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better suited for easy comprehension or has more prima facie
attractions than a system of government notes, established by the
authority and resting on the credit of the nation .-'

But, simple as the notes themselves may appear, it is by no
simple process that the conditions under which they are now
issued have been arrived at. Our legislation on this subject now
covers a period of thirty-five years. During that time there has
been a rapid succession of important legislative acts bearing upon
the legal tender paper and some administrative acts of equally
serious import. The system, as we have it to-day, is, therefore, a
product, not of any compact declaration by the law-making power,
but of a singularly complex series of laws and executive orders.
It is to some aspects of this series, — or, in other words, to some
aspects of the history of the legal tender issues, — and to some
considerations flowing therefrom, that I desire to direct the atten-
tion of readers of this article. Accepting the constitutionality of
the legal tender acts, as settled by the repeated decisions of the
Supreme Court, and waiving all questions as to the necessity of
the acts or of either of them, as foreign to my present subject, I
wish to inquire what inferences are to be drawn from the manner 4
in which the authority of Congress has been exercised, and how
far the prima facie attractions of our paper legal tender are

1 Quarterly Journal of Economics, April, 1897.
207



208 ESSAYS

thereby affected. For this purpose, it will be necessary to make
a short recapitulation of the chief legislative and executive acts
which mark the period opened by the first Legal Tender Act and
relate to the same subject-matter, and to do this even at the risk
of stating much with which the reader must be supposed to be
familiar.

1. The leading advocates of the act of February 25, 1862,
pressed that measure upon Congress as a temporary expedient
forced upon the country by the stress of war (i 861-1862, ch. 33).
They also pressed it as a measure which had its place in a large
scheme of legislation, by which they expected to provide a per-
manent paper currency exclusively of bank-notes. To meet the
urgent needs of the Treasury, a limited amount of legal tender
notes were to be issued, exchangeable at the pleasure of the
holder for United States bonds, and the bonds were to be made
the basis of a bank currency. Issued, exchanged, and reissued,
the notes were expected to open a market for a large amount of
bonds, and finally to be absorbed and disappear. It may be
doubted whether the majority in Congress were then ready to
accept the whole of this comprehensive scheme, but there is no
doubt that the majority agreed to the issue as something not
intended long to survive the exigency which called it into being.
Even with this restricted view of the scope of the legislation, the
provision making the notes exchangeable for bonds was plainly a
matter of prime importance. It was looked upon as offering a
possible outlet for the notes in case the circulation were overloaded
with them, and it provided the means for their withdrawal when
the present need should have passed by and the public credit
should have begun to advance. The bonds having been made
coin bonds, the exchangeability of the notes was the ground of
hope for their present credit and ultimate redemption.

2. But the expectations of the advocates of the first Legal
Tender Act were disappointed. Although some sanguine leaders
had predicted that the whole of the first issue would not be used,
a second issue was called for by the Treasury, and a third. It
was also discovered that, so long as notes could be exchanged for
bonds at par, the price of bonds could not rise above that point,
and that with this limitation of possible profit the present induce-



THE SAFETY OF THE LEGAL TENDER PAPER 209

ment for exchange was too small to invite large operations. At
the instance of the Treasury, therefore, and in order to facilitate
the sale of bonds. Congress, in the Ways and Means Act of March
3, 1863, declared that the right to exchange the notes should
cease from the first day of the following July (1862-1863, ch. 73,
§ 3). One year, therefore, saw the central provision of the original
system abolished, and without debate in either House. " This
act," says Mr. Sherman, in one of his numerous references to the
subject, " though convenient in its temporary results, was a most
fatal step, and for my part in acquiescing in and voting for it I
have felt more regret than for any other act of my official life." ^

3. The summer of 1864 saw the worst fears as to a resort to a
paper legal tender fully justified. At the end of June the out-
standing United States notes were 1^431,000,000; there were also
in circulation ^168,000,000 of interest-bearing notes which were a
legal tender for their face ; and, in response to the urgent demand
of the Treasury, authority for an additional issue of ;^200,ooo,ooo
of similar interest-bearing legal tender notes was to be embodied
in the Ways and Means Act. Gold, which in April stood at 180,
was starting on the rapid ascent which carried it to 240 on the ist
of July. Congress was engaged in an unsuccessful effort to pre-
vent time-sales of gold and of foreign exchange, by means of what
has been known as " The Gold Bill " ; and confusion, distrust, and
discredit were rapidly gaining ground. As a reassuring measure,
therefore, to quiet public alarm, a clause was incorporated in the
Ways and Means Act declaring that the total amount of United
States notes should never exceed 1^400,000,000, and a possible
temporary addition of ^50,000,000, if required for the payment of
private deposits then held by the Treasury (i 863-1 864, ch. 172, § 2).
This limitation of the issue of United States notes was a wise
concession to public opinion, and without doubt had its influence
in the next few months in raising the public credit ; but the ability
of Congress to maintain such a restriction under the pressure of
any great exigency was never put to a severe test, and the happy
ending of the war nine months later abruptly introduced an en-
tirely new order of questions relating to the legal tender issues.

4. So far as the temper of the public was concerned, the first
months of peace were remarkably favorable for measures looking

^ Speech in the Senate, March 6, 1876 ; to be found in his " Speeches," p. 496.
P



2IO ESSAYS

towards specie payment and the withdrawal of the legal tenders ;
and it was probably a misfortune that Congress was not then in
session to improve a moment which in other respects was oppor-
tune, and to do this before the apprehension of contraction or any
of the real dangers of that process should be seriously felt. But
when Congress met in December, 1865, — after the announcement
of his policy by Secretary McCulloch, — the strength of feeling
was still such that, by a vote of 144 to 6, the House of Represent-
atives adopted a resolution of cordial concurrence " in the views
of the Secretary of the Treasury in relation to the necessity of a
contraction of the currency with a view to as early a resumption
of specie payments as the business interests of the country will
permit," and pledged its cooperation to that end.

5. A secretary gifted with tact in dealing with other men,
and standing aloof from the political contests of the time, might
perhaps have made this proffer of concerted effort the basis of a
successful policy ; but Mr. McCulloch had not that tact, and was
so far identified with the reconstruction policy of President John-
son as to share the odium incurred by the latter in his struggle
with Congress. Four months after the declaration of December,
1865, Congress, in making provision for the retirement of Treas-
ury notes, forbade the Secretary to retire more than $10,000,000 of
United States notes within the next six months, or more than
^4,000,000 in any one month thereafter (1865-1866, ch. 28).

6. The Secretary did not use to its full extent the authority
allowed him by Congress. The commercial revulsion which began
in London in 1866 was followed by continued depression in this
country, the public mind became more and more sensitive on the
subject of contraction, and wild demands began to be made for the
payment of the five-twenty bonds in legal tender notes. The
Finance Committee of the Senate, in December, 1867, reported a
bill providing for the exchange of these bonds for a five per cent
coin bond, the offer resting upon the avowed calculation that the
right of the public creditor was doubtful, and that he would find it
for his advantage to take a bond bearing a lower rate of interest
and free from cloud. In the discouraged state of mind indicated
by this proposition. Congress, in February, 1868, "suspended"
altogether the authority previously given to the Secretary " to
make any reduction of the currency by retiring and cancelling



THE SAFETY OF THE LEGAL TENDER PAPER 21 1

United States notes"; and thus the first movement for a return
towards specie was peremptorily closed (1867- 1868, ch, 6), The
notes outstanding had been reduced from about $400,000,000 to
1^356,000,000; but this reduction had been offset by an increase of
national-bank notes during the same months.

7. Happily, the Republican National Convention in July, 1868,
planted itself on firm ground as to the payment of the five-twenty
bonds, and in its platform denounced," all forms of repudiation"
and called for the payment of all creditors, "not only according to
the letter, but the spirit of the laws." The Democratic party a
few weeks later gave its support to what was supposed to be the
popular craze of the day, and upon this issue and others was badly
beaten. General Grant was elected after an excited canvass ; and
the popular verdict was registered in an " Act to strengthen the
Public Credit," approved in March, 1869, being the first act passed
under the new administration. This law declared the faith of the
United States to be pledged to the payment of both notes and
bonds in coin, except when the law under which they were issued
had expressly provided for payment otherwise, and closed by
further pledging the faith of the United States " to make provision
at the earliest practicable period for the redemption of the United
States notes in coin " (1869, ch. i).

8. Nothing was done towards giving effect to this pledge.
Secretary Boutwell, in December, 1869, suggested that authority
should be given for reducing the circulation, as occasion might
offer, by an amount not exceeding $2,000,000 in any one month ;
but it was clear that he did not regard the matter as of any
present importance, and no action was taken. Congress had
apparently acquiesced in the policy of allowing the country to
"grow up" to a currency admitted to be excessive. A year or
two later, however, it appeared that the Treasury had on more
than one occasion issued legal tender notes in lieu of a part of
those "retired and cancelled" by Secretary McCulloch. The
question as to the legality of any such reissue was referred by the
Senate to its Finance Committee; and the majority of that com-
mittee, headed by Mr. Sherman, reported a resolution that the
Secretary " has not the power under existing law " to issue notes for
any portion of those retired under the act of 1866. The question
involved was of moment ; for, if $5,000,000 could be issued by the



212 ESSAYS

Secretary at his discretion, so could 1^44,000,000, and the whole of
the ground supposed to have been gained by the payment of this
form of debt might thus be lost. The resolution, however, was
not called up for action, and at the end of the session the Secretary
might easily have felt that his action had the tacit acquiescence
of Congress.

9. Mr. Boutwell's successor, Secretary Richardson, having
paid out in the revulsion of 1873 a large part of his cash balance
in the vain effort to relieve the money market by the purchase of
bonds, soon found himself so crippled by the decline of revenue
that in October, 1873, he began paying out the retired notes for
ordinary expenses; and this reissue was continued until, at the
beginning of February, 1874, when the revenue had recovered
from its collapse, $26,000,000 of the notes were again in circula-
tion, raising the total to $382,000,000.

10. At the long session of 1874 Congress first passed the
so-called inflation bill, vetoed by President Grant, by which the
issue of legal tender notes was to be increased to $400,000,000
and the possible issue of national-bank notes was to be raised to
the same point, and then adopted the Compromise Act of June,
1874, by which, among other provisions, it was declared that the
amount of legal tender notes should be fixed at $382,000,000
(1873-1874, ch. 343, § 6). The amount reissued by Secretary Rich-
ardson was thus made a part of the permanent currency, and so
remained until the work of withdrawal began anew under the
Resumption Act of 1875.

11. The Resumption Act was not prepared with open doors;
and, doubtless, there is much in its secret history which would be
of great interest. Certainly, its public history, if we view it as a
measure for financial reform, is unique. The bill, introduced by
the Finance Committee of the Senate, was admitted to be the
work of a party caucus, in which no agreement could be reached
except by consenting to leave a principal point unexplained.
Whether legal tender notes, when "redeemed " in the language of
the bill, could be reissued or not, Mr. Sherman, who had charge
of the measure, steadily refused to say, knowing well that any
explicit answer would drive off one wing or the other of his
expected majority, and deeming it his business to carry the bill
through by whatever means. It was passed by the Senate, there-



THE SAFETY OF THE LEGAL TENDER PAPER 213

fore, with an obstinate refusal on the part of its chief advocate to
state the meaning and effect of its leading provision. In the
House all risk of explanation was avoided, by forcing the bill
through without debate under the operation of the previous ques-
tion ; and thus the great work of resumption was entered upon,
with absolutely no authoritative determination of the main question
whether redemption would end the legal tender currency or not
(1874-1875, ch. 15). It was only certain that, when the measure
should finally be interpreted for purposes of administration, one
section or the other of its supporters would meet with bitter dis-
appointment.

12. As a preparation for actual specie payment in 1879, the
Resumption Act provided for a gradual reduction of outstanding
legal tender notes from $382,000,000 to $300,000,000, so far as such
reduction could be offset by the issue of national-bank notes by
new banks, or by old ones increasing their circulation. This de-
vice for avoiding a contraction in the total currency was defeated
by an unexpected surrender of bank circulation under the pressure
of the times ; and the consequent net reduction of legal tender
notes and bank-notes came to be regarded in some parts of the
Union as the cause of the depression, which deepened in this
country in 1876 and 1877 as it did in the greater part of Europe.
When Congress came together in October, 1877, a bill was at once
reported to the House by the Committee on Banking and Currency
to repeal the third section of the Resumption Act, this section con-
taining all the provisions as to the redemption of the United States
notes. With an amendment exempting from repeal the provision
for free banking, this bill was passed in the House and went to
the Senate. That body amended the House bill so as to make it
simply a bill for making United States notes receivable in payment
for the four per cent bonds and also for customs duties, and finally
passed it in this form in the following June by a vote of 45 to 15.
But, while this measure was pending in the Senate, and in view of
the probable disagreement of the two Houses, the mover of
the House bill introduced there a short bill to forbid the further
retirement of legal tender notes ; and this was hurriedly passed
through both House and Senate, and became a law May 31, 1878
(1877-1878, ch. 146). This momentous act, which finally settled the
question as to the meaning of " redemption " in the Resumption



214



ESSAYS



Act and completed the conversion of the United States notes into
a permanent currency, — an act scarcely inferior in its importance
to the Resumption Act itself, — was adopted almost without debate.
The issue at that moment stood, as it stands at present, at
$346,681,016.

13. The reserve of gold, accumulated for the redemption of
legal tender paper under these changed conditions, received a
tardy recognition from Congress in 1882, when, under the act for
extending the charters of the national banks, it was provided that
the issue of gold certificates by the Treasury should be suspended
" whenever the amount of gold coin or gold bulHon in the Treasury
reserved for the redemption of United States notes falls below one
hundred millions of dollars " (i88i-i882,ch. 290, § 12). No means
of replenishing this reserve have ever been provided, except those
named in the Resumption Act, — surplus revenues and bonds of the
descriptions authorized by the Refunding Act (i 869-1 870, ch. 256),

14. The winter of 1889 and 1890 brought a fresh outburst of
agitation for the free coinage of silver, at a time when the compul-
sory coinage of silver dollars under the Bland Act of 1878 was
finally submerging the Treasury. The result of several months
of debate in Congress was the passage of the Silver Purchase Act
of 1890, by which Congress required the purchase of 4,500,000
ounces of silver per month, payment therefor to be made in " coin
notes," which were to be a legal tender and to be withdrawn from
circulation only when replaced by an equal amount of the silver
dollars ( 1 889-1 890, ch. 708). This provision for adding to the legal
tender paper is the only part of the act which there is occasion to
consider here. The reduction of legal tender circulation had been
made impossible by the act of 1878 ; and Congress now ordered its
periodical increase, by such an amount as should be required by
the stated purchases of silver, without limit, and with no discre-
tionary power of suspension in any exigency. It was declared to
be the policy of the United States to maintain the " parity " of gold
and silver ; but no provision was made for an increase of the gold
reserve established for the protection of the United States notes,
in case " parity " meant the maintenance of the gold standard.
It was provided on the other hand that the coin notes might be re-
deemed in silver at the pleasure of the Secretary, so that the decUne
to the silver standard appeared to be a matter of probable ultimate



THE SAFETY OF THE LEGAL TENDER PAPER 215

necessity. The new measure was, therefore, a surprising sequel
to the long effort made to place the legal tender notes on the solid
footing of gold.

15. Not many months had passed before the saturation of the
currency with legal tender paper and silver was proved by the
slackening of gold payments for customs duties. In the spring of
1893 the new coin notes outstanding had risen to 1^140,000,000,
and the increase then going on was not far short of ^4,000,000 per
month ; gold receipts at New York were nearly dried up, and the
gold reserve in the Treasury was falling below the prescribed
;^ 100,000,000. The visible danger of the suspension of gold pay-
ments precipitated the violent monetary panic which culminated
in July. Congress was called together in August to provide the
means of financial safety, and the repeal of the clause in the act of
1890 requiring the purchase of silver was carried, after a parlia-
mentary contest which lasted for eighty-two days (1893, ch. 8).

These are the leading points in the history of a currency now
old enough to have had its trial in every variety of national for-
tune, — in prosperity and in adversity, in war and in peace. As
an exhibition of unsteady purpose, the record appears to me to be
without a parallel, considering the gravity of the subject-matter.
This is the manner in which the nation has dealt with the paper
legal tender which practically* lies at the base of the great mass of
its credit transactions, — used concurrently with gold no doubt at
present, but for many years used almost exclusively, and possibly
in some contingency destined to be so used again. The customary
paper circulation, which should rest on a bed-rock of law as
unchangeable as anything of human institution can be, has lain
upon a quicksand. Instability has been the leading characteristic
of our legislation on this subject for a third of a century.

If we consider the course pursued by the other leading nations
in their management of currency and kindred matters, the contrast
is remarkable. England has made no important change in her
currency system for over fifty years, and, notwithstanding the
inviting field which it presents for the reformer, still prefers not to
risk her reputation for absolute safety upon possible, but still un-
certain, improvements. France has kept her system without sub-
stantial change, except in the scale of its operations, ever since the



2l6 ESSAYS

absorption of the departmental banks by the Bank of France in
1848. The war with Germany, suspension of specie payments,
revolution, invasion, and defeat tried the strength of her legisla-
tion and of her confidence in it ; but it stands to-day nearly as it
stood before 1870, except for the legal tender power then given to
the notes of the Bank of France. Germany laid her course in her
coinage and bank acts of 1871 to 1875, and has followed it from
that day without deviation, her occasional legislation upon this
subject being directed steadily to the completion of the system as
originally planned. These nations now have an unfaihng confi-
dence in the steadiness, permanence, and soundness of their own
monetary arrangements ; and a chief element in that confidence
is the certainty that serious change is not within the range of
probability.

This contrast, though still disadvantageous, would be less pain-
ful if in the rapid succession of changes made by our government
there were discernible any approach to continuity of purpose. A
consistent policy might be developed or a system might grow up
by a succession of short stages, and the wisdom of the process
might be justified as regards its intention, if not as regards its skill.
But no such continuity is to be found in the series of measures
recapitulated above. Fundamental principles are adopted at one
time and abandoned at another. The automatic absorption of
notes by bonds, their systematic retirement and cancellation by the
discretionary authority of the Treasury, the payment of them as a
debt, the idea of fixity of amount, and that of an adequate reserve
in proportion to the amount, — such conceptions as these have
been held for a time, then dropped, then succeeded by others, per-
haps equally short-lived. The series of acts, as a whole, points to
no particular end, its several parts have no systematic tendency or
common direction. The steps taken have been without logical
order, and the important consequences following have often been
neither expected nor desired. The line traced by these measures
is in fact a legislative zigzag, not a line of development.

When we inquire for the cause of such a mortifying result from
thirty-five years of constantly renewed financial anxiety and debate,
we must find it in the general absence of any sense of responsibility
for the formation and maintenance of a consistent policy. Not
many of our Secretaries of the Treasury have found it worth while



THE SAFETY OF THE LEGAL TENDER PAPER 217

to plan and act for any distant future, they knowing well that
executive initiative counts for but little in the end ; and, moreover,
whatever secretaries may desire, no Congress can be relied upon
to carry out the purposes of a predecessor. Inspection of the list
of acts shows that usually some accidental conjuncture or some
supposed popular demand has been the real spring of action in
each case, and that for the individual legislator a supposed man-
date for the passing moment has generally been enough to dis-
charge him from all personal responsibility.

Consistency in the popular demand is not a characteristic of
our politics. The American people can be rehed upon with confi-



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 23 of 40)