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the Secretary should ofifer any large lot the price would fall
below 98."

On January 17, 1863, $100,000,000 notes, later increased to
$150,000,000, were issued. The price of gold at this time was
142; by the end of the month it was 159. The former issues
had been fundable within five years at the option of the holder
into the 6 per cent gold bonds, which was a method of indirect
redemption. Chase hoped that if this provision were repealed
he could issue 5 per cent bonds, and he persuaded Congress to
pass the law of March 3, 1863, which repealed the conversion
clauses of the legal-tender act by fixing July 1 as the date when
the right of redemption would cease. This was a breach of

o White: Money and Ranking, p. no. &0p. cit., p. 114.

114



The Credit of Nations

contract which destroyed the previous standards of value, in-
jured government credit, and hindered the conversion of the
currency at the end of the war.

At the same date treasury notes (as distinguished from the
noninterest -bearing "greenbacks") were authorized, the act
providing for $400,000,000 in denominations of not less than
$\o to run for not more than three years and bear interest
in "lawful money" at not more than 6 per cent. They were
legal tender for their face value, minus interest. Thus it was
hoped the holder Vv^ould have an inducement to keep the
note, and if he used it as money the recipient would have an
inducement to keep it. Under these provisions $44,520,000
of one-year and $166,480,000 of two-year notes at 5 per cent
were issued, besides $266,595,440 compound-interest notes for
three years at 6 per cent. These latter were semiannually
compounded, and the interest was payable with the principal
at maturity. Thus $10 were worth $10.30 at the end of the
first half year and $11.94 ^-t the end of three years. They
were the most scientific form of legal-tender notes issued, as
the owner had an increasing inducement to hold them as an
investment.

In 1862 silver coins grew scarce and about $27,000,000 of
fractional currency notes were issued. On March 3, 1863, there
was an issue of bonds at 6 per cent "ten-forties," of which both
the principal and interest were payable in coin. (Some were
already suggesting the payment of government obligations in
greenbacks.) Of these $75,000,000 were issued at an average
price of 104^. On March 3, 1864, another issue of ten-forties,
at 6 per cent, was authorized, $196,000,000 in all, at prices
ranging from par to 107. In June, 1864, an act limited the
amount of greenbacks issued or to be issued to $450,000,000.
During the same month Chase insisted upon the unfortunate act
prohibiting the sale of gold on "futures." He believed the price



"5



National Monetary Commission

of gold had been advanced by brokers' gambling, and declared
"it must and shall come down." On the day of the bill's
passage the price of the gold dollar was 198 cents in legal
tender, the next day 208, the next 230, and soon 250. Never
before had there been so rapid an advance, and after two weeks'
operation the law was repealed without debate. On June 30
Chase resigned and was succeeded by Fessenden. During this
year taxation was resorted to with more effect.

Various estimates have been formed of the loss incurred
through this debasement of the currency. In 1865 Prof. Simon
Newcomb estimated the loss up to the end of 1 864 at $1 80,000,000
and the loss still to be incurred as $300,000,000, a total of
$480,000,000. Professor Adams's (Public Debts) estimate is
$850,000,000, reckoning the difference between the debt created
and the gold value of the currency which the Government
received in return. Mr. Wesley Mitchell (Journal of Political
Economy, March, 1897) put the loss at $528,400,000, on the
supposition that the government receipts were increased
$228,700,000 by the use of the greenbacks. He assumed that
the receipts from internal revenue were increased to the full
extent of the greenbacks, but admitted this to be doubtful.

The main features of Chase's loan policy were: (i) His
endeavor to obtain moderate rates of interest. Early issues
were at 7.30 per cent, later at 7, 6, and 5 per cent. He steadily
refused to borrow except on his own terms, and evinced a great
aversion to the terms of the money market. This eagerness for
low interest led to the blunder of substituting 5 per cent for 6
per cent bonds in 1863. This raised the price of gold 20 per
cent, and led to further legal-tender issues, and so to a further
rise in the price of gold. (2) His wish for a general distribution
of the loans led him to favor popular subscription, c. g., through
Jay Cooke's agencies. This again arose partly from his hostility
to the banks. (3) Another object was future controllability



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and hence his opposition to long loans. This has been criticised
on the ground that it made foreigners distrust the debt and also
because "the country was flooded -•= * =•= with short-time
paper, which served in many instances the purposes of currency,
expanded prices, and increased the speculation and extrava-
gance always incidental to war. Temporary obligations falling
due in the midst of civil conflict were a source of double vex-
ation to the Treasury Department, which was obhged to con-
duct a series of refunding operations and at. the same time to go
into the money market to borrow ever-increasing sums." "

The proportion of long to short term indebtedness each
year may be seen from the following table:



1861-62. _
1862-63 -
1863-64- -
1864-65 - .

1861-1865



Long term.



Short term.



Per cent.
IS
29
67
39



40



Per cent.
8s



Another table (Bastable, p. 653) gives the relation of loan
to tax revenue:

[In millions of dollars.]



1861.
1862.
1863.
1864-
1865.
1866.



Year.



Revenue.


Loans.


Total.


41-5


23-7


65. 2


51-9


433-6


485-5


112. 6


595-6


708.2


264. 6


696.


960. 6


333-7


864.8


1,198.5


538.0


92. 6


650. 6



Percentage

of loans to

total

receipts.



"Dewey: Financial History, p. 317.



National Monetary Commission

The growth of the debt (including notes and treasury bills)

was as follows:

June 30 —

1 861 $90, 600, 000

1 862 524, 200, 000

1863 1, 119, 800, 000

1864 I, 815, 800,000

1865 2, 680, 600, 000

1866 2, 773, 200, 000

In 1866 the interest charge was $133,000,000, and the interest-
bearing debt was thus divided on August 31, 1865:

5 per cent bonds $269, 100, 000

6 per cent bonds i, 281, 000, 000

7.3 per cent bonds 830, 000, 000

Several of the loans issued in 1864 and 1865 were sold at from
102 to 104, and others at par, interest being 6 per cent.

(6) Confederate finaiice. — The Confederate States met their
expenses almost wholly by treasury notes, which served as the
currency of the people. "Those notes were not made legal ten-
der by legislative authority, but were made practically so by
public opinion and by the repeal of state laws for the collection
of debts. Their course was similar to that of the Revolutionary
bills of credit. They became nearly worthless before the close
of the war and were repudiated in part by the Confederate
government and were superseded by another batch, a sort of
'new tenor,' which pursued the same downward career. Sec-
retary Memminger said that it was impossible to carry on
war by means of taxes alone. This was a mistake. Except
money borrowed abroad, every country pays the cost of a war
at the time of the war. The Southern Confederacy presents an
easy illustration of this maxim, because it was for the most
part isolated, having little communication with the outer world,
and because all of its debts were obliterated at the end of the
war * * * There being nobody else to pay it, the people of



118



The Credit of Nations

the Confederacy must have paid it, and must have paid it dur-
ing the time of the war, and not a moment later." "■

The following were the issues under the Confederacy :

March, 1861, $2,000,000 treasury notes at 3.65 per cent pay-
able to order. These were not currency; $15,000,000 borrowed
in gold on the security of 8 per cent bonds.

May 16, 1 86 1, $20,000,000 treasury notes for $5 and $10,
noninterest bearing. These were redeemable in specie in two
years and convertible into 8 per cent bonds. They acted as
currency. The issue of bonds was increased to $150,000,000.
This was in part a produce, especiall}' a cotton, loan.

August 19, 1861, $100,000,000 treasury notes, later raised to
$150,000,000. They were convertible into 8 per cent bonds or
6 per cent call certificates.

At the end of 1861, $105,000,000 treasury notes were out-
standing and the premium on gold was 15 to 20 per cent.

April, 1862, $165,000,000 8 per cent bonds; $50,000,000 treas-
ury notes; also a new kind of notes for $100, bearing 7.3 per
cent interest and payable for taxes. These also passed into
circulation, owing to the rapid rise in prices. Up to this time
9 per cent of the expenses of the war had been met by bonds,
85 per cent by notes, and 6 per cent by taxes, donations, and
the confiscation of federal property.

September, 1862, an act was passed authorizing note issues
limited only by the public expenses.

December, 1862, the outstanding notes, including state
issues, amounted to $500,000,000. Gold in relation to notes
was worth 3:1.

March, 1863, a loan for £3,000,000 was raised abroad (by
Erlanger & Co., of Paris). It was secured by the cotton in the
Confederate States at a valuation of 6d. per pound (the selling
price in England being 2 id.). The issue price was 90, and it is

«White: Money and Banking, pp. 148, 149.

119



National Monetary Commission

said to have been five times oversubscribed in England alone.
Yet after deducting brokers' commissions, interest on the
bonds, repurchases to sustain the market, and other expenses
the net amount realized (on $15,000,000) was $6,500,000. This
paid for the confederate cruisers.

Attempts at compulsory funding, i. e., repudiation, 1863-64.

January, 1864, outstanding notes $700,000,000. Gold quo-
tation, 20:1. "Old notes and the new notes circulated side by
side, were equally discredited, and continued to depreciate
together."

January, 1865, gold quotation, 53:1.

March, 1865, bill for $80,000,000 notes passed over the Presi-
dent's veto; attempt at a forced specie loan of $3,000,000,
failing this a tax of 25 per cent on all the specie in the Confed-
eracy. This was just before the end of the war.

(H) 1 865-1 890. THE FUNDING OF THE FEDERAL DEBT.

The highest point of the debt was reached on September i,

1865, when it stood at $2,846,000,000 against a cash reserve

in the Treasury of $88,000,000, the net UabiUties thus being

$2,758,000,000. Its composition was as follows:"

Funded debt $1, no, 000, ocx>

Inconvertible paper (of which $26,000,000 was fractional

currency) 460, 000, 000

Floating debt (mostly immediately repayable) i, 276, 000, 000

Total 2, 846, 000, 000

According to Adams (Public Debts, p. 248) the interest-
bearing obligations stood then at $2,381,000,000. On June 30,

1866, the interest-bearing debt consisted of loans at 5 different
rates of interest maturing at 19 different periods, there were
12 different 6 per cent bonds and notes, 5 different 5 per cent
and 5 different 7.3 per cent. Part of the interest was pay-
able in coin and part in currency. Only one-ninth of the

aBolles: Financial History, p. 306.
120



The Credit of Nations

debt ran for longer than two years, the remainder was in tran-
sient forms, expressing in the aggregate nearly a hundred
contingencies of duration, option, conversion, extension,
renewal, etc.

The problems which faced McCulloch, the new Secretary to
the Treasury, were: (i) How to pay off or fund the floating
debt; (2) how to provide a permanent scheme of debt reduc-
tion. In rather over two years the floating debt was brought
down to $408,000,000 (a decrease of over $900,000,000), and
the inconvertible paper was reduced by $20,000,000. The
act of April 12, 1866, authorized the conversion of temporary
into long-term obligations. In accordance with this new
funded debt to the amount of $686,000,000 at 6 per cent was
issued at a slight premium. The temporary obligations were
cleared off in 1868. A sinking-fund law had been enacted in
1862; but as there was no real surplus until 1866 it had been
inoperative, nor was later debt reduction carried out in con-
formity with it. In 1870 and 1871 refunding acts were passed
authorizing the creation of $500,000,000 bonds redeemable in ten
years, $300,000,000 at ^% per cent redeemable in fifteen years,
and $1,000,000,000 at 4 per cent redeemable in thirty years.
None of these issues was to be sold at less than par in gold.
Both interest and principal were to be paid in "coin," and
later the question arose whether gold alone was meant, or gold
and silver. These stocks unexpectedly went to a high pre-
mium, and so were difficult to redeem. Before thirty years
were over the Government could borrow at 2% per cent. By
1876 the five-twenties of 1862 were converted to 5 per cent due
in 1881, and by 1879 the five-twenties of 1865-1868 were con-
verted into the same denomination. The 4 per cent thirty-
year bonds were not placed till 1877, and were therefore not
redeemable till 1907, and the 4>< per cent fifteen-year bonds
were not placed till 1876, and were therefore not redeemable
till 1 891.



National Monetary Co tn mission

The surplus of 1882 was used to cancel temporary and
outstanding debt; but by 1886 all bonds subject to optional
redemption had been canceled, so that in 1887 the question
was whether the Treasury had power to buy bonds in excess
of the amount apportioned by the sinking fund. Great hag-
gling with the bondholders ensued. In the summer of 1887
the Secretary to the Treasury called for offers toward redemp-
tion. The 4>^ per cents at once ran up from 109 to iii, and
most offers were above no. The Treasury refused all above
109^, and the offers dropped to between 106% and 109.

Between 1880 and 1890 the old war loans disappeared. The
5 per cents, which fell due in 188 1, were continued at 3>^ and 3
per cent, but extinguished in 1890. The following table '^
shows the progress of reduction of the interest bearing debt:



September, 1865
November, 1868
November, 1884
December, 1889.
June, 1892



Rate


of


interest.


Per cent.


6


34


5


8


3


92


3


7


3


9



Interest charge.



tiiSi , 000, 000

126, 400, 000

47, 300, 000

41, 000, 000

22, 900, 000



Capital.



$2, 756, 400. 000

2, 484, 900, 000

I , 408, 500, 000

I, 056, 100, 000

585, 000, 000



Thus, in twenty-seven years $2,100,000,000 were removed
from the capital liability, and the annual charge was reduced
by nearly $130,000,000. The reasons for this success were the
rapid rise of the United States credit by which the 6 per
cent and 5 per cent bonds as they fell due were reduced to
4>^ per cent, and even 3 per cent; also, the large annual sur-
pluses which resulted from the high duties on imports. "The
protective system was in this way the cause of the repayment
of the war loans. From the financial point of view it is plain
that a like result could have been reached at much less real



« Bastable, p. 654.



The Credit of Nations

cost and sacrifice if moderate duties had been used; but then
it is doubtful whether in that case the policy of repayment
would have been so firmly adhered to. The result was that
the federal debt became unimportant except in connection
with the management of the Treasury and the banking system."
(Bastable.)

On the other hand, Mr. Horace White (Money and Banking,
p. 1 66) criticises the attitude of the Federal Government toward
the legal tender issues. Suspension of specie payments lasted for
fourteen years, during which time the policy of Congress under-
went many fluctuations. In December, 1865, it voted in favor
of the early resumption of specie payments, and accordingly,
in April, 1866, passed a law to retire and cancel the legal tender
notes at the rate of $4,000,000 per month. In February, 1868,
after $44,000,000 had been canceled, it repealed this act. In
1873 the Treasury Department reissued $26,000,000 of the re-
tired notes, without authority of law. The following year Con-
gress passed a bill to reissue the entire $44,000,000, but Presi-
dent Grant vetoed it, and it was not passed over the veto. In
1875 a law provided for the resumption of specie payments on
the ist of January, 1879. Two years later the House of Repre-
sentatives passed a bill to repeal this resumption act, but it
was defeated in the Senate by one vote. Both Houses then
passed an enactment that the legal tender notes should not be
retired when redeemed, but paid out and kept in circulation.
The amount then outstanding was about $346,000,000. Specie
resumption accordingly took place on January i, 1879.

In 1890 Congress passed a law for a new emission of legal-
tender notes in payment for silver bullion to be stored in the
Treasury. The new issues were followed by the exportation of
gold, and a disastrous financial panic, the history of which falls
within the next period.



123



National Monetary Commission

From the price quotations of the 4 percent bonds after 1878
we find that their yield in the first year was rather under French
rentes, in 1879 and 1880 it was above them, but from 1880 to
1889 considerably below, partly owing to the currency law.



1878
1879
1880
1881
1882
1883
1884
188s
1886
1887
1888
1889
1890



Highest.


Lowest.


Average
price.


I02J<


99K


loo. 672


10454


99


100. 609


1135^


103


106. 322


I18H


112H


IIS-37S


I21K


1 1 VA


1 19. 2690


I2SJ^


iiS'A


119. 8446


124?^


iiSH


121. 5529


I24H


121H


122. 2833


1295^


123


126. 2147


I29H


124J4


127- 1751


130


123H


126. 7252


129^


126K


127-8331


126J4


121^


122. 7499



Yield.



Per cent.



.966

• 963
.631

■ 134
. 912
.912
.758
.680

• 427

■ 317
. 266

■ 134

■ 372



(I) I 890-1 898.

In 1873 by a coinage revision act no provision was made for
the coinage of the silver dollar; at that time it was worth more
than 100 cents in gold. In 1876 the price of silver fell and the
dollar was only equal to 89 cents. Those interested in the mines
as well as the inflation party set on foot an agitation to remonetize
silver, which ended in the bill of 1 878. This provided for a limited
coinage of silver dollars from bullion purchased by the Govern-
ment. It remained in force till 1890, when it was repealed and a
new act was passed enlarging the purchases of bullion and provid-
ing that payment be made with legal tender treasury notes which
should be redeemable in "coin." This act remained in force for
three years. Under it legal tender notes were issued to the
amount of $156,000,000. At the same time changes in the tariff
largely reduced the revenue culminating in 1894 in a deficit,



124



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and the issue of notes was followed by an almost equal expor-
tation of gold. The "greenback redemption fund" in the
Treasury fell below $100,000,000 in April, 1893.

A financial panic was followed by a prolonged commercial
crisis during which the Government had four times to sell bonds
to replenish the gold reserves. Congress repealed the act of
1890 but did nothing more, since the majority of its members
were unfavorable to the gold standard.



Amount.



Gold drawn from the Treasury (by redemption of legal

tender notes)

Do

Gold exported

Borrowed by the Government

Bonds issued



1079-1092
1893-1896
1893-1896
1893-1896
1893-1896



$43,310,887
483.538,788
344, 248,036
293, 481,894
262.315, 400



Bonds issued for the gold redemption fund.



$100,000,000, at 4 per cent for 30 years (original loan).

$50,000,000, at 5 per cent for 10 years

$50,000,000, at 5 per cent for 9 years

$62,000,000, at 4 per cent for 30 years

Si 00, 000, 000, at 4 per cent for 30 years




Interest
(to 1908).



i5l20, 000, 000
25, 000, 000
22, 500, 000

74, 700. 000
120, 000. 000

362, 200. 000



The amount of the greenbacks is only $346,000,000, but to
keep these and also the treasury notes issued under the silver
act of 1890, alive and equal to gold $362,000,000 of bonds have
been issued and $362,000,000 of interest incurred, while the
amount of the greenbacks is still owed. The total liability to
the Government, according to an official estimate of the Treasury
Department in the Congressional Record, April 29, 1908,
has been $1,081,881,562. If the notes had been funded on



82300° — 10-



125



National Monetary Commission

January i, 1879, into 4 per cent thirty-year bonds and can-
celed, the cost of the principal and interest to July i, 1907,
would have been $741,897,340, or a saving of $339,984,222."

(J) 1898. THIJ FINANCES OF THE SPANISH WAR.

To meet the expenses of the Spanish war internal revenue
taxes were promptly increased and Congress also authorized
the issue of not more than $100,000,000 of treasury certificates,
and not more than $400,000,000 of 10-20 bonds at 3 per cent.
In fact, the Treasury raised $200,000,000 by the sale of 10-20
bonds, while the additions from the new internal taxes were
more than $100,000,000 per annum. In July, 1898, the interest-
bearing debt amounted to about $847,000,000 — $100,000,000 at
5 per cent and the remainder at 4 per cent. The 4 percents
payable in 1925 were quoted at 125.34, the average for the
month (or a yield of 2.704 per cent), and it was accordingly
argued that it was foolish to place the new loan at 3 per cent.
The bonds were subscribed seven times over, and rose to a pre-
mium of 1 1 1.79 in May, 1901. These were far better terms
than had ever before been secured by the United States Gov-
ernment in war time. The main reasons for the success were
that the bonds were offered for popular subscription at small
amounts, and they formed a better basis for the national-bank
note circulation than the old bonds at 125.34, and a much
better basis than those bonds at 128^^, a point reached before
the end of the war. One hundred thousand dollars in old
bonds, quoted October 31, 1898, at 128^-2, deposited as secu-
rity for circulation, yielded a profit of $302.93, with interest
at 6 per cent. Moreover the international market for gilt-
edged stocks was then highly favorable. It was in this year
that British consols touched the high-water mark of 113.

a White. Money and Banking, pp. 191-192.



126



The Credit of Nations

As Congress had prescribed that it should be a popular loan
the offers of banking houses to take it at a slight premium were
refused. It was issued in denominations as low as $20; sub-
scriptions were received through the post-office, and every
bona fide offer under $500 was accepted. More than half the
issue was taken by 230,000 of these small subscriptions, and
no subscription of more than $4,500 was accepted. In all,
320,000 persons offered subscriptions and an amount of
$1,400,000,000 was tendered. The bonds soon advanced to 102
and 105^, and the subscribers made from 3 to 5 per cent in a
few days. The Government certainly lost an original premium
by refusing the offers of the bankers, and owing to the small
size of the bonds and the number of the holders incurred greater
cost and trouble in handling the loan and paying interest. But
the success gave financial prestige to the Government.

The funded debt, which was $585,000,000 in 1892, had
advanced to $1,046,000,000 in 1899, an increase of $461,000,000,
or 78 per cent. The interest charge, in spite of low rates, had
risen from $23,000,000 to $40,000,000.

(K) 1 899-1 909.

In 1864, at the instance of Secretary Chase, Congress had
passed a bill to set up a national banking system, by which the
bank-note circulation of the country was used to promote
the sale of government bonds. The sole merit of the plan was
that it helped public credit in time of need. By the act each
bank on commencing business was bound to deposit in the
United States Treasury bonds of the United States bearing a
certain proportion to its capital. (If the capital was under
$150,000, it must deposit bonds equal to one-fourth of its capi-
tal; if it was more than $150,000 at least $50,000 must be de-
posited.) In return the bank was entitled to circulate notes
equal to the par value of the bonds deposited, but not exceeding


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