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dence in a sufficiently alarming crisis, finally and after great tra-
vail, to rally in support of the honest and wise course in any
matter of high policy ; but this result is often reached only after a
season of painful doubt and seeming vacillation, and after much
mischief. The last year, for example, witnessed the latest of a
series of occasional appeals to the sound common sense of the
plain people, in which the result was fortunate, to be sure, and em-
phatic, but was obviously too long left in uncertainty. How should
we expect the sense of legislative responsibility for a continuous
course of action to be developed under such conditions ? How
can we wonder that the congressman is too anxiously mindful of
the shifting mass of opinion behind him, on which his political
future depends, to resist the passing demand for change ? Or why
should our financial legislation be less changeable and inconsistent
than our tariff legislation, in which we are now expecting the third
radical alteration, not to say revolution, effected in the space of
seven years .-"

Is it even surprising that, on the whole, the net result of con-
flicting financial acts should be a general weakening of our system
and a loosening of the grip upon hard money? The fact is in-
dubitable. For proof of it we need only compare, first, the condi-
tion of things in 1865, when there was a general consensus of
opinion that the return to specie payment was a manageable prob-
lem for early solution; second, the condition in 1875, when, after
a year of painful tergiversation, a Resumption Act was finally
carried through in deference to a manifest public opinion, although
by means of an agreement that its terms should be unintelligible ;
and, third, the recent state of affairs, when the country has repeat-



2i8 " ESSAYS

edly found itself brought dangerously near the verge of a fresh
suspension, and has still found it impossible to obtain a line of
legislation demanded for the better protection of the national honor
and well-being. The reason for this irregular, but on the whole
progressive, relaxation on the side of political morals, at the same
time that we have secured specie payment, is not far to seek. In
any debate where the fateful words " contraction " and " relief "
are heard, the fears and demands of a sufficiently noisy minority
have extraordinary potency, especially in the even years which
witness the national elections ; and ground once lost by any weak-
ness in this part of the field of politics is regained with great dif-
ficulty. The country is now and then roused to the fact that it is
slipping down a dangerous declivity ; but, after all, even under a
government of and for and by the people, it is not always easy for
the clear will of the majority to find expression in law.

It is not to be assumed that the cause of this legislative inca-
pacity to deal firmly with a subject of the gravest importance is to
be found in special defects of character, intellectual force, or proper
purpose among the men who make up the Congress of the United
States. The parliamentary bodies in other countries as well as our
own suffer from the follies of individual members, often fail to do
their duty, and are the objects of criticism and satire. Under their
forms of parliamentary government, however, they are in a meas-
ure protected from what might prove to be their own incapacity,
— sometimes by traditional modes of procedure, sometimes by posi-
tive rules, and generally by established forms of political organiza-
tion and leadership. Without the defences of this kind which time
and habit have thrown around the House of Commons, that body
might easily find its action as much a matter of chance, and as
little to be relied upon under the strain of an unsettled public
opinion, as that of the House of Representatives. Add to the
differences in customary procedure the fact that it is our usual
practice to elect to Congress no one who is not a resident of the
district to be represented, — so that disagreement with local opin-
ion often means for the member not merely failure at a new elec-
tion, but political death, — and there are reasons enough why
Congress should have failed so conspicuously to frame and defend
any consistent line of policy as to the paper currency.

A few words should also be said here as to a phase of popular



THE SAFETY OF THE LEGAL TENDER PAPER 219

opinion with which members of Congress have long had to reckon,
— a phase of opinion singularly persistent and general, showing
itself in an extreme dread of "contraction." The long deprecia-
tion following the great issues of United States notes during the
war impressed upon the public mind the consequences of inflation,
so deeply that the lesson is nearly as vivid to-day as it was thirty
years ago. The majority, no doubt, have a wholesome dread of
any tendency in that direction ; and a minority, perhaps, desire
such a tendency in some form or other, with more or less crude
notions as to controlling the results. But, whether resisting infla-
tion or favoring it, the great mass of our people clearly have a
strong belief in the effect of quantity upon the value of a circula-
tion ; and this appears to make up the greatest part of their simple
creed as to money. To hold the currency where it is becomes the
ideal of steady management ; and contraction becomes an evil in
itself, and perhaps more dreaded even than inflation, because its
earlier stages are more painful.

The dread of contraction was the one argument against resump-
tion which had any strength with the public ; and it has not lost its
power since, although we plainly have the whole world upon which
to draw, if our own supply is below our needs. A morbid anxiety
as to the sufficiency of the currency to-day possesses the public
mind, as is shown by the copious statistics with which the govern-
ment publications constantly strive to reassure the people, and by
the frequent efforts of Presidents and Secretaries to satisfy public
opinion as to the care with which the supply of currency is insured.
No other country of importance shows this hypochondriac anxiety
as to its symptoms, or gives a tithe of the attention given by ours
to the mere quantity of its money ; and no one of the leading com-
mercial countries, it must be said, is either so favored by fortune or
so constantly in trouble in this respect. But our excessive sensi-
tiveness on this point is obstinate : it has apparently been increased
by the course of the discussion as to silver, and we are still abso-
lutely unwilling to trust to the operation of natural laws for the
adjustment of the amount of our active currency.

The necessary conclusion from our experience with the legal
tender notes plainly is that a government currency, under our
conditions, is an unfit subject for national legislation. Many sub-
jects required legislation in the heat of civil war which are recog-



220 ESSAYS

nized as having no place in time of peace ; many powers were then
called into use, from stern necessity, which have been laid aside,
like disused weapons consigned to the arsenal. A system which
makes the usual legal tender of the country a subject of current
legislation risks too much upon the chances of mistake, attack, and
uncertainty. It is a familiar and useful practice in our legislative
bodies to recognize some subjects as fitted for treatment by general
laws, in order that they may be freed from the uncertainties and
may not add to the temptations which beset the work of every
legislature. The case of the paper currency of the country is
analogous to this, in that for safety it requires to be placed upon
such a basis as shall reduce to the minimum the chances of its
coming up for action and shall prevent a constantly recurring
anxiety as to its future.

What happens with a paper legal tender is far different from
the course of legislation as to the legal tender coin. With regard
to the latter the government fixed its standard and established its
system of coinage in 1792, and then found at the most only two
occasions for legislation as to other matters than mere detail, until
the silver question presented itself in 1878. But the paper legal
tender never has been, and it is safe to say never can be, put upon
a basis where it can have a like course of freedom from change.
Resting purely upon credit, and regarded as a creation of money by
mere act of Congress, it steadily invites alteration, the removal of
this limit or that, the increase of its amount, or the alteration of its
coin basis. The reserve to be held in the Treasury under any safe
adjustment can never fail, from its magnitude, to attract the covet-
ous gaze of the schemers who throng around the great source of
government bounty. In addition to these risks to which the paper
legal tender is exposed, it has also to meet those arising from the
silver controversy now threatening the coin. It was well rec-
ognized six months ago that in the event of Mr. Bryan's elec-
tion the legal tender paper might be suddenly lowered to the
silver standard, by the mere substitution of silver redemption for
gold, and by mere executive order. It is not fit that the paper
currency of the country should thus be kept adrift, or that the
people of the country should be called upon periodically to rally
for the safety of something which fails of one of its main purposes
if it is not kept free from any suspicion of danger.



THE SAFETY OF THE LEGAL TENDER PAPER 221

The passage of the Silver Purchase Act of 1890 is a striking
illustration of the peril of the present situation. Two explanations
have been given of the causes which united a majority of both
Houses in favor of an act which proposed a steady dilution of the
paper currency, involving the ultimate suspension of gold payments
and final degradation of our standard to the level of silver. One
explanation, current at the time and long afterwards, was to the
effect that a majority of both Houses favored the free coinage
of silver, that President Harrison could not be relied upon to veto
a bill framed for that purpose, and that the insane " experiment "
of buying the domestic product of silver by new issues of paper
was resorted to as a compromise, in dread of a more rapidly
working measure and one which would leave no locus petiiten-
tiae. The other explanation — given in the Senate nearly a year
ago by Senator Teller — was to the effect that the Silver Pur-
chase Act was the consideration for which the silver interest,
holding the balance of power in the Senate, was induced to give
its support to the Tariff Act of 1890, then on its passage. This
statement of the transaction, made by one who did not hesitate
to declare himself one of the contracting parties in the case, has
the greater intrinsic probability ; but, be that as it may, let the one
account or the other be the correct statement, it is true in either
case that legislature and executive were alike ready to cut the
paper currency adrift from the solid standard and to let it float
towards depreciation. In the one case this would be for the
reason that a sound currency was doomed in any event ; and in
the other case for the reason that neither Congress nor President
regarded its sacrifice as anything more than a proper makeweight,
to be thrown in for the sake of securing a higher scale of customs
duties.

Is there another country in the world, outside of South America,
in which a paper legal tender, with all the possibilities implied in
its misuse, would be dealt with in this fashion } The election of
1896 and all that has followed inspires confident hope of a less
troubled future ; but, after all, what guarantee have we that the
amazing defection of 1890 may not be repeated within half a dozen
years ? Such an untoward result would mean no greater revolu-
tion than that which took place in the half-dozen years ending with
1890 : indeed, it maybe doubted whether in the minds of most men



222 ESSAYS

the assurance of safety is not sensibly weaker now than it was
before that year.

The case of 1890 shows the peril that may come from positive
action by Congress, and the last three years have shown with equal
distinctness the dangers to be feared from its inaction. Since the
beginning of 1894 there has been a necessity for the periodical
replenishment of the gold reserve. Withdrawals, sometimes for
export and sometimes from precaution, have brought the stock of
gold down to the danger point ; and it has been filled up by the
proceeds of successive loans, amounting to over $260,000,000. It
is immaterial whether the cause of this steady borrowing, for the
payment of a debt which is not thereby diminished, is to be found
in what has been called the " endless chain " of notes redeemed,
reissued, again redeemed and again issued, or is to be found in a
deficiency of revenue. In either case the evil was flagrant, and it
was the business of Congress to apply an appropriate remedy, —
by fresh taxation in the one case, or by modifying the system of
reissue under the act of 1878 in the other. But it will be within
the recollection of every reader that Congress found itself abso-
lutely unable to act. Four times the necessity for borrowing has
presented itself, with a suspension of gold payments as the only
alternative. On three occasions out of the four Congress was in
session at the critical moment ; but it uniformly appeared that action
was out of the question. Grant that the responsibility for failure
lay with a factious few and not with the majority, and the fact still
remains that the Congress of the United States was unable to act
in an emergency created by its own legislation. It was even unable
to apply the palliative of providing for the issue of shorter bonds,
bearing a lower rate of interest than those to be issued under the
act of 1870, a bill for that purpose passed by the House in 1896
having been converted by the Senate into a bill for the free coinage
of silver. For three years, therefore, the credit of the government
and the standard of prices and payments have remained, not with-
out defence, — for the executive still performed its duty with the
means afforded by the half-forgotten provision in the Resumption
Act, — but so shaken at intervals as to cause constant dread, some-
times nearly degenerating into panic.

A currency which is exposed to such dangers as these cannot
be called safe in any proper sense of the word. The wealth of



THE SAFETY OF THE LEGAL TENDER PAPER 223

the promisor of the note is unspeakable, but from time to time the
application of that wealth in fulfilment of the promise is not beyond
question. The power to enforce the legal tender of the note at its
face in payment of debt is absolute, but the standard of its value
has never been made secure. For thirty-five years the policy of the
law in regard to this currency has been uncertain, and the causes
of this uncertainty have gained in strength and multiplied as time
has gone on. One ingenious expedient and another is suggested
for regulating the use and redemption of the notes, in the hope of
giving them steadiness and securing somewhere a power of con-
trol; but there is no escape from the fatal objection, that the direct
power of legislation is not only paramount but is beyond the con-
trolling force of any steady political influence. In short, not only
is there no guarantee, but there is no probability that the history
of these issues, if they continue for another generation, will be any
less checkered than it has been in the last. Without dwelling upon
such forebodings, however, it is enough to say here, that while the
very foundation of all credit is thus left doubtful neither the credit
of the nation nor that of the mass of its citizens can reach its
proper strength. None can profit by such uncertainty except
those whose command of wealth enables them to secure them-
selves, at the expense of others, against the hazards of the future.

The necessary alternative to the issue of paper currency by the
government is the delegation of this function to banks and the
complete substitution of private credit for public as the medium
of exchange in domestic operations. A large proportion of these
operations are already performed by means of bank credit, with
an adjustment to the needs of the day which is nearly automatic;
and the only relief from the increasing perils of the present situa-
tion is to be found in the same direction. This reliance upon
banks would not, necessarily, mean the absorption of the whole
right of paper issue by the national banks, although this absorp-
tion would have much to recommend it ; but it would clearly imply
the confinement of the right to banks working under tolerably uni-
form conditions, as the guarantee of their safety and wide credit,
and therefore presumably under some kind of national regulation
and supervision.

Even with the use of bank-notes, then, the paper currency
must continue to be a subject of national legislation. There is,



224 ESSAYS

however, an important distinction in the kind of legislation called
for by government paper and by bank paper respectively, and
a great difference in the risks to which we may be exposed in the
two cases. Congress has had the national bank system before it,
for any necessary legislation, for almost the same length of time
as the legal tender issues ; but the course of action in the two
cases offers no point of resemblance. Inconsistent and essentially
weak as the dealing of Congress with the legal tender issues has
been, its legislation as to the banks has on the whole been marked
by steady purpose, has tended to complete the original system,
and as a general result has materially strengthened it. Deserv-
edly or not, the banks have from the start had abundance of ene-
mies, in Congress and out of it ; but the bank legislation, if not
uniformly wise, has been sparing in amount and usually directed
to the details rather than the general structure and credit of the
system. Comparison shows clearly that for thirty odd years the
legislator has approached bank questions from an entirely different
point of view and in a different frame of mind from that which has
led him to such unfortunate results in acting upon legal tender
notes. He has not felt the same temptations, he has not been
under the same outside influences, the pressure of the times has
not turned his thoughts in the same direction. The fundamental
difference in the two cases is no doubt explained by La Roche-
foucauld's famiUar maxim, that " it is easier to be wise for others
than to be wise for one's self." The legislator has found it con-
genial and easy to hold others to the strict line of their obligations
and of sound pubhc policy, but not so easy to observe this line
in deciding as to what lay within his own hand. His greatest
folly in dealing with the banks — the absurd attempt, made by
Congress in 1881 and foiled by the veto of President Hayes, to
force a reduction of the interest of bonds held by the banks — was
after all not a measure of relaxation towards them, but one of
severity.

This natural tendency of Congress, considered merely as a
collection of human beings, to exact more from others than from
themselves, is undoubtedly strengthened by the kind of presump-
tion established in the popular mind to the disadvantage of any
corporation, in questions of responsibility or of seeming conflict
of interest. The national banks have felt the pressure of this



THE SAFETY OF THE LEGAL TENDER PAPER 22$

influence against them, in cases where they have sought for changes
of legislation which would have been for the general advantage.
No doubt in such cases impartiahty of judgment would better have
befitted the legislator than unfavorable prepossession ; but, after
all, can it be doubted that the disposition to say " No " has had an
important place among the causes for the general steadiness of our
bank legislation ? To hold the banks to their obligation and to
grant them few favors has been the rule, and the existence of any
rule analogous to this in deaHng with the legal tender issues would
have given an entirely different cast to that unfortunate chapter of
our history.

The nations already referred to as able to manage their curren-
cies successfully and quietly have all done this by delegating the
power of issue to banks. They have established their banks on
different principles, but have agreed in the general policy of throw-
ing upon them certain duties and restricting the field of probable
legislation. That their systems have a remarkable steadiness and
permanence has already been pointed out. These systems they
also strengthen, as time goes on, not so much by legislation as by
practice, by public opinion, and by the estabhshment of traditions
of duty on the part of the banks themselves. Both in England
and in France the legislative power takes distinctly the attitude of
observation, towards an establishment which is conducted for
private profit, but is intrusted with a quasi public function. In
Germany the imperial control of the Reichsbank makes the rela-
tion somewhat different, and yet a note circulation of remarkable
stability has been built up there on the basis of private capital
invested in order to earn a profit.^ In neither one of the three
countries does the regulation of the currency present itself as a
subject for ordinary legislation.

But it is not necessary for the present discussion to enter upon
the general considerations for or against a paper currency consist-
ing of bank-notes alone ; and I shall only call attention here, in
conclusion, to the often-repeated argument that a government issue,
being a loan without interest, results in a saving to the Treasury

^ There are still outstanding in Germany imperial treasury notes (not made a legal
tender) to the amount of 120,000,000 marks, remaining from the larger issue made in
1875 to replace the notes of the several German states. But this exception to what is
said above is not important.
Q



226 ESSAYS

which is lost when the right of circulation is delegated to banks.
The experience of the United States in the last five years alone
presents a complete answer to this penny-wise reasoning. In that
space of time the people of the United States have lost by shaken
confidence, discouraged enterprise, and the actual ruin of thousands
of citizens, resulting from the mismanagement of their currency,
an amount beyond all comparison with the annual saving of per-
haps $12,000,000 made by them at the Treasury. The thrill of
alarm which runs through the country whenever the gold reserve
dips too far below the line, or when there is delay or doubt in
applying the costly remedy, means a loss to the people to be
measured only by scores of millions. The monetary panic of 1893
alone, by its direct results and without reference to the stagnation
which followed it, was enough to counterbalance all savings of
interest made by the Treasury in the last twenty years.

But the question as to the means of securing the safest paper
currency is one in which the consequences to the national industry
and prosperity are on a scale so vast that any attempt at pecuniary
measurement appears irrelevant, — as irrelevant as it would be to
draw from the post-office deficit a conclusion as to the maintenance
of the postal service by our people. No such calculations are
needed to show that our people cannot afford to rest content with
a system which their experience for a generation has shown to be
radically unsafe. So long as such a system continues, its history
must continue to repeat itself. Errors made in the past will be
made also by the new men in the future ; and the possibility that,
in any moment of popular discouragement or passing delusion,
some fresh experiment or abandonment of wholesome limitation
may be resolved upon in haste, but with irreparable results, must
continue to be a standing menace to our credit, public and private.



THE NATIONAL BANKING SYSTEM i

Of the constituents of our paper currency the government
notes are amply shown by the history of the last thirty years to
be the dangerous element. Experience has shown that we can
rely upon no principle or policy as a safeguard against the caprice
or the temptation, which at intervals must surely beset any legis-
lative body having control of the direct issue of paper. The
bank-notes, on the other hand, have been jealously guarded and
strengthened by legislation, until they resemble a government
issue resting upon a special fund of cash and securities rather



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 24 of 40)