Francis Wrigley Hirst.

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or open repudiations by some of the colonial assemblies v/ere
not uncommon. The English merchants who gave large credits
suffered heavily, and there were many disputes between the
colonial governors and their legislatures.

The Continental Congress at the outbreak of the Revolution
also resorted to paper currency, and the individual States
continued their issues. Between 1775 and 1779 $241,000,000
worth of continental paper was issued, while the States were
responsible for $209,000,000. The Congress tried to enforce a
redemption of its own issues upon the States but failed, and
depreciation was very rapid. In November, 1779, the ratio of
the real value of the paper to its face value was 383^ to 1.
"Boston was, in October, 1779, on the verge of starvation;
money transactions had nearly ceased, and business was done
by barter." * In 1780 an attempt was made to replace the
money by "new tenor," but depreciation continued. The new-
bills started at a depreciation of 2 to i, which became 3 to i

o White: Money and Banking, p. 98.

National Monetary Commission

before they were paid to the army, and dropped to 6 to i in a
few months. "Old tenor went at a galloping pace down to
500 for I in Philadelphia, when it ceased to circulate. In the
remoter districts of the South it continued in circulation nearly
a year longer, and until the depreciation had reached 1,000
for i."'^

The Congress also contracted about $11,000,000 of domestic
loans (reduced to a specie basis) at rates varying- from 4 to 6
per cent. After March i, 1782, the interest was not met, but
certificates of value were given to the holders, and these were
received by the Government in payment for taxes. Further,
the Government gave receipts for impressed supphes to an esti-
mated total of $16,700,000.

External loans and subsidies were raised from the Govern-
ments of France and Spain and from private bankers in Hol-
land, to the amount of $7,830,517, at par, for the most part at
5 per cent, although a small proportion of the French loan was
at 4 per cent. The French government subsidies were mainly
spent in France on supplies, but one instalment reached America
in specie and helped to pay the interest on the domestic loans.
By 1782 Holland, having gained confidence in the success of
American arms and the integrity of the American Government,
became an important lender.

A superintendent of finance (Robert Morris) was created in

1 78 1, but resigned three years later. The capital indebtedness

in 1784 was —

Foreign debts and arrears of interest $7, 921, 886

Loan office certificates 11, 585, 000

Unliquidated certificates of indebtedness 16, 708, 000

Arrears of interest on home debt 3, 109, 000

Total . 39,323,886

The indebtedness of the individual States stood at about

$21,000,000. From 1784 to 1789 loans of $2,296,000 were

"Op cit., p. 99.

The Credit of Nations

raised in Holland at 4 per cent, nominally at par; although
various bonuses and "gratifications" raised the rate to nearly
6% per cent. In 1787 the Federal Constitution among its
other far-reaching enactments laid down that the new Federal
Congress should "have power to borrow money on the credit
of the United States" (Art. I, sec. 8), that "all debts con-
tracted and engagements entered into before the adoption of
this Constitution shall be as valid against the United States
under this Constitution as under the Confederation" (Art. VI,
sec. i), and that "no State shall coin money or emit bills of
credit" (Art. I, sec. 10).

In 1789 the Department of the Treasury was founded, and
Alexander Hamilton became its first Secretary. I have
touched upon this early history very briefly. Its chief interest
and importance for present-day controversies lies in the fact
that the Government of the United States inherited from the
States of which it was composed the vicious principle of con-
founding debt wdth currency. The crude notion of raising
money by debasing the currency whether by adulterating the
metal or by issuing an excess of paper has now been relegated
to the least civilized and intelligent states of the world. But
traditions die hard, and the system of propping up credit by
currency regulations may still be traced in the laws of the
United States.

(B) 1790-1812.

After the passage of the Constitution Hamilton prepared
his first report on public credit (January 9, 1790), in which
he summarized the amount of debt as follows:

Foreign debt, with arrears of interest $11, 710,000

Estimated domestic debt 27,383,000

Accrued interest on the domestic debt 13, 030, 000

Unliquidated debt 2,000,000

Total - - 54. 123.000


National Monetary Commission

The question of funding was complicated by the deprecia-
tion that had occurred. Were the holders of continental cer-
tificates to be paid at their face value, or at their face value
plus the accrued interest, or at the sum they had actually given?
This was hotly debated, and a wild speculation in certificates
ensued. But Hamilton prevailed, and it was agreed that all
holders should receive the face value of their certificates plus
the accrued interest. The only exception was in the case of
the outstanding continental bills of credit, which were funded
into 6 per cent bonds at the rate of $ioo of bills to $i of specie.
But of these bills comparatively few were ever presented.

Out of the $21,500,000 of state debts the Federal Govern-
ment took over the larger part, $18,000,000, on the ground
that they had been incurred for war purposes. The Southern
States during the war had composed their embarrassments
either by taxation or repudiation, and, as their existing debts
per head of population were much less than those of the
Northern States, they opposed the measure. Hamilton, whose
aim was political — to consolidate the interests of the States
and to procure national unity — pacified them by a bargain
through which the Federal Capital was to be in the South, and
Washington accordingly stands on territory taken from Virginia
and Maryland.

By the funding act of 1790 three loans were authorized:

1. A loan of not more than $12,000,000 for the payment of
the foreign debt.

2. A loan to the full amount of the domestic debt, which
could be subscribed in any of the old certificates of indebtedness
issued by the Continental Congress. In return, subscribers
received two certificates, one for an amount equal to two-thirds
of the subscription with 6 per cent interest, the other for one-
third not bearing interest till 1801. As the old debt bore 6
per cent interest, this practically meant a reduction for ten

years to 4 per cent.


T h


r e

d i t of Nations

Conversion was not compulsory; but as the old debt was
redeemable at pleasure and there was a general expectation
that it would soon be extinguished, it was to the interest of
holders to make the exchange. A 3 per cent loan was also
issued to clear off the arrears of interest.

3. The third loan, to take up the state debts, could be received
in the certificates issued by the States for war purposes. The
interest provisions in this case were also complicated. The
government agreed to Umit the amount of the new debt re-
deemed in any one year, and offered quarterly instead of annual
payments of interest at 13 different places. The national
revenue, subject to the prior claim of the foreign debt, was
pledged to the payment of interest.

Six per cent loans were raised in Holland and Antwerp to pay
off part of the foreign debt to France and Spain and to extend
the remainder. Allowing for commission and expenses these
were floated at from 96X to 94^2. The act was complicated,
and created too many varieties of stock, but on the whole it
proved successful, and the old floating obligations disappeared,
as these figures show:



Old debt:

$1 , 500, 000
61 , 000, 000
1 2, 800, 000

SS7, 000. 000

Unfunded -

Foreign . . - .

I 2, 400, 000

New debt .


7S. 300, 000

In 1 79 1, through Hamilton's exertions the first bank of the
United States was chartered (the Government subscribing
$2,000,000 to its capital of $10,000,000) and proved a financial
success. During the subsequent ten years the expenditure of
the Government forced it to borrow inanv small loans from the


National Monetary Commission

bank. In all, these mounted up to about $10,000,000, of whith
one-third was outstanding in 1801 . In 1798 a loan of $5,000,000
and in 1800 another of i?i, 500,000 for appropriations and mili-
tary purposes were authorized. These were limited to fifteen
years, and the fear of invasion forced the Treasury to pay 8
per cent.

In 1792 a sinking fund was created, but its operation did not
prevent the growth of the debt.

With Jefferson's administration in 1801 the policy of public
retrenchment with a view to the reduction of debt and taxation
took the field, with Gallatin at the Treasury as its director.
"He had been unceasing in his demand for economy, for
specific instead of general appropriations, for the extinction of
the debt in preference to military and naval expenditures, and
for a change in the form of the sinking fund."" The result was
a remarkable reduction of debt between 1801 and 181 2. The
net amount paid off was $38,000,000, but the real reduction was
larger; for the Louisiana purchase accounted for an addition
of nearly $15,000,000. At the ^ame time some unpopular
excise duties and the salt tax were repealed. The foreign debt
with the costly loans of 1798 and 1800 were wiped out, and no
further recourse was had to temporary loans.

In 1803 Gallatin to meet the $15,000,000 incurred by the
Louisiana purchase issued a loan of $11,500,000, at 6 per cent,
redeemable after fifteen years in four annual instalments. The
balance was met from the revenue chiefly from customs, as it
was a period of expanding trade. The loan was very successful.
In 181 1, in spite of Gallatin's support of the United States Bank,
the renewal of its charter was lost in the Senate by i vote,
owing to political reasons and the jealousy of the state banks,
of which 88 were by this time in existence.

« Dewey: Financial History of the U. S., p. 119.


The Credit of Nations

(C) THE WAR OF l8l2.^

Gallatin had long foreseen the approach of war, and on
several occasions had declared that he should propose to raise
the necessary money by loans; taxes would only be increased
in so far as might be needed to pay interest on new debt.
Congress was very ready to agree to a loan policy, and in
March, 1811, it authorized a loan of $5,000,000, at 6 per cent,
not to be sold under par. In December, 181 1, however, Galla-
tin proposed the revival of the unpopular excise taxes, declaring
that Congress, by its destruction of the United States Bank, had
deprived him of an important credit instrument. It was,
however, too late to resort to a strong poHcy of taxation; the
proposals were rejected, and loans continued. An increase of
customs duties produced little revenue, for commerce with
Europe was almost destroyed by the war.

In October, 1814, Dallas replaced Gallatin at the Treasury
and had to deal with a serious situation. The following is, in
outHne, the financial history of the war period:'^

Mar. 14. Loan of $11,000,000, at 6 per cent.
June 12. War declared.

June 30. Issue of $5,000,000 of Treasury notes.
July I. Customs duties doubled.

Feb 8. Loan of $16,000,000, at 6 per cent.
Feb. 25. $5,000,000 of Treasury notes.

\JL '-,' [internal-revenue duties and some direct taxation imposed.

Aug. 2. Loan of $7,500,000, at 6 per cent.

Mar. 4. $10,000,000 of Treasury notes. /

Mar. 24. Loan of $25,000,000.
August. Specie jjayments suspended.
Dec. 15. Internal-revenue taxes increased.
Dec. 24. Treaty of peace.
Dec. 26. $10,500,000 of Treasuiy notes.

Jan. 18. New internal taxes.
Feb. 24. $25,000,000 of Treasury notes.
Feb. 24. Loan, at 7 per cent.

a Dewey: Financial History, p. 132.

National Monetary Commission

The ordinary rule of policy was not to issue government
stock below par; but public credit began to fall, and it was
found necessar}^ to accept lower bids for the loan of February
8, 1 813, for most of which 88 was taken. It was difficult to
get subscribers in the Eastern vStates, where the commercial
interest had been antagonized by Jefferson's policy of embargo,
nonintercourse, and war. In New England only $3,000,000
were subscribed out of the $41,000,000 raised to the end of
1814. The loss of the bank was much felt by the Government.

For the loan of August 2, 181 3, special terms had to be made;
it was not to be sold under 88 and was actually placed at 88X-
In the case of the loan of March 24, 1814, the Government
agreed that if more favorable terms were offered to later sub-
scribers they would be extended to earlier purchasers. Thus it
became the interest of the earlier holders to depress the price.
From 88 the loan dropped to 80, and later on to 65. Public
credit rose with the conclusion of peace, and the average price
received for the loan of March 3, 181 5, was 95. A Committee of
Ways and Means of the House of Representatives estimated
in 1830 that during this war the actual value in specie of the
Treasury receipts was only $34,000,000 for loans of over
$80,000,000 nominal.

During the war period Treasury notes were issued to the
amount of $36,500,000 (part to replace earlier issues), and all
except $3,392,994 were payable to order at a definite time and
bore interest at 5I per cent. Two-thirds were in denominations
over $100. They did not become, and were not intended to
become, part of the circulating medium, though they were
receivable in payment of taxes. A proposal to issue Treasury
notes as legal tender was decisively rejected by the House of
Representatives in 1814. The notes remained generally at
par until the suspension of specie payments.


The Credit of Nations

(D) 1 816-1846.

In 1 81 6, when Dallas was Secretary to the Treasury, and
Madison, President, the second bank of the United States was
founded to reorganize the currency. Of its capital ($35,000,000)
one-fifth, or $7,000,000, was subscribed to the Government.
By the terms of the charter government funds were kept in the
bank or its branches but could be removed at the discretion of the
Secretary of the Treasury. Up to 181 9 its career was inglorious,
but after that date it became very prosperous. Between
181 1 — the refusal of the charter to the first bank — and 181 6 the
number of state banks rose from 88 to 246. After the suspen-
sion of specie payments their notes fell to a discount of 10 to 30
per cent, yet they were accepted by the Government in payment
of taxes. This naturally led to increased issues. The circula-
tion — $45,000,000 in 1 81 2 — had risen to $100,000,000 in 181 7.
"The monetary derangement was so acute that the Treasury
Department was obliged to keep four accounts with its deposi-
tories, in four standards of value — cash, or local currency;
Treasury notes bearing interest; Treasury notes not bearing
interest; and special deposits.""

In January, 181 6, the debt stood at $127,000,000; the follow-
ing March Congress ordered an annual appropriation of
$10,000,000 to the sinking fund and in 181 7 $9,000,000 more
were added. The succeeding years, however, were marked by
deficits, and in 181 9 there was a severe crisis throughout the
country — a reaction after the forced growth of manufactures dur-
ing the war and the speculation and bad banking that followed
it. Since 181 7, $32,000,000 of debt had been redeemed, but
now loans were called for to tide over the financial difiuculties.
In May, 1820, a small loan of $3,000,000 was issued, two-thirds
at 6 percent, redeemable at pleasure, which sold at 102, the
remainder for twelve years at 5 per cent at par.
'i Dewey J Financial History, p. 145.

82300° — 10 S 109

National Monetary Commission

In 1 82 1 several millions of the public debt fell due, and in
March another loan of $5,000,000 for fourteen years at 5 per
cent was issued, and it was readily taken at a premium of from
5 to 8 per cent, foreshadowing the revival of trade and confidence
which took place in this year. After 1822 there were constant
surpluses, but as the debt ran for fixed periods they could only
be used to purchase stock at a premium in the open market.
In 1826 $19,000,000 became due, more than the sinking fund
could discharge. Attempts were made at refunding which were
not markedly successful, but in spite of the handicap of fixed
loans the conditions favored rapid debt reduction, and by 1835
the debt had been extinguished.

The political antagonism against the bank of the United
States culminated in 1833 when President Jackson withdrew
the government deposits. During the crisis of 1 837-1 843 the
Government issued treasury notes to the amount of $47,000,000,
about one-third being reissues. They bore interest, some even
at a nominal rate, i "mill" du^^o) per $100. They all ranfor
a definite time, for the Committee on Ways and Means of the
House of Representatives declared that if payable on demand
they were "bills of credit," which by the Constitution Congress
had no power to issue.

From 1 84 1 to 1843 the new Whig Government proposed loans
to fund these notes and for current needs. In 1841 the loan
was for three years with interest from 5I to 6 per cent. It
could not be sold at less than par, and of the $12,000,000
authorized less than half was issued. In 1842 and 1843 the
stock could be sold at less than par and the loans ran for ten
and twenty years, respectively. In 1842 $8,000,000 was dis-
posed of from 97X to par, and in 1843 $7,000,000 at a premium
of I to 2)H- But the effects o^ the crisis and the suspicion
caused by State repudiations prevented a wider success.


The Credit of Nation


(E) 1 846-1 848 — THE MEXICAN WAR.

The net indebtedness created by this war was $49,000,000.
All the loans, at 6 per cent, were floated at, or even above, par.
As they ran for ten or twelve years and remained at a premium,
redemption proved costly. One loan of $18,000,000 was bid
for in specie to the amount of $57,750,000 — the first on a specie
basis since the Government entered office. Treasury notes were
also issued to the amount of $26,000,000, bearing interest at
5 1 and 6 per cent. Like the notes of 1837 to 1843, they were
"merely government loans of which the securities were in small
denominations and had only short periods to run."'*

(F) 1 848-1 860.

In 1 85 1 the debt stood at $68,000,000, but it was steadily
reduced until it reached $28,700,000 in 1857. In that year a
sharp commercial and banking panic ensued upon feverish rail-
road construction and the gold discoveries, though protectionists
blamed the low tariff of 1846 and the further reductions which
took place in 1857. The bank note circulation, which was
$58,000,000 in 1843, was $214,000,000 in 1857.

In i860 the debt was $65,000,000, or $2 per head of the popu-
lation. During the period 1 836-1 860 its capital amount rarely
exceeded and was sometimes much below the annual receipts of
the Federal Government. Since the establishment of the Con-
stitution it had stood as follows :

1 79 1 $75,400,000

180 1 83, 000, 000

1804 86, 400,000

1812 45. 200,000

1816 127,300,000

1819 95,500,000


185 1 68, 300, 000

1 860 64, 800, 000

o White: Money and Banking, p. 107.

National Monetary Commission

(G) 1 861-1866 — THE CIVIL WAR.

(a) Federal Finance. — The result of the elections in Novem-
ber, i860, gave a shock to credit, and in December, in order to
float a treasury note issue at par, 10 to 12 per cent interest
had to be offered. On February 8, 1861, a 6 per cent loan for
$18,000,000 was issued with no restrictions as to price, and sold
at an average price of 89.

In March Lincoln appointed Chase Secretary of the Treasury,
and in April war broke out. The debt in July stood at
$74,985,000, about $18,000,000 of which had been incurred
since the secession movement began. Chase estimated that
during the next year about $320,000,000 would be required, of
which he proposed to raise $80,000,000 by taxes and $240,-
000,000 by loans. In August he negotiated $50,000,000 in
three loans from the banks of New York, Boston, and Phila-
delphia, at par, with interest at 7.3 per cent. Chase did not
believe that he had the power to leave the money in the banks
till actually required, and then draw it by check, and conse-
quently ordered the banks, in spite of their protests, to pay the
gold by w^eekly installments into the subtreasury at New York.
As the government creditors in their turn paid it back to the
banks, the effect at first was not great. But in December the
Trent affair caused a fear of war with England and Chase
asked for another loan of $200,000,000.

The government credit declined, so that the banks could
not sell government securities except at a loss, and people
stopped depositing or even withdrew money. The reserve
dwindled rapidly, and on December 30 the banks suspended
specie payment and were, of course, foUow^ed by the Treasury.
Before these loans $60,000,000 of noninterest-bcaring treasury
notes had been issued, of which $33,000,000 were outstanding.
These were payable on demand and receivable for taxes, but
were not legal tender.

The Credit of Nations

In January, 1862, the Committee on Ways and Means, by a
majority of one vote, proposed a legal-tender system and the bill
passed Congress by narrow majorities. It provided (i) for the
issue of $150,000,000 of notes ($50,000,000 to take up the out-
standing demand notes). They were payable to bearer, for
denominations of not less than $5 and noninterest bearing.
They v/ere legal tender and exchangeable for bonds. (2) Of
these bonds $500,000,000 were authorized at 6 per cent, re-
deemable in five years, payable in twenty years — the well-
known "five-twenties." These sold at a fractional premium
when reckoned in the depreciated paper currency. (3) Certifi-
cates of deposit bearing 5 per cent interest in exchange for
United States notes left on deposit for not less than thirty
days, payable at ten days' notice.

A sinking fund was established.

The Senate added amendments: (i) The interest should be
payable in coin. (2) The Secretary of the Treasury should have
power to sell the 6 per cent bonds at any time at their market
value for notes or coin (to obtain gold for the interest). (3) All
import duties should be payable in coin.

Chase was in fact opposed to legal-tender notes, but he had
not the courage of his convictions and yielded, partly out of
hostility to the bankers. "A delegation of bankers from New
York, Boston, and Philadelphia came to Washington to remon-
strate against the bill. * =•= * Mr. James Gallatin presented
a plan of national finance which would, in the opinion of these
gentlemen, procure the means for carrying on the war without
recourse to legal-tender notes. One of the proposals was to
'issue 6 per cent twenty-year bonds, to be negotiated by the
Secretary of the Treasury without any limitation as to price
he may obtain for them in the market.' Mr. Spaulding (the
proposer of the bill) * * * objected 'to any and every
form of "shinning" by the Government through Wall or vState


National Monetary Commission

street to begin with; objected to the knocking down of govern-
ment stocks to 75 or 60 cents on the dollar, the inevitable result
of throwing a new and large loan on the market without limita-
tion as to price.' In order to avoid selling government stocks
at js or 60 cents on the dollar in an honest way Mr. Spaulding
initiated a policy which ended in selling those stocks at 40 cents
on the dollar in a roundabout way, and cheating creditors,
soldiers, and laboring men out of more than half their dues in
an incidental way."

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Online LibraryFrancis Wrigley HirstThe credit of nations → online text (page 8 of 16)