the Secretary of the Treasury, the Ways and Means Committee of the House of Representatives framed a bill authorizing the issue of one hundred and fifty millions of bonds, and the same amount of Treasury notes, the latter to be a full legal tender, and fundable in an interest-bearing bond at the option of the holder. The contest between the popular branch of the government and the Senate, upon this measure, forms one of the most interesting and instructive lessons of the financial legislation of the nation. In the Senate, a bitter and determined opposition to the legal-tender clause was developed. The associated banks of New York had adopted a resolution that the Treasury notes of the government should only be received by the different banks from their customers as “a special deposit to be paid in kind;” and it was one of the lessons of the war, that notices containing the announcement above quoted remained posted in the New York banks until a high premium on those very notes, over the dishonored greenbacks, caused a shrewd depositor to demand of the bank his deposits in kind. The demand was settled by a delivery of greenbacks, which were a full legal tender for the purpose, and the notices suddenly disappeared. The compromise effected between the two Houses resulted in the issue of the emasculated greenback, and it also led the way to the establishment of the National Banking system, and the issue of the promissory notes of the banks to be used as money.
Much of the force of all criticism of the system so devised has been weakened by the fact that the attack has been aimed at the banks themselves, and not against one special feature of the system. In explanation, though not in excuse for this, should be stated the fact that every issue of the annual finance report of the government contained the special pleadings of the comptrollers of the currency, concealing some facts, misstating others, and creating thereby the impression that they were endeavoring to win the favor of the banking institutions. Added to this were the efforts of those controlling the national bank in the great money centres to secure a permanency of the note-issuing feature of their system, after a very general public sentiment against it had been aroused, and even after its evil effects had been felt by smaller banks located among, and supported more directly by, the producing classes. But now, when the discussion is removed from the arena of politics, when the volume of the bank-note system is rapidly disappearing, and when many of the best and strongest banks are seeking to be relieved from the burden of note-issuance, it is opportune to discuss calmly and without prejudice the wisdom of the original acts and their effects upon the country.
It has been claimed that by the organization of the national banks the government was enabled to dispose of its bonds and aided in carrying on the war. Do the facts warrant the claim? All national bank notes have been redeemable solely in Treasury notes. They do not possess the legal-tender qualification equal to the Treasury note, and cannot therefore be considered any better than the currency in which they are alone redeemable, and in comparison with which they have less uses. These are truths that were just as palpable twenty-five years ago as to-day. It follows that the issue of the bank notes did not furnish any better form of currency than that which came directly from the government to the people. Every dollar of such notes issued contributed just as much towards an inflation of the currency as the issue of an equal amount of Treasury notes. With these facts in mind, a review of the organization of the banks and their issue of notes will reveal the effect of such acts.
In 1864 the notes of the government had been depreciated to such an extent that coin was quoted at a premium ranging from 80 per cent to 150 per cent. The record of a single bank organized and issuing notes under such circumstances is illustrative of the whole system.
Take a bank with one hundred thousand dollars to invest in government bonds as a basis for its issuance of currency. The bonds were bought with the depreciated Treasury notes. Deposited with the Comptroller of the Currency at Washington, the bank received ninety thousand dollars of notes to issue as money. It also received six thousand dollars in coin as one year’s advance interest upon its deposited bonds, under the law of March 17, 1884. This coin, not being available for use as money, was sold or converted into Treasury notes at a ratio of from two to two and a half for one. The bank, therefore, had received, as a working cash capital, a sum in excess of the money invested in its bonds. The transaction stands as follows:
From this it will appear that the bank has the use, as currency, of more than the amount of its bonds, while the government is to pay, in addition, six per cent per annum on the full amount of bonds so long as the relations thus created continue. Surely no argument is needed to prove that, if the government had issued the $90,000 in the form of Treasury notes, and had paid out the interest money for its current obligations, there would have been no greater inflation of the currency, a more uniform currency would have been maintained, and a saving effected of the entire amount of interest paid on bonds held for security of national bank notes, which at this date would amount to a sum nearly representing the total bonded debt of the country.
But there remains a still more serious charge to be made against this system. Defended as a war measure by which the banks were to aid the government in conquering the rebellion, the fact remains that at the date of Lee’s surrender only about $100,000,000 of bonds had been accepted by the banks, even though they received a bonus for the act. But, after the war had closed, and the government was with one hand contracting the volume of its own circulating notes by funding them into interest-bearing bonds, the banks were allowed to inflate the currency by the further issue of over $200,000,000 of their notes. Time may produce a sophist cunning enough to devise an adequate defence or apology for such legislation. His work will only be saved from public indignation and rebuke when a continued series of outrages shall have dulled the national intelligence and destroyed the national honor.
But there came a time when the policy of the government was radically changed. The soldiers had conquered a peace, – or thought they had, – and, as they marched in review before their commander-in-chief, had been paid off in crisp notes of the government – legal tender to the soldier, but not to the bondholder; the time for government to pay the soldiers had ceased; the national banks had been allowed to show their patriotism and their willingness to aid the government overthrow a rebellion already conquered, by the issuance of their notes to add to an inflated and depreciated currency; the soldiers had returned to the arts of peace, and had taken their places as producers of the nation’s wealth and taxpayers to the national Treasury. Then Mr. Sherman, with his brother patriots and statesmen, discovered that the country (meaning, of course, the bondholders) was suffering under the evils of a depreciated currency. Their tender consciences had never suffered a twinge while the soldiers were receiving from the government a currency depreciated in value as the result of its own acts. But when the soldier became the taxpayer, and from his toil was to be obliged to pay the bondholder, then the patriotic hearts of Mr. Sherman and his co-conspirators in the dominant political party trembled at the thought of a soldier being allowed to discharge his obligations in the same kind of money he had received for his services. As a recipient of the government dole, paper money, purposely depreciated, was quite sufficient. From the citizen by the product of whose toil a bonded interest-bearing debt was to be paid, “honest money” was to be demanded. It required no argument to convince the government creditor that this was a step in his interest, and public clamor was hushed with the catchwords of “honest money” and “national honor,” while driblets of pensions were allowed to trickle from rivers of revenue. The Nero of Rome had been excelled by his Christian successor, and the dumb submission of ancient slaves became manly independence in contrast with modern stupidity.
By the passage of the so-called “Credit-strengthening Act,” in March, 1869, it was provided that all bonds of the government, except in cases where the law authorizing the issue of any such obligation has expressly provided that the same may be paid in lawful money, or other currency than gold and silver, should be payable in coin. This act was denounced by both Morton and Stevens, as a fraud upon the people, in that it made a new contract for the benefit of the bondholder. The injustice of the act could have been determined upon the plainest principles of equity: if the bonds were payable in coin, there was no need for its passage; if they were not so payable, there could be no excuse for it. If there existed a doubt sufficiently strong to require such an act, it was clearly an injustice to ignore the rights of the many in the interests of the few. But the men who had not scrupled to send rag-money to the soldiers in the trenches, and coin to the plotters in the rear,