f e c t e d th e in v e s tm e n t m arket th ro u g h its

i n f lu e n c e upon th e p u b l i c c r e d i t ,

th e amount o f d e b t ,

and th e d i s t r i b u t i o n o f d e b t .

t h e G o v e r n m e n t - b o n d m a r k e t was a l a r g e Investm ent m arket,

the currency supply, A lthough

p a r t o f th e whole

the s e c u r i t i e s o f p riv a te

en te rp rise

were i n c r e a s i n g r a p i d l y i n volume and I m p o r ta n c e w h i l e th e a v a i l a b l e amount o f Government s e c u r i t i e s

(334)

s te a d i ly dw indled.

335 The p r i c e s o f s t o c k s an d b o n d s and t h e y i e l d o n com­ m e r c i a l p a p e r i m m e d i a t e l y r e f l e c t e d c h a n g e s i n t h e money supply.

J u s t a s the e x c e s s iv e

i s s u a n c e o f p a p e r money d u r ­

i n g t h e w ar had p r o v i d e d t h e p e o p l e w i t h t h e means t o buy Government o b l i g a t i o n s ,

so , a f t e r the w ar,

the a b u n d a n t

supply of c u rre n c y su p p o rted s e c u r i t y p r i c e s . t i o n h a d b e e n c a r r i e d on a t a r a p i d r a t e , have low ered th e s e p r i c e s ,

I f co n trac­

i t would q u i c k l y

b u t t h e o a r e f u l w ith d r a w a l of

o n l y i d l e c u r r e n c y d i d n o t p u t p r e s s u r e on t h e bond m a r k e t . A f t e r c o n t r a c t i o n , and u n t i l t h e end o f t h e g r e e n b a c k p erio d ,

th e e x c e ssiv e c u rre n cy co n tin u ed

m ent-bond p r i c e s , U n til the p a n ic ,

to s u s t a i n Govern­

in term s of g reen b ack s, a t a h ig h l e v e l . the m a rk e t f o r c o r p o r a t e

s e c u r i t i e s was

lik ew ise supported. More I m p o r t a n t , h o w e v e r , w a s t h e e f f e c t o f d e b t a n d c u r r e n c y p o l i c i e s upon the r e a l v a lu e o f s e c u r i t i e s o f gold.

in term s

So f a r a s m a r k e t j u d g m e n t w e i g h e d t h e s e r i o u s n e s s

o f the v a r io u s p r o p o s a ls to pay the d e b t in g re e n b a c k s o r in s ilv e r ,

o r t o e f f e c t r e p u d i a t i o n i n some o t h e r w a y , t h e

p r i o e s o f a l l A m erican bonds d e c l i n e d i n f o r e i g n m a r k e ts . The c o n t i n u a l u n d e r c u r r e n t o f r e p u d i a t i o n s e n t i m e n t t h r o u g h ­ out the p o st-w a r p e rio d kept th e gold p r i c e s o f s e c u r i t i e s a t a n a b n o r m a l l y l o w l e v e l and r e t a r d e d t h e i r

improvement

e v e n when a l l o t h e r o i r e u m p t a n o e s w e r e e x t r e m e l y f a v o r a b l e f o r h ig h e r p r i c e s and low er i n t e r e s t r a t e s . R e f u n d i n g h a d no a p p r e c i a b l e d i r e c t e f f e c t o n t h e i n ­ vestm ent m arket.

I n e s s e n c e i t was t h e e x ch a n g e o f bonds

336

o f one c l a s s f o r bo n d s o f a n o t h e r .

A lthough the p r o c e s s by

w h ic h i t was a c c o m p l i s h e d i n v o l v e d t h e r e c e i p t and p a y m e n t of larg e c alled

sums a s new b o n d s w e r e s o l d a n d o l d e r o n e s w e r e

i n and p a i d ,

th e p o l i c y of le a v in g the s u b s c r i p t i o n

p a y m e n ts on d e p o s i t w i t h th e n a t i o n a l b a n k s p r e v e n t e d t h e f u n d s f r o m b e i n g t i e d up i n t h e T r e a s u r y w i t h c o n s e q u e n t a d v e r s e e f f e c t upon th e m a r k e ts .

In d irectly ,

enhancement of the p u b lic c r e d i t ,

the e f f e c t of refu n d in g

was u s u a l l y f a v o r a b l e m a r k e tw is e ,

a l t h o u g h when t o o r a p i d a

d eclin e

through the

i n th e g o ld premium acco m p an ied a s u c c e s s f u l r e f u n d ­

ing o p e ra tio n ,

s e c u r ity p r ic e s expressed

i n g r e e n b a c k s ware

depressed. The c o n s t a n t r e d u c t i o n o f t h e d e b t w a s a p o w e r f u l s u p ­ p o r t t o th e w hole in v e s tm e n t m a rk e t,

for as i t

s u p p l y o f Government bonds i t a l s o r e l e a s e d T r e a s u r y to be r e i n v e s t e d p riv ate e n te rp rise. means f o r r e t u r n i n g

reduced the

fu n d s from th e

la r g e ly in the s e c u r i t i e s

of

D e b t r e d u c t i o n was t h u s c o n t i n u a l l y a t o c i r c u l a t i o n money d r a w n i n t o

the

T r e a s u r y e i t h e r a s s u r p l u s revenue or as r e c e i p t s from th e sale

of T r e a s u r y g o l d . The w a r t i m e a n d i m m e d i a t e p o s t - w a r b o n d - s e l l i n g

p a i g n s had r e s u l t e d d eb t,

i n a wide d i s t r i b u t i o n

b u t a f t e r t h a t tim e

a nd more c o n c e n t r a t e d .

o f Government

t h e o w n e r s h i p o f i t b ecame more

Sherm an’ s a tte m p t to p o p u l a r i z e

G o v e r n m e n t ’ s s e c u r i t i e s mot w i t h o n l y p a r t i a l and success.

N evertheless,

cam­

there e f f o r ts

the

tem porary

tc make a w i d e r m a r k e t ,

337

and a l s o ing to

th e c o n tin u o u s p u b l ic d i s c u s s i o n of m a t t e r s p e r t a i n ­

the d e b t ,

sira b ility

a c q u a in t e d p e o p le w i t h the n a t u r e and d e­

of such i n t a n g i b l e p r o p e r t y .

velopm ent o f

C e r ta in ly the de­

the c o r p o r a t e form o f e n t e r p r i s e

and t h e e n o r ­

d o m e s t i c c a p i t a l m a r k e t -aore f a c i l i t a t e d

mous e x p a n s i o n o " t h e

a s new e n t e r p r i s e - u s a b l e

t o d r a w u p o n many s m a l l and l a r g e

savings accu m u latio n s. The c o m b i n e d e f f e c t o f t h e r e s u m p t i o n o f s p e c i e p a y m e n t s and t h e out

com pletion of refu n d in g r e s to re d

the c o u n t r y .

As a r e s u l t ,

confidence

through­

an u n p r e c e d e n t e d s a v e o f i n ­

v e stm e n t buying s e t in w hich in th e c o u rse o f the fo llo w in g se v era l years raised

the p r i c e s o f a l l

ty p es o f s e c u r i t i e s

to h ig h l e v e l s . 3FF1CT ON T.rlh; PHI C l OF GOLD The d e b t p o l i c i e s and c u r r e n c y p o l i c i e s o f t h e T r e a s u r y c o n tin u a lly exercised

an i n f l u e n c e on th e p r i c e of g o l d .

long as th ese p o l i c i e s p e rm itte d an e x ce ss of c u rre n c y , high p r ic e

l e v e l , and a n a d v e r s e b a l a n c e o f t r a d e ,

in g s c a r c i t y o f gold e n h an c ed i t s w hich d e p r e c i a t e d

v alu e.

So a

the r e s u l t ­

In g en eral,

p o licies

th e c r e d i t o f the c o u n try s u s ta in e d

the p re ­

mium on g o l d * B e t w e e n May 1865 and S e p t e m b e r 1869 no p e r m a n e n t r e d u c ­ t i o n in th e p r i c e of gold to o k p l a c e ,

but in th is period

it

w a s much l o w e r a n d f l u c t u a t e d l e s s w i d e l y t h a n i t h a d d u r i n g

338 th e w ar.

1

W hat t h e c o n t r a c t i o n p o l i c y d i d t o e n h a n c e t h e

p u b l i c c r e d i t w as l a r g e l y c o u n te r b a l a n c e d by t h e g ro w in g d e ­ mand f o r i n f l a t i o n .

A t th e

same tim e

c u l a t i o n w as b e in g r e d u c e d , th e la rg e sto c k o f g o ld .

t h a t th e

cu rren cy c i r ­

T r e a s u r y w as a c c u m u l a t i n g a

T h i s w i t h d r a w a l f ro m t h e m a r k e t t e n d e d

t o o f f s e t t h e e f f e c t t h a t c o n t r a c t i o n a l o n e w o u ld h a v e h a d u p o n t h e g o l d p re m iu m . t im e

S a l e s o f T r e a s u r y g o l d w e r e made f ro m

t o tim e i n o r d e r t o k e e p t h e p r i c e f r o m r i s i n g

T hese s a l e s gave s t a b i l i t y

to th e m a rk e t, b u t a t a h ig h e r

l e v e l t h a n w o u ld h a v e p r e v a i l e d h e ld i n th e T r e a s u r y .

u n d u ly .

if

l e s s o f th e m e ta l had b e en

E v en w i t h t h e a b a n d o n m e n t o f g r e e n b a c k

c o n t r a c t i o n , h o w e v e r , M c C u llo c h * s c o n t r o l o v e r t h e m a r k e t s re m a in e d su ch t h a t a r i s e D u rin g t h i s p e r i o d th e

i n t h e g o l d p rem iu m w as c h e c k e d .

" n o r m a l " p r i c e o f g o l d w as a b o u t 135

to 1 4 0 .2 U nder B o u t w e ll ’ s v ig o r o u s p o l i c y o f d e b t r e d u c t i o n , la rg e

q u a n t i t i e s o f T r e a s u r y g o ld w ere s o ld a t f a i r l y r e g u l a r

in te rv a ls.

D u r i n g t h e f i r s t n i n e m o n th s o f t h i s p r o g r a m , t h e 3 a v e r a g e p r i c e r e c e i v e d f o r i t w as 1 3 2 . B e c a u s e h e w as d e ­ te rm in e d n o t to g iv e a i d to s p e c u l a t o r s i n s e c u r i t i e s and 4 g o ld , i t w a s p o s s i b l e f o r t h e g r e a t g o l d c o n s p i r a c y w h ic h t

-

M i t c h e ll , G o ld .

P r i c e s , and W a g e s, p p . 1 3 - 1 4 .

2Idem . 5T reaau ry R e p o rt. 1869, p p . X II-X III.

^ B o u tw ell, R e m in isc e n c e s. V o l. I I , p . 1 6 8 .

339 re s u lte d rise

i n th e B la c k F r i d a y p a n ic t o ta k e p l a c e .

The r a p i d

i n t h e g o l d p re m iu m a s a " c o r n e r " w as t h r e a t e n e d , d i s ­

r u p t e d a l l m a r k e t s an d u n s e t t l e d b u s i n e s s . A f t e r t h i s e p i s o d e , g o ld d e c l i n e d .

A t th e b e g in n in g o f

B o u t w e l l ’ s a d m i n i s t r a t i o n i t h a d b e e n a b o u t 1 4 0 , a t t h e end 1 c lo s e to 112. T h is was due n o t o n ly t o t h e d e b t - r e d u c t i o n p o l i c y o u t a l s o t o t h e g e n e r a l im p r o v e m e n t i n t h e G o v e r n ­ m e n t’ s c r e d i t f o llo w in g a s s u ra n c e g iv e n by C ongress i n th e P u b l i c C r e d i t A c t o f 1 8 6 9 t h 0 t t h e d e b t w o u ld n o t b e r e p u d i ­ a te d .

The r e f u n d i n g o p e r a t i o n s a l s o c o n t r i b u t e d

c o n fid e n c e .

g

The p a n i c o f 1 8 7 3 r e s u l t e d

to g e n e ra l

i n a sh a rp d rop i n

th e p r i c e o f g o ld , f o r th e s u b s t a n t i a l in c r e a s e

i n th e

a m o u n t o f g r e e n b a c k s a t t h a t t i m e w as o f l e s s s i g n i f i c a n c e th a n th e p ro s p e c t o f a fa v o ra b le b a la n c e o f t r a d e . The p a s s a g e o f t h e R e s u m p ti o n A c t i n 1 8 7 5 , c o n t i n u a l p r o g r e s s a a o h y e a r i n r e f u n d i n g and r e d u c i n g fin a lly

th e d e b t , and

t h e d e t e r m i n a t i o n o f S e c r e t a r y S herm an t o a c q u i r e

g o ld f o r re s u m p tio n , r e s u l t e d i n a c o n tin u o u s d e c lin e in th e p r i c e o f th e m e t a l u n t i l i n D ecem ber 1878 i t r e a c h e d a p a r i t y w ith th e g re e n b a c k s .

1I b i d . , p . 1 3 8 . 2

M it c h e ll, o p . o i t . , p . 14 .

540

EFFECT ON THE

INTERNATIONAL BALANCE OF PAYMENTS

The F lo w o f G o v e rn m e n t S e c u r i t i e s t o E u r o p e , and T h e T r R e t u r n As a r e s u l t o f a n i n f l a t i o n a r y d e b t p o l i c y w h i c h made t h e A m e r ic a n m a r k e t t h e b e s t f o r th e p o o r e s t to buy

E u r o p e a n s t o s e l l i n and

i n , t h e r e w as c o n t i n u a l l y a n a d v e r s e b a l ­

a n c e o f t r a d e from 1861 th r o u g h m ost o f 1 8 7 3 . o f th e . a r t o th e y e a r o f t h e p a n ic

th e a n n u a l e x c e s s o f

i m p o r t s a v e r a g e d a r o u n d #1 05 m i l l i o n . ^ t a t i o n o f g o ld red u c ed th e s u p p ly .

From t h e e n d

The r e s u l t i n g e x p o r ­

As a c o n s e q u e n c e , i t w as

n e c e s s a r y t o s e n d A m e r ic a n s e c u r i t i e s

to f o r e ig n f i n a n c ia l

c e n t e r s t o su p p le m e n t g o ld in m e e tin g th e b a l a n c e . p o r t a t io n o f s e c u r i t i e s —b o th p u b lio on a l a r g e s c a l e .

T h is e x ­

and p r i v a t e — t o o k p l a c e

A t a few t i m e s t h e r e t u r n o f t h e s e s e c u r i ­

t i e s w as i n s u f f i c i e n t v o lu m e t o h a v e a s i g n i f i c a n t i n f l u e n c e o n t h e money m a r k e t .

As th e a m o u n t o f d e b t h e l d i n E u ro p e

i n c r e a s e d , t h e p a y m e n t o f i n t e r e s t u p o n i t a u g m e n te d t h e a d ­ v e r s e b a la n c e o f p a y m e n ts. I n 186 6 i t w a s e s t i m a t e d t h a t t h e a m o u n t o f A m e r ic a n 2 s e c u r i t i e s h e l d i n E u ro p e w as a s f o l l o w s : U n ited S t a t e s b o n d s ............. .. # 3 5 0 , 0 0 0 , 0 0 0 1 5 0 .0 0 0 .0 0 0 S t a t e a n d m u n i c i p a l b o n d s . . . ............... .. R a i l r o a d and o t h e r s t o c k s ana b o n d s . . . 1 0 0 0 0 0 . 0 0 0

.

#600,000,000

T o ta l ^-Graham, " I n t e r n a t i o n a l T r a d e , " p . 232 2T re a su ry R e p o rt. 1866, p .

12.

341 The r a p i d

in c re a s e

i s i n d i c a t e d b y a n e s t i m a t e made t h r e e

y ears la te r U n i t e d S t a t e s s e c u r i t i e s ........................... # 1 , 0 0 0 , 0 0 0 , 0 0 0 S t a t e s e c u r i t i e s ....................................... 1 0 0 ,0 0 0 ,0 0 0 C o r p o r a t e an d m i s c e l l a n e o u s s e c u r i t i e s 3 6 5 , 5 0 0 , 0 0 0 T o t a l .................................................. # 1 , 4 6 5 , 5 0 0 , 0 0 0 The f a o t t h a t a l a r g e p a r t o f t h e d e b t h e l d a b r o a d w a s i n th e h a n d s o f s p e c u l a t o r s — a c o n d i t i o n to be e x p e c te d a s a c o n s e q u e n c e o f t h e lo w s t a t e

o f th e p u b lic c r e d i t — gave

rise

t o some a p p r e h e n s i o n t h a t l a r g e a m o u n ts o f i t m i g h t b e p th ro w n upon th e A m erican m a rk e t a t a n y t im e . I t w as f e a r e d

t h a t i f c o n d i t i o n s b e c a m e u n f a v o r a b l e , h o l d e r s w o u ld b e i n ­ c lin e d

to o u t t h e i r l o s s e s ,

o b lig e d to s e l l .

o r , b e i n g o n m a r g i n , w o u ld b e

As t h e p u b l i c o r e d i t im p r o v e d and b o n d s

r o s e i n p r i c e , p r o f i t - t a k i n g on s p e c u l a t i v e e x p e c tin g to r e ta r d

h o l d i n g s w as

t h e i m p r o v e m e n t an d p o s s i b l y d r a i n g o l d

f r o m t h e New Y ork m oney m a r k e t . An u n f o r t u n a t e a s p e c t o f t h i s

flo w o f U n ite d S t a t e s o b ­

l i g a t i o n s t o E u r o p e f o r some y e a r s a f t e r s i n c e t h e y w e re b e i n g t a k e n a t a p r i c e

t h e w ar was t h a t ,

i n g o l d w h ic h r e p r e ­

s e n te d a b o u t 4 0 - p e r c e n t d i s c o u n t , t h e r e w as b e in g c r e a t e d "an a d d i t i o n a l in d e b te d n e s s to th e e x t e n t o f th e d i f f e r e n c e b e tw e e n th e am ount r e c e i v e d f o r o u r s e c u r i t i e s and t h e i r p a r

R e p o r t o f t h e S p e c i a l C o m m is s io n e r o f t h e R e v e n u e . 1 8 6 9 , p p . x x v T T - S c f x . -----------------------------------------------------------

2T reasury R ep o rt. 1866, p . 1 2 .

342 v a l u e , e v e r y f r a c t i o n o f w hich, we s h a l l u l t i m a t e l y h a v e t o pay in g o ld , in a d d itio n to th e i n t e r e s t . " 1 ev er,

A o t u a l l y , how­

th e o b l i g a t i o n s w ere b e in g s o ld on no b e t t e r

term s

w i t h i n th e o o u n tr y ; and i n e i t h e r c a s e i t w as a m a t t e r o f b o rro w in g 6 0 - c e n t d o l l a r s l a t e r to re p a y 1 0 0 - c e n t d o l l a r s . O b v io u sly ,

t h e b u r d e n o f t h e d e b t w o u ld b e i n c r e a s e d a s t h e

d o lla r a p p re c ia te d

to p a r i t y w ith g o ld .

The b o n d h o l d e r s

w o u ld , o f c o u r s e , g a i n t h e r e b y w h e th e r t h e y w ere E u ro p e a n s o r A m e ric an s. If

i t c o u l d b e s e e n , h o w e v e r , t h a t t h e i m p o r t s w h ic h

o c c a sio n e d t h i s flo w o f s e c u r i t i e s

t o E urope w ere l a r g e l y

c a p i t a l g o o d s w h io h w o u ld i n c r e a s e t h e p r o d u c t i v e p o w e r o f t h e c o u n t r y a n d y i e l d a r e t u r n m ore a m p le t h a n t h e c o s t o f o b t a i n i n g t h e m , t h e a r r a n g e m e n t o o u l d be s a i d e c o n o m ic a lly so u n d . a t le a st

to have been

T h i s se e m s n o t t o h a v e b e e n t h e o a s e ,

to th e e x t e n t t h a t i t

sh o u ld have b een :

Our i m p o r t a t i o n s o f g oods hav e b e e n i n c r e a s e d by n e a r l y t h e am o u n t o f t h e b o n d s w h i c h h a v e b e e n e x p o rte d . N o t o n e d o l l a r i n f i v e o f t h e am o u n t o f t h e f i v e - t w e n t i e s now h e l d i n E n g l a n d a n d u p o n th e c o n t i n e n t h a s b een r e tu r n e d to th e U n ite d S t a t e s i n th e fo rm o f r e a l c a p i t a l . 2 Our b o n d s have b e e n l a r g e l y p a id f o r i n a r t i c l e s f o r w h i c h no n a t i o n c a n a f f o r d t o r u n i n d e b t — f o r a r t i c l e s w h io h h a v e n e i t h e r s t i m u l a t e d i n ­ d u s t r y n o r i n c r e a s e d th e p r o d u c tiv e pow er o f th e o o u n t r y , w h ic h h a v e , i n f a o t , a d d ed n o t h i n g t o th e n a ti o n a l w e a lth . A r e f e r e n c e t o th e c u sto m ­ house e n t r i e s w i l l s u b s t a n t i a t e th e c o r r e c tn e s s

R e p o r t o f th e P o m p tro H e r of th e C u rre n c y . 1865, p . 66. 2T re a su ry R e p o rt. 1866, p . £3.

343 o f th e se s ta te m e n ts . T w o -th ird s o f th e im p o rta ­ t i o n s o f th e U n ite d S t a t e s c o n s i s t o f a r t i c l e s w h i c h , i n e c o n o m i c a l t i m e s , w o u ld h e p r o n o u n c e d lu x u rie s. The w a r a n d a r e d u n d a n t c u r r e n c y h a v e b r o u g h t a b o u t u n e x a m p le d e x t r a v a g a n c e , w h io h c a n o n l y be s a t i s f i e d b y t h e m o s t c o s t l y p r o d u c t s o f fo re ig n c o u n trie s . A f a c t o r w h ic h c o n t r i b u t e d

to th e a d v e rse b a la n c e o f

t r a d e w as t h e n e c e s s i t y f o r s h i p p i n g t h e g r e a t e r p a r t o f

American im ports and e x p o r ts i n f o r e i g n s h i p b u i l d i n g c o u l d n o t be e n c o u r a g e d ,

v e s se ls .

.American

f o r , b e s id e s w hat

n a t u r a l a d v a n t a g e s o t h e r c o u n t r i e s may h a v e h a d i n t h i s f i e l d , o n e i m p o r t a n t d i s a d v a n t a g e t o A m e r ic a n s h i p b u i l d e r s w as t h a t "T he h i g h p r i c e

i n o u r d e p r e c i a t e d p a p e r m oney o f t h e c h i e f

m a te r ia ls f o r s h ip - b u ild in g has re n d e re d us u n a b le , s in c e w ar,

t o c o m p e te w i t h o t h e r n a t i o n s i n t h i s

th e g g rea t in d u s try ."

B e f o r e 1860 m ore t h a n 75 p e r c e n t o f t h e A m e r ic a n f o r e i g n tr a d e had been c a r r i e d r a t i o w as r e v e r s e d , in fo re ig n v e s s e ls .

i n A m e ric a n s h i p s .

A f te r th e war th e

a p p r o x i m a t e l y 75 p e r c e n t b e i n g s h i p p e d g

I n 1872 S e c r e t a r y B o u t w e l l c o m m e n te d ,

" I f t h e a n n u a l e a r n i n g s o f A m e ric a n v e s s e l s w e re e i g h t y m illio n in ste a d of t h i r t y

th e d i f f e r e n c e

i n t h e am o u n t o f

e x c h a n g e a v a i l a b l e a b r o a d w o u ld m e e t a l a r g e p a r t o f t h e 4 a d v e rse b a la n c e in o r d in a r y y e a r s ."

^I b i d . . 1868, p . V I I I . 3 I b i d . , 1 8 7 7 , p . X L I. S e e a l s o D a v id A. W e l l s , "T he M e a n in g o f R e v en u e R e f o r m , " N o r t h A m e r ic a n R e v ie w . J u l y 1871, V o l. C X III, p . 1 3 0 .

g T reasury R ep o rt. 1874, p . XXXI; and 18 7 9 , p . XXVTII. 4I b ld . . 1872, p . X X III.

344 When t h e r e t u r n f l o w o f G o v e rn m e n t s e c u r i t i e s s e t i n , i t w as due o n ly i n p a r t to th e ch an g e i n th e b a la n c e o f t r a d e a f t e r th e p a n ic .

The g r a d u a l im p r o v e m e n t o f t h e p u b l i c

c re d it,

s u s ta in e d by th e p r o s p e c t o f s p e c ie re s u m p tio n ,

c reased

t h e i n v e s t m e n t q u a l i t y o f t h e b o n d s a n d i n t h a t way

te n d e d to enhance t h e i r v a lu e .

in ­

R e a d ju stm e n t w ith in th e

c o u n t r y t o a l o w e r p r i c e l e v e l and m ore s t a b l e b u s i n e s s c o n d i ­ tio n s a fte r

th e w o r s t e f f e c t s o f th e p a n ic had d i s a p p e a r e d ,

w e r e a c c o m p a n ie d by a n a b u n d a n c e o f l i q u i d c o n s e rv a tiv e in v e s tm e n t.

c a p i t a l se e k in g

Y e t b e t w e e n 1866 and 1 8 7 9 , i n s p i t e

o f th e b o rro w in g f o r re s u m p tio n p u r p o s e s ,

th e i n t e r e s t - b e a r ­

i n g p o r t i o n o f t h e d e b t h a d b e e n r e d u c e d b y $435 m i l l i o n . 1 T h i s r e d u c t i o n w as v e r y much g r e a t e r i n p r o p o r t i o n t o t h e s u p p l y a v a i l a b l e t o i n v e s t o r s t h a n i t w as i n p r o p o r t i o n t o t h e t o t a l a m o u n t o f t h e d e b t , f o r m ore t h a n h a l f t h e d e b t w a s c o m p o sed o f g r e e n b a c k s , t h e b o n d s t i e d up a s s e c u r i t y fo r n a tio n a l-b a n k n o te s ,

9

bonds h e ld by th e T re a su ry t o s e ­

c u r e G o v e rn m e n t d e p o s i t s i n n a t i o n a l b a n k s , and b o n d s h e l d m ore o r l e a s p e r m a n e n t l y b y s a v i n g s b a n k s a s a l e g a l f o r m o f in v e s tm e n t. T h us t h e c u r t a i l e d

s u p p l y o f G o v e rn m e n t b o n d s a n d t h e

1I b l d . . 1946, p . 455. 2 "T he f o r o e d m a r k e t c r e a t e d b y t h e b a n k s f o r t h e b o n d s e n h a n c e d th e c r e d i t o f th e g o v e rn m e n t and e n a b le d i t s o o n e r t o command b e t t e r t e r m s f o r i t s l o a n s . " K in le y , In d ep e n d en t T r e a s u r y , p p . 113-114.

345

i n o r e a s e d demand f o r th em f o r c e d t h e y i e l d w a s so c l o s e t o

t h e i r p r i c e s u p w a rd u n t i l

t h a t o f c o n s o ls and r e n t e s t h a t th e

A m e ric a n s e c u r i t i e s c e a s e d t o o f f e r t h a t e x t r a v a l u e w h ic h f o r e i g n b o n d s m u s t h a v e t o c o m p e te w i t h d o m e s t i c g o v e r n m e n t d e b t.

When t h e d i f f e r e n c e

i n y i e l d was s m a l l , E u r o p e a n i n ­

v e s t o r s f a v o r e d t h e o b l i g a t i o n s o f t h e i r own g o v e r n m e n t s .

So

to o w ere A m erican i n v e s t o r s w i l l i n g to p ay t h a t h id d e n p r e ­ mium w h i c h a g o v e r n m e n t b o n d commands i n i t s th e p o s t - p a n i c y e a r s o f i d l e c a p i t a l ,

own o o u n t r y .

In

d o m e stic in v e s tm e n t d e ­

mand g r e w , a n d w i t h i n s i x y e a r s t h e # 1 , 0 0 0 m i l l i o n o f U n i t e d S t a t e s d e b t h e l d a b r o a d w as r e d u c e d t h a t a m o u n t.1

bo a s m a l l f r a c t i o n o f

I t m ust be n o te d t h a t , o t h e r c ir c u m s ta n c e s

b e in g f a v o r a b l e to th e t r e n d ,

i t w as t h e e n h a n c e m e n t o f t h e

G o v e r n m e n t ’ s c r e d i t m ore t h a n m e r e l y t h e f a v o r a b l e c h a n g e i n t h e b a l a n c e o f t r a d e w h ic h b r o u g h t t h i s a b o u t , f o r a t t h e same t i m e t h a t G o v e rn m e n t s e c u r i t i e s w e r e b e i n g r e t u r n e d

to

t h e home m a r k e t o t h e r A m e ric a n s e c u r i t i e s w e r e b e i n g a c q u i r e d b y E u r o p e a n s i n i n c r e a s i n g a m o u n t s a s f o r e i g n c a p i t a l w as a ttra c te d

to th e U n ited S t a t e s to speed i t s

v e lo p m e n t a n d ,

in p a r t i c u l a r ,

to h e lp b u ild

in d u s tr ia l de­ i ts ra ilro a d s.

T h i s o u t w a r d and r e t u r n f l o w o f G o v e rn m e n t s e c u r i t i e s d u r i n g t h e g r e e n b a c k p e r i o d t o o k p l a c e w i t h no s e r i o u s

1I n t h e s p r i n g o f 1878 i t was e s t i m a t e d t h a t t h e am ount h e ld a b ro a d h ad d w in d le d t o #600 m i l l i o n . I n N ovem ber t h e e s t i m a t e w as o n l y #200 m i l l i o n . H . M i s c . D o c . N o. 4 8 , 4 5 t h G o n g ., 2d S e s s . . p p . 1 1 - 1 2 ; and T r e a s u r y R e p o r t . 1 8 7 8 , p . X V III.

346 d i s r u p t i o n s o f t h e m oney m a r k e t e i t h e r i n New Y o rk o r a b r o a d . I t h a s b e e n s e e n how c o n f i d e n c e i n M c C u l lo c h * s f i r m m o n e y m a r k e t p o l i c y p r e v e n t e d p a n i c i n t h e s p r i n g o f 1866 when some E u ro p ean h o ld in g s w ere l i q u i d a t e d a t th e o u tb r e a k o f w ar b e ­ tw e e n P r u s s i a a n d A u s t r i a .

A g a in , a t th e b e g in n in g o f th e

F r a n c o - P r u s s i a n W ar, b e c a u s e o f a n a d e q u a t e T r e a s u r y b a l a n c e and a d e te rm in e d b o n d -b u y in g p o l i c y , 1 th e o n ly e f f e o t o f th e d istu rb e d

f i n a n c i a l c o n d i t i o n s i n E u r o p e w a s t o d e l a y com­

m e n c e m e n t o f th e r e f u n d i n g p r o g r a m .

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w h ich f o r e i g n m o n ey -m ark et d i s t u r b a n c e s m ig h t have had s e r i o u s e f f e c t s upon th e d o m e s tic m a rk e t had th e

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t h e s e w as i n 1 8 7 1 , w hen J a y Cooke a n d h i s a s s o c i a t e s s o l d some # 8 4 m i l l i o n o f t h e 5 - p e r c e n t l o a n i n E u r o p e .

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b o n d s h a d a l l b e e n s u b s c r i b e d b u t n o t y e t t a k e n up an d p a i d fo r,

th e d e v elo p m e n t o f th e

a u tu m n s t r i n g e n c y i n t h e New

Y o r k m oney m a r k e t p u t s u c h p r e s s u r e on some bond p r i c e s t h a t Cooke w as a l a r m e d l e s t s u b s c r i b e r s t o t h e new l o a n r e f u s e

II,

to

1 C o m m e rc ia l an d F i n a n c i a l C h r o n i c l e . J u l y 1 6 , 1 8 7 0 , V o l . pp. 77.

34? t a k e up t h e i r s u b s c r i p t i o n s .

To r e m e d y t h e s i t u a t i o n , B o u t -

w e l l i n c r e a s e d h i s g o l d s a l e s and b o n d p u r c h a s e s a nd b y t h u s reliev in g

t h e m a r k e t a t home t i d e d

th e s y n d i c a t e th r o u g h the

c risis. The London money m a r k e t w a s d i s t u r b e d b y t h e s y n d i c a t e ’ s s a l e o f a l a r g e amount o f bonds t h e r e f o r g o l d , g o ld was t h e r e b y draw n fro m th e th at i t

»ould b e .

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t o o p e n a n a c c o u n t i n h i s name and B o u t w e l l ’ s ,

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f o r the Governm ent.

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th e B a n k ’ s o f f i c e r s were c o n v in c e d t h a t

R i c h a r d s o n w o u l d n o t ’’w i t h d r a w t h e money and t a k e

i t t o New

Y o r k ” t h a t t h e d i s c o u n t r a t e v'as l o w e r e d and t h e money m a r k e t e a s e d* . 1 R ichardson th u s ex p lain ed situ atio n

in w hich,

t h e d e l i c a c y o f t h e r a t h e r odd

i t w o u l d se e m ,

t h e B r i t i s h b a n k e r s were

u n n e c e s s a r i l y m aking m a t t e r s d i f f i c u l t f o r th e m s e lv e s : . . . I t h o u g h t i t v.ou ld be i n j u r i o u s and p r e j u ­ d i c i a l to t h e Funded Loan t o have a p a n i c i n London, i n w h i c h t h e m a r k e t p r i c e o f t h e new l o a n w o u l d d r o p c o n s i d e r a b l y b e l o w p a r j u s t a t a t i m e when i t s p r i c e

■ ''L e tter o f W i l l i a m a . R i c h a r d s o n t o S e c r e t a r y B o u t w e l l , J a n u a ry 25, 1872, quoted in B o u tw e ll, o p . c i t . . V ol. I I , pp. 194-199.

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a s u b s ta n t ia l refu n d in g

o p e ra tio n in a

f o r e i g n m a r k e t was s u c c e s s f u l l y c o m p l e t e d w i t h t u r b a n c e t o t h e money m a r k e t s and w i t h o u t f ro m one c o u n t r y t o t h e o t h e r . s lo w s a l e

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no i m p o r t a n t e f f e c t u p o n f o r e i g n m a r k e t s . The p a y m e n t o f t h e # 1 5 , 5 m i l l i o n G eneva aw ard b y G r e a t B rita in

to th e

U n i t e d S t a t e s i n S e p t e m b e r 1873 w as a n i n s t a n c e

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by re d e m p tio n o f d e b t h e ld a b ro a d .

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i n E n g la n d b y t h e B r i t i s h G o v e rn m e n t s i m p l i f i e d

t h e p r o b l e m o f t r a n s f e r and e a s e d t h e s t r a i n on t h e L on d o n 2 m oney m a r k e t . A n o th e r l a r g e T re a s u ry o p e r a tio n d i r e c t l y c o n cern ed w ith t h e E u r o p e a n m oney m a r k e t t o o k p l a c e w hen S h e rm a n w a s p r e p a r ­ in g f o r th e r e s u m p tio n o f s p e c i e p a y m e n ts . s a le o f re fu n d in g

b o n d s , a g a i n s t w h ic h c o m p e n s a t o r y p u r c h a s e s

o f c a l l e d b o n d s w e re m a d e , t h e w as i n t e n d e d

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t o r e s u l t i n a m ovem ent o f g o l d t o New Y o r k .

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a c q u i s i t i o n o f g o l d f o r r e s u m p t i o n w as p r i o r i n i m p o r t a n c e t o

^Idem . ^ C o m m e rc ia l and E l n a n o i a l C h r o n i c l e . A u g u s t 1 6 , 1 8 7 3 ,

Vol. Vti, p. £14.

349 r e f u n d i n g , y e t I t w as a f a r m ore c o m p le x a n d d e l i c a t e m a t t e r a n d w as n e c e s s a r i l y a g r a d u a l o p e r a t i o n .

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d r a w a l o f g o l d fro m E u r o p e i n a s h o r t p e r i o d o f t i m e w o u ld h a v e l o w e r e d b a n k r e s e r v e s t h e r e , d i s c o u n t r a t e s w o u ld h a v e b e e n r a i s e d , a n d a r e t u r n f l o w o f g o l d fro m t h e U n i t e d S t a t e s In d u ced .

A t t h e same t i m e , p r e s s u r e

on t h e money m a r k e t w o u ld

h a v e lo w e re d bond p r i c e s and p r e v e n te d f u r t h e r

s a le or exchange

o f r e f u n d i n g b o n d s a s w e l l a s t h e s a l e o f a d d i t i o n a l re s u m p ­ t i o n bonds. A l t h o u g h h a m p e r e d f o r a t i m e by t h e t h r e a t o f g r e e n b a c k and f r e e - s i l v e r l e g i s l a t i o n ,

th e s a l e o f th e re s u m p tio n i s ­

s u e s p r o g r e s s e d w i t h o u t s e r i o u s e f f e c t upon t h e L on d o n m a r k e t . The t r a n s f e r o f g o l d t o t h e U n i t e d S t a t e s t o o k p l a c e a s d e ­ s i r e d , and t h e g o ld re m a in e d w i t h in th e c o u n tr y .

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o f t r a d e b e i n g f a v o r a b l e t o t h e U n i t e d s t a t e s , a n d t h e am ount o f F e d e r a l b o n d s a b r o a d b e i n g r e d u c e d t o a lo w p o i n t a n d t h u s l e s s a p t to s u b s t i t u t e

f o r g o ld in s e t t l i n g

th e b a la n c e , i t

w a s n a t u r a l f o r g o l d t o move i n t h e d i r e c t i o n w h i c h i t d i d . A l t o g e t h e r i t was a l a r g e t r a n s a c t i o n w h i c h i f h a s t i l y o r a w k w a r d ly h a n d l e d w o u ld h a v e q u i c k l y d i s t u r b e d f o r e i g n m a r k e ts and J e o p a r d iz e d r e s u m p tio n . and a ls o

H ere a g a i n ,

sk ill,

c o o p e r a tio n , c la y e d a h ig h ly im p o rta n t p a r t in th e

^ S p e c ie R e su m p tio n an d R e fu n d in g o f N a t io n a l D e b t, p a s s i m .

350

m e a s u r e s w h i c h w e r e t a k e n t o i m p le m e n t t h e f i n a l

a ch ie v e m e n t

o f m o n e ta ry p o l i c y i n th e g re e n b a c k p e r i o d . The e m p lo y m e n t o f a s y n d i c a t e w h i c h i n c l u d e d t h e f o r e ­ m o s t b a n k i n g h o u s e s o f t h e w o r l d w as w e l l w o r t h t h e r e l a t i v e ­ l y s m a l l c o m m i s s i o n p a i d t o t h e m em bers o f i t . in stin c tiv e

k n o w le d g e o f m a r k e t s w h i c h t h e

sy n d ic a te p o sse sse d , n a n c ia l tre n d s,

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le a d e r s of th e

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t h e i r t i m i n g and s k i l l i n s u p p o r t i n g t h e

m a r k e t w h e n i t w a s r e q u i r e d and i n d i s p o s i n g o f t h e b o n d s a s th e m ark et p e rm itte d w ith o u t d i s t u r b in g

th e p r i c e ,

and

t h e m any c o n t a c t s a n d s o u r c e s o f i n f o r m a t i o n w h i c h t h e mem­ b e rs of th ese

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i n L ondon

s h o u ld be a c c o rd e d h ig h r e c o g n i t i o n f o r

th e y p la y e d in t h i s s u c c e s s f u l v e n tu re in a f o r ­

e i g n m oney m a r k e t .

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n e s s o f p u r p o s e , and C o n a n t's k e e n o b s e r v a t i o n o f th e m ar­ k e t s an d h i s g r e a t d i l i g e n c e , d i d much t o m ake t h e E u r o p e a n s a l e o f t h e r e s u m p tio n b o n d s and th e t r a n s f e r o f th e p r o c e e d s to

th e U n ited S t a t e s a s u c c e s s f u l o p e r a t i o n .

*Idem.

351

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fo rm a tio n and d i s t r i b u t i o n

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b e made c l e a r , h o w e v e r : The w e a l t h o f t h e c o u n t r y i n c r e a s e d , r e a l w ages r o s e ,

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th e c o n t r o l l i n g f o r c e i n th e n a t i o n a l e x p a n s io n .

of co u rse, I t w as

The a v e r a g e a n n u a l p e r - c a p i t a i n c r e a s e i n t h e n a t i o n a l w e a l t h w as $ 2 2 .5 6 b e tw ee n 1860 and 1870, an d $ 3 9 .6 5 b e tw e e n 1870 a n d 1 8 8 0 . W e a l t h . D e b t , a n d T a x a t i o n . V o l . I , p . 3 3 , The a v e r a g e o f r e l a t i v e w a g e s w e i g h t e d a c c o r d i n g t o i m p o r t a n c e o n t h e b a s i s o f t h e 1 8 6 0 l e v e l a s 100 w a s 6 8 . 7 i n 1 8 6 5 an d 1 3 9 . 4 i n 1 8 7 9 . S . K e p t . No. 1 3 9 4 , 52d C o n g ., 2d S e s s . , V o l. I , p . 1 4 . S e e a l s o M i t c h e l l , G o l d . P r i c e s , an d W ages u n d e r t h e G r e e n b a c k S t a n d a r d , p p . 1 0 2 - 1 0 3 . The r e l a t i v e a v e r a g e o f p r i c e s i n g o l d f o r f a r m p r o d u c t s o n t h e b a s i s o f 1 8 6 0 a s 100 w as 1 6 7 . 1 i n 1 8 6 4 a n d 9 8 . 4 i n 1879. A s i m i l a r i n d e x f o r t h e p r i c e s o f a r t i c l e s i n common u s e sh o w s a d e c l i n e f r o m 1 9 0 . 7 i n 1 8 6 5 t o 9 6 . 6 i n 1 8 7 9 . S . R e p t . N o. 1 3 9 4 , 5 2 , C o n g ., 2d S e s s , , V o l . I , p p . 1 0 - 1 1 . See a ls o M itc h e ll, o p . c l t . . p p . 2 6-27. P r i v a t e d e b t , wJiIoh w a s s m a l l a t t h e en d o f t h e w a r , in c re a s e d w ith th e i n d u s t r i a l e x p a n sio n o f th e l a s t , th e a g r i c u l t u r a l d e v e l o p m e n t o f t h e W e s t , t h e boom o f s p e c u l a t i o n , and th e r a p id e x te n s io n o f th e r a ilw a y sy s te m . The p a n i o and i t s a f te r m a th m e re ly i n t e r r u p t e d a lo n g - te r m t r e n d . T re a su ry R e p o r t . 1 8 6 5 , p p . 1 2 - 1 3 ; C o m m e r c ia l and F i n a n c i a l C h r o n i c l e . F e b r u a r y 2 5 , 1 8 7 1 , V o l . X I I , p p . 229-230*; G e o r g e P a i s h , The T r a d e B a l a n c e o f t h e U n i t e d S t a t e s ( S . D o c . N o. 5 7 9 , 6 1 s t C o n g . , 2d S e s s T T , p p . 1 7 6 - 1 7 8 ; A. M. S e k o l s k i , T he G r e a t A m e r i c a n L an d B u b b l e ( H a r p e r an d B r o t h e r s , New Y o r k a n d L o n d o n , 15 3 2 T , C h s . X I I I - X I V ; B u c k , The A g r a r i a n C r u s a d e . p a s s i m : J o h n D . H i c k s , The P o p u l i s t R e v o l t (T he U n i v e r s i t y o f k i n n e s o t a P r e s s , M in n e a p o lis , l 9 3 l ) , p p . 1 5 -2 1 ; and F r e d e r i c k A. C l e v e l a n d and F r e d W. P o w e l l , R a i l r o a d P r o m o t i o n a n d C a p i t a l i z a t i o n i n t h e U n i t e d S t a t e s (L o n g m a n s , G r e e n , a n d C o . , tfew Y o r k , e t c . , 1 9 6 $ ) , p a s s i m .

552

r a t h e r a q u a l i f y i n g and d i r e c t i n g

in f lu e n c e th e e f f e c t o f

w h i c h d e p e n d e d u p o n t h e way i n w h io h i t w a s m a n a g e d .

Had

t h e r e b e e n no d e b t , o r h a d t h e d e b t b e e n t w i c e a s l a r g e , t h e t r e m e n d o u s n a t u r a l a n d s o c i a l f o r c e s a t w o rk w ould c e r t a i n l y have c o n tin u e d , a t a d i f f e r e n t r a t e u n d o u b te d ly , p r o b a b l y a l o n g so m e w h at d i f f e r e n t l i n e s ,

and w ith a d j u s t ­

m en ts and a d a p t a t i o n s w h ic h can o n ly be c o n j e c t u r e d .

The

n e e d f o r s a v in g and c a p i t a l i n v e s tm e n t , f o r e x a m p le , w as so g r e a t t h a t r e g a r d l e s s o f th e s t a t u s o f th e d e b t and th e e f f e c t s o f i t s m a n a g e m e n t, s a v i n g w o u ld h a v e t a k e n p l a c e . How m u ch , b y whom, a n d a f t e r w h a t s e r i e s w ith s u f f e r i n g and l o s s — i f

of a d ju s tm e n ts ,

th e d e b t had been so b a d ly

m anaged t h a t i t s

e a r l i e r e f f e c t s w ere c a ta c ly s m ic — can

o n ly be g u e s s e d .

B u t s a v i n g w as t h e g r e a t n e e d o f t h e

n a t i o n , a n d r e g a r d l e s s o f how muoh t h i s n e e d m ig h t be o b s c u r e d b y t h e m e c h a n i c s o f m oney a n d c r e d i t ,

ta x a tio n ,

a n d F e d e r a l - d e b t m a n a g e m e n t, a n e n e r g e t i c p e o p l e i n a f a v o r a b l e n a t u r a l and p o l i t i c a l e n v iro n m e n t c o u ld be e x p e c te d to r e t u r n to th e p a th o f r e a l i t y . * 1

" . . . th e e x p e r ie n c e o f a n o th e r y e a r r e a f f i r m s th e p r i n c i p l e . . . t h a t th e p r o g r e s s and g ro w th o f th e c o u n t r y , th ro u g h i t s e le m e n ts o f v i t a l i t y , v i z . , g r e a t n a t i o n a l r e s o u r c e s and an i n h e r e n t s p i r i t o f e n e rg y and e n t e r p r i s e i n th e p e o p le , a re in a g r e a t d e g re e in d e p e n d e n t o f l e g i s ­ l a t i o n , a n d o f t h e i m p o v e r i s h m e n t a n d d i s o r d e r w h ic h t h e o c c u rre n c e o f a lo n g w ar h a s n e c e s s a r i l y o c c a s io n e d ." R e p o r t o f t h e S p e c i a l C o m m is s io n e r o f t h e R e v e n u e . 1 8 6 9 , p p . iii^ T v,

353 It is

im p o rta n t to

n o t e how t h e d e b t w a s d i s t r i b u t e d *

P r a c t i c a l l y a l l o f th e o r i g i n a l b o rro w in g had b e e n w i t h i n th e c o u n t r y , b u t b e f o r e 1873 a t l e a s t $ 1 ,0 0 0 m i l l i o n o f th e o b l i g a t i o n s h a d come i n t o t h e p o s s e s s i o n o f f o r e i g n h o l d e r s * By 1879 most, o f t h i s

am ount had b e e n r e t u r n e d

to t h e U n ite d

S t a t e s , s o t h a t t h e d e b t w as a g a i n l a r g e l y a d o m e s t i c o n e . A t f i r s t t h e w a r d e b t h a d w i d e o w n e r s h i p among t h e p e o p l e . T h i s w a s p a r t l y due t o t h e e f f o r t made t o o b t a i n p o p u l a r s u b s c rip tio n s ,

b u t m ore l a r g e l y

to

th e n a tu r e of th e v a rio u s

o b l i g a t i o n s a n d t h e u s e made o f th e m w hen e v i d e n c e s o f d e b t w ere d i s b u r s e d i n p la c e o f m oney.

The g r e e n b a c k s w e r e , o f

c o u rs e , c u rre n c y , and th e y c o n tin u e d a s a m edium o f e x c h a n g e .

th ro u g h o u t to c i r c u l a t e

By 1 8 7 9 , w hen f u n d i n g w as c o m p l e t e d ,

o w n e rsh ip o f th e i n t e r e s t - b e a r i n g p a r t o f becom e

h ig h ly c o n c e n tra te d .

th e d e b t had

O f f ic ia l e stim a te s

in d ic a te

t h a t m ore t h a n 80 p e r c e n t o f i t w a s h e l d i n a m o u n t s e x c e e d ­ in g $ 2 5 ,0 0 0 , and t h a n $ 1 0 ,0 0 0 *

1

m o re t h a n 8 8 p e r c e n t i n a m o u n t s g r e a t e r T h u s, m o st o f th e d e b t w as h e ld w i t h i n th e

c o u n try by i n s t i t u t i o n s and w e a lth y i n d i v i d u a l s .

^C f. fie p o rt on V a lu a tio n . T a x a tio n , and P u b lic I n d e b t e d n e s s in~~the U n i t e d S t a t e s , p p . 4 8 9 - 4 9 1 . The w i d e s t d i s t r i b u t i o n o f t h e F e d e r a l d e b t a t t h i s t im e w a s i n New E n g l a n d , w h e r e a b o u t 36 p e r c e n t o f a l l G o v e r n m e n t- b o n d h o l d e r s h e l d a p p r o x i m a t e l y 11 p e rc e n t o f th e in te r e s t- b e a r in g d e b t. I b i d . , p . 492*

354 The w a r d e b t w a s M e a d w e i g h t ” d e b t .

H ow ever n e c e s s a r y

and b e n e f i c i a l i t w a s t o b o r r o w a n d s p e n d w i t h o u t l i m i t i n o r d e r to w i n , n o t h i n g was c r e a t e d t h a t was d i r e c t l y a n d p r o d u c t i v e an d w o u ld y i e l d a r e t u r n a p p l i c a b l e se rv ic e

and r e d u c t io n o f th e d e b t .

ta n g ib le to

th e

I n c r e a t i n g th e d e b t,

s a v i n g s had been bo rro w ed and f u t u r e s a v i n g s a n t i c i p a t e d . The d e b t i n s t r u m e n t s w e r e t h e s y m b o ls o f t h e w e a l t h d e s t r o y e d a s w e l l a s th e p ro m is e to r e s t o r e had c o n tr i b u te d

it,

or to t h e i r

t h a t w e a l t h t o t h o s e who

su ccesso rs.

P e a c e tim e

p r o d u c t i o n c o u ld be e x p e c te d e v e n t u a l l y t o r e p l a c e t h e w e a l t h d e s t r o y e d by w a r .

B u t, a s th e d e b t r a n o n , th e i n t e r e s t

p a y m e n ts r e q u i r e d t h a t p a r t o f t h e w e a l t h b e in g p ro d u c e d be d r a w n aw ay fro m t h e p r o d u c e r s and p a i d a s in co m e t o t h o s e who h e l d

th e d e b t.

T h e s e i n t e r e s t p a y m e n t s w e re t h e i m m e d i a t e c o s t o f t h e d e b t.

Repaym ent o f t h e p r i n c i p l e ,

as i t

m ig h t ta k e p l a c e ,

w a s a f u r t h e r e x p e n d i t u r e , m ore w i t h i n t h e c o n t r o l o f t h e G o v ern m en t, b u t r e g a r d e d , e v e n tu a lity .

in th e o ry a t l e a s t ,

as an

W h atev e r f u n d s w ere t o be d i s b u r s e d to m e e t

t h e s e e x p e n s e s o f d e b t h a d t o be o b t a i n e d a s r e v e n u e o v e r and above t h a t r e q u ir e d to p ay th e o th e r e x p e n se s of th e G o v e rn m e n t.

S i n c e t h e r e w as a T r e a s u r y s u r p l u s e a c h y e a r ,

d is b u rs e m e n ts on a c c o u n t o f th e d e b t c o n t i n u a l l y exceeded i n t e r e s t re q u ire m e n ts . o u tla y .

B ut i n t e r e s t w as by f a r th e l a r g e r

The a v e r a g e a n n u a l r e d u c t i o n o f p r i n c i p a l w a s

# 3 2 .6 m i l l i o n , w h ile t h e a v e r a g e a n n u a l i n t e r e s t c h a r g e was

355

$ 1 1 7 .1 m i l l i o n .

The a v e r a g e a n n u a l e x p e n d i t u r e o n d e b t w as

t h e r e f o r e # 1 4 9 .8 m i l l i o n .

T h i s , w h en c o m p a re d t o

th e

a v e r a g e a n n u a l t o t a l e x p e n d i t u r e s o f # 1 9 2 .5 m i l l i o n , o t h e r th an fo r d e b t,

i n d i c a t e s th e m ag n itu d e o f T re a su ry d i s b u r s e ­

m e n ts s o l e l y on a c c o u n t o f d e b t i n t h e

f i s c a l y e a r s 1866

t h r o u g h 1879 The d e b t m o s t d i r e c t l y i n f l u e n c e d t h e c r e a t i o n a n d d i s ­ t r i b u t i o n o f w e a lth and th e fo rm a tio n o f c a p i t a l th ro u g h th e p ro c e s s o f i t s re d e m p tio n .

As t h e r e v e n u e d raw n f r o m t h e

p e o p l e b y m eans o f a h i g h l y r e g r e s s i v e t a x s y s t e m w as s l u i c e d t h r o u g h t h e T r e a s u r y an d i n t o

th e hands o f p r i v a t e

i n v e s t o r s who s u r r e n d e r e d t h e i r G o v e rn m e n t b o n d s f o r i t , t h e m oney w as l a r g e l y r e i n v e s t e d i n e q u itie s of p r iv a te

in d u stry .

tie

o b l i g a t i o n s an d

W hat h a d come f r o m t h e

e n f o r c e d s a v i n g s o f many who w o u ld h a v e r a i s e d t h e i r s t a n d a r d s of

l i v i n g had th e i n c i d e n c e o f t a x a t i o n b e e n o t h e r w i s e ,

b e ea m e o a p i t a l .

T h u s a s G o v e rn m e n t d e b t w as p a i d , some

i n v e s t o r s w e re o b l ig e d to r e p l a c e t h e i r h o l d in g s o f G overn­ m ent p ro m ise s w ith

c la im s t o n ew ly c r e a t e d w e a l t h , and i n

t h i s way t h e a b s t i n e n c e o f c e r t a i n c l a s s e s r e s u l t e d

i n th e

p r o d u c t i o n o f m o re c a p i t a l g o o d s a n d f e w e r c o n s u m e r s * goods.

B ut th e o w n e rsh ip o f t h i s a d d i t i o n a l am ount o f

p e rm a n e n t, p r o d u c t i v e w e a lth d id n o t d e v o lv e upon th o s e

■ ^ C a lc u la tio n s b a s e d on d a t a i n T r e a s u r y R e p o r t . 1946, pp. 369, 455.

356 w h o se s a c r i f i c e h a d made t h e p r o d u c t i o n p o s s i b l e . re g re ss iv e ferred

it

The

t a x s y s t e m , t h r o u g h t h e m edium o f t h e d e b t , t r a n s ­ in to o th e r hands.

p ro d u c tiv e f a c i l i t i e s ,

The n a t i o n w a s t h e r i c h e r i n

b u t t h e o w n e rsh ip o f i t s w e a l t h was

b e in g c o n c e n tr a te d i n a s m a ll p o r t io n o f th e p o p u la tio n * I n t e r e s t p a y m e n ts r e c e i v e d b y h o l d e r s o f G o v e rn m e n t o b l i g a t i o n s , w h e th e r i n d iv i d u a ls o r i n s t i t u t i o n s , r e s u lte d in f a r l e s s c a p i t a l in v e s tm e n t.

u n d o u b ted ly

The i n t e r e s t p a i d

t o i n s t i t u t i o n s was e v e n t u a l l y t r a n s f e r r e d t o b e n e f i c i a r i e s o r s t o c k h o l d e r s a s in co m e t o be s p e n t o r s a v e d b y t h e re c ip ie n t.

It

se em s r e a s o n a b l e t o b e l i e v e t h a t t h e g r e a t e r

p a r t o f t h i s in co m e f ro m G o v e rn m e n t s e c u r i t i e s , w h e t h e r d i r e c t l y o r i n d i r e c t l y r e o e i v e d , w as s p e n t f o r p u r p o s e s o f c o n su m p tio n .

I n t h i s c a s e i t c a n b e s a i d t h a t t h o s e who

p a i d t h e t a x e s con su m ed f e w e r g o o d s p a id f o r p ro d u c in g . a ls o p a id

ta x e s,

th a n th e y had been

So f a r a s t h e r e c i p i e n t s

of in te re s t

t h e d i s c r e p a n c y was l e s s e n e d , b u t t h e

c o n c e n t r a t i o n o f t h e d e b t i n t h e h a n d s o f a f e w made s u c h cases e x c e p tio n a l. T hus, to

th e d e g re e t h a t t a x a t i o n l i m i t e d

c o n su m p tio n ,

t h e r e d u c t i o n o f G o v e rn m e n t d e b t e n f o r c e d s a v i n g s and t e n d e d t o a l l o c a t e m ore o f t h e n a t i o n ' s r e s o u r c e s t o t h e p ro d u c tio n o f c a p i ta l goods.

A t t h e same t i m e ,

th e

re d u c tio n in i n t e r e s t c h arg es p e rm itte d a d d itio n a l p a y m e n t , w i t h t h e same r e s u l t . w h i c h o c c u r r e d u p t o 1872 g a v e

debt

The r e d u c t i o n o f t a x e s m ore c o n s u m in g p o w e r t o t h e

357 lo w er-in co m e g r o u p s , and b e c a u se o f th e t h r i f t y few , a p a r t o f t h i s u n d o u b t e d l y becam e s a v i n g s * pow er was th e n t r a n s f e r r e d o f G o v e rn m e n t s e c u r i t i e s ,

A l t h o u g h l e s s c o n s u m in g

th ro u g h th e T re a s u ry to th e h o l d e r s t h e in c o m e f r o m r e i n v e s t m e n t b y

t h o s e w h o se h o l d i n g s w e r e re d e e m e d s u s t a i n e d t h e i r c o n s u m in g p o w er. The f i s c a l a n d

m o n e t a r y p o l i c i e s o f t h e G o v e rn m e n t i n

t h i s p e r i o d a f f e c t e d m o s t s e v e r e l y t h e a g r i c u l t u r a l and lab o rin g p a rts of

th e p o p u l a t i o n .

F arm ers s u f f e r e d m o st.

The a v e r a g e f a r m w as h e a v i l y m o r t g a g e d a t a h i g h r a t e o f in te re s t.

M o st f a r m e r s w e r e o b l i g e d

a n d e q u i p m e n t on c r e d i t .

As d e b t o r s ,

to buy t h e i r

su p p lie s

t h e y w ere e s p e c i a l l y

s t r a i t e n e d by th e g r a d u a l a p p r e c i a t i o n o f th e g r e e n b a c k cu rre n cy .

The f l u c t u a t i n g v a l u e o f t h a t m edium o f e x c h a n g e

a l s o added to th e e x p e n se o f m a rk e tin g t h e i r p r o d u c t s . g r e a t d e c lin e

The

i n th e p r i c e s f o r a g r i c u l t u r a l c o m m o d itie s

f u r t h e r red u ced th e

f a r m e r s ’ in c o m e , and t h e t a r i f f w e ig h e d

h e a v i l y on h i s c o s t s o f p r o d u c t i o n a s w e l l a s h i s c o s t o f liv in g . p ric e s,

Many o f h i s p r o d u c t s w e re s o l d a t c o m p e t i t i v e w o r l d b u t a s a c o n s u m e r o f m a n u f a c t u r e d g o o d s he p a i d

p r i c e s made h i g h b y t h e p r o t e c t i v e t a r i f f .

E ven t h o s e

whose

p l i g h t w as t h e m o s t w r e t c h e d and w h o se d e b t s o v e rw h e lm e d th em , c o n t r i b u t e d , n e v e r t h e l e s s , th e F e d e ra l d e b t.

to w ard th e r e d u c t i o n of

The c o m p le x p r o c e s s w h i c h c o n c e a l e d

f a c t f r o m m o s t f a r m e r s s p a r e d th em i t s no w o n d e r , h o w e v e r , t h a t t h e f a r m i n g

g rim i r o n y .

th is

I t was

c l a s s o rg a n iz e d

358 p o litica lly

and s t r u c k o u t b l i n d l y a g a i n s t w h a t i t

was t h e s o u r c e o f i t s

supposed

i l l s and t h a t i t fa v o re d r a d i c a l d e b t

a nd c u r r e n c y m e a s u r e s . On l a b o r ,

e s p e c i a l l y the

less

Federal finance vas also se v ere, ab o v e h a v e

in d icated .

sk illed ,

th e im pact of

as th e p ro cesses described

U nlike th e f a r m e r s , how ever,

p a r t o f t h e p o p u l a t i o n was l e s s b u r d e n e d b y d e b t .

th is The

a p p r e c i a t i o n o f t h e c u r r e n c y a nd t h e a b u n d a n c e o f f a r m produce b ro u g h t low er p r i c e s by w hich they b e n e f i t e d ;

and,

s s h a s b e e n sh o w n , r e a l w a g e s w e r e g r a d u a l l y r i s i n g . W o rk e r s t o o k some p a r t i n t h e t h i r d - p a r t y m o v e m e n t s o f t h e t i m e , b u t t h e i r r e a l c o n c e r n r e m a i n e d h i g h e r w a g e s and few er h o urs o f w ork. I t was t h e m a n u f a c t u r i n g ,

com m ercial,

and f i n a n c i a l

i n t e r e s t s w hich b e n e f i t e d most from th e grow th o f n a t i o n a l w ealth in th is p e rio d . it

How ever t h i s w e a l t h w a s d i s t r i b u t e d ,

did f u r t h e r th e c r e a t i o n o f a d d i t i o n a l w e a lth .

a l l y t h e r e w a s t o come a b o u t a more e q u i t a b l e d istrib u tio n .

E ventu­

system of

CHAPTER XIII & SUMMARY OF DEBT-MAHAGjBMBNT OBJECTIVES: 1 8 6 5 -1 8 7 9 A l t h o u g h t h e m o d e rn v ie w o f d e b t- m a n a g e m e n t o b j e c t i v e s i s m uch b r o a d e r t h a n t h a t o f t h e p o s t - C i v i l War p e r i o d ,

th e

f o r e g o i n g s t u d y show s t h a t d u b t - m a n a g e m e n t p o l i c y , e v e n a t t h a t t i m e , w e n t f a r b e y o n d m e re c o n c e r n w i t h t h e s i z e o r b u rd e n o f th e d e b t.

How t h e g r e a t C i v i l War d e b t d o m i n a t e d

t h e l o a n m a r k e t s , an d how , t h r o u g h t h e i n t e r r e l a t i o n s h i p o f d e b t p o l i c y and m o n e ta ry p o l i c y ,

its

m anagem en t a f f e c t e d

e v e r y a s p e c t o f t h e econom y, i s th e i m p o r t a n t l e s s o n w h ic h th a t

p e rio d o ffe re d It

is n o ta b le

th e f u t u r e .

t h a t e a c h of th e S e c r e t a r i e s o f th e T re a s ­

u r y com prehended w e l l enough th e g e n e r a l p ro b le m o f th e d e­ p r e c i a t e d c u r r e n c y a n d t h e lo w s t a t e

o f th e p u b lic

c re d it

a n d t h a t e a c h u n d e r s to o d t h e m eans a t h i s d i s p o s a l f o r d e a l ­ in g w ith i t .

Y e t i n o n e o r a n o t h e r w ay e a c h w as l i m i t e d

i n h i s p o w e r to r e s o l v e

th e p ro b le m e i t h e r by f o r c e s b ey o n d

h i s c o n t r o l — such a s th e w i l l o f C o n g re ss, p u b lic o p in io n , f in a n c ia l tre n d s,

a n d i n t e r n a t i o n a l e v e n t s — o r by h i s own

n a t u r e and ju d g m e n t.

M c C u l l o c h 's f i r m p o l i c y o f c u r r e n o y

c o n t r a c t i o n was l i m i t e d b y a c t s o f C o n g r e s s ; B o u t w e l l an d R ic h a rd s o n p u rsu e d a p o l i c y o f d e b t r e d u c t i o n and r e f u n d in g ,

(359)

360 but fa ile d

t o e m p lo y t h e e x p e d i e n t w h ic h w o u l d p r o b a b l y h a v e

b e e n m ost e f f e c t i v e stric tio n

a t t h a t t im e , n a m e ly , a d e te r m in e d r e ­

o f t h e c u r r e n c y c i r c u l a t i o n ; B r i s t o w and M o r r i l l

c o n tin u e d to re d u c e and r e f u n d

t h e d e b t , b u t w a i t e d f o r m ore

a u t h o r i t y from C o n g ress to d e a l w i t h th e c u r r e n c y ; u s in g th e

a u t h o r i t y he h a d ,

jo in e d

S h e rm a n ,

d e b t p o l i c y w ith m o n etary

p o l i c y and v i g o r o u s l y e x e c u t e d a p l a n w h ic h r e s t o r e d o f th e c u rr e n c y and r e e s t a b l i s h e d

th e p u b lic

th e v a lu e

c re d it*

F o l l o w i n g i s a summary o f b o t h t h e n a r r o w e r and t h e b r o a d e r o b j e c t i v e s o f d e b t-m an a g em e n t p o l i c y a s a s c e r t a i n e d in th e f o re g o in g in v e s ti g a t i o n : B e tw e e n 1865 and 1879 t h e m a t u r i t y s t r u c t u r e d e b t w ent th ro u g h th r e e p h a s e s .

o f th e

A t f i r s t o n l y a b o u t 40 p e r ­

c e n t o f i t w as i n f u n d e d f o r m , t h e r e s t b e i n g s h o r t - t e r m , flo a tin g ,

and n o n - i n t e r e s t - b e a r i n g d e b t .

p a r t of d eb t p o lic y

I t w as a m ajo r

to b r in g th e l a t t e r un d er c o n t r o l by

m eans of c o n v e r s io n i n t o 6 - p e r c e n t b o n d s re d e e m a b le y e a r s and p a y a b l e a f t e r t w e n t y y e a r s .

in fiv e

A lth o u g h t h i s form

o f s e c u r i t y w as n o t t h e m o s t s a t i s f a c t o r y

t o i n v e s t o r s and

w as b e l i e v e d t o h a v e some a d v e r s e e f f e c t u p o n t h e s t a t u s o f th e d e b t a b ro a d ,

i t made f u t u r e r e f u n d i n g m o re r e a d i l y p o s ­

sib le . T h ese f i v e - t w e n t i e s w ere g r a d u a l l y r e f u n d e d i n t o

th re e

b o n d i s s u e s h a v i n g m a t u r i t i e s r e s p e c t i v e l y o f 1 0 , 1 5 , a n d 30 y ears.

The 3 0 - y e a r m a t u r i t y — f a r t h e l a r g e s t o f t h e t h r e e

i s s u e s —was in p a r t an a tt e m p t t o

" t a i l o r ” th e d e b t to m eet

361 th e p re f e r e n c e of i n v e s t o r s . A t t h e e n d o f t h e w a r t h e w h o le s t r u c t u r e o f t h e d e b t w as a b e w i l d e r i n g c o m p l e x i t y o f m a t u r i t i e s , r a t e s , o f p a y m e n t.

and t e r m s

T h i s s i t u a t i o n h a d come a b o u t d u r i n g t h e w a r , w hen

t h e n e e d t o b o r r o w — h o w e v e r and w h e r e v e r p o s s i b l e - - w a s u r g e n t . .A f t e r t h e v a r , h o w e v e r , stru c tu re

i t w as b e l i e v e d t h a t t h e c o m p le x

o f th e d e b t te n d e d to a l i o r a t e

im p ro v e m e n t o f t h e p u b l i c c r e d i t . in g ,

i n v e s t o r s and r e t a r d

T h ro u g h c o n v e r s i o n , r e f u n d ­

and r e d e m p t i o n , t h e d e b t was e v e n t u a l l y g r e a t l y s i m p l i f i e d . R e d u c tio n in th e

i n t e r e s t c h a r g e o n t h e d e b t w as d e ­

la y e d by th e n e c e s s i t y o f c a r r y i n g o u t th e tio n s a t a h ig h r a t e .

c o n v e rsio n o p e ra ­

The i n t e r e s t c o s t w a s a c t u a l l y som e­

w h a t m o re i n 1868 and o n l y s l i g h t l y l o w e r i n 1 8 7 0 t h a n i t h a d been in 1866. ly a th ird .

By 1 8 7 9 , h c w e v e r , i t h a d b e e n r e d u c e d b y n e a r ­ D ebt p o l i c y had g iv e n c o n t r o l l a b i l i t y o f th e

d e b t and e n h a n c e m e n t o f t h e p u b l i c c r e d i t p r e c e d e n c e o v e r sa v in g in

in te r e s t ch arg es.

Two s p e c i a l i z e d

d e v ic e s f o r e n h a n c in g th e v a lu e o f

G o v e rn m e n t s e c u r i t i e s w e r e t a x e x e m p t i o n o f p r i n c i p a l a n d i n t e r e s t , and th e s in k in g fu n d . to n tin e s , a n n u itie s,

No a t t e m p t w a s made t o u s e

l o t t e r i e s , or o th e r such a t t r a c t i o n s .

The i d e a o f a c a p i t a l l e v y f o r t h e r e d u c t i o n o f d e b t — a p r o ­ p o s a l w h ich e v e r y so o f t e n h a s a p p e a re d in th e h i s t o r y o f B r i t i s h d e b t m a n a g e m e n t— se e m s n e v e r t o h a v e b e e n s e r i o u s l y m e n t i o n e d i n A m erio a d u r i n g

th is p e rio d .

362 C o n t r o l o f t h e f l o a t i n g and s h o r t - t e r m d e b t w as a n im ­ p o rta n t o b je c tiv e

i n th e y e a r s im m e d ia te ly a f t e r

T h i s was a c h i e v e d t h r o u g h c o n v e r s i o n .

t h e w ar#

L a te r, c o n tro l over

a la r g e p a r t o f t h e d e b t w i t h r e s p e c t t o i t s

fu rth e r refu n d ­

i n g a n d p a y m e n t w as l o s t when 3 0 - y e a r n o n - o a l l a b l e b o n d s w ere u sed t o r e f u n d b o n d s o f s h o r t e r m a t u r i t i e s .

T h i s w as

an u n f o r tu n a te a rra n g e m e n t, f o r i t p la c e d a la r g e p a r t o f th e d e b t o u t o f c o n t r o l o f t h e G o v e rn m e n t f o r a l o n g p e r i o d

in

w h i c h i n t e r e s t r a t e s w e r e low a n d s u r p l u s r e v e n u e s w e r e l a r g e . The l o s s f i n a l l y r e s u l t i n g f r o m t h i s

e r r o r i n p o l i c y w as v e r y

g re a t. The d i s t r i b u t i o n o f t h e d e b t w as a m a t t e r o f s e r i o u s c o n c e rn , e s p e c i a l l y w ith r e g a r d to f o r e ig n h o ld in g s .

D u rin g

a n d a f t e r t h e w a r , G o v e rn m e n t s e c u r i t i e s f o u n d t h e i r way ab ro ad

i n i n c r e a s i n g a m o u n ts u n t i l a b o u t h a l f th e i n t e r e s t -

b e a r i n g d e b t was e x t e r n a l l y h e l d .

U n t i l 1870, how ever, th e

s a l e o f th 9 s e c u r i t i e s d i r e c t l y i n E u ro p e w as c o n t r a r y t o p o lic y .

The lo w s t a t e o f t h e p u b l i c o r e d i t and t h e s e n t i m e n t

a g a i n s t b o rro w in g a b ro a d b o th c o n tr i b u te d t o

th is .

A fte r

1 8 7 0 i t w as a l m o s t c o n t i n u a l l y t h e p o l i c y t o s e l l b o n d s i n E u ro p e, b u t th e

s a l e s w ere s o l e l y f o r r e f u n d i n g and resu m p ­

tio n p u rp o ses.

F o r e i g n I n v e s tm e n t c a p i t a l th u s was n o t

d ire c tly ra ise d

t h r o u g h G o v e rn m e n t b o r r o w i n g , a l t h o u g h t h e

o u t f l o w o f G o v e rn m e n t s e c u r i t i e s a p p e a r s , t o h a v e b r o u g h t i n new c a p i t a l .

t o some e x t e n t ,

I t w o u ld h a v e b e e n s o u n d

eco nom y f o r t h e G o v e rn m e n t to h a v e b o r r o w e d a b r o a d e v e n t o

363 red eem i t s

d o m estics d e b t , f o r t h e r e w as a l a r g e s u p p l y o f

f o r e i g n c a p i t a l a n d a l a r g e demand f o r d o m e s t i c c a p i t a l . The i n t e r n a l d i s t r i b u t i o n o f t h e d e b t w a s a t t i m e s t h e su b je c t of a tte n tio n ;

and a l l t h e S e c r e t a r i e s f r o m C h ase t o

S h e rm a n a p p e a r t o h a v e f a v o r e d a s w id e a d i s t r i b u t i o n among th e p o p u la tio n a s p o s s i b l e .

The f i n a n c i a l m e a s u r e s o f t h e

war d id s p r e a d th e d e b t q u i t e w i d e ly , b u t t h e r e a f t e r i t c o n c e n t r a t e d m ore an d m ore i n t h e p o s s e s s i o n o f a r e l a t i v e l y s m a ll num ber o f h o l d e r s .

The o n l y p o s i t i v e a c t i o n s t a k e n

to g iv e th e d e b t w id e r d i s t r i b u t i o n in th e p o s t- w a r y e a r s w e r e i n 1 8 7 7 , w hen S h e rm an s o l d #75 m i l l i o n i n d e n o m i n a t i o n s o f # 50 an d # 1 0 0 d i r e c t l y t o s m a l l s u b s c r i b e r s , an d a g a i n i n 1 8 7 9 , w hen # 4 0 m i l l i o n w o r t h o f r e f u n d i n g o e r t i f i o a t e s i n d e n o m in a tio n s o f #10 w as o f f e r e d

to th e p u b l i c .

te m p ts to d e m o c ra tiz e th e d e b t had l i t t l e c o n c e n tra tio n of h o ld in g s .

T hese a t ­

e f f e o t upon th e

I n 1 88 0 a s t u d y made b y t h e

T r e a s u ry f o r th e C ensus O f f ic e i n d i c a t e d

t h a t a p p ro x im a te ly

8 8 p e r c e n t o f t h e d e b t w as h e l d i n a m o u n ts o v e r # 1 0 , 0 0 0 . T h u s a c o n s i d e r a b l e p a r t o f d e b t m a n a g e m e n t w as c o n c e r n ­ ed d i r e c t l y w i t h th e d e b t i t s e l f .

D e b t m a n a g e m e n t w as a l s o ,

h o w e v e r , a s u p p o r t t o o t h e r f i s c a l p o l i c y so f a r a s i t h e lp e d to enh ance th e p u b lic

c r e d i t and p e r m i t s a l e

r e s u m p t i o n b o n d s on f a v o r a b l e t e r m s .

B e sid e s t h i s ,

o f th e i t h e lp e d

t o s u s t a i n t h e p r o t e c t i v e - t a r i f f s y s te m , w h ic h y i e l d e d su c h l a r g e r e v e n u e s t h a t t h e m a in o u t l e t f o r t h e s u r p l u s w as th ro u g h re d e m p tio n o f d e b t.

S in c e g o v e rn m e n ta l e x p e n d itu r e

364 o u t s i d e t h e I m m e d ia te s o o p e o f G o v e rn m e n t w a s n o t s e r i o u s l y c o n sid e re d in th e se tim e s ,

th e p o l i c y o f d e b t paym ent d id

n o t l im i t o th e r f i s c a l p o lic ie s a f t e r rem oved.

th e w ar ta x e s had been

No s u b s t a n t i a l r e d u c t i o n i n t h e t a r i f f w as d e s i r e d

by th e a d m i n i s t r a t i o n s i n p o w er. An i m p o r t a n t o b j e c t i v e

o f d e b t m a n a g e m e n t w as t o c o u n t e r ­

a c t th e i l l e f f e c t s of th e d e b t, e s p e c i a l l y i n i t s e a r l i e r , s h o r t - t e r m fo rm .

These a c t i v i t i e s w ere d i r e c t e d , a s f a r a s

p o s s i b l e , a t c o m p e n sa tin g f o r th e r i g i d i t i e s o f th e In d e p e n d e n t T r e a s u r y sy s te m , i n g , and th e

In e la stic

cu rren cy .

and i n a d e q u a c i e s

t h e u n i t sy ste m o f b a n k ­

D e b t-m a n a g e m e n t p o l i c y w as

th u s d i s t i n c t l y an a id t o m o n etary p o l io y and w as, i n f a c t , a p a rt of i t .

I t gave e l a s t i c i t y

c u rr e n c y sy ste m .

to an o th e rw is e i n e l a s t i c

The a m o u n t o f g r e e n b a c k s i n c i r c u l a t i o n

c o u ld be t e m p o r a r i l y re d u c e d by a llo w in g s u r p l u s re v e n u e to a c c u m u l a t e i n t h e T r e a s u r y an d b y s e l l i n g

T reasu ry g o ld .

It

c o u l d be i n c r e a s e d s i m p l y b y r e d e e m i n g s e c u r i t i e s a s t h e y came d u e and b y b u y i n g s e c u r i t i e s i n t h e o p e n m a r k e t .

The

n a t i o n s 1 - b a n k - n o t e c u r r e n c y was m a i n t a i n e d b y r e a s o n o f t h e lo n g m a t u r i t y d a te o f a l a r g e q u a n t i t y o f r e f u n d in g and r e ­ s u m p tio n bonds i s s u e d l a t e

i n t h e 1 6 7 0 's *

The p r o p o s a l t h a t t h e G o vernm ent b o r r o w i n o r d e r t o f i ­ n a n c e a p r o g r a m o f f u l l e m p lo y m e n t w o u ld h a v e b e e n s t a r t l i n g i n a p e r i o d w hen t h e p h i l o s o p h y o f l a i s s e r f a l r e

g re a tly

l i m i t e d t h e r o l e o f t h e G o v e rn m e n t i n t h e e c o n o m y .

Y et th e re

365 w e r e t i m e s , a s p e c i a l l y a f t e r t h e p a n i c o f 1 6 7 3 , w hen s u c h a n i d e a w o u ld h a v e se em e d good t o m any p e o p l e .

The demand f o r

"m ore money/’ p a r t i c u l a r l y f o r m ore g r e e n b a c k s a n d f o r s i l v e r , was th e e q u i v a l e n t o f t h i s .

T h e r e w a s , h o w e v e r , no i d e a

o f c o m p e n sa to ry sp e n d in g t o l e s s e n th e e x tre m e s o f th e b u s i ­ n e s s o y o le . p a n ic ,

Even d u r i n g th e s e v e r e d e p r e s s i o n f o l l o w i n g th e

t h e d e b t w as r e d u c e d t o some e x t e n t i n e a c h y e a r *

Econ­

omy i n G o v e rn m e n t o p e r a t i o n s w a s c o n s i d e r e d h i g h l y d e s i r a b l e . A l t h o u g h n a r r o w i n g t h e l i m i t s o f t h e b u s i n e s s c y c l e was n o t a p a r t o f d e b t- m a n a g e m e n t p o l i c y ,

t h e T r e a s u r y w as c o n ­

t i n u a l l y co n cern ed w ith th e s h o r t e r - t e r m f l u c t u a t i o n s in th e l o a n and i n v e s t m e n t m a r k e t s ,

f o r t h e s e w e re t h e v e r y c e n t e r

o f t h e n a t i o n ’ s b u s i n e s s an d f i n a n c i a l l i f e . re q u ire d ,

th e y w ere r e s t r a i n e d

As t h e o c c a s i o n

o r e a s e d by t h e a c t i o n s

o f th e

S e c r e t a r i e s i n v a r y i n g th e am ount o f c u r r e n c y and g o ld h e ld in th e T re a su ry ,

i n i n c r e a s i n g some f o r m s o f d e b t ( s u c h a s t h e

t e m p o r a r y d e p o s i t s an d t h e c o m p o u n d - i n t e r e s t n o t e s , u n d e r M c C u l l o c h ) , i n w i t h d r a w i n g an d r e i s s u i n g g r e e n b a c k s , an d i n r e d e e m i n g d e b t i n s u f f i c i e n t a m o u n t s , w hen p o s s i b l e th e r e q u ire m e n ts o f th e

situ a tio n .

to m eat

T h e s e a c t i o n s h a d a n im­

p o r t a n t e f f e c t b o t n u p o n b u s i n e s s a c t i v i t y and u p o n t h e sh o rte r-te rm

tre n d s of p r i c e s ,

m e n t w as r e l a t e d g o ld .

e s p e c i a l l y when d e b t m a n a g e ­

t o t h e a c c u m u l a t i o n and the s a l e o f T r e a s u r y

B u s i n e s s m e n a n d b a n k e r s came t o r e l y h e a v i l y upon

T re a su ry p o lic y to ease se a so n a l s tr in g e n c ie s , t i o n s of th e T re a su ry re se m b le d , c e n tr a l bank.

fo r th e o p e ra ­

i n a r u d e w ay, t h o s e o f a

366

The e f f e c t o f d e b t m an ag em en t o n th e p r i c e l e v e l ,

in a

m ore g e n e r a l w ay, w a s c o n t i n u o u s t h r o u g h o u t t h e p e r i o d .

R e­

d u c t i o n o f p r i c e s t o a p o i n t w h e re t h e y w ould s t i m u l a t e t h e e x p o r t o f g o o d s and r e d u c e t h e a d v e r s e t r a d e b a l a n c e was c o n c e d e d t o b e a n e o e s s a r y p a r t o f a n y p o l i c y w h ic h s o u g h t to r e s to r e

t h e p u b l i c c r e d i t an d b r i n g a b o u t t h e r e s u m p t i o n

o f s p e c i e p a y m e n ts.

To t h i s e n d , c o n t r o l o v e r t h e o u r r e n o y

s u p p l y w a s s o m e ti m e s u n d e r t a k e n , e f f e c t o f th e ju d ic io u s s a le

s o m e tim e s n e g l e c t e d .

o f g o l d i n o r d e r t o h o l d down

t h e p re m iu m o n t h a t m e t a l was t o r e s t r a i n w h ich te n d e d

The

th e r i s e

in p r ic e s

t o a c o o m p an y d e p r e c i a t i o n o f t h e g r e e n b a c k s .

D anger o f s t r i n g e n c y fro m t h e s e g o ld

s a l e s w as p r e v e n t e d ,

w hen n e c e s s a r y , b y t h e c o m p e n s a t o r y p u r c h a s e o f b o n d s i n th e open m a rk e t.

T hese p o l i c i e s w ere c o n c e rn e d w ith th e

l a r g e r c o n s i d e r a t i o n s o f b u s in e s s s t a b i l i t y and th e n a t i o n a l w e lfa re . T hrough i t s m o n ey -m ark et o p e r a t i o n s , th e T r e a s u r y c o u ld in flu e n c e c u rre n t r a t e s of i n t e r e s t .

The r a t e

t o be p a id

on th e G o v e rn m e n t' s b o n d s , h o w e v e r, c o u ld o n l y be i n f l u e n c e d o v e r t h e l o n g e r r u n by m ean s o f d e b t p o l i c i e s t h a t w e r e c o n ­ d u c iv e t o th e enhancem ent o f sta b ility

of b u sin e ss.

t h e p u b l i c c r e d i t and t h e

T h e r e w as no t i m e w hen r a i s i n g t h e

r a t e o f i n t e r e s t o n G o v e rn m e n t b o n d s w a s d e s i r a b l e f o r a n y p u rp o se. D e b t m a n a g e m e n t w a s n o t c o n s c i o u s l y d i r e c t e d to w a r d

367 i n f l u e n c i n g t h e s i z e an d th e d i s t r i b u t i o n o f n a t i o n a l in c o m e , y e t i t had an im p o r ta n t e f f e c t upon b o th . t o m a i n t a i n a s t a b l e eco n o m y ,

So f a r a s i t h e l p e d

i t w as, o f c o u r s e , co n d u civ e to

a f u l l e r u s e o f t h e f a c t o r s o f p r o d u c t i o n and t h e r e b y a l a r g e r o u t p u t o f g o o d s and s e r v i c e s .

Of m ore p o s i t i v e

sig n ific a n c e ,

h o w e v e r , w as t h e e f f e c t o f d e b t r e d u c t i o n , w h i c h ,

in c o n ju n c ­

t i o n w i t h t h e r e g r e s s i v e t a x s y s t e m , h a d th e e f f e c t o f d i s ­ t r i b u t i n g a p a r t o f th e e a rn in g s o f a l l p a r a t i v e l y few b o n d h o l d e r s .

t h e p e o p l e t o a com­

T h is i n c r e a s e d

i n g and i n v e s t m e n t and r e s u l t e d

th e r a t e o f s a v ­

i n a h i g h e r n a t i o n a l in o o m e .

B ut i t a l s o c o n c e n tr a te d th e o w n e rsh ip o f w e a lth i n th e hands o f a few . I n t h i s way t h e b u r d e n o f t h e d e b t f e l l m o s t h e a v i l y upon th e p o o r e r c l a s s e s o f p e o p le .

The b u r d e n w a s a u g m e n te d

b y t h e way i n w h i c h t h e d e b t h a d b e e n c r e a t e d .

B ecause th e

G o v e r n m e n t 's o b l i g a t i o n s h a d b e e n s o l d f o r g r e a t l y d e p r e c i a t e d p a p e r m oney, f a r m o re d e b t w as i n c u r r e d t h a n .vould o t h e r w i s e have been n e c e s s a r y . and p r i n c i p a l ,

Y et m o st o f i t was p a y a b l e ,

in g o ld .

t h i s gave a v a ry l a r g e

in te re s t

I n te rm s o f th e o r i g i n a l in v e s tm e n t, I n te r e s t r e tu r n as w e ll as c a p ita l

g a in to b o n d h o ld e rs a t th e ex p en se o f ta x p a y e r s .

C h eap money

h a d b e e n b o r r o w e d , an d d e a r m oney w as b e i n g r e p a i d . t h i s f a c t w as th e

Added t o

I n f l a t i o n a r y e f f e c t o f th e ch eap en ed c u r ­

r e n c y , w h ic h p l a c e d a n a d d i t i o n a l t a x u p o n t h e c o n s u m in g pow er o f a l l

in d iv id u a ls a lik e .

368 W it h t h e r e s u m p t i o n o f s p e c i e p a y m e n ts an d t h e c o m p le ­ t i o n o f th e re fu n d in g pro g ram ,

two g r e a t o v e r a l l o b j e c t i v e s

o f d e b t m an a g em en t w e r e a c h i e v e d : to a p a r i t y w ith g o ld , e sta b lish e d *

th e c u r r e n c y was b r o u g h t

an d t h e p u b l i c c r e d i t w a s f u l l y r e ­

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