Readings in Money and Banking
by Chester Arthur Phillips · English · Gutenberg #35120 · 1,855,540 chars · public domain (US)
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Title: Readings in Money and Banking
Author: Chester Arthur Phillips
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Language: English
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READINGS IN MONEY AND BANKING
* * * * *
THE MACMILLAN COMPANY
NEW YORK . BOSTON . CHICAGO . DALLAS
ATLANTA . SAN FRANCISCO
MACMILLAN & CO. LIMITED
LONDON . BOMBAY . CALCUTTA
MELBOURNE
THE MACMILLAN CO. OF CANADA. LTD.
TORONTO
* * * * *
READINGS IN MONEY AND BANKING
Selected And Adapted
by
CHESTER ARTHUR PHILLIPS
Assistant Professor of Economics in Dartmouth College
and Assistant Professor of Banking in the Amos
Tuck School of Administration and Finance
New York
The Macmillan Company
1921
All rights reserved
Printed in the United States of America
Copyright 1916
By the Macmillan Company
Set up and electrotyped. Published September, 1916.
Ferris Printing Company
New York City
PREFACE
Designed mainly for class room use in connection with one of the
introductory manuals on the subject of Money and Banking or of Money and
Currency, this volume, _in itself_, lays no claim to completeness. Where
its use is contemplated the problems of emphasis and proportion are,
accordingly, to be solved by the selection of one or another of the
available texts, or by the choice of supplementary lecture topics and
materials. The contents of the introductory manuals are so divergent in
character as to render possible combinations of text and readings that
will include, it is hoped, matter of such range and variety as may be
desired.
Fullness of treatment has been attempted, however, in the chapters
dealing with the important recent developments in the "mechanism of
exchange," and my aim has been throughout to select and, in many
instances, to adapt with a view to meeting the wants of those who are
interested chiefly in the modern phases of the subject.
For valuable suggestions in the preparation of the volume I am greatly
indebted to Professors F. H. Dixon and G. R. Wicker and Mr. J. M.
Shortliffe of Dartmouth, Professor Hastings Lyon of Columbia, Professor
E. E. Day of Harvard, and to my former teacher, Professor F. R.
Fairchild of Yale. I desire also to mention my great obligation to
authors and publishers who alike have generously permitted the
reproduction of copyrighted material.
CHESTER ARTHUR PHILLIPS.
Dartmouth College,
Hanover, N. H., July, 1916.
TABLE OF CONTENTS
CHAPTER PAGE
I THE ORIGIN AND FUNCTIONS OF MONEY 1
II THE EARLY HISTORY OF MONEY 10
III QUALITIES OF THE MATERIAL OF MONEY 18
IV LEGAL TENDER 26
V THE GREENBACK ISSUES 33
VI INTERNATIONAL BIMETALLISM 71
VII THE SILVER QUESTION IN THE UNITED STATES 82
VIII INDEX NUMBERS 115
IX BANKING OPERATIONS AND ACCOUNTS 121
X THE USE OF CREDIT INSTRUMENTS IN PAYMENTS
IN THE UNITED STATES 150
XI A SYMPOSIUM ON THE RELATION BETWEEN MONEY
AND GENERAL PRICES 159
XII THE GOLD EXCHANGE STANDARD 213
XIII A PLAN FOR A COMPENSATED DOLLAR 229
XIV MONETARY SYSTEMS OF FOREIGN COUNTRIES 246
XV THE NATURE AND FUNCTIONS OF TRUST COMPANIES 256
XVI SAVINGS BANKS 270
XVII DOMESTIC EXCHANGE 290
XVIII FOREIGN EXCHANGE 305
XIX CLEARING HOUSES 355
XX STATE BANKS AND TRUST COMPANIES SINCE THE PASSAGE
OF THE NATIONAL BANK ACT 381
XXI THE CANADIAN BANKING SYSTEM 406
XXII THE ENGLISH BANKING SYSTEM 435
XXIII THE SCOTCH BANKS 474
XXIV THE FRENCH BANKING SYSTEM 488
XXV THE GERMAN BANKING SYSTEM 526
XXVI BANKING IN SOUTH AMERICA 559
XXVII AGRICULTURAL CREDIT IN THE UNITED STATES 575
XXVIII THE CONCENTRATION OF CONTROL OF MONEY AND CREDIT 606
XXIX CRISES 627
XXX THE WEAKNESSES OF OUR BANKING SYSTEM PRIOR TO
THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM 672
XXXI THE FEDERAL RESERVE SYSTEM 723
XXXII THE EUROPEAN WAR IN RELATION TO MONEY,
BANKING AND FINANCE 797
APPENDICES 830
READINGS IN MONEY AND BANKING
CHAPTER I
THE ORIGIN AND FUNCTIONS OF MONEY
[1]In order to understand the manifold functions of a Circulating
Medium, there is no better way than to consider what are the principal
inconveniences which we should experience if we had not such a medium.
The first and most obvious would be the want of a common measure for
values of different sorts. If a tailor had only coats, and wanted to buy
bread or a horse, it would be very troublesome to ascertain how much
bread he ought to obtain for a coat, or how many coats he should give
for a horse. The calculation must be recommenced on different data,
every time he bartered his coats for a different kind of article; and
there could be no current price, or regular quotations of value. Whereas
now each thing has a current price in money, and he gets over all
difficulties by reckoning his coat at L4 or L5, and a four-pound loaf at
6_d._ or 7_d_. As it is much easier to compare different lengths by
expressing them in a common language of feet and inches, so it is much
easier to compare values by means of a common language of pounds,
shillings, and pence. In no other way can values be arranged one above
another in a scale: in no other can a person conveniently calculate the
sum of his possessions; and it is easier to ascertain and remember the
relations of many things to one thing, than their innumerable cross
relations with one another. This advantage of having a common language
in which values may be expressed, is, even by itself, so important, that
some such mode of expressing and computing them would probably be used
even if a pound or a shilling did not express any real thing, but a mere
unit of calculation. It is said that there are African tribes in which
this somewhat artificial contrivance actually prevails. They calculate
the value of things in a sort of money of account, called macutes. They
say, one thing is worth ten macutes, another fifteen, another twenty.
There is no real thing called a macute: it is a conventional unit, for
the more convenient comparison of things with one another.
This advantage, however, forms but an inconsiderable part of the
economical benefits derived from the use of money. The inconveniences of
barter are so great, that without some more commodious means of
effecting exchanges, the division of employments could hardly have been
carried to any considerable extent. A tailor, who had nothing but coats,
might starve before he could find any person having bread to sell who
wanted a coat: besides, he would not want as much bread at a time as
would be worth a coat, and the coat could not be divided. Every person,
therefore, would at all times hasten to dispose of his commodity in
exchange for anything which, though it might not be fitted to his own
immediate wants, was in great and general demand, and easily divisible,
so that he might be sure of being able to purchase with it, whatever was
offered for sale. The primary necessaries of life possess these
properties in a high degree. Bread is extremely divisible, and an object
of universal desire. Still, this is not the sort of thing required: for,
of food, unless in expectation of a scarcity, no one wishes to possess
more at once than is wanted for immediate consumption; so that a person
is never sure of finding an immediate purchaser for articles of food;
and unless soon disposed of, most of them perish. The thing which people
would select to keep by them for making purchases, must be one which,
besides being divisible, and generally desired, does not deteriorate by
keeping. This reduces the choice to a small number of articles.
By a tacit concurrence, almost all nations, at a very early period,
fixed upon certain metals, and especially gold and silver, to serve this
purpose. No other substances unite the necessary qualities in so great a
degree, with so many subordinate advantages. Next to food and clothing,
and in some climates even before clothing, the strongest inclination in
a rude state of society is for personal ornament, and for the kind of
distinction which is obtained by rarity or costliness in such ornaments.
After the immediate necessities of life were satisfied, every one was
eager to accumulate as great a store as possible of things at once
costly and ornamental; which were chiefly gold, silver, and jewels.
These were the things which it most pleased every one to possess, and
which there was most certainty of finding others willing to receive in
exchange for any kind of produce. They were among the most imperishable
of all substances. They were also portable, and containing great value
in small bulk, were easily hid; a consideration of much importance in an
age of insecurity. Jewels are inferior to gold and silver in the quality
of divisibility; and are of very various qualities, not to be accurately
discriminated without great trouble. Gold and silver are eminently
divisible, and when pure, always of the same quality; and their purity
may be ascertained and certified by a public authority.
Accordingly, though furs have been employed as money in some countries,
cattle in others, in Chinese Tartary cubes of tea closely pressed
together, the shells called cowries on the coast of Western Africa, and
in Abyssinia at this day blocks of rock salt; though even of metals, the
less costly have sometimes been chosen, as iron in Lacedaemon from
ascetic policy, copper in the early Roman republic from the poverty of
the people; gold and silver have been generally preferred by nations
which were able to obtain them, either by industry, commerce, or
conquest. To the qualities which originally recommended them, another
came to be added, the importance of which only unfolded itself by
degrees. Of all commodities, they are among the least influenced by any
of the causes which produce fluctuations of value. They fluctuate less
than almost any other things in their cost of production. And from their
durability, the total quantity in existence is at all times so great in
proportion to the annual supply, that the effect on value even of a
change in the cost of production is not sudden: a very long time being
required to diminish materially the quantity in existence, and even to
increase it very greatly not being a rapid process. Gold and silver,
therefore, are more fit than any other commodity to be the subject of
engagements for receiving or paying a given quantity at some distant
period. If the engagement were made in corn, a failure of crops might
increase the burthen of the payment in one year to fourfold what was
intended, or an exuberant harvest sink it in another to one-fourth. If
stipulated in cloth, some manufacturing invention might permanently
reduce the payment to a tenth of its original value. Such things have
occurred even in the case of payments stipulated in gold and silver; but
the great fall of their value after the discovery of America, is, as
yet, the only authenticated instance; and in this case the change was
extremely gradual, being spread over a period of many years.
When gold and silver had become virtually a medium of exchange, by
becoming the things for which people generally sold, and with which they
generally bought, whatever they had to sell or to buy; the contrivance
of coining obviously suggested itself. By this process the metal was
divided into convenient portions, of any degree of smallness, and
bearing a recognized proportion to one another; and the trouble was
saved of weighing and assaying at every change of possessors, an
inconvenience which on the occasion of small purchases would soon have
become insupportable. Governments found it their interest to take the
operation into their own hands, and to interdict all coining by private
persons; indeed, their guarantee was often the only one which would have
been relied on, a reliance however which very often it ill deserved;
profligate governments having until a very modern period seldom
scrupled, for the sake of robbing their creditors, to confer on all
other debtors a licence to rob theirs, by the shallow and impudent
artifice of lowering the standard; that least covert of all modes of
knavery, which consists in calling a shilling a pound, that a debt of a
hundred pounds may be cancelled by the payment of a hundred shillings.
It would have been as simple a plan, and would have answered the purpose
as well, to have enacted that "a hundred" should always be interpreted
to mean five, which would have effected the same reduction in all
pecuniary contracts, and would not have been at all more shameless. Such
strokes of policy have not wholly ceased to be recommended, but they
have ceased to be practised; except occasionally through the medium of
paper money, in which case the character of the transaction, from the
greater obscurity of the subject, is a little less barefaced.
Money, when its use has grown habitual, is the medium through which the
incomes of the different members of the community are distributed to
them, and the measure by which they estimate their possessions. As it is
always by means of money that people provide for their different
necessities, there grows up in their minds a powerful association
leading them to regard money as wealth in a more peculiar sense than any
other article; and even those who pass their lives in the production of
the most useful objects, acquire the habit of regarding those objects as
chiefly important by their capacity of being exchanged for money. A
person who parts with money to obtain commodities, unless he intends to
sell them, appears to the imagination to be making a worse bargain than
a person who parts with commodities to get money; the one seems to be
spending his means, the other adding to them. Illusions which, though
now in some measure dispelled, were long powerful enough to overmaster
the mind of every politician, both speculative and practical, in Europe.
It must be evident, however, that the mere introduction of a particular
mode of exchanging things for one another, by first exchanging a thing
for money, and then exchanging the money for something else, makes no
difference in the essential character of transactions. It is not with
money that things are really purchased. Nobody's income (except that of
the gold or silver miner) is derived from the precious metals. The
pounds or shillings which a person receives weekly or yearly, are not
what constitutes his income; they are a sort of tickets or orders which
he can present for payment at any shop he pleases, and which entitle him
to receive a certain value of any commodity that he makes choice of. The
farmer pays his laborers and his landlord in these tickets, as the most
convenient plan for himself and them; but their real income is their
share of his corn, cattle, and hay, and it makes no essential difference
whether he distributes it to them directly or sells it for them and
gives them the price; but as they would have to sell it for money if he
did not, and he is a seller at any rate, it best suits the purposes of
all, that he should sell their share along with his own, and leave the
laborers more leisure for work and the landlord for being idle. The
capitalists, except those who are producers of the precious metals,
derive no part of their income from those metals, since they only get
them by buying them with their own produce: while all other persons have
their incomes paid to them by the capitalists, or by those who have
received payment from the capitalists, and as the capitalists have
nothing, from the first, except their produce, it is that and nothing
else which supplies all incomes furnished by them. There cannot, in
short, be intrinsically a more insignificant thing, in the economy of
society, than money; except in the character of a contrivance for
sparing time and labor. It is a machine for doing quickly and
commodiously, what would be done, though less quickly and commodiously,
without it: and like many other kinds of machinery, it only exerts a
distinct and independent influence of its own when it gets out of order.
The introduction of money does not interfere with the operation of any
of the Laws of Value.... The reasons which make the temporary or market
value of things depend on the demand and supply, and their average and
permanent values upon their cost of production, are as applicable to a
money system as to a system of barter. Things which by barter would
exchange for one another, will, if sold for money, sell for an equal
amount of it, and so will exchange for one another still, though the
process of exchanging them will consist of two operations instead of
only one. The relations of commodities to one another remain unaltered
by money: the only new relation introduced, is their relation to money
itself; how much or how little money they will exchange for; in other
words, how the Exchange Value of money itself is determined. And this is
not a question of any difficulty, when the illusion is dispelled, which
caused money to be looked upon as a peculiar thing, not governed by the
same laws as other things. Money is a commodity, and its value is
determined like that of other commodities, temporarily by demand and
supply, permanently and on the average by cost of production.
In the foregoing,[2] attention has been directed mainly to the two
functions of money known (1) as the Standard or Common Denominator of
Value, and (2) as the Medium of Exchange. Concerning transactions begun
and ended on the spot nothing more need be said; but the fact of
contracts over a period of time introduces an important element--the
time element. Whenever a contract is made covering a period of time,
within which serious changes in the economic world may take place, then
difficulties may arise as to what is a just standard of payments.
Various articles might serve equally well as a standard for exchanges
performed on the spot, but it is not so when any one article is chosen
as a standard for deferred payments. Without much regard to theory, the
world has in fact used the same standard for transactions whether
settled on the spot, or whether extending over a period of time.
In order to work with perfection as a standard for deferred payments,
the article chosen as that standard should place both debtors and
creditors in exactly the same absolute, and the same relative, position
to each other at the end of a contract that they occupied at its
beginning; this implies that the chosen article should maintain the same
exchange value in relation to goods, rents, and the wages of labour at
the end as at the beginning of the contract, and it implies that the
borrower and lender should preserve the same relative position as
regards their fellow producers and consumers at the later as at the
earlier point of time, and that they have not changed this relation, one
at the loss of the other. This makes demands which any article that can
be suggested as a standard cannot satisfy. And yet it is a practical
necessity of society that some one article should in fact be selected as
the standard. The business world has thus been forced to find some
commodity which--while admittedly never capable of perfection--provides
more nearly than anything else all the essentials of a desirable
standard.
The causes which may bring about changes in the relations between goods
and labor, on the one side, and the standard, on the other, are
various. We may, for instance, compare wheat with the existing gold
standard. The quantity of gold for which the wheat will exchange is its
price. As wheat falls in value relatively to gold, it exchanges for less
gold, that is, its price falls; or, _vice versa_, gold exchanges for
more wheat, and relatively to wheat gold has risen. As one goes up, the
other term in the ratio necessarily goes down; just as certainly as a
rise in one end of a plank balanced on a log necessitates a fall in the
other end of the plank. Therefore, changes in prices can be caused by
forces affecting either the gold side or the wheat side of the ratio; by
forces affecting either the money standard or the goods compared with
that standard. Consequences of importance follow from this explanation.
First suppose that commodities and labor remain unchanged in their
production and reward, respectively; then, anything affecting the supply
of and demand for gold will affect in general the value of gold in
comparison with goods and labor. Or, second, if we suppose an
equilibrium between the demand for and supply of gold, then, prices and
wages can be affected also by anything affecting the cost of obtaining
goods or labor. It is one-sided to look for changes in prices solely
from causes touching gold, or one term of the price ratio. If, however,
it should be desired that prices should remain stationary, then this can
be brought about only by finding for the standard an article that would
automatically move in extent, and in the proper compensating direction,
so as to meet any changes in value arising not only from causes
affecting itself, but also from causes affecting labor and the vast
number of goods that may be quoted in price. No commodity ever existed
which could thus move in value.
During long periods of time--within which gains in mechanical skill and
invention, revolutions in political and social habits, changes in taste
or fashion, settlement of new countries, opening of new markets, may
take place--great alterations in the value of the standard may occur
wholly from natural causes affecting the commodity side of the price
ratio. And yet, in default of a perfect standard, persons who borrow and
lend create debts and obligations expressed in terms of that article
which has been adopted as the standard by the concurring habits of the
commercial community of which they form a part. It should be understood,
whenever men enter into obligations reaching over a period of time, that
a necessary part of the risks involved in this undertaking is the
possibility of an alteration in the exchange values of goods, on the one
hand, and in the standard metal on the other, due to industrial changes
and natural causes. This is one of the risks which belong to individual
enterprise, differing in no way from other possibilities of gain and
loss. For instance, prices rose, as indicated by an index number of 100
in 1860 to an index number of 216 in 1865. Therefore, in the United
States, in this period of rising prices the creditor lost and the debtor
gained. On the other hand, from 1865 to 1878, prices fell from 216 to
101, and in this period of falling prices the creditor gained and the
debtor lost. It is to be observed, however, that these figures refer to
actual quotations of prices during the fluctuations of our paper money.
But it is evident in such movements as these, that parties to a
time-contract must take their own chances of changes; and indeed it is
much more wholesome that they should do so.
It should be kept well in mind that it is not a proper function of
government to step in and save men from the ordinary risks of trade and
industry. It goes without saying that if changes in the value of the
standard due to natural causes take place during the continuance of a
contract, it is not the business of government to indemnify either party
to the contract. This is a matter on which every individual who enters
into time obligations must bear his own responsibility.
FOOTNOTES:
[1] John Stuart Mill, _Principles of Political Economy_, Vol. II, pp.
17-23.
[2] Adapted from _The Report of the Commission of the Indianapolis
Convention_, pp. 92, 93, 103, 104. The University of Chicago Press,
1898.
CHAPTER II
THE EARLY HISTORY OF MONEY
[3]Living in civilized communities, and accustomed to the use of coined
metallic money, we learn to identify money with gold and silver; hence
spring hurtful and insidious fallacies. It is always useful, therefore,
to be reminded of the truth, so well stated by Turgot, that every kind
of merchandise has the two properties of measuring value and
transferring value. It is entirely a question of degree what commodities
will in any given state of society form the most convenient currency,
and this truth will be best impressed upon us by a brief consideration
of the very numerous things which have at one time or other been
employed as money. Though there are many numismatists and many political
economists, the natural history of money is almost a virgin subject,
upon which I should like to dilate; but the narrow limits of my space
forbid me from attempting more than a brief sketch of the many
interesting facts which may be collected.
CURRENCY IN THE HUNTING STATE
Perhaps the most rudimentary state of industry is that in which
subsistence is gained by hunting wild animals. The proceeds of the chase
would, in such a state, be the property of most generally recognized
value. The meat of the animals captured would, indeed, be too perishable
in nature to be hoarded or often exchanged; but it is otherwise with the
skins, which, being preserved and valued for clothing, became one of the
earliest materials of currency. Accordingly, there is abundant evidence
that furs or skins were employed as money in many ancient nations. They
serve this purpose to the present day in some parts of the world.
In the book of Job (ii, 4) we read, "Skin for skin, yea, all that a man
hath will he give for his life"; a statement clearly implying that skins
were taken as the representative of value among the ancient Oriental
nations. Etymological research shows that the same may be said of the
northern nations from the earliest times. In the Esthonian language the
word _raha_ generally signifies money, but its equivalent in the kindred
Lappish tongue has not yet altogether lost the original meaning of skin
or fur. Leather money is said to have circulated in Russia as late as
the reign of Peter the Great, and it is worthy of notice, that classical
writers have recorded traditions to the effect that the earliest
currency used at Rome, Lacedaemon, and Carthage, was formed of leather.
We need not go back, however, to such early times to study the use of
rude currencies. In the traffic of the Hudson's Bay Company with the
North American Indians, furs, in spite of their differences of quality
and size, long formed the medium of exchange. It is very instructive,
and corroborative of the previous evidence to find that even after the
use of coin had become common among the Indians the skin was still
commonly used as the money of account. Thus Whymper says, "a gun,
nominally worth about forty shillings, bought twenty 'skins.' This term
is the old one employed by the company. One skin (beaver) is supposed to
be worth two shillings, and it represents two marten, and so on. You
heard a great deal about 'skins' at Fort Yukon, as the workmen were also
charged for clothing, etc., in this way."
CURRENCY IN THE PASTORAL STATE
In the next higher stage of civilization, the pastoral state, sheep and
cattle naturally form the most valuable and negotiable kind of property.
They are easily transferable, convey themselves about, and can be kept
for many years, so that they readily perform some of the functions of
money.
We have abundance of evidence, traditional, written, and etymological,
to show this. In the Homeric poems oxen are distinctly and repeatedly
mentioned as the commodity in terms of which other objects are valued.
The arms of Diomed are stated to be worth nine oxen, and are compared
with those of Glaucos, worth one hundred. The tripod, the first prize
for wrestlers in the 23rd Iliad, was valued at twelve oxen, and a woman
captive, skilled in industry, at four. It is peculiarly interesting to
find oxen thus used as the common measure of value, because from other
passages it is probable, as already mentioned, that the precious metals,
though as yet uncoined, were used as a store of value, and occasionally
as a medium of exchange. The several functions of money were thus
clearly performed by different commodities at this early period.
In several languages the name for money is identical with that of some
kind of cattle or domesticated animal. It is generally allowed that
_pecunia_, the Latin word for money, is derived from _pecus_, cattle.
From the Agamemnon of Aeschylus we learn that the figure of an ox was the
sign first impressed upon coins, and the same is said to have been the
case with the earliest issues of the Roman _As_. Numismatic researches
fail to bear out these traditions, which were probably invented to
explain the connection between the name of the coin and the animal. A
corresponding connection between these notions may be detected in much
more modern languages. Our common expression for the payment of a sum of
money is _fee_, which is nothing but the Anglo-Saxon _feoh_, meaning
alike money and cattle, a word cognate with the German _vieh_, which
still bears only the original meaning of cattle.
In the ancient German codes of law, fines and penalties are actually
defined in terms of live-stock. In the Zend Avesta, as Professor
Theodores ... informs me, the scale of rewards to be paid to physicians
is carefully stated, and in every case the fee consists in some sort of
cattle. The fifth and sixth lectures in Sir H. S. Maine's most
interesting work on _The Early History of Institutions_, which has just
been published, are full of curious information showing the importance
of live-stock in a primitive state of society. Being counted by the
head, the kine was called capitale, whence the economical term capital,
the law term chattel, and our common name cattle.
In countries where slaves form one of the most common and valuable
possessions, it is quite natural that they should serve as the medium
of exchange like cattle. Pausanias mentions their use in this way, and
in Central Africa and some other places where slavery still flourishes,
they are the medium of exchange along with cattle and ivory tusks.
According to Earl's account of New Guinea, there is in that island a
large traffic in slaves, and a slave forms the unit of value. Even in
England slaves are believed to have been exchanged at one time in the
manner of money.
ARTICLES OF ORNAMENT AS CURRENCY
A passion for personal adornment is one of the most primitive and
powerful instincts of the human race, and as articles used for such
purposes would be durable, universally esteemed, and easily
transferable, it is natural that they should be circulated as money. The
_wampumpeag_ of the North American Indians is a case in point, as it
certainly served as jewellery. It consisted of beads made of the ends of
black and white shells, rubbed down and polished, and then strung into
belts or necklaces, which were valued according to their length, and
also according to their color and luster, a foot of black _peag_ being
worth two feet of white _peag_. It was so well established as currency
among the natives that the Court of Massachusetts ordered in 1649, that
it should be received in the payment of debts among settlers to the
amount of forty shillings. It is curious to learn, too, that just as
European misers hoard up gold and silver coins, the richer Indian chiefs
secrete piles of wampum beads, having no better means of investing their
superfluous wealth.
Exactly analogous to this North American currency, is that of the cowry
shells, which, under one name or another--_chamgos_, _zimbis_, _bouges_,
_porcelanes_, etc.--have long been used in the East Indies as small
money. In British India, Siam, the West Coast of Africa, and elsewhere
on the tropical coasts, they are still used as small change, being
collected on the shores of the Maldive and Laccadive Islands, and
exported for the purpose. Their value varies somewhat, according to the
abundance of the yield, but in India the current rate used to be about
five thousand shells for one rupee, at which rate each shell is worth
about the two-hundredth part of a penny. Among our interesting
fellow-subjects, the Fijians, whale's teeth served in the place of
cowries, and white teeth were exchanged for red teeth somewhat in the
ratio of shillings to sovereigns.
Among other articles of ornament or of special value used as currency,
may be mentioned yellow amber, engraved stones, such as the Egyptian
scarabaei, and tusks of ivory.
CURRENCY IN THE AGRICULTURAL STATE
Many vegetable productions are at least as well suited for circulation
as some of the articles which have been mentioned. It is not surprising
to find, then, that among a people supporting themselves by agriculture,
the more durable products were thus used. Corn has been the medium of
exchange in remote parts of Europe from the time of the ancient Greeks
to the present day. In Norway corn is even deposited in banks, and lent
and borrowed. What wheat, barley, and oats are to Europe, such is maize
in parts of Central America, especially Mexico, where it formerly
circulated. In many of the countries surrounding the Mediterranean,
olive oil is one of the commonest articles of produce and consumption;
being, moreover, pretty uniform in quality, durable, and easily
divisible, it has long served as currency in the Ionian Islands,
Mytilene, some towns of Asia Minor, and elsewhere in the Levant.
Just as cowries circulate in the East Indies, so cacao nuts, in Central
America and Yucatan, form a perfectly recognized and probably an ancient
fractional money. Travellers have published many distinct statements as
to their value, but it is impossible to reconcile these statements
without supposing great changes of value either in the nuts or in the
coins with which they are compared. In 1521, at Caracas, about thirty
cacao nuts were worth one penny English, whereas recently ten beans
would go to a penny, according to Squier's statements. In the European
countries, where almonds are commonly grown, they have circulated to
some extent like the cacao nuts, but are variable in value, according to
the success of the harvest.
It is not only, however, as a minor currency that vegetable products
have been used in modern times. In the American settlements and the West
India Islands, in former days, specie used to become inconveniently
scarce, and the legislators fell back upon the device of obliging
creditors to receive payment in produce at stated rates. In 1618, the
Governor of the Plantations of Virginia ordered that tobacco should be
received at the rate of three shillings for the pound weight, under the
penalty of three years' hard labor. We are told that, when the Virginia
Company imported young women as wives for the settlers, the price per
head was one hundred pounds of tobacco, subsequently raised to one
hundred and fifty. As late as 1732, the legislature of Maryland made
tobacco and Indian corn legal tenders; and in 1641 there were similar
laws concerning corn in Massachusetts. The governments of some of the
West India Islands seem to have made attempts to imitate these peculiar
currency laws, and it was provided that the successful plaintiff in a
lawsuit should be obliged to accept various kinds of raw produce, such
as sugar, rum, molasses, ginger, indigo, or tobacco....
The perishable nature of most kinds of animal food prevents them from
being much used as money; but eggs are said to have circulated in the
Alpine villages of Switzerland, and dried codfish have certainly acted
as currency in the colony of Newfoundland.
MANUFACTURED AND MISCELLANEOUS ARTICLES AS CURRENCY
The enumeration of articles which have served as money may already seem
long enough for the purposes in view. I will, therefore, only add
briefly that a great number of manufactured commodities have been used
as a medium of exchange in various times and places. Such are the pieces
of cotton cloth, called _Guinea pieces_, used for traffic upon the banks
of the Senegal, or the somewhat similar pieces circulated in Abyssinia,
the Soulou Archipelago, Sumatra, Mexico, Peru, Siberia, and among the
Veddahs. It is less easy to understand the origin of the curious straw
money which circulated until 1694 in the Portuguese possessions in
Angola, and which consisted of small mats, called _libongos_, woven out
of rice straw, and worth about 1-1/2_d._ each. These mats must have had,
at least originally, some purpose apart from their use as currency, and
were perhaps analogous to the fine woven mats so much valued by the
Samoans, and also treated by them as a medium of exchange.
Salt has been circulated not only in Abyssinia, but in Sumatra, Mexico,
and elsewhere. Cubes of benzoin gum or beeswax in Sumatra, red feathers
in the Islands of the Pacific Ocean, cubes of tea in Tartary, iron
shovels or hoes among the Malagasy, are other peculiar forms of
currency. The remarks of Adam Smith concerning the use of hand-made
nails as money in some Scotch villages will be remembered by many
readers, and need not be repeated. M. Chevalier has adduced an exactly
corresponding case from one of the French coalfields.
Were space available it would be interesting to discuss the not
improbable suggestion of Boucher de Perthes, that, perhaps, after all,
the finely worked stone implements now so frequently discovered were
among the earliest mediums of exchange. Some of them are certainly made
of jade, nephrite, or other hard stones, only found in distant
countries, so that an active traffic in such implements must have
existed in times of which we have no records whatever.
There are some obscure allusions in classical authors to a wooden money
circulating among the Byzantines, and to a wooden talent used at Antioch
and Alexandria, but in the absence of fuller information as to their
nature, it is impossible to do more than mention them....
THE INVENTION OF COINING
The date of the invention of coining can be assigned with some degree of
probability. Coined money was clearly unknown in the Homeric times, and
it was known in the time of Lycurgus. We might therefore assume, with
various authorities, that it was invented in the mean time, or about 900
B. C. There is tradition, moreover, that Pheidon, King of Argos, first
struck silver money in the island of Aegina about 895 B. C., and the
tradition is supported by the existence of small stamped ingots of
silver, which have been found in Aegina. Later inquiries, however, lead
to the conclusion that Pheidon lived in the middle of the eighth century
B. C., and Grote has shown good reasons for believing that what he did
accomplish was done in Argos, and not in Aegina.
The mode in which the invention happened is sufficiently evident. Seals
were familiarly employed in very early times, as we learn from the
Egyptian paintings or the stamped bricks of Nineveh. Being employed to
signify possession, or to ratify contracts, they came to indicate
authority. When a ruler first undertook to certify the weights of pieces
of metal, he naturally employed his seal to make the fact known, just
as, at Goldsmiths' Hall, a small punch is used to certify the fineness
of plate. In the earliest forms of coinage there were no attempts at so
fashioning the metal that its weight could not be altered without
destroying the stamp or design. The earliest coins struck, both in Lydia
and in the Peloponnesus, were stamped on one side only....
FOOTNOTES:
[3] W. Stanley Jevons, _Money and the Mechanism of Exchange_, D.
Appleton and Company, New York, 1902, pp. 19-28, 54, 55.
CHAPTER III
QUALITIES OF THE MATERIAL OF MONEY
[4]Many recent writers, such as Huskisson, MacCulloch, James Mill,
Garnier, Chevalier, and Walras, have satisfactorily described the
qualities which should be possessed by the material of money. Earlier
writers seem, however, to have understood the subject almost as well....
Of all writers, M. Chevalier ... probably gives the most accurate and
full account of the properties which money should possess, and I shall
in many points follow his views.
The prevailing defect in the treatment of the subject is the failure to
observe that money requires different properties as regards different
functions. To decide upon the best material for money is thus a problem
of great complexity, because we must take into account at once the
relative importance of the several functions of money, the degree in
which money is employed for each function, and the importance of each of
the physical qualities of the substance with respect to each function.
In a simple state of industry money is chiefly required to pass about
between buyers and sellers. It should, then, be conveniently portable,
divisible into pieces of various size, so that any sum may readily be
made up, and easily distinguishable by its appearance, or by the design
impressed upon it. When money, however, comes to serve, as it will at
some future time, almost exclusively as a measure and standard of value,
the system of exchange, being one of perfected barter, such properties
become a matter of comparative indifference, and stability of value,
joined perhaps to portability, is the most important quality. Before
venturing, however, to discuss such complex questions, we must proceed
to a preliminary discussion of the properties in question, which may
thus perhaps be enumerated in the order of their importance:
1. Utility and value.
2. Portability.
3. Indestructibility.
4. Homogeneity.
5. Divisibility.
6. Stability of value.
7. Cognisability.
1. UTILITY AND VALUE
Since money has to be exchanged for valuable goods, it should itself
possess value and it must therefore have utility as the basis of value.
Money, when once in full currency, is only received in order to be
passed on, so that if all people could be induced to take worthless bits
of material at a fixed rate of valuation, it might seem that money does
not really require to have substantial value. Something like this does
frequently happen in the history of currencies, and apparently valueless
shells, bits of leather, or scraps of paper are actually received in
exchange for costly commodities. This strange phenomenon is, however, in
most cases capable of easy explanation, and if we were acquainted with
the history of every kind of money the like explanation would no doubt
be possible in other cases. The essential point is that people should be
induced to receive money, and pass it on freely at steady ratios of
exchange for other objects; but there must always be some sufficient
reason first inducing people to accept the money. The force of habit,
convention, or legal enactment may do much to maintain money in
circulation when once it is afloat, but it is doubtful whether the most
powerful government could oblige its subjects to accept and circulate as
money a worthless substance which they had no other motive for
receiving.
Certainly, in the early stages of society, the use of money was not
based on legal regulations, so that the utility of the substance for
other purposes must have been the prior condition of its employment as
money. Thus the singular _peag_ currency, or _wampumpeag_, which was
found in circulation among the North American Indians by the early
explorers, was esteemed for the purpose of adornment, as already
mentioned.... The cowry shells, so widely used as a small currency in
the East, are valued for ornamental purposes on the West Coast of
Africa, and were in all probability employed as ornaments before they
were employed as money. All the other articles [previously] mentioned
... such as oxen, corn, skins, tobacco, salt, cacao nuts, tea, olive
oil, etc., which have performed the functions of money in one place or
another, possessed independent utility and value. If there are any
apparent exceptions at all to this rule, they would doubtless admit of
explanation by fuller knowledge. We may, therefore, agree with Storch
when he says: "It is impossible that a substance which has no direct
value should be introduced as money, however suitable it may be in other
respects for this use."
When once a substance is widely employed as money, it is conceivable
that its utility will come to depend mainly upon the services which it
thus confers upon the community. Gold, for instance, is far more
important as the material of money than in the production of plate,
jewellery, watches, gold-leaf, etc. A substance originally used for many
purposes may eventually serve only as money, and yet, by the demand for
currency and the force of habit, may maintain its value. The cowry
circulation of the Indian coasts is probably a case in point. The
importance of habit, personal or hereditary, is at least as great in
monetary science as it is, according to Mr. Herbert Spencer, in morals
and sociological phenomena generally.
There is, however, no reason to suppose that the value of gold and
silver is at present due solely to their conventional use as money.
These metals are endowed with such singularly useful properties that, if
we could only get them in sufficient abundance, they would supplant all
the other metals in the manufacture of household utensils, ornaments,
fittings of all kinds, and an infinite multitude of small articles,
which are now made of brass, copper, bronze, pewter, German silver, or
other inferior metals and alloys.
In order that money may perform some of its functions efficiently,
especially those of a medium of exchange and a store of value, to be
carried about, it is important that it should be made of a substance
valued highly in all parts of the world, and, if possible, almost
equally esteemed by all peoples. There is reason to think that gold and
silver have been admired and valued by all tribes which have been lucky
enough to procure them. The beautiful lustre of these metals must have
drawn attention and excited admiration as much in the earliest as in the
present times.
2. PORTABILITY
The material of money must not only be valuable, but the value must be
so related to the weight and bulk of the material, that the money shall
not be inconveniently heavy on the one hand, nor inconveniently minute
on the other. There was a tradition in Greece that Lycurgus obliged the
Lacedaemonians to use iron money, in order that its weight might deter
them from overmuch trading. However this may be, it is certain that iron
money could not be used in cash payments at the present day, since a
penny would weigh about a pound, and instead of a five-pound note, we
should have to deliver a ton of iron. During the last century copper was
actually used as the chief medium of exchange in Sweden; and merchants
had to take a wheelbarrow with them when they went to receive payments
in copper _dalers_. Many of the substances used as currency in former
times must have been sadly wanting in portability. Oxen and sheep,
indeed, would transport themselves on their own legs; but corn, skins,
oil, nuts, almonds, etc., though in several respects forming fair
currency, would be intolerably bulky and troublesome to transfer.
The portability of money is an important quality not merely because it
enables the owner to carry small sums in the pocket without trouble, but
because large sums can be transferred from place to place, or from
continent to continent, at little cost. The result is to secure an
approximate uniformity in the value of money in all parts of the world.
A substance which is very heavy and bulky in proportion to value, like
corn or coal, may be very scarce in one place and over-abundant in
another; yet the supply and demand cannot be equalised without great
expense in carriage. The cost of conveying gold or silver from London to
Paris, including insurance, is only about four-tenths of one per cent.;
and between the most distant parts of the world it does not exceed from
2 to 3 per cent.
Substances may be too valuable as well as too cheap, so that for
ordinary transactions it would be necessary to call in the aid of the
microscope and the chemical balance. Diamonds, apart from other
objections, would be far too valuable for small transactions. The value
of such stones is said to vary as the square of the weight, so that we
cannot institute any exact comparison with metals of which the value is
simply proportional to the weight. But taking a one-carat diamond (four
grains) as worth L15, we find it is, weight for weight, 460 times as
valuable as gold. There are several rare metals, such as iridium and
osmium, which would likewise be far too valuable to circulate. Even gold
and silver are too costly for small currency. A silver penny now weighs
7-1/4 grains, and a gold penny would weigh only half a grain. The pretty
octagonal quarter-dollar tokens circulated in California are the
smallest gold coins I have seen, weighing less than four grains each,
and are so thin that they can almost be blown away.
3. INDESTRUCTIBILITY
If it is to be passed about in trade, and kept in reserve, money must
not be subject to easy deterioration or loss. It must not evaporate like
alcohol, nor putrefy like animal substances, nor decay like wood, nor
rust like iron. Destructible articles, such as eggs, dried codfish,
cattle, or oil, have certainly been used as currency; but what is
treated as money one day must soon afterwards be eaten up. Thus a large
stock of such perishable commodities cannot be kept on hand, and their
value must be very variable. The several kinds of corn are less subject
to this objection, since, when well dried at first, they suffer no
appreciable deterioration for several years.
4. HOMOGENEITY
All portions of specimens of the substance used as money should be
homogeneous, that is, of the same quality, so that equal weights will
have exactly the same value. In order that we may correctly count in
terms of any unit, the units must be equal and similar, so that twice
two will always make four. If we were to count in precious stones, it
would seldom happen that four stones would be just twice as valuable as
two stones. Even the precious metals, as found in the native state, are
not perfectly homogeneous, being mixed together in almost all
proportions; but this produces little inconvenience, because the assayer
readily determines the quantity of each pure metal present in any ingot.
In the processes of refining and coining, the metals are afterwards
reduced to almost exactly uniform degrees of fineness, so that equal
weights are then of exactly equal value.
5. DIVISIBILITY
Closely connected with the last property is that of divisibility. Every
material is, indeed, mechanically divisible, almost without limit. The
hardest gems can be broken, and steel can be cut by harder steel. But
the material of money should be not merely capable of division, but the
aggregate value of the mass after division should be almost exactly the
same as before division. If we cut up a skin or fur the pieces will, as
a general rule, be far less valuable than the whole skin or fur, except
for a special intended purpose; and the same is the case with timber,
stone, and most other materials in which reunion is impossible. But
portions of metal can be melted together again whenever it is desirable,
and the cost of doing this, including the metal lost, is in the case of
precious metals very inconsiderable, varying from 1/4_d._ to 1/2_d._ per
ounce. Thus, approximately speaking, the value of any piece of gold or
silver is simply proportional to the weight of fine metal which it
contains.
6. STABILITY OF VALUE
It is evidently desirable that the currency should not be subject to
fluctuations of value. The ratios in which money exchanges for other
commodities should be maintained as nearly as possible invariable on the
average. This would be a matter of comparatively minor importance were
money used only as a measure of values at any one moment, and as a
medium of exchange. If all prices were altered in like proportion as
soon as money varied in value, no one would lose or gain, except as
regards the coin which he happened to have in his pocket, safe, or bank
balance. But, practically speaking, as we have seen, people do employ
money as a standard of value for long contracts, and they often maintain
payments at the same variable rate, by custom or law, even when the real
value of the payment is much altered. Hence every change in the value of
money does some injury to society.
It might be plausibly said, indeed, that the debtor gains as much as the
creditor loses, or vice versa, so that on the whole the community is as
rich as before; but this is not really true. A mathematical analysis of
the subject shows that to take any sum of money from one and give it to
another will, on the average of cases, injure the loser more than it
benefits the receiver. A person with an income of one hundred pounds a
year would suffer more by losing ten pounds than he would gain by an
addition of ten pounds, because the degree of utility of money to him is
considerably higher at ninety pounds than it is at one hundred and ten.
On the same principle, all gaming, betting, pure speculation, or other
accidental modes of transferring property involve, on the average, a
dead loss of utility. The whole incitement to industry and commerce and
the accumulation of capital depends upon the expectation of enjoyment
thence arising, and every variation of the currency tends in some degree
to frustrate such expectation and to lessen the motives for exertion.
7. COGNISABILITY
By this name we may denote the capability of a substance for being
easily recognised and distinguished from all other substances. As a
medium of exchange, money has to be continually handed about, and it
will occasion great trouble if every person receiving currency has to
scrutinize, weigh, and test it. If it requires any skill to discriminate
good money from bad, poor ignorant people are sure to be imposed upon.
Hence the medium of exchange should have certain distinct marks which
nobody can mistake. Precious stones, even if in other respects good as
money, could not be so used, because only a skilled lapidary can surely
distinguish between true and imitation gems.
Under cognisability we may properly include what has been aptly called
_impressibility_, namely, the capability of a substance to receive such
an impression, seal, or design, as shall establish its character as
current money of certain value. We might more simply say, that the
material of money should be coinable, so that a portion, being once
issued according to proper regulations with the impress of the state,
may be known to all as good and legal currency, equal in weight, size,
and value to all similarly marked currency....
FOOTNOTES:
[4] W. Stanley Jevons, _Money and the Mechanism of Exchange_, pp. 29-39.
D. Appleton & Company, New York, 1902.
CHAPTER IV
LEGAL TENDER[5]
The essential idea of "legal tender" is that quality given to money by
law which obliges the creditor to receive it in full satisfaction of a
past debt when expressed in general terms of the money of a country. A
debt is a sum of money due by contract, express or implied. When our
laws, for instance, declare that United States notes are legal
tender--and this is the only complete designation of a legal-tender
money--for "all debts public and private," it must be understood that
this provision does not cover any operations not arising from contract.
Current buying and selling do not make a situation calling for legal
tender; a purchaser cannot compel the delivery of goods over a counter
by offering legal-tender money for them, because, as yet, no debt has
been created.[6]
Contracts made in general terms of the money units of the country must
necessarily often be interpreted by the courts. The existence of
contracts calling for a given sum of dollars and the necessity of
adjudicating and enforcing such contracts, require that there should be
an accurate legal interpretation of what a dollar is. As every one
knows, the name, or unit of account, is affixed to a given number of
grains of a specified fineness of a certain metal. This being the
standard, and this having been chosen by the concurring habits of the
business world, it is fit that the law should designate that, when only
dollars are mentioned in a contract, it should be satisfied only by the
payment of that which is the standard money of the community.
Since prices and contracts are expressed in terms of the standard
article, it is clear that the legal-tender quality should not be equally
affixed to different articles having different values, but called by the
same name. This method would be sure to bring confusion, uncertainty,
and injustice into trade and industry. No one who had made a contract
would know in what he was to be paid. The legal-tender quality, then,
should be confined to that which is the sole standard. And it is also
obvious that when a standard is satisfactorily determined upon, and when
various effective media of exchange, like bank notes, checks, or bills
of exchange, have sprung up, the legal-tender quality should not be
given to these instruments of convenience. They are themselves expressed
in, and are resolvable into, the standard metal; so the power to satisfy
debts should be given not to the shadow, but to the substance, not to
the devices drawn in terms of the standard, but only to the standard
itself, even though, as a matter of fact, nine-tenths of the debts and
contracts are actually settled by means of these devices. So long as
these instruments are convertible into, and thus made fully equal to,
the standard in terms of which they are drawn, they will be used by the
business community for the settlement of debts without being made a
legal tender. And whenever they are worth less than the standard they
certainly should not be made a legal tender, because of the injustice
which in such a case they would work.
Having shown that the legal-tender quality is only a necessary legal
complement of the choice of a standard, it will not be difficult to see
that the state properly chooses an article fit to have the legal-tender
attribute for exactly the reasons that governed the selection of the
same article as a standard. The whole history of money shows that the
standard article was the one which had utility to the community using
it. As the evolution of the money commodity went on from cattle to
silver and gold, so the legal-tender provisions naturally followed this
course.
A state may select a valueless commodity as a standard, but that will
not make it of value to those who would already give nothing for it; and
so, it may give the legal-tender quality to a thing which has become
valueless, but that will not of itself insure the maintenance of its
former value. This proposition may, at first, appear to be opposed to a
widely-spread belief; but its soundness can be fully supported. It
should be learned that a commodity, or a standard, holds its value for
reasons quite independent of the fact that it is given legal
recognition. It has happened that legal recognition has been given to it
because it possessed qualities that gave it value to the commercial
world, and not that it came to have these qualities and this value
because it was made a legal tender.
A good illustration of this truth is to be found in international trade.
Money which is not dependent on artificial influences for its value, and
which is not redeemable in something else, is good the world over at its
actual commercial value, not at its value as fixed by any legal-tender
laws. It is not the legal-tender stamp that gives a coin its value in
international payments. A sovereign, an eagle, a napoleon, is constantly
given and received in international trade not because of the stamp it
bears, but because of the number of grains of a given fineness of gold
which it contains--the value of which is determined in the markets of
the world. And an enormous trade among the great commercial countries
goes on easily and effectively without regard to the legal-tender laws
of the particular country whose coins are used.
By imposing the attribute of legal tender, however, upon a given metal
or money, it may be believed that thereby a new demand is created for
that metal, and that its value is thus controlled. And in theory there
is some basis for this belief. It is, of course, true that, in so far as
giving to money a legal-tender power creates a new demand for it (which
without that power would not have existed) an effect upon its value can
be produced. But this effect is undoubtedly much less than is usually
supposed. It must be remembered that the value of gold, for instance, is
affected by world influences; that its value is determined by the demand
of the whole world as compared with the whole existing supply in the
world. In order to affect the value of gold in any one country, a demand
created by a legal-tender enactment must be sufficient to affect the
world-value of gold. Evidently the effect will be only in the proportion
that the new demand bears to the whole stock in the world. It is like
the addition of a barrel of water to a pond; theoretically the surface
level is raised, but not to any appreciable extent.
It may now be permissible to examine into the extent to which a demand
is created by legal-tender laws. If the article endowed with a
legal-tender power is already used as the standard and as a medium of
exchange, it is given no value which it did not have before. The customs
and business habits of a country alone determine how much of the
standard coin will be carried about and used in hand-to-hand purchases,
and how much of the business will be performed by other media of
exchange, such as checks or drafts. The decision of a country to adopt
gold--when it had only paper before, as was the case in Italy--would
create a demand for gold to an extent determined by the monetary habits
of that country; and this demand has an effect, as was said, only in the
proportion of this amount to the total supply in the world. This
operation arises from choosing gold as the standard of prices and as the
medium of exchange. To give this standard a legal-tender power in
addition does not increase the demand for it, because the stamp on the
coin does not in any way alter the existing habits of the community as
to the quantity of money it will use.
But in case an equal power to pay debts is given to fixed quantities of
two metals, while each quantity so fixed has a different metallic value
but the same denomination in the coinage, Gresham's law is set in
operation with the result that the cheaper metal becomes the standard.
After this change has been accomplished, the legal tender has no
value-giving force. When the cheaper metal has become the standard, its
legal-tender quality does not raise the value of the coin beyond the
value of its content. This cheaper standard, in international trade,
would be worth no more in the purchase of goods because it bore the
stamp of any one country. Prices must necessarily be adjusted between
the relative values of goods and the standard with which they are
compared. If the standard is cheaper, prices will be higher,
irrespective of legal-tender acts. Where two metals are concerned, then,
the only effect of a legal-tender clause is an injurious one, in that
the metal which is overvalued drives out that which is under-valued.
The example of an inconvertible paper, such as our United States notes
(greenbacks) in 1862-1879, is still more conclusive. Although a full
legal tender for all debts public and private, their value steadily sank
until they were at one time worth only 35 cents in gold. In California,
moreover, these notes, although legal-tender, were even kept out of
circulation by public opinion. In short, the value of inconvertible
paper can be but little affected by legal-tender powers. Its value is
more directly governed, as in the case of token coins, by the
probabilities of redemption.[7] As bearing on the point that the value
of the paper was more influenced by the chances of redemption than by
legal-tender laws, we may cite the sudden fluctuations in the value of
our United States notes during the Civil War. With no change in the
legal-tender quality and no change in the indebtedness which might be
paid with such notes, their value frequently rose or fell many per cent.
in a single day owing to reports of Federal successes or defeats in
battle, which had a tendency to affect one way or the other the public
estimate of the probabilities of an early resumption of specie payments.
The fact that they were legal tender evidently had no effect whatever in
maintaining their value.
In view of the evident fact that legal-tender acts do not preserve the
value of money, it is clear that the demand created by such legislation
must be insignificant. And this must be so in principle as well as in
fact.
There is but one thing which the legal-tender quality enables money to
do which it could not equally well do without being a legal tender; that
is, to pay past debts. An examination, however, shows that this use of
money is very small compared with its other uses. The amount of past
debts coming due and which might be paid in any year, month or day is
insignificant when compared with the total transactions of that year,
month or day--so very small as to lose all measurable value-giving
power. In other words, the one thing which legal-tender money can surely
do in spite of the habits, wishes or prejudices of the business
community in which it exists, namely, cancel past debt, is
infinitesimally small when compared with those other things which man
wishes money to do for him. It is for this reason that it ceases to give
value, and this is why history has shown so many instances where money
endowed with legal-tender power has become utterly valueless. The
legal-tender money is no longer money if it will not secure for man the
things which are most important for his welfare, if it will not buy
food, clothes and shelter; for it performs none of the functions of
money except the subsidiary one of cancelling past debts.
Moreover, the obligatory uses of legal-tender money are in fact very
inconsiderable. A law requiring a past debt to be satisfied with money
of a certain kind has for its essence only the payment of something of a
definite value, or its equivalent; in practice, it does not even bring
about the actual use of a legal money, since the monetary habits of the
community will not necessarily require the debt to be paid in such
money. Take the extreme case of a judgment by a court against a
defendant for fulfilment of a contract; in such an example, of all
others, it would be supposed that legal money would be exacted. But even
here, the judgment would most probably be satisfied by the attorney's
check, or at most by a certified check. If such media of exchange are of
common usage in the community they will be resorted to in practice even
for legal-tender payments.
The necessity of paying that which would be mutually satisfactory to
payer and payee also makes clear why the existence of a legal-tender
money does not necessarily cause its actual use in payments. The
business habits of the community are stronger than legislative powers.
Business men will not as a rule take advantage of a legal-tender act to
pay debts in a cheaper money, if they look forward to remaining in
business. For, if, by taking advantage of legal devices they defraud the
creditor, they cannot expect credit again from the same source; and
since loans are a necessity of legitimate modern trade, such action
would ruin their credit and cut them off from business activity in the
future. Gold was not driven out of circulation by paper money during the
years 1862-1879 in California, because the sentiment of the business
public was against the use of our depreciated greenback currency; and a
discrimination was made against merchants who resorted to the use of
paper.
Explanation has been given of the principles according to which
legal-tender laws should be applied, if at all. It is not wholly clear
that there is any reason for their existence. It may now be well to
indicate briefly the origin of legal-tender provisions. It can scarcely
be doubted that their use arose from the desire of defaulting monarchs
to ease their indebtedness by forcing upon creditors a debased coinage.
Having possession of the mints, the right of coinage vesting in the
lord, the rulers of previous centuries have covered the pages of history
with the records of successive debasements of the money of account. The
legal-tender enactment was the instrument by which the full payment of
debts was evaded. There would have been no reason for debasing coins, if
they could not be forced upon unwilling creditors. It is, therefore,
strange indeed that, in imitation of monarchical morals of a past day,
republican countries should have thought it a wise policy to clothe
depreciated money with a nominal value for paying debts. Although the
people are now sovereign, they should not embrace the vices of mediaeval
sovereignty for their own dishonest gain in scaling debts.
FOOTNOTES:
[5] _Report of the Monetary Commission of the Indianapolis Convention_,
pp. 131-7. The Hollenbeck Press, Indianapolis, 1900.
[6] "A contract payable in money generally is, undoubtedly, payable in
any kind of money made by law legal tender, at the option of the debtor
at the time of payment. He contracts simply to pay so much money, and
creates a debt pure and simple; and by paying what the law says is money
his contract is performed. But, if he agrees to pay in gold coin, it is
not an agreement to pay money simply, but to pay or deliver a specific
kind of money and nothing else; and the payment in any other is not a
fulfilment of the contract according to its terms or the intention of
the parties." 25 California 564, Carpenter _vs._ Atherton.
[7] For a contrary view, see Joseph French Johnson, _Money and
Currency_, Chapter 13.--EDITOR.
CHAPTER V
THE GREENBACKS
THE GREENBACK ISSUES
[8]The greenbacks were an outgrowth of the Civil War. Soon after the
opening of the struggle the Secretary of the Treasury negotiated a loan
of $150,000,000 with Eastern banks. Partly because of Confederate
successes and partly because of the failure of Secretary Chase to adopt
a firm policy of loans supported by taxation, public credit greatly
declined, and Government bonds became almost unsaleable. The outlook
became alarming and depositors withdrew gold from the New York banks in
such large amounts that specie payments were suspended, December 30,
1861. In February, 1862, Congress provided for the issue of $150,000,000
in United States notes or greenbacks. Bond sales proceeded slowly and a
second issue of $150,000,000 of notes was authorised in July of the same
year. As a result of "military necessity" a third issue of $100,000,000
was authorised January 17, 1863, and temporarily increased March 3 to
$150,000,000. Provision was made for the reissue of the greenbacks and
$400,000,000 were outstanding at the close of the war.
THE FLUCTUATING PREMIUM ON GOLD
Depreciation of the greenbacks occurred at once and the value of gold as
expressed in greenbacks was subject to almost constant change. During
the year 1862 the premium varied from 2 to 32; in 1863 from 25 to 60;
and in 1864 from 55 to 185. Among the most important political and
economic factors which caused these fluctuations may be mentioned:
(1) The increase in the amount of the greenbacks. Each new issue was
reflected in a rise in the premium.
(2) The condition of the treasury. The annual reports of the Secretary
of the Treasury were anxiously awaited and their appearance caused a
rise or fall of the premium according as the condition of the finances
seemed gloomy or hopeful.
(3) Ability of the Government to borrow. The fate of a loan indicated
public confidence or distrust.
(4) Changes in the officials of the treasury department. Secretary
Chase's resignation, July 1, 1864, depressed the currency decidedly.
(5) War news. Every victory raised the price of currency and every
defeat depressed it.
From 1862 to 1865 the premium on gold and the median of relative prices
correspond so well that one cannot resist the conclusion that these
changes were mainly due to a common cause, which can hardly be other
than the varying esteem in which the notes of the Government that
constituted the standard money of the country were held. If this
conclusion be accepted, it follows that the suspension of specie
payments and the legal-tender acts must be held almost entirely
responsible for all the far-reaching economic disturbances following
from the price upheaval which it is our task now to trace in detail.
THE EFFECTS OF GREENBACKS UPON WAGES
Statistical evidence supports unequivocally the common theory that
persons whose incomes are derived from wages suffer seriously from a
depreciation of the currency. The confirmation seems particularly
striking when the conditions other than monetary affecting the labour
market are taken into consideration. American workingmen are intelligent
and keenly alive to their interests. There are probably few districts
where custom plays a smaller and competition a larger role in
determining wages than in the Northern States. While labor organisations
had not yet attained their present power, manual laborers did not fail
to avail themselves of the help of concerted action in the attempt to
secure more pay. Strikes were frequent. All these facts favored a speedy
readjustment of money wages to correspond with changed prices. But more
than all else, a very considerable part of the labor supply was
withdrawn from the market into the army and navy. In 1864 and 1865 about
one million of men seem to have been enrolled. About one-seventh of the
labor supply withdrew from the market. But despite all these favoring
circumstances, the men who stayed at home did not succeed in obtaining
an advance in pay at all commensurate with the increase in living
expenses. Women on the whole succeeded less well than men in the
struggle to readjust money wages to the increased cost of living.
It is sometimes argued that the withdrawal of laborers from industrial
life was the chief cause of the price disturbances of the war period.
This withdrawal, it is said, caused the advance of wages, and greater
cost of labor led to the rise of prices. The baselessness of this view
is shown by two well established facts--first, that the advance of wages
was later than the advance of prices, and second, that wages continued
to rise in 1866 after the volunteer armies had been disbanded and the
men gone back to work.
Wage-earners, however, seem to have been more fully employed during the
war than in common times of prosperity. Of course, the enlistment of so
many thousands of the most efficient workers made places for many who
might otherwise have found it difficult to secure work. Moreover, the
paper currency itself tended to obtain full employment for the laborer,
for the very reason that it diminished his real income. In the
distribution of what Marshall has termed the "national dividend" a
diminution of the proportion received by the laborer must have been
accompanied by an increase in the share of some one else. Nor is it
difficult to determine who this person was. The beneficiary was the
active employer, who found that the money wages, interest, and rent he
had to pay increased less rapidly than the money prices of his products.
The difference between the increase of receipts and the increase of
expenses swelled his profits. Of course, the possibility of making high
profits provided an incentive for employing as many hands as possible.
After an examination of the change in the condition of the great mass of
wage-earners, it may seem surprising that few complaints were heard
from them of unusual privations. This silence may be due in part to the
fact that a considerable increase of money income produces in the minds
of many a fatuous feeling of prosperity, even though it be more than
offset by an increase of prices. But doubtless the chief reason is to be
found in the absorption of public interest in the events of the war. The
people both of the South and North were so vitally concerned with the
struggle that they bore without murmuring the hardships it entailed of
whatever kind. Government taxation that under other circumstances might
have been felt to be intolerable was submitted to with cheerfulness. The
paper currency imposed upon wage-earners a heavier tax--amounting to
confiscation of perhaps a fifth or a sixth of real incomes. But the
workingmen of the North were receiving considerably more than a bare
subsistence minimum before the war, and reduction of consumption was
possible without producing serious want. Accordingly the currency tax,
like the tariff and the internal revenue duties, was accepted as a
necessary sacrifice to the common cause and paid without protest by
severe retrenchment.
RENT
URBAN RENTS
In studying the influence of depreciation upon rent, it is necessary to
use that term in its popular rather than in its scientific sense. This
fact is less to be lamented, because the theorist himself admits that
the distinction becomes sadly blurred when he attempts to deal with
short intervals of time. Capital once invested in improvements can
seldom be withdrawn rapidly. In "the short run," therefore, it is
practically a part of the land, and the return to it follows the analogy
of rent rather than of interest.
The renting landlord found that the degree in which he was affected by
the fluctuations in the value of the paper money depended largely upon
the terms of the contract into which he had entered. It is clear from a
careful examination that the landlord who before suspension had leased
his property for a considerable period without opportunity for
revaluation must have suffered severely if paid in greenbacks. The
number of "dollars" received as rental might be the same in 1865 as in
1860, but their purchasing power was less than one-half as great.
Somewhat less hard was the situation of the landlord who had let his
property for but one or two years. At the expiration of the leases he
had opportunities to make new contracts with the tenants.
In his capacity as special commissioner of the revenue, Mr. David A.
Wells devoted some attention to the rise of rent. His report for
December, 1866, says:
The average advance in the rents of houses occupied by
mechanics and laborers in the great manufacturing centres of
the country is estimated to have been about 90 per cent.; in
some sections, however, a much greater advance has been
experienced, as for example, at Pittsburgh, where 200 per
cent. and upward is reported. In many of the rural
districts, on the other hand, the advance has been much
less. Mr. Wells later modified this estimate somewhat.
The advance in rents was greater in cities than in minor towns. In some
cities--_e. g._, Cincinnati and Louisville--owners of workingmen's
tenements appear to have been able to increase their money incomes
rather more rapidly than prices advanced, but in Boston, Philadelphia,
St. Louis, and in smaller towns, their money incomes appear to have
increased more slowly than living expenses. These conclusions rest,
however, on a narrow statistical basis.
FARM RENTS
The rural landowner suffered serious injury from the paper currency when
he let his land for a money rent. But renting farms for a fixed sum of
money has always been less common in the United States than renting for
a definite share of the products. It is probable that at the time of the
Civil War more than three-quarters of the rented farms were let "on
shares." Inasmuch as no money payments entered into such arrangements,
the pecuniary relations of landlord and tenant were not directly
affected by the change in the monetary standard. Farm owners who had let
their places on these conditions escaped the direct losses that weighed
so heavily on the recipients of money rents. But even they did not avoid
all loss. For the price of agricultural products for the greater part
of the war period lagged considerably behind the price of other goods.
This difference, of course, meant loss to men whose incomes were paid in
bushels of grain.
INTEREST AND LOAN CAPITAL
THE PROBLEM OF LENDERS AND BORROWERS OF CAPITAL
The task of ascertaining the effect of the greenback issues upon the
situation of lenders and borrowers of capital is in one respect more
simple and in another respect more complex than the task of dealing with
wage-earners. It is simpler in that there are not different grades of
capital to be considered like the different grades of labor. But it is
more complex in that the capitalist must be considered not only as the
recipient of a money income, as is the laborer, but also as the
possessor of certain property that may be affected by changes in the
standard money.
The problem is further complicated by the fact that the relative
importance of these two items--rate of interest and value of
principal--is not the same in all cases. Whether a lender is affected
more by the one item or the other depends upon what he intends to do
with his property at the expiration of existing contracts. A widow left
in 1860 with an estate of say $10,000, who expected to keep this sum
constantly at interest and to find new borrowers as soon as the old
loans were paid, could neglect everything but the net rate of interest
received. On the other hand, if this estate had been left to a youth of
twenty who intended to invest his property in some business after a few
years, the rate of interest would be of relatively less importance to
him than the purchasing power of the principal when the time came to set
up for himself.
Of course, the same difference exists in the case of different
borrowers. Those borrowers who expected to renew old loans on maturity
would have to consider little beyond the interest demanded by lenders,
while borrowers who expected to pay off the loans out of the proceeds of
their ventures would be interested primarily in the amount of goods that
would sell for sufficient money to make up the principal.
Although these two classes of cases are by no means independent of each
other, the following discussion will be rendered clearer by observing
the broad difference between them. Accordingly, attention will first be
directed to the effect of the price fluctuations upon the purchasing
power of the principal of loans, and afterward to changes in the rate of
interest.
PURCHASING POWER OF THE PRINCIPAL OF LOANS
Most persons who made loans in the earlier part of the Civil War and
were repaid in greenbacks must have suffered heavy losses from the
smaller purchasing power of the principal when it was returned to them.
But while this general fact is clear, it is difficult to make a
quantitative statement of the degree of the loss that will be even
tolerably satisfactory.
In the case of almost all loans made before the middle of 1864 and
repaid prior to 1866, the creditor found that the sum returned to him
had a purchasing power much less than the purchasing power that had been
transferred to the borrower when the loan was made. This decline varied
from 1 to more than 50 per cent. On loans made in the middle of 1864 or
later, on the contrary, the creditor gained as a rule. In the case of
loans made in January, 1865, and repaid six months later, the increase
in purchasing power was over 40 per cent.
THE RATE OF INTEREST
In turning to study the fortunes of men who have no thought of employing
their capital for themselves, but expect to seek new borrowers as
rapidly as old loans are repaid, one finds it necessary to distinguish
between cases where loans have been made for short and for long terms;
between the cases, that is, where there is and where there is not an
opportunity to make a new contract regarding the rate of interest. The
latter cases may be dismissed with a word. The capitalist who lent
$10,000 for five years in April, 1862, at 6 per cent. interest, would be
in relatively the same position as the workingman who received no
advance in money wages; while his money income remained the same, the
rise of prices would decrease his real income in 1864 and 1865 by about
one-half. Of course, this loss to the creditor is a gain to the debtor;
for to the business man using borrowed capital the advance of prices
means that he can raise his interest money by selling a smaller
proportion of his output.
More interesting is the case of loans maturing and made afresh during
the period under examination. The important question is: How far did the
lender secure compensation for the diminished purchasing power of the
money in which he was paid by contracting for a higher rate of interest?
The advance in the rate of interest was comparatively small--much too
small to compensate for the increased cost of living. While prices rose
approximately 85 per cent. and money wages somewhat less than 60 per
cent. during the years 1860-65, rates of interest on call and time loans
increased less than 15 per cent. during the same period.
The conclusion is not only that persons who derived their income from
capital lent at interest for short terms were injured by the issues of
the greenbacks, but also that their injuries were more serious than
those suffered by wage-earners.
To explain this state of affairs is not easy. The first reason that
suggests itself to the mind considering the problem is that both lenders
and borrowers failed to foresee the changes that would take place in the
purchasing power of money between the dates when loans were made and
repaid. No doubt there is much force in this explanation. If, for
instance, men arranging for loans in April, 1862, to be repaid a year
later, had known that in the meantime the purchasing power of money
would decline 30 per cent., they would have agreed upon a very high rate
of interest. Men able to discern the future course of prices would not
have lent money at the ordinary rates, and if the rates prevailing in
the New York market throughout all 1862 and 1863 were less than 7 per
cent., it must have been because the extraordinary rise of prices was
not foreseen by borrowers and lenders.
Nor is it surprising that business men failed to see what was coming;
for the course of prices depended chiefly upon the valuation set upon
the greenbacks, and this valuation, in turn, depended chiefly upon the
state of the finances and the fortunes of war--matters that no one could
foresee with certainty. Indeed, there was much of the time a very
general disposition to take an unwarrantedly optimistic view of the
military situation and the chances of an early peace. Many members of
the business community seem to have felt that the premium on gold was
artificial and must soon drop, that prices were inflated and must
collapse. To the extent that such views prevailed borrowers would be
cautious about making engagements to repay money in a future that might
well present a lower range of prices, and lenders would expect a gain
instead of a loss from the changes in the purchasing power of money.
But the full explanation of the slight advance in interest cannot be
found in this inability to foresee the future--at least not without
further analysis of what consequences such inability entailed.
Workingmen are commonly credited with less foresight than capitalists,
and nevertheless they seem, according to the figures, to have succeeded
better in making bargains with employers of labour than did lenders with
employers of capital. The explanation of this less success seems to be
found in the difference between the way in which depreciation affected
what the capitalist and the laborer had to offer in return for interest
and wages. There is no reason for assuming that an artisan who changed
employers during the war would render less efficient service in his new
than in his old position, or that a landlord who changed tenants had
less advantages to put at the disposal of the incoming lessee. In both
these cases the good offered to the active business man remained
substantially the same, and it may safely be assumed that, other things
being equal, this business man could afford to give quite as much for
the labor and the land after as before suspension. From the business
man's point of view, therefore, there seems to have been room for a
doubling of money wages and rent when the purchasing power of money had
fallen one-half. But in the case of the borrower of capital the like was
not true. The thousand dollars which Mr. A offered him in 1865 was not,
like the labour of John Smith or the farm of Mr. B, as efficient for his
purposes as it would have been five years before. For, with the thousand
dollars he could not purchase anything like the same amount of
machinery, material, or labor. And since the same nominal amount of
capital was of less efficiency in the hands of the borrower, he could
not without loss to himself increase the interest which he paid for new
loans in proportion to the decline in the purchasing power of money, as
he could increase the wages of laborers or the rent for land.
It should also be pointed out that on one important class of loans
capitalists suffered comparatively little even during the war. Interest
on many forms of Government bonds was paid in gold. Capitalists who
invested their means in these securities consequently received an income
of almost unvarying specie value. If the person who made these
investments were an American, he would be able to sell his gold-interest
money at a high premium, but he would also have to pay correspondingly
high prices for commodities, so that upon the whole his position would
not be greatly different from that of the foreign investor. That such
opportunities for investment as these securities offered should exist
when men were most of the time loaning money for short terms at 7 per
cent. or less, is perhaps the most emphatic proof that could be offered
of the inability of the public to foresee what the future had in store.
PROFITS
Laborers, landlords, and lending capitalists are all alike in that the
amount of remuneration received by them for the aid which they render to
production is commonly fixed in advance by agreement, and is not
immediately affected by the profitableness or unprofitableness of the
undertaking. It remains to examine the economic fortunes of those men
whose money incomes are made up by the sums left over in any business
after all the stipulated expenses have been met.
A very important part of the solution of the problem of profits has
already been contributed by the preceding studies of wages, rent, and
interest. The evidence has been found to support the conclusion that in
almost all cases the sums of money wages, rent, and interest received by
laborers, landlords, and capitalists increased much less rapidly than
did the general price level. If the wording of this conclusion be
reversed--the prices of products rose more rapidly than wages, rent, or
interest--we come at once to the proposition that as a rule profits
must have increased more rapidly than prices. For, if the sums paid to
all the other co-operating parties were increased in just the same ratio
as the prices of the articles sold, it would follow that, other things
remaining the same, money profits also would increase in the same ratio.
But if, while prices doubled, the payments to labourers, landlords, and
capitalists increased in any ratio less than 100 per cent., the sums of
money left for the residual claimants must have more than doubled. In
other words, the effect of the depreciation of the paper currency upon
the distribution of wealth may be summed up in the proposition: The
shares of wage-earners, landowners, and lenders in the national dividend
were diminished and the share of residual claimants was increased.
Two other general propositions respecting profits are suggested. First,
other things being equal, profits varied inversely as the average wage
per day paid to employees. This conclusion follows directly from the
fact that the money wages of men earning $1-$1.49 per day before the
perturbation of prices increased in higher ratio than those of men
earning $1.50-$1.99; that the wages of the latter class increased more
than the wages of men in the next higher wage class, etc. Second, other
things being equal, profits varied directly as the complexity of the
business organization. By this proposition is meant, for example, that a
farmer who paid money rent, used borrowed capital, and employed hired
labourers, made a higher percentage of profits than a farmer of whom any
one of these suppositions did not hold true. If, as has been argued, the
increase of profits was made at the expense of laborers, landlords, and
capitalists, it follows that that _entrepreneur_ fared best whose
contracts enabled him to exploit the largest number of these other
persons.
PROFITS IN AGRICULTURE
The farmers of the loyal states were among the unfortunate producers
whose products rose in price less than the majority of other articles,
and from this standpoint they were losers rather than gainers by the
paper currency. Of course, it is possible that the farmer's loss from
this inequality of price fluctuations might be more than offset by his
gains at the expense of labourers, landlord, and lending capitalist.
But there is good reason for believing that the increase of the
_entrepreneur's_ profits in the latter fashion was less in farming than
in any other important industry. This conclusion seems to follow from
the proposition that, other things being equal, profits varied directly
as the complexity of business organization. The American farmers of the
Civil War were in a large proportion of cases their own landlords,
capitalists, and laborers. So far as this was true, they had few
important pecuniary contracts with other persons of which they could
take advantage by paying in depreciated dollars. Of those farmers who
hired labor very many paid wages partly in board and lodging--an
arrangement which threw a considerable part of the increased cost of
living upon them instead of upon their employees. Finally, the renting
farmer probably gained less on the average from the contract with his
landlord than tenants of any other class, because in a majority of cases
the rent was not a sum of money, but a share of the produce. While,
then, the general effect of the paper standard was in the direction of
increasing profits, it seems very doubtful whether farmers as a whole
did not lose more than they gained because of the price disturbances.
STATISTICAL EVIDENCE REGARDING PROFITS
It would be highly desirable to test our general conclusions by means of
direct information regarding profits made in various branches of trade,
but the data available for such a purpose are very meager. What scraps
of information are available, however, support the view that profits
were uncommonly large. Mr. David A. Wells, for example, in his reports
as special commissioner of the revenue, has stories of "most anomalous
and extraordinary" profits that were realized in the paper, woolen,
pig-iron, and salt industries. A more general indication of the
profitableness of business is afforded by the remark in the annual
circular of Dun's Mercantile Agency for 1864, that "it is generally
conceded that the average profits on trade range from 12 to 15 per
cent."
But the most important piece of evidence is found in the statistics of
failures compiled by the same agency. The following table shows Dun's
report of the number of bankruptcies and the amount of liabilities in
the loyal States from the panic year 1857 to the end of the war:
_Year_ _Number_ _Liabilities_
1857 4,257 $265,500,000
1858 3,113 73,600,000
1859 2,959 51,300,000
1860 2,733 61,700,000
1861 5,935 $178,600,000
1862 1,652 23,000,000
1863 495 7,900,000
1864 510 8,600,000
1865 500 17,600,000
The very great decrease both in the number and the liabilities of firms
that failed is the best proof that almost all business enterprises were
"making money."
From one point of view the small number of failures is surprising. An
unstable currency is generally held to make business unsafe, and seldom
has the standard money of a mercantile community proven so unstable,
undergone such violent fluctuations in so short a time, as in the United
States during the Civil War. Yet, instead of being extremely hazardous,
business seems from the statistics of failures to have been more than
usually safe.
The explanation of the anomaly seems to be that the very extremity of
the danger proved a safeguard. Business men realized that the inflation
of prices was due to the depreciation of the currency, and that when the
war was over gold would fall and prices follow. They realized very
clearly the necessity of taking precautions against being caught in a
position where a sudden decline of prices would ruin them. They did this
by curtailing credits. So long as prices continued to rise such
precautions were really not needed by the man in active business except,
in so far as he was a creditor of other men; but when prices commenced
to fall prudence had its reward. Such a sudden and violent drop of
prices as occurred between January and July, 1865, would have brought a
financial revulsion of a most serious character upon a business
community under ordinary circumstances. But so well had the change been
prepared for, that the number of failures was actually less than it had
been in the preceding year of rapidly rising prices.
The whole situation can hardly be explained better than it was by a New
York business man writing in _Harper's Monthly Magazine_: "When the war
ended," he said, "we all knew we should have a panic. Some of us, like
Mr. Hoar, expected that greenbacks and volunteers would be disbanded
together. Others expected gold to fall to 101 or 102 in a few days.
Others saw a collapse of manufacturing industry, owing to the cessation
of Government purchases. But we all knew a 'crisis' was coming, and
having set our houses in order accordingly, the 'crisis' of course never
came."
THE PRODUCTION AND CONSUMPTION OF WEALTH
PRODUCTION
What influence did the greenback currency have as one of the many
factors that affected the production of wealth? In the first place, the
paper standard was responsible in large measure for the feeling of
"prosperity" that seems from all the evidence to have characterized the
public's frame of mind. Almost every owner of property found that the
price of his possessions had increased, and almost every wage-earner
found that his pay was advanced. Strive as people may to emancipate
themselves from the feeling that a dollar represents a fixed quantity of
desirable things, it is very difficult for them to resist a pleasurable
sensation when the money value of their property rises or their incomes
increase. They are almost certain to feel cheerful over the larger sums
that they can spend, even though the amount of commodities the larger
sums will buy is decreased. Habit is too strong for arithmetic.
But, more than this, "business" in the common meaning of the word was
unusually profitable during the war. The "residual claimant" is in most
enterprises the active business man, and, as has been shown, his money
income did as a rule rise more rapidly than the cost of living. In other
words, "business" was, in reality as well as in appearance, rendered
more profitable by the greenbacks. There is therefore no error in saying
that the business of the country enjoyed unwonted prosperity during the
war. And it may be added that the active business man is probably a more
potent factor in determining the community's feeling about "good times"
and "bad times" than is the workingman, the landlord, or the lending
capitalist.
The effect of high profits, however, is not limited to producing a
cheerful frame of mind among business men. Under ordinary circumstances
one would say that when the great majority of men already in business
are "making money" with more than usual rapidity they will be inclined
to enlarge their operations, that others will be inclined to enter the
field, and that thus the production of wealth will be stimulated. But
the circumstances of the war period were not ordinary and this
conclusion cannot be accepted without serious modifications.
1. It has been shown that business men realised the precariousness of
all operations that depended for their success upon the future course of
prices--and nearly all operations that involved any considerable time
for their consummation were thus dependent. So far did this disposition
prevail that it produced a marked curtailment in the use of credit. The
prudent man might be willing to push his business as far as possible
with the means at his own disposal, but he showed a disinclination to
borrow for the purpose. Thus the uncertainty which all men felt about
the future in a large measure counteracted the influence of high profits
in increasing production.
2. The foregoing consideration of course weighed most heavily in the
minds of cautious men. But not all business men are cautious. Among many
the chance of winning large profits in case of success is sufficient to
induce them to undertake heavy risks of loss. On the whole, Americans
seem to display a decided propensity toward speculative ventures and are
not easily deterred by having to take chances. To men of this type it
seems that the business opportunities offered by the fluctuating
currency would make a strong appeal. But, while the force of this
observation may be admitted, it does not necessitate a reconsideration
of the conclusion that the instability of prices tended to diminish the
production of wealth. For in a time of great price fluctuations the
possibilities of making fortunes rapidly are much greater in trade than
in agriculture, mining, or manufactures. Every rise and fall in
quotations holds out an alluring promise of quick gain to the man who
believes in his shrewdness and good fortune, and who does not hesitate
to take chances. The probable profits of productive industry in the
narrower sense might be larger than common, but this would not attract
investors in large numbers if the probable profits of trading were
larger yet; and such seems clearly to have been the case during the war
when the paper currency offered such brilliant possibilities to
fortunate speculators in gold, in stocks, or in commodities. Instead,
then, of the greenbacks being credited with stimulating the production
of wealth, they must be charged with offering inducements to abandon
agriculture and manufactures for the more speculative forms of trade.
This tendency of the times did not escape observation. On the contrary,
it was often remarked and lamented in terms that seem exaggerated. Hugh
McCulloch, for instance, in his report as Secretary of the Treasury for
1865, said:
There are no indications of real and permanent prosperity
... in the splendid fortunes reported to be made by skilful
manipulations at the gold room or the stock board; no
evidences of increasing wealth in the facts that railroads
and steamboats are crowded with passengers, and hotels with
guests; that cities are full to overflowing, and rents and
the necessities of life, as well as luxuries, are daily
advancing. All these things prove rather ... that the number
of non-producers is increasing, and that productive industry
is being diminished.
In one of his reports as special commissioner of the revenue, Mr. Wells
said:
During the last few years large numbers of our population,
under the influence and example of high profits realized in
trading during the period of monetary expansion, have
abandoned employments directly productive of national
wealth, and sought employments connected with commerce,
trading, or speculation. As a consequence we everywhere find
large additions to the population of our commercial cities,
an increase in the number and cost of the buildings devoted
to banking, brokerage, insurance, commission business, and
agencies of all kinds, the spirit of trading and speculating
pervading the whole community, as distinguished from the
spirit of production.
Within the period under review, then, it seems very doubtful whether the
high profits had their usual effect of leading to a larger production
of raw materials or to an increase in manufactures. The prudent man
hesitated to expand his undertakings because of the instability of the
inflated level of prices; the man with a turn for speculative ventures
found more alluring opportunities in trade.
CONSUMPTION
No one can read contemporary comments on American social life of the
later years of the war without being impressed by the charges of
extravagance made against the people of the North. Newspapers and
pulpits were at one in denouncing the sinful waste that, they declared,
was increasing at a most alarming rate. The "shoddy aristocracy" with
its ostentatious display of wealth became a stock subject for
cartoonists at home, and earned a well-merited reputation for vulgarity
abroad.
In trying to account for this unpleasant phase of social development,
men usually laid the blame upon the paper standard. High prices were
said to make every one feel suddenly richer and so to tempt every one to
adopt a more lavish style of living than his former wont. Thus the view
gained general credence that the greenbacks were ultimately responsible
for a great increase in the consumption of wealth.
However, such a view regarding the consumption of wealth can be but
partially true. The enormous profits of _entrepreneurs_ made possible
the rapid accumulation of an unusual number of fortunes, and the
families thus lifted into sudden affluence enjoyed spending their money
in the ostentatious fashion characteristic of the newly rich. It is
therefore true that the monetary situation was largely responsible for
the appearance of a considerable class of persons--of whom the fortunate
speculator and the army contractor are typical--who plunged into the
recklessly extravagant habits that called down upon their heads the
condemnation of the popular moralist.
But if the greenbacks were in the last resort a chief cause of the
increased consumption of articles of luxury by families whom they had
aided in enriching, they were not less truly a cause of restricted
consumption by a much larger class of humbler folk. The laboring man
whose money wages increased but one-half, while the cost of living
doubled, could not continue to provide for his family's wants so fully
as before. He was forced to practise economies--to wear his old clothing
longer, to use less coffee and less sugar, to substitute cheaper for
better qualities in every line of expenditure where possible. Similar
retrenchment of living expenses must have been practised by the families
of many owners of land and lenders of capital. In other words, the war
time fortunes resulted in a very large measure from the mere transfer of
wealth from a wide circle of persons to the relatively small number of
residual claimants to the proceeds of business enterprises. The enlarged
consumption of wealth which the paper currency made possible for the
fortunate few was therefore contrasted with a diminished consumption on
the part of the unfortunate many on whose slender means the greenbacks
levied contributions for the benefit of their employers.
That the diminished consumption of wealth by large numbers of poor
people escaped general notice, while the extravagance of the newly rich
attracted so much attention, need not shake one's confidence in the
validity of these conclusions. The purchase of a fast trotting-horse by
a Government contractor, and the elaborateness of his wife's gowns and
jewelry, are much more conspicuous facts than the petty economies
practised by his employees. The same trait that leads fortunate people
to flaunt their material prosperity in the eyes of the world leads the
unfortunate to conceal their small privations. Even an attentive
observer may fail to notice that the wives of workingmen are still
wearing their last year's dresses and that the children are running
barefoot longer than usual.
But though the newspapers were not full of comments on the enforced
economies of the mass of the population, wholesale dealers in staple
articles of food and clothing noticed a decrease in sales. In reviewing
the trade situation in September, 1864. when real wages were near their
lowest ebb, Hunt's _Merchants' Magazine_ remarked that "the rise in the
prices of commodities has ... outrun the power of consumption and the
fall trade has been almost at a stand. Those articles such as coffee,
sugar, low grade goods, which form the staple products of the great mass
of the people in moderate circumstances, have reached such high rates
that the decline in consumption is very marked, amounting almost to a
stagnation of the fall trade." The consumption of many articles of
luxury increased very greatly, while the consumption of many staple
articles declined.
THE GREENBACKS AND THE COST OF THE CIVIL WAR
The reader who goes back to the debates upon the legal-tender bills will
find that most of the unfortunate consequences that followed their
enactment were foretold in Congress--the decline of real wages, the
injury done creditors, the uncertainty of prices that hampered
legitimate business and fostered speculation. But a majority of this
Congress were ready to subject the community to such ills because they
believed that the relief of the treasury from its embarrassments was of
more importance than the maintenance of a relatively stable monetary
standard.
GREENBACKS AND EXPENDITURES
What effect had the greenbacks upon the amount of expenditures incurred?
Few questions raised by the legal-tender acts have attracted more
attention than this. Even while the first legal-tender bill was being
considered its critics declared that if made a law it would increase the
cost of waging the war by causing an advance in the prices of articles
that the Government had to buy. As the war went on the soundness of this
view became apparent.
When the war was over and the divers reasons that had deterred many men
from criticizing the financial policy of the government were removed,
competent writers began to express similar views with freedom. For
example, Mr. C. P. Williams put the increase of debt at one-third to
two-fifths; S. T. Spear, at a billion dollars; L. H. Courtney, an
English critic, at nearly $900,000,000. Of later discussions that of H.
C. Adams has attracted the most attention. He estimated that of the
gross receipts from debts created between January 1, 1862, and
September 30, 1865, amounting to $2,565,000,000 the gold value was but
$1,695,000,000--a difference of $870,000,000 between value received and
obligations incurred.
A detailed consideration of the elements that enter the problem would
seem to warrant a reduction of the estimates given to $791,000,000. It
is hardly necessary to insist strenuously that this is but a very rough
estimate.
THE GREENBACKS AND RECEIPTS
The total increase of receipts was approximately $174,000,000, as shown
in the following table:
(In millions of dollars)
_1862_ _Fiscal Year_ _1866_
_(Six Months) 1863 1864 1865 (Two Months)_
Current receipts:
From customs 33.5 69.1 102.3 84.9 31.3
From sales of public lands .1 .2 .6 1.0 .1
From direct tax 1.8 1.5 .5 1.2 .0
From miscellaneous sources .5 3.0 47.5 33.0 12.3
From internal revenue ... 37.6 109.7 209.5 64.4
---- ----- ----- ----- -----
35.9 111.4 260.6 329.6 108.1
Estimated actual increase 0 10 39 106 19
The caution is hardly necessary that the above results are to be
accepted subject also to a wide margin of error.
There were other financial consequences of the shift from the specie to
the paper standard, however, that were not unimportant, though they were
indirect and difficult to gauge. Two of the most prominent must be
indicated.
1. It is probable that not a little of the lavishness with which public
funds were appropriated by Congress during the war can be traced to the
paper-money policy.
2. If the paper currency tempted the Government to reckless
expenditures, it also predisposed the people to submit more willingly to
heavy taxation. It has been remarked several times that the advance of
money wages and of money prices made most people feel wealthier, and,
feeling wealthier, they were less inclined to grumble over the taxes.
While these indirect effects of the paper currency on expenditures and
receipts could not by any system of bookkeeping be brought to definite
quantitative statement, it is probable that their net result was
unfavorable to the treasury.
CONTRACTION AND INFLATION OF THE LEGAL TENDERS[9]
The policy of a permanent currency of government legal-tender paper at
the close of the Civil War was unknown. Upwards of four hundred million
notes of the United States were, it is true, in circulation at the
return of peace. There were doubtless many individuals who approved the
continuance of exactly this form of currency. But no such proposition
had been advanced by any public man of influence or by any political
organization. That the resort to legal-tender powers was an evil
justified only by extreme emergency, and that the circulation of
government notes in any form was a purely temporary measure, were the
unanimous convictions of the statesmen who contrived the system. The
logical inference that these Government notes would be paid off and
cancelled, as soon as the war deficiency had ended, was publicly
accepted.
Such was the theory and purpose of the public men through whom the
Legal-Tender Act was constructed and applied. Nor is the general
position of our statesmen, at the close of the Civil War, any more
obscure than their original position. The first financial resolution
adopted by Congress, in December, 1865, was an explicit promise to
retire the legal tenders. The first legislation of that Congress gave
discretionary powers to the Secretary of the Treasury for continuous
contraction. Very few legislative victories are won without at least a
temporary popular endorsement, and the votes of December, 1865, and of
March, 1866, were no exceptions. But the popular approval of contraction
in that year, exception as it was to all our subsequent legislation, is
readily enough explained. Public opinion, when the war ended, was
governed by impatience with inflated prices; inflation far beyond the
European level, and properly ascribed to the condition of the currency.
The cost of living reached during 1865 the highest point recorded in
this country's history. From 1860 to 1865, inclusive, the average of
European prices rose only 4 to 6 per cent.; average prices in the
United States advanced, in the same period, no less than 116 per cent.
With flour at $16 a barrel, butter at 55 cents a pound, coal at $10 a
ton, and wages and salaries advanced since 1860 hardly one-third as far
as prices, the demand for currency reform obtained ready endorsement
from the people.
This popular sentiment was further strengthened by the Administration's
attitude at the opening of Lincoln's second term. Mr. McCulloch's first
official Treasury report, dated December 4, 1865, took positive ground
for the reduction of the legal-tender debt. He asked authority to issue
bonds in his discretion, at 6 per cent. or less, "for the purpose of
retiring not only the compound interest notes, but the United States
notes."
Two weeks after the publication of this report, on December 18, 1865,
the House of Representatives resolved, by a vote of 144 to 6,
that this house cordially concurs in the view 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
this country will permit; and we hereby pledge co-operative
action to this end as speedily as practicable.
This resolution of 1865, however, marked the climax of the movement.
Never thereafter did the policy of retiring the legal-tender notes even
approach success. The truth is, that the inflated prices had begun
already, during the three months after the resolution of December, to
recede. This was inevitable, from the very nature of the previous
expansion; and it was a welcome movement to consumers. But it
necessarily caused some derangement in the plans of trade, and
politicians began to ask, when they had to face the fulfilment of their
pledge through a formal act of Congress, how the contraction policy
would be greeted by producers. The bill, as originally introduced,
granted full powers to the Secretary of the Treasury to issue new bonds
for the retirement both of interest-bearing and of noninterest-bearing
debt. In the spring of 1866 this measure was defeated in the House of
Representatives by a vote of 70 to 64. Reconsidered and amended so as to
restrict contraction of the legal tenders to $10,000,000 in the first
six months and to $4,000,000 per month thereafter, the compromise
measure did indeed pass the House by 83 to 53, and the Senate by 32 to
7. But a victory thus won was ominous. Mr. McCulloch himself declared
the amended act to be awkward and ineffective. Still more significant
was the character of opposition developed in the course of the debate.
It had a dozen varying grounds of argument, most of them pretty certain
to appeal to popular prejudice later on. Some Congressmen objected to
the discretionary powers as revolutionary, and, while conceding Mr.
McCulloch's ability and conservatism, pointed out that a very different
Treasury Secretary might succeed him. Others pronounced the notion of
immediate resumption of specie payments to be "Utopian in the extreme."
Much was heard of the comfortable theory that if Congress would "allow
things to go on without active interference," the "natural development
of events" would automatically bring about resumption. More than one
legislator could not understand, "when we have $450,000,000 [debt]
bearing no interest, and which need bear no interest, why it is to be
taken up and put into bonds." The excellence of a circulating medium
"that rests on the property of the whole country, and has for its
security the faith and patriotism of the greatest and freest country on
the face of the globe," played its usual part in the discussion; so did
the argument that "the amount of legal tenders now outstanding is not
too much for the present condition of the country." In short, all the
arguments which have been made familiar by the twenty subsequent years
of controversy, cut a figure in this opening discussion.
As a matter of fact, even the restricted powers of note retirement
granted under the law of March, 1866, were revoked within two years.
Little or no progress had meantime been made towards resumption of
specie payments. The Secretary himself had officially pointed out that
two commercial influences must be removed before resumption would be
possible; the excessively high prices in the United States and the heavy
balance of foreign trade against us. But prices continued above the
European level, and, as a consequence, export of merchandise was checked
and imports greatly stimulated. The entire gold product of each year in
the United States was sent abroad.
Contraction of the inflated currency, even if pursued under the
limitations of the Act of 1866, would in time have brought about
conditions under which resumption might have been planned. But events
outside of the United States now moved in such a way as to turn the
entire financial community against the Secretary's policy. Hardly two
months after the vote of March came a wholly unexpected crisis in the
foreign money markets. The London collapse, precipitated by the
Overend-Gurney failure of May, 1866, was in some respects as complete as
any in the history of England. It affected every nation with which Great
Britain had commercial dealings; not least of all the United States, of
whose securities it was estimated that European investors even then held
$600,000,000. During three months the Bank of England kept its minimum
discount rate at the panic figure of 10 per cent.; the consequent sudden
recall of foreign capital put a heavy strain on the American markets.
With the familiar disposition of the trade community to lay the blame
for disordered markets on some move of public policy, the Treasury's
operations to reduce outstanding notes were made the scapegoat.
Politicians with an eye to popularity were quick to catch this drift of
public sentiment. Some of them honestly believed that McCulloch's action
in the currency was the cause of the trade distress; others, better
informed but equally politic, avoided personal declaration of opinion,
but characteristically announced that whether the theory was correct or
not, the public believed it, and that in deference to the public,
currency contraction ought to cease. The usual result ensued. Under the
previous question, and without debate, a measure revoking absolutely the
Secretary's power of contraction passed the House of Representatives in
December, 1867, by a vote of 127 to 32. In the Senate there was an able
show of opposition, but it was plainly put on the defensive, and on
January 22, 1868, the resolution passed both chambers in its original
and final shape.
This was the end of the McCulloch plan. It was the end of all serious
debate upon resumption, for at least six years. It was also, and very
logically, the beginning of the fiat-money party. The Republicans were
forced into open defence of sound financial principles by the very
recklessness of their opponents. Helped by the great personal prestige
of its candidate, General Grant, the Republican party won a sweeping
victory. President Johnson, who was then at open odds with his party,
had produced in his Annual Message of December 7, 1868, the
extraordinary suggestion that "the 6 per cent. interest now paid by the
Government" on its debt "should be applied to the reduction of the
principal in semi-annual instalments"; in other words, that the plan of
repudiating interest obligations--since adopted, with no agreeable
results, by Turkey and Greece--should be formally approved by the United
States. This remarkable utterance was first condemned by an overwhelming
vote in both House and Senate; next, by an almost equally decisive vote,
on March 3, 1869, Congress adopted the Public Credit Act, promising coin
redemption of both notes and bonds, solemnly pledging its faith "to make
provision, at the earliest practicable period, for the redemption of the
United States notes in coin."
The promise was as easily made as the similar pledge of December, 1865;
was still more easily broken. No such arrangement was made, nor any
serious attempt in that direction, until the matter was forced on the
party by the exigency of politics. Not only was no effort made to reduce
outstanding legal tenders, but the supply in circulation was heavily
increased; rising from $314,704,000 in the middle of 1869 to
$346,168,000 in 1872, and two years later, as a result of the Treasury's
weak experiments in the panic, to $371,421,000.
This period was congenial to such juggling with public credit and
legislative pledges. Socially, financially, and politically, it stands
out quite apart from any other decade of the century. Moral sense for a
time seemed to have deteriorated in the whole community; it was a sorry
audience, at Washington or elsewhere, to which to address appeals for
economy, retrenchment, and rigid preservation of the public faith. The
Government's financial recklessness was readily imitated by the
community at large; debt was the order of the day in the affairs of
both. As the period approached its culmination, foreign trade reflected
the nature of the situation. Merchandise imports in the fiscal year 1871
rose $84,000,000 over 1870; in 1872 they increased $106,000,000 over
1871. This movement was the familiar warning of an approaching crash;
but the warning fell on deaf ears, as it usually does. In 1873 the house
of cards collapsed.
The panic of 1873 left the country's financial and commercial structure
almost a ruin. It had, however, several ulterior results so valuable
that it is not wholly unreasonable to describe the wreck of credit as a
blessing in disguise. American prices, long out of joint with the
markets of the world, and thoroughly artificial in themselves, were
certain to be eventually brought down. This very liquidating process
served a useful double purpose; it disclosed the nation's true
resources, and it placed the United States on equal footing with the
commercial world at large. With the bursting of the bubble of inflated
debt and inflated prices, the excessive importations ceased.
Simultaneously the export trade, which had halted during 1872, in spite
of the continued agricultural expansion, rose to proportions never
before approached in our commercial history. In 1874, the balance of
foreign trade turned permanently in our favor. By 1876, even the
continuous outflow of gold was checked. In short, the two conditions
fixed by Hugh McCulloch, ten years before, as indispensable to
resumption of specie payments, had now been realized.
Congress was not by any means disposed, however, to seize the
opportunity. The first result of the money market crisis in 1873, as in
all similar years, was urgent public clamor for more currency. The
Supreme Court had decided finally, in 1871, for the constitutionality of
the legal tenders; the Secretary of the Treasury, in 1873, had so far
yielded to the prevalent excitement as to reissue legal-tender notes
already formally retired. The first response of Congress, therefore, was
an inflation measure. By a vote of 140 to 102 in the House of
Representatives, and of 29 to 24 in the Senate, a law was passed for the
permanent increase of the legal-tender currency, by $18,000,000. The
Republican party controlled Congress by unusually large majorities; but
60 per cent. of the party's vote in each chamber was cast in favor of
the bill. Only the interposition of Grant's Presidential veto prevented
this first positive backward step in the direction of fiat money.
It is reasonable to suppose that this curious vote of the Administration
party, which occurred in April, 1874, measured the party's political
desperation. They were about to receive, in the Congressional elections,
the usual chastisement experienced by a dominant party when the people
vote in a period of hard times; the inflation act was an anchor thrown
desperately to windward. The experiment was in all respects a failure.
Even the party's own State conventions failed to say a good word for the
inflation bill, and it gained no mitigation of sentence in the November
vote.
PASSAGE OF THE RESUMPTION ACT[10]
The Forty-third Congress had three months of existence left to it after
the vote of November, 1874. Already defeated overwhelmingly at the
polls, it had nothing to risk by a move in sound-money legislation, and
possibly much to gain. It used this three-months' period to enact a law
of the first importance, not only to the nation, but to the Republican
party's future history--a law which must fairly be described, however,
under the circumstances of the time, as an expression of death-bed
repentance. This was the Specie-Resumption Act, drawn up by a party
committee, and submitted to Congress, in December, 1874, by Senator John
Sherman. It fixed the date for resumption of specie payments at January
1, 1879, provided for the reduction of legal-tender notes from
$382,000,000 to $300,000,000, but made no provision for any further
retirement of the notes. It went through Congress on January 7, 1875. It
was contended by some that under the Resumption Act of 1875 there could
be no reissue of the greenbacks once received into the Treasury.
Inflationist successes of 1877-1878 settled this uncertainty, as
Congress, May 31, 1878, ordered that there be no further destruction of
greenbacks. The amount then outstanding was $346,681,000--the volume of
legal tenders still current.
THE STRUGGLE FOR RESUMPTION[11]
The Resumption Act is one of the most curious laws in financial history.
It was plain in its requirement that on and after January 1, 1879, the
Treasury should "redeem in coin the United States legal-tender notes
then outstanding, on their presentation for redemption"; but it left the
Treasury to make whatever arrangements it might choose. The law, it is
true, conferred ample powers. In order "to prepare and provide for the
redemption in this Act authorized or required," it empowered the
Secretary of the Treasury "to use any surplus revenues, from time to
time, in the Treasury not otherwise appropriated, and to issue, sell,
and dispose of bonds of the United States at not less than par in coin."
This power was perpetual.
The Law of 1875 involved the double problem of providing for resumption
at the stipulated date, and of maintaining it afterward. It is the first
of these undertakings, which we shall now sketch. There were, as we have
already seen, two influences at work in 1875, which made possible the
achievement as it would not have been in 1866. These influences--the
shifting of the foreign trade balance in favor of the United States and
the subsequent check to gold exports--were factors on which no finance
minister could have reckoned. Both in fact developed after the passage
of the Resumption Law. But even after allowing for these accidental
commercial advantages, the credit for the return to specie payments on
January 1, 1879, belongs individually and without dispute to John
Sherman.
As one of the authors of the Resumption Act, Mr. Sherman was responsible
both for its virtues and its vices. His appointment to the Treasury,
therefore, in the Administration under which resumption must by law be
carried out, was entirely logical. Yet the practical efficiency of Mr.
Sherman, in an administrative office, could not then have been foretold.
The Secretary's previous career, though useful and industrious, had been
marred by weaknesses which did not promise well. As a legislator, he
belonged to the school of compromisers who have indirectly been
responsible, in a score of critical emergencies, for the gravest
mischief in our history.
But Mr. Sherman was not the first of public men to show that the faults
or weakness of a legislator, whose purpose is to obtain enactment of a
policy, will sometimes disappear in the administrator, who presses
settled policies into execution. As Secretary he was unwavering in
pursuit of the resumption goal; practical, resolute, and adroit in the
means employed. It was in the face of the repudiation clamor that he
declared officially for payment of the Government bonds in gold. Equally
distinct was the Secretary's public declaration that the Act of 1875
conferred the power to issue bonds after, as well as before, resumption;
another precedent which did invaluable service sixteen years afterward.
To say that Secretary Sherman's management of the Treasury achieved
during his time precisely the results proposed, and achieved them
promptly, is to concede his administration's practical success. Nor were
these results attained through extravagance or waste. In his refunding
and resumption operations, Mr. Sherman placed the bonds of the United
States on better terms than any of his predecessors.
ARRANGEMENTS FOR RESUMPTION[12]
The Secretary of the Treasury now put the final touches on his
arrangements for resumption. Partly by accident and partly through
stress of circumstances, the Treasury gold reserve was defined, in later
years, at a fixed and arbitrary minimum. The theory adopted by Mr.
Sherman, however, in his early operations, was different and undoubtedly
better. Following probably the practice of the Bank of England, he fixed
his reserve at 40 per cent. of outstanding notes--"the smallest
reserve," he wrote to Congress, "upon which resumption could be
prudently commenced and successfully maintained." On this basis he held
in the Treasury, on December 31, 1878, $114,193,000 gold in excess of
outstanding gold certificates, which was a trifle over 40 per cent. of
the Government notes then circulating outside the Treasury. Of this gold
reserve, $95,500,000 had been obtained through sale of bonds, part of
the coin being procured in Europe.
There remained now to be settled only the formal machinery of exchange
between the Treasury and outside institutions. If the Treasury had left
the banks to pursue unchanged their policy of keeping special gold
deposits, the Government reserve would have been at once imperilled. If
the banks had continued to present their individual drafts for
redemption across the counter of the Sub-Treasury, any timid or
blundering banker might have started a general drain of gold. Against
these possibilities Mr. Sherman now took measures. He secured the
admission of the New York Sub-Treasury as a member of the
clearing-house. At New York and Boston the clearing-houses modified
their rules, agreed to abolish "gold deposits" after January 1st, and to
accept the legal tenders freely in discharge of balances against one
another and against the Government. At the same time, the requirement of
coin payment of customs duties was revoked, and public officers were
directed to receive coin or legal tenders at the payer's option--a move
of obvious propriety, since refusal to take notes in payment would
merely send the importer to the Treasury's redemption office to convert
them into coin. All these preliminaries had been formally and positively
settled before the close of 1878. On December 17th, the premium on gold
disappeared, for the first time since 1861; on January 1st, specie
payments were quietly resumed.
SHOULD THE GREENBACKS BE RETIRED?
[13]Let us now consider for a moment an issue which twenty years ago was
urgently pertinent, was in fact the very crux of so-called "currency
reform," and which still persists as a live issue in the minds of some
of the veteran "reformers" of those days, although the conditions which
then gave it point have long since disappeared.
In the middle nineties, when it was estimated that the total gold stock
of the entire country was only about 600 million dollars and less than
200 millions of this was in the vaults of the treasury, the
Government's fiduciary currency, consisting of 346 millions of
greenbacks and 400 millions or more of overvalued silver, presented
beyond question a serious menace to the country's monetary standard. It
meant that the treasury had outstanding currency obligations payable in
gold to the extent of three or four times its own gold holdings, and
amounting to far more than all of the gold in the country, including the
holdings of the treasury, the banks, and the general public. At that
time fluctuations in the trade balance of a single year sometimes almost
equalled the treasury's gold holdings in amount, and it was quite
conceivable, in fact not improbable, that a sudden unfavorable change in
that balance might drain the treasury of all of its gold, and leave the
country with a currency standard of depreciated silver or paper. This
was the situation which continually menaced Mr. Cleveland's second
administration, causing great financial anxiety and forcing the treasury
during those years of peace and normal expenditures to borrow 262
million dollars in gold in order to replenish its continually dwindling
reserve. Such a situation inevitably led the advocates of monetary
legislation in the nineties to place first and foremost among their
proposals the necessity of getting rid of the precarious greenback, and
most of the plans proposed by bankers' associations, chambers of
commerce, and financial experts generally at that time emphasized the
urgency of this measure.
WHY RETIREMENT IS NOT IMPORTANT
It sometimes happens that, with the lapse of time and with changed
conditions, infirmities, long left untreated, cure themselves, and so it
has been with the one-time bothersome greenback. Twenty years ago, when
the outstanding greenbacks amounted to twice the gold holdings of the
treasury and to much more than half of the country's entire gold stock,
there was abundant reason for anxiety on account of their continued
circulation. The situation is utterly different to-day. Gold has
accumulated in the treasury beyond the wildest "dreams of avarice" of
the nineties. From less than 200 millions in the middle nineties the
treasury's gold holdings have grown to approximately 1,250 millions
to-day, and the estimated gold stock of the country has increased from
600 to more than 1,800 millions, despite the fact that the Director of
the Mint in 1907 reduced the estimate for gold in circulation by 135
millions as compared with the basis of previous years.
The greenback has thus become each year a relatively less important
element in our currency system, an element of ever less and less potency
for harm. Doubtless the absolute amount of outstanding greenbacks has
diminished considerably through loss and destruction during fifty years,
and is to-day far less than the $346,000,000 issued during the Civil
War, which are still carried as an obligation on the Government
books....
The greenbacks are less menacing to-day for the further reason that they
are being rapidly transformed into small denominations which are
absorbed in the general circulation, and which could only with great
difficulty be collected in sufficiently large amounts to cause a serious
drain upon the treasury through presentation for redemption.... So great
and continuous is the demand for notes of small denominations that one
may safely predict that in another decade practically all of the
greenbacks still in existence will be in small denominations in the
pockets of the people.
The "endless chain" with its ineffectual bond issues, the imminence of
specie suspension, and the fear of treasury bankruptcy will never again
result from the outstanding greenbacks. Their dangers, lurid and
nerve-racking though they were twenty years ago, are now only memories.
THE CONFEDERATE CURRENCY[14]
The financial system adopted by the Confederate Government was
singularly simple and free from technicalities. It consisted chiefly in
the issue of treasury notes enough to meet all the expenses of the
Government, and in the present advanced state of the art of printing
there was but one difficulty incident to this process; namely, the
impossibility of having the notes signed in the Treasury Department, as
fast as they were needed. There happened, however, to be several
thousand young ladies in Richmond willing to accept light and
remunerative employment at their homes, and as it was really a matter
of small moment whose name the notes bore, they were given out in sheets
to these young ladies, who signed and returned them for a consideration.
I shall not undertake to guess how many Confederate treasury notes were
issued. Indeed, I am credibly informed by a gentleman who was high in
office in the Treasury Department, that even the Secretary himself did
not certainly know. It was clearly out of the power of the Government
ever to redeem the notes, and whatever may have been the state of
affairs within the treasury, nobody outside its precincts ever cared to
muddle his head in an attempt to get at exact figures.
We knew only that money was astonishingly abundant. Provisions fell
short sometimes, and the supply of clothing was not always as large as
we should have liked, but nobody found it difficult to get money enough.
It was to be had almost for the asking. And to some extent the abundance
of the currency really seemed to atone for its extreme badness. Money
was so easily got, and its value was so utterly uncertain, that we were
never able to determine what was a fair price for anything. We fell into
the habit of paying whatever was asked, knowing that to-morrow we should
have to pay more.
Speculation became the easiest and surest thing imaginable. The
speculator saw no risks of loss. Every article of merchandise rose in
value every day, and to buy anything this week and sell it next was to
make an enormous profit quite as a matter of course. So uncertain were
prices, or rather so constantly did they tend upward, that when a cargo
of cadet gray cloths was brought into Charleston once, an officer in my
battery, attending the sale, was able to secure enough of the cloth to
make two suits of clothes, without any expense whatever, merely by
speculating upon an immediate advance. Naturally enough, speculation
soon fell into very bad repute, and the epithet "speculator" came to be
considered the most opprobrious in the whole vocabulary of invective.
The feeling was universal that the speculators were fattening upon the
necessities of the country and the sufferings of the people. Nearly all
mercantile business was regarded at least with suspicion, and much of it
fell into the hands of people with no reputations to lose, a fact which
certainly did not tend to relieve the community in the matter of high
prices.
The prices which obtained were almost fabulous, and singularly enough
there seemed to be no sort of ratio existing between the values of
different articles. I bought coffee at forty dollars and tea at thirty
dollars a pound on the same day. My dinner at a hotel cost me twenty
dollars, while five dollars gained me a seat in the dress circle of the
theatre. I paid one dollar the next morning for a copy of the
_Examiner_, but I might have got the _Whig_, _Dispatch_, _Enquirer_, or
_Sentinel_, for half that sum. For some wretched tallow candles I paid
ten dollars a pound. The utter absence of proportion between these
several prices is apparent, and I know of no way of explaining it except
upon the theory that the unstable character of the money had
superinduced a reckless disregard of all value on the part of both
buyers and sellers. A facetious friend used to say prices were so high
that nobody could see them, and that they "got mixed for want of
supervision." He held, however, that the difference between the old and
the new order of things was a trifling one. "Before the war," he said,
"I went to market with the money in my pocket, and brought back my
purchases in a basket; now I take the money in the basket, and bring the
things home in my pocket."
As I was returning to my home after the surrender at Appomattox Court
House, a party of us stopped at the residence of a planter for supper,
and as the country was full of marauders and horse thieves, deserters
from both armies, bent upon indiscriminate plunder, our host set a
little black boy to watch our horses while we ate, with instructions to
give the alarm if anybody should approach. After supper we dealt
liberally with little Sam. Silver and gold we had none, of course, but
Confederate money was ours in great abundance, and we bestowed the crisp
notes upon the guardian of our horses, to the extent of several hundreds
of dollars. A richer person than that little negro I have never seen.
Money, even at par, never carried more of happiness with it than did
those promises of a dead government to pay. We frankly told Sam that he
could buy nothing with the notes, but the information brought no sadness
to his simple heart.
"I don' want to buy nothin', master," he replied. "I's gwine to keep dis
always."
I fancy his regard for the worthless paper, merely because it was called
money, was closely akin to the feeling which had made it circulate among
better-informed people than he. Everybody knew, long before the
surrender, that these notes never could be redeemed. There was little
reason to hope, during the last two years of the war, that the
"ratification of a treaty of peace between the Confederate States and
the United States," on which the payment was conditioned, would ever
come. We knew the paper was worthless, and yet it continued to
circulate. It professed to be money, and on the strength of that
profession people continued to take it in payment for goods. The amount
of it for which the owner of any article would part with his possession
was always uncertain. Prices were regulated largely by accident, and
were therefore wholly incongruous.
In the winter of 1863-64 Congress became aware of the fact that prices
were higher than they should be under a sound currency. If Congress
suspected this at any earlier date, there is nothing in the proceedings
of that body to indicate it. Now, however, the newspapers were calling
attention to an uncommonly ugly phase of the matter, and reminding
Congress that what the Government bought with a currency depreciated to
less than one per cent. of its face, the Government must some day pay
for in gold at par. The lawgivers took the alarm and sat themselves down
to devise a remedy for the evil condition of affairs. With that
infantile simplicity which characterized nearly all the doings and quite
all the financial legislation of the Richmond Congress, it was decided
that the very best way to enhance the value of the currency was to
depreciate it still further by a declaratory statute, and then to issue
a good deal more of it. The act set a day, after which the currency
already in circulation should be worth only two-thirds of its face, at
which rate it was made convertible into notes of the new issue, which
some, at least, of the members of Congress were innocent enough to
believe would be worth very nearly their par value. This measure was
intended, of course, to compel the funding of the currency, and it had
that effect to some extent, without doubt. Much of the old currency
remained in circulation, however, even after the new notes were issued.
For a time people calculated the discount, in passing and receiving the
old paper, but as the new notes showed an undiminished tendency to still
further depreciation, there were people, not a few, who spared
themselves the trouble of making the distinction.
I am sometimes asked at what time prices attained their highest point in
the Confederacy, and I find that memory fails to answer the question
satisfactorily. They were about as high as they could be in the fall of
1863, and I should be disposed to fix upon that as the time when the
climax was reached, but for my consciousness that the law of constant
depreciation was a fixed one throughout the war. The financial condition
got steadily worse to the end.
The Government's course in levying a tax in kind, as the only possible
way of making the taxation amount to anything, led speedily to the
adoption of a similar plan, as far as possible, by the people. A
physician would order from his planter friend ten or twenty visits'
worth of corn, and the transaction was a perfectly intelligible one to
both. The visits would be counted at ante-war rates, and the corn
estimated by the same standard. In the early spring of 1865 I wanted a
horse, and a friend having one to spare, I sent for the animal, offering
to pay whatever the owner should ask for it. He could not fix a price,
having literally no standard of value to which he could appeal, but he
sent me the horse, writing, in reply to my note:
"Take the horse, and when the war shall be over, if we are both alive
and you are able, give me as good a one in return. Don't send any note
or due-bill. It might complicate matters if either should die."
A few months later I paid my debt by returning the very horse I had
bought. I give this incident merely to show how utterly without
financial compass or rudder we were.
How did people manage to live during such a time? I am often asked; and
as I look back at the history of those years, I can hardly persuade
myself that the problem was solved at all. A large part of the people,
however, was in the army, and drew rations from the Government. The
country people raised upon their plantations all the necessaries of
life, and were generally allowed to keep enough of them to live on, the
remainder being taken by the subsistence officers for army use.
In the cities, living was not by any means so easy as in the country.
Business was paralyzed, and abundant as money was, it seems almost
incredible that city people got enough of it to live on. Very many of
them were employed, however, in various capacities, in the arsenals,
departments, bureaus, etc., and these were allowed to buy rations at
fixed rates, after the post-office clerks in Richmond had brought
matters to a crisis by resigning their clerkships to go into the army,
because they could not support life on their salaries of nine thousand
dollars a year. For the rest, if people had anything to sell, they got
enormous prices for it, and could live a while on the proceeds. Above
all, a kindly, helpful spirit was developed by the common suffering, and
this, without doubt, kept many thousands of people from starvation.
Nobody formed any plans or laid by any money for to-morrow or next week
or next year, and indeed to most of us there really seemed to be no
future. We were not used to think of ourselves as possible survivors of
a struggle which was every day perceptibly thinning our ranks. The
coming of ultimate failure we saw clearly enough, but the future beyond
was a blank.
The reader may find it difficult to believe that with gold at a hundred
and twenty-five for one, or 12,400 per cent. premium; when every day
made the hopelessness of the struggle more apparent; when our last man
was in the field; when the resources of the country were visibly at an
end, there were financial theorists who honestly believed that by a mere
trick of legislation the currency could be brought back to par. I heard
some of these people explain their plan during a two days' stay in
Richmond. Gold, they said, is an inconvenient currency always, and
nobody wants it, except as a basis. The Government has some
gold--several millions in fact--and if Congress will only be bold enough
to declare the treasury notes redeemable at par in coin, we shall have
no further difficulty with our finances. So long as notes are redeemable
in gold at the option of the holder, nobody wants them redeemed.... The
gold which the Government holds will suffice to satisfy a few timid
ones, and there will be an end of high prices and depreciated currency.
I am not jesting. This is, as nearly as I can repeat it, the utterance
of a member of the Confederate Congress.
The matter of prices was frequently made a subject for jesting in
private, but for the most part it was carefully avoided in the
newspapers. As with the accounts of battles in which our arms were not
successful, necessary references to the condition of the finances were
crowded into a corner, as far out of sight as possible. The _Examiner_,
however, on one occasion denounced with some fierceness the charges
prevailing in the schools; and I quote a passage from Prof. Sidney H.
Owens's reply, which is interesting as a summary of the condition of
things in the South at that time:
"The charges made for tuition are about five or six times as high as in
1860. Now, sir, your shoemaker, carpenter, butcher, market man, etc.,
demand from twenty, to thirty, to forty times as much as in 1860. Will
you show me a civilian who is charging only six times the prices charged
in 1860, except the teacher only? As to the amassing of fortunes by
teachers, spoken of in your article, make your calculations, sir, and
you will find that to be almost an absurdity, since they pay from twenty
to forty prices for everything used, and are denounced exorbitant and
unreasonable in demanding five or six prices for their own labor and
skill!"
There were compensations, however. When gold was at 12,000 per cent.
premium with us, we had the consolation of knowing that it was in the
neighborhood of one hundred above par in New York, and a Richmond paper
of September 22, 1864, now before me, fairly chuckles over the high
prices prevailing at the North, in a two-line paragraph which says, "Tar
is selling in New York at two dollars a pound. It used to cost eighty
cents a barrel." That paragraph doubtless made many a five-dollar
beefsteak palatable.
FOOTNOTES:
[8] Adapted from Wesley Clair Mitchell, _A History of the Greenbacks_,
Part II, The University of Chicago Press, 1903.
[9] Adapted from A. D. Noyes, _Forty Years of American Finance_, pp.
7-20. G. P. Putnam's Sons, New York and London, 1909.
[10] _Ibid._, pp. 21-22.
[11] _Ibid._, pp. 23-31.
[12] _Ibid._, pp. 44-47.
[13] A. Piatt Andrew, The Essential and the Unessential in Currency
Legislation, in _Questions of Public Policy_, Addresses delivered in the
Page Lecture Series, 1913, before the Senior Class of the Sheffield
Scientific School, Yale University, pp. 55-59. Yale University Press,
New Haven, Connecticut. 1913.
[14] Adapted from George Gary Eggleston, _A Rebel's Recollections_, pp.
78-107. Hurd and Houghton. Boston, 1875.
CHAPTER VI
INTERNATIONAL BIMETALLISM
[15]... There are natural and commercial causes which may operate to
produce either an incessant fluctuation in the relative value of silver
and gold, or a wide and increasing divergence, from year to year,
through a long period, from the ratio of exchange existing between the
two metals at the commencement of the period. So far are the sources and
conditions of supply of the one different from those of the other that,
notwithstanding the influence of the durableness of the metals in giving
steadiness of value to either by turns, and hence to the two in their
relation to each other, it would be in the highest degree unreasonable
to assume that the ratio of exchange between gold and silver would
remain unaltered through any considerable term of years. The annual or
monthly variations may take the form of oscillations, now on one side
and now on the other of any historical ratio, or they may be cumulative
on one side of that ratio, producing a divergence increasing from month
to month, and year to year; but variations in some degree, in some
direction, are to be expected under the unrestrained operation of causes
influencing the demand for, or the supply of, each metal.
The conditions, natural and commercial, which determine the ratio of
exchange of the two metals being such, we have seen that government may
enter, and, by making the two indifferently legal tender for debts at a
ratio fixed by law, may, for the time, counteract the operation of any
and all forces tending to produce divergence. So long as any country
establishing such a principle holds a considerable amount of that metal
which, under the natural and commercial conditions of supply and demand
prevailing at the time, tends to become the dearer of the two, it is
impossible that the cheapened metal should there, or in any market, fall
far below that ratio. By the force of the bimetallic law, the
substitution of the cheapened for the dearer metal will at once begin;
and so long as that continues, the divergence of the market ratio from
the mint ratio can never be wide. Why should any one in London or New
York pay much more than fifteen and a half ounces of silver for an ounce
of gold, when gold can, at any time and in any amount, be obtained for
silver at the rate of fifteen and a half in Paris?
This operation of the bimetallic system can not be denied; but there is
ground for dispute as to the degree of the advantages to result, and as
to the cost at which those advantages are to be obtained. The
monometallist, or advocate of the so-called single standard, is disposed
to disparage the benefits to be expected, and to magnify the expense of
this system. He points to the fact that the two metals do not actually
circulate in the same country, at the same time, in any considerable
degree; that it is always the one metal or the other which is used as
money, according as the market ratio diverges to the one side or the
other of the mint ratio, while the coin made from the dearer metal
acquires a premium, and is exported or hoarded. Hence it is said
bimetallism really means the use of but one metal in a country at a
time. It is not a double standard, but an alternate standard.
To this the bimetallist replies that the concurrent use of the two money
metals, side by side, in the same markets, is a matter wholly of
indifference. The merit of the bimetallic scheme does not depend on this
at all.
The object of bimetallism is, by joining the two metals together in the
coinage, at a fixed ratio, to diminish the extent of the fluctuations to
which the value of each would be separately liable, by generating a
compensatory action between the two, by which the cheapening metal shall
receive a larger use, while the appreciating metal drops partially out
of its former demand, thus making the two fall together, if there must
be a fall, or rise together, in the opposite case: or, conceivably,
making the tendency of one to fall precisely counteract the tendency of
the other to rise.
Thus we may suppose four successive cases to illustrate the working of
this principle.
The first is, where the demand for the use of either metal in trade
remaining the same, a large increase in the supply of one metal, A,
takes place, the supply of the other, B, remaining unchanged. In this
case, without the bimetallic system, the value of A would tend to fall
rapidly through a considerable space, while the value of B would stand
fast. With the bimetallic system, the joint supply of the two metals
would be applicable to meet the joint demand for the two. Now, as the
joint supply has been increased without any change in the joint demand,
there must be a fall in value; but the fall will be in the two
indistinguishably, except for a slight degree of delay and friction in
exchange. Both will fall, but the depth of the fall will be diminished
as the surface over which it is to take place has been enlarged.
The second is where, the demands of trade for both metals remaining the
same, a diminution occurs in the supply of A, while the supply of B
remains unchanged. Here, by the operation of the same principle, a rise
in the value of money will take place, since the joint supply has been
reduced without any corresponding change in the joint demand. The rise
will be a rise of the two metals indistinguishably, the height of the
rise being diminished as the surface over which it is to take place has
been enlarged.
The third case is where, demand remaining the same, the supply of both
metals undergoes a change in the same direction, either of increase or
of diminution, at the same time. In this event, the fall or rise will
again be of the two indistinguishably, the point reached being a mean
between the points which would have been reached by the two severally.
The fourth case is where, demand remaining the same, the supply of the
two metals undergoes a change at the same time, but in opposite
directions, A through diminution, B through increase. In this case, the
opposite tendencies will counteract each other. If of equal force, the
value of money will be stable; if of unequal force, there will be
movement in the direction of the stronger to the extent of the
difference between the two. Instead of one falling and the other rising
in value, the change will be wrought in the two indistinguishably.
It will appear from the foregoing statements that, under the bimetallic
system, the value of money will be liable to vary more frequently than
under the monometallic system. That is, a change in respect to either
constituent of the money mass will produce a change of value; and it is
apparent that the chances of change are greater with two constituents
than with one. On the other hand, the variations under the bimetallic
system are likely to be less extensive. Indeed, it is a matter of
practical certainty that they will be far less extensive than they would
be under the monometallic system, whichever metal were adopted as the
standard of deferred payments.
But, again, the monometallist interposes the objection that the
bimetallic system is only to be supported at great expense to the States
maintaining it; that they lose by the exchange of the dearer for the
cheapened metal, even though they acquire a certain premium in doing so,
and that sooner or later the stock of the dearer metal in the bimetallic
countries will become exhausted, and the system will collapse, the price
of the two metals no longer being held closely or nearly at the former
ratio by the possibility of exchanging them at that ratio, freely, in
any amount.
How far a bimetallic country loses by the alternation of the metals in
circulation, as now one and now the other becomes the cheaper at the
coinage ratio, is a nice question.
That the service rendered to the commerce of the world by establishing a
normal price for each metal in terms of the other, and thus creating and
maintaining a par-of-exchange between gold countries and silver
countries, is worth far more than its cost, seems to me beyond a
rational doubt. It would, in my view, be as reasonable to doubt whether
London Bridge repays the expense of its erection and repair. Were the
cost of this bimetallic service, whatever it is, properly assessed upon
and collected from each commercial nation of the world by turns,
according to the proportion in which it derives advantage therefrom, I
think it might safely be said that no one of these nations would sustain
a single other charge which so fully justified itself in the return it
made, whether that other charge were for works of construction, for the
administration of justice, or for any other strictly necessary purpose.
But there is no assurance that the cost of the bimetallic system will be
thus equitably assessed. If the whole charge of erecting and repairing
London Bridge were thrown upon the merchants of the two or three streets
nearest thereto, while yet the whole population were allowed to use the
bridge, free of toll, there would not unnaturally arise a strong sense
of injustice on the part of those who bore this burden for the public
benefit; it might even become a question whether the undoubted
advantages derived by them from the use of the bridge repaid the
disproportionate expense which it caused them. If the maintenance of the
bimetallic system involves a certain burden on the nations which sustain
it, as I am disposed to think is the case, it fairly becomes a question
whether those individual nations are compensated for bearing the whole
expense of the service by their share of the advantages resulting
therefrom to the trade and industry of the world.
That England could well have afforded, throughout the present century,
to maintain this system for her own benefit, whatever it cost, even
though other nations profited by it in greater or less degree, is clear
as the light. That France, a country of far less extended international
trade, has been compensated for bearing so large a part as she has done
of the burden of maintaining a par-of-exchange for the commerce of the
world, by her share of the resulting advantages, I make no question; but
it must be admitted to be fairly a matter of dispute.
On such a point it is evidence of no small value that the French people
themselves and the French statesmen, though singularly acute and
sagacious in matters of finance, have apparently not doubted that the
bimetallic system was for the interest of their country. Certain of the
French political economists--MM. Chevalier, Levasseur, Bonnet,
Mannequin, Leroy Beaulieu--from their theory of the subject have held
that France lost by her policy in this respect; but the financiers of
that remarkable nation held firmly to the "double standard" from 1785
to 1874. And though France at the latter date restricted her silver
coinage, and two years later stopped it altogether, it was not done as
the result of any change of views. Partly it was from deference to her
monetary allies, Belgium and Switzerland, but chiefly because the
demonetization of silver by Germany and the sale of the discarded metal
of that empire brought a sudden strain upon the bimetallic system which
threatened to break it violently down. Hence France closed her mints to
silver, but not with any confession that her policy had been erroneous
under the conditions previously existing; not from any desire to abandon
that policy should the future offer conditions which would admit the
resumption of bimetallism. It was the declaration of M. Leon Say, the
French Minister of Finance, the President of the International Monetary
Conference of 1878, that France, in suspending the coinage of silver,
had taken no step towards the single gold standard, but had placed
herself in a position to await events, a position which she would not
leave till good reasons for action should appear, and then most probably
to re-enter on the system of the double standard....
The objection that the stock of the dearer metal in the bimetallic
States must, if the drain be indefinitely continued, become after a
while exhausted, and that the system will then lose all its efficiency
in holding the two metals together, is unquestionably valid; but an
altogether unreasonable weight has been assigned to it in the discussion
of bimetallism as a scheme of practical statesmanship.
If we look at almost any treatise written from the monometallic point of
view, we shall find that it is taken as conclusive against that scheme,
that conditions of supply and demand can be assumed for the two metals
separately which would result in the complete exhaustion of the dearer
metal, and the consequent loss of all virtue in the bimetallic scheme.
The bimetallist is confronted with a series of adverse conditions, taken
each at its maximum and piled one above the other without the least
regard to the modesty of nature, or the experience of the past; and is
then challenged to say whether the system he proposes could be
maintained under such circumstances. If he is candid enough to admit
that bimetallism would fail there, it is taken for granted that the
whole question is disposed of.
Now, human institutions are not to be judged of, and approved or
disapproved, by such methods. The folly of reasoning like this would be
seen at once were it applied to ordinary political matters. No
government on earth could stand against one-fourth or one-tenth of the
elements of hostility which might conceivably be arrayed against it.
Mankind do not, therefore, refuse to form governments.
Bimetallism is a political institution for practical ends, and is
entitled to be judged with reference to reasonable probabilities. It may
claim the benefit of the chance that adverse conditions will be offset
by conditions favourable, and that the adverse conditions will not prove
so severe at the start as they may be conceived, and that their force
will be more quickly spent than might be feared.
It would be perfectly legitimate ground on which to establish European
bimetallism, that the French system, with so little of support from
other States, passed within a quarter of a century through the three
successive shocks of the gold discoveries of Siberia, the gold
discoveries of California, and the gold discoveries of Australia, and
yet was not brought to the ground.
With Germany, France, and England joined in a monetary union, no changes
reasonably to be anticipated in the conditions of supply of the one
metal or the other would succeed in moving the market ratio far apart
from the mint ratio thus supported by maintaining over so wide a surface
a legal equivalence between the two metals in payment of debts.
And, moreover, while bimetallism is entitled to be judged like any other
political institution, with reference to the reasonable probabilities of
the future, the allowance which requires to be made for error and
extraneous force is less than in most political institutions, inasmuch
as the failure of bimetallism involves no disaster to industry or
society.
When an engineer designs a bridge which is intended to sustain a weight
of eighty tons, he introduces a "factor of safety," say three or five,
and makes the bridge strong enough to bear two hundred and forty or four
hundred tons. The greater the calamity which would result from the
breaking down of the bridge--the deeper the chasm which it spans, the
swifter the torrent below--the larger the factor of safety. With many
political institutions, likewise, the consequences of failure would be
so disastrous that the statesman seeks to introduce a high factor of
safety; but in the case of bimetallism no catastrophe whatever is to be
anticipated, even in the event of failure. At the worst, after the drain
of the dearer metal, in consequence of changes in the conditions of
supply, is completed, the bimetallic country is simply in the same
position with the countries of the single standard using the cheapened
metal. While the process of substitution is going on, it sells the
dearer metal at a premium; when the process is over, it is no worse off
than it would have been had it originally selected as its sole money of
full legal-tender power the metal which it has bought at a discount, and
which other countries, perhaps its immediate neighbours, are still
using. It is not the case of a country seeking to reject the cheapening
metal, and to supply its place with the metal which is continually
becoming scarcer and dearer.... There is all the difference, in the two
cases, between going down hill and going up hill.
Not only is no catastrophe involved in the failure of bimetallism
through the exhaustion of the dearer metal, but it is always in the
power of the Government to arrest the drain at any point without shock.
Thus, in 1874, France and her monetary allies, seeing the prospect of a
considerable drain of gold through the importation of the discarded and
cheapened silver of Germany, and having decided, whether wisely or
unwisely, not to prevent that drain, restricted the coinage of silver
without repealing or suspending the law which made gold and silver legal
tender indifferently at a fixed ratio. Two years later, finding that the
forces operating to lower the value of silver were powerful and
persistent, the coinage of silver was peremptorily stopped.
Can one point to any sign that France has suffered any special injury to
her trade and production from this act?...
We now have to note ... that every additional State which joins the
bimetallic group, having the same mint ratio between gold and silver,
does not only share the cost or the burden with those already in the
system, but diminishes the aggregate cost or burden to be borne, and
this, not in a slight, but in an important degree, so that should the
monetary league become general, the total cost or burden to be divided
among the many allies would be inappreciable; while, should the system
come to embrace all commercial States, there would, in theory, be no
burden at all to be borne by any one.
Thus let us suppose the commercial world to be divided into sixteen
States, A to P, inclusive, the first six having the single gold
standard, four, G to J, the so-called double standard of gold and
silver, say at 15-1/2:1; the remaining six States having the single
standard of silver, thus:
A, B, C, D, E, F (G, H, I, J), K, L, M, N, O, P.
It is evident that in the case of a change in the conditions of supply
tending to cheapen silver relatively to gold, the new silver would pass
into the countries of the double standard, G to J, be there exchanged
for gold at the rate of 15-1/2: 1, with some small premium as the profit
of the transaction, and the gold would go to the gold countries, A to F,
in settlement of trade balances.
The rapidity with which this substitution of silver for gold will go
forward will depend, first, on the force of the natural causes operating
to cheapen silver, and, secondly, on the force of the commercial causes
operating to maintain or advance the value of gold. The length of time
during which the drain of the dearer metal can be sustained without
exhaustion will (given the rate of movement) depend solely on the stock
of that metal existing in the bimetallic States jointly when the drain
begins.
But chief among the commercial causes operating to maintain or advance
the value of gold is the exclusive power with which gold is invested by
law to pay debts within States A to F; while the stock of the dearer
metal available to sustain the drain described is made up, not of all
the gold in the sixteen States A to P, or in the ten States A to J, but
only of the gold in the four bimetallic States, G to J.
Hence we see that for every gold State which adopts the "double
standard" the amount of gold available, in the case of a cheapening of
silver, to meet the drain of the dearer metal (on which the virtue of
the bimetallic system depends) is increased; while the demand for gold
in preference to silver at 15-1/2:1 (the only cause which threatens the
stability of the bimetallic system) is, in just so far, diminished. On
the other hand, every silver State that adopts the "double standard"
strengthens the bimetallic system in the case of a cheapening of gold.
Let us suppose the sixteen commercial States to be divided as four gold
States, eight gold and silver States, and four silver States, as
follows:
A, B, C, D (E, F, G, H, I, J, K, L), M, N, O, F.
We see that the bimetallic system is now not twice as strong merely as
in the case first assumed, but many times as strong, since not only is
the amount of the dearer metal (whichever that may at the time be)
subject to drain greatly increased, but the demand for that metal, in
preference to silver at 15-1/2:1, now comes from four countries only,
instead of six, as formerly. The transfer of still another State from
each of the two single-standard groups would vastly increase the
stability of the bimetallic system, A, B, C (D, E, F, G, H, I, J, K, L,
M), N, O, P. Not only would the base of the system be broadened by
bringing the dearer metal of ten States, D to M, under tribute in the
event of changes operating on the supply of either to affect its value;
but the force of the causes threatening the equilibrium of the system
would be reduced, since the demand for the dearer metal would now come
from only three States: A, B, C, in the case of a cheapening of silver
relatively to gold; N, O, P, in the case of a cheapening of gold
relatively to silver.
Bring still another State from each group into the monetary union, and
the danger of a breaking down of the system, under any change in the
conditions of supply which it would be reasonable to anticipate, almost
disappears.
A, B (C, D, E, F, G, H, I, J, K, L, M, N), O, P. Twelve States now
supply the dearer metal; only two States will take it in preference to
the other at the ratio of the mint. Those two States--whether A, B, or
O, P--can not take the dearer metal indefinitely. They will soon be
surfeited. A further increase of money in them would only be followed
by a fall in its value, which would soon proceed so far as to bring the
metals together again. What the one metal would tend to lose in value
through increase of supply, the other would tend to lose through
diminution of demand.
This is the Modern Bimetallic Scheme advocated by Wolowski and Cernuschi
in France, Malou and de Laveleye in Belgium, Mees and Vrolik in Holland,
Schneider in Germany, Haupt in Austria, Seyd and the Liverpool writers
in England, Horton, Nourse, and George Walker in the United States.
It differs widely from the plan of the so-called "double standard,"
which was pronounced impracticable by Locke, Adam Smith, and Ricardo.
Not the smallest presumption against the reasonableness of this scheme
is created by the fact that eminent economists of the past century, and
of the first half of the present, declared in favour of the single
standard, whether of gold or of silver. Those writers contemplated a
condition of international relations in which anything like general and
permanent concert of action, in establishing and maintaining a ratio
between the metals in the coinage, would have been wholly beyond
reasonable expectation....
A general or universal system of bimetallism would involve no machinery,
no international accounts, no detail whatever. The simple agreement of
governments to coin at a certain ratio would be sufficient for all the
objects that have been discussed. If unification of coinage, identity of
moneypieces, and mutual acceptance of coins by the several nations
forming such a monetary league, were to be added, some machinery for the
redemption of worn pieces might require to be brought into existence;
but this is not a necessary feature of successful bimetallism, which
would be entirely compatible with the retention by each State of its own
devices and denominations, and with the exchange of moneys as at present
effected....
FOOTNOTES:
[15] Francis A. Walker. _Money in Its Relations to Trade and Industry_,
pp. 164-176; 178-182. Henry Holt & Company. New York. 1889.
CHAPTER VII
THE SILVER QUESTION IN THE UNITED STATES
[16]Such was the singular combination of events after the peace of 1865
that almost at the moment when a million citizens were turned from
organised destruction to pursuit of peaceful industry, the avenues of
American employment and production were widened in a degree
unprecedented in the history of trade. Within eight years after Lee's
surrender, the railway mileage of the United States was literally
doubled. Only a fraction of this increase belonged to the
transcontinental lines which linked the two oceans in 1869. Quite aside
from the 1,800 miles of the Pacific railways, upwards of 30,000 miles of
track were laid in the United States between 1865 and 1873. Four
noteworthy economic developments accompanied this extension of the
transportation system. A fertile interior domain, hitherto untouched,
was opened up to industry. With the rush of population to these Western
districts, not only did the disbanded army resume production without
industrial overcrowding such as followed the Napoleonic wars, but
provision was made for three or four hundred thousand immigrants
annually. European capital in enormous volume was drawn upon to provide
the means for this development. Finally, the United States rose from the
position of a second- or third-class commercial State to the first rank
among agricultural producers and exporters. Each of these several
phenomena had its special influence on the period.
Not less immediately connected with this opening up and settlement of
our agricultural West was still another phenomenon, of peculiar interest
to the study of the ensuing period. The average price of grain had
advanced with great rapidity during the Civil War. In 1867, the price of
wheat, even on the Chicago market, reached the remarkable level of
$2.85 per bushel; nor was this price very greatly above the annual
maximum of the period. In a large degree, this advance resulted from
inflation of the American currency. But the upward movement was
world-wide; in 1867 and 1868 the average price, even in England, was
close to the equivalent of two dollars a bushel. That any such abnormal
market could be maintained in the face of the new American supplies was
at least improbable. The increase in cereal production was twice as
rapid as the country's increase in population; the United States became
therefore the leading figure in the world's export markets; and this was
certain to have important influence on prices.
As in America, so in Europe, production received immediate stimulus.
While American capital was opening up the Mississippi Valley, European
capital was similarly busy along the fertile river basins of the Dnieper
and the Danube. The Russian railway system grew during this period from
something like 2,000 miles to upwards of 13,000. In Austria-Hungary the
percentage of increase was almost equally large. All of these new
transportation lines, like our own new Granger railways, were at once
engaged in carrying to the seaboard supplies of grain which never before
had reached an export market. The problem of an earlier generation had
been how to feed the constantly increasing population; a wholly new
problem was presently to arise, based on the question how to find a
ready and profitable market for the year's output of breadstuffs.
Prices, in short, which rose almost continuously throughout the world
during the period of slack production from 1858 to 1873, receded almost
as continuously in the ensuing generation. Nowhere was this phenomenon
destined to have more immediate importance, economically, socially, and
politically, than in the United States.
The opinion is more or less widely held that the decline in prices,
notably of grain, has resulted from legislation on the currency. Without
for the present arguing that proposition, it may be affirmed with entire
safety that a good share of the period's currency legislation has
resulted from the decline in the price of grain. The fall in wheat has
been the typical argument for arbitrary increase of the silver or paper
currency in almost every Congressional debate since 1872. What is
perhaps even more significant, the division in almost every
Congressional vote upon these subjects has been, not political but
geographical--the commercial East against the agricultural West.
AGITATION FOR SILVER AND THE PASSAGE OF THE BLAND BILL
[17]In the summer session of 1876, several bills had been introduced,
providing for increased silver coinage and for remonetization of the
silver dollar. None of these propositions came to anything; they were
chiefly remarkable from the fact that they first gave vogue to the
theory of the "crime of 1873"--a theory which assumed that the dropping
of the silver dollar from the list of coins in the statutes of that year
was the outcome of a conspiracy which carried its legislation through in
secret. The entire baselessness of this assertion has been demonstrated
often enough and in convincing detail; this very provision regarding the
silver dollar was a subject of public discussion in the House, and met
with no serious opposition. The assertion in itself is so patently
absurd that I shall not pause to discuss it. The truth is that silver in
1873, and during a generation before that date, was worth more to its
owner in the form of bullion than in the form of coin. In 1872 the
silver requisite to coin a dollar at the established ratio was worth
$1.02. For years, therefore, nobody thought of bringing his silver to
the mint for coinage; he sold it in the commercial markets. The total
silver-dollar coinage of the United States, between 1789 and 1873, was
barely eight million dollars, and when, in 1873, the law provided that
except for the so-called trade dollar coined for export, "no deposit of
silver for other coinage shall be received," no one had interest enough
in the matter to offer criticism.
But in 1874 and 1875 came one of those curious coincidences which render
possible for all time conflicting theories of an economic event.
Germany, having adopted the gold standard of currency in July, 1873,
began to sell its old silver coin as bullion. At exactly the same time,
Mackay and Fair, in the heart of the Nevada Mountains, were opening up
the Great Bonanza. The Pacific Coast was in fact going wild over the
rise in mining shares while the East was financially and industrially
paralysed.
The statute dropping the silver dollar from this country's coinage list
was enacted February 12, 1873; the German law for retirement of silver
coinage was adopted July 9, 1873; and a year later the news of the rich
Nevada "ore-finds" became public property. Between the German sales and
the sales at Nevada City, the price of silver yielded. In 1874, for the
first time in a generation, 412-1/2 grains of standard silver would have
been worth more when coined into a legal-tender dollar than when sold in
the bullion market. The motive of the mining interest in the free-silver
coinage agitation of 1876 and 1877 was not mysterious.
The motive of the anti-Administration party in Congress was somewhat
different. There is not the slightest question that the silver-coinage
movement, in the agricultural West particularly, had the same origin and
the same following as the paper inflation movement of a few years
before. Mr. Bland himself, the author of the silver bill, declared that
the question was presented as between what he called "honest resumption"
with silver coinage, "or on the other hand a forced unlimited inflation
of paper money." In the heat of debate on the silver bill, the same
statesman declared in Congress that if his coinage plan could not be
passed, he was "in favour of issuing paper money enough to stuff down
the bondholders until they are sick." The point of these remarks lies in
their frank assumption that the free-silver sentiment and the fiat-money
sentiment were interchangeable.
So much, then, for the origin and nature of the silver movement. The
Bland Bill passed the House on November 5, 1877, under the previous
question and without debate, by a vote of 164 to 34, and the resumption
operations of the Government came to an instant halt. The market price
of silver then was such that the legal-tender dollar of the Act would
have been worth intrinsically less than ninety cents. Foreign
subscribers to our resumption bonds suspected instantly that payment of
the Government debt in a depreciated coin was planned by Congress; their
suspicions were confirmed by a resolution introduced December 6th by
Stanley Matthews, Mr. Sherman's own successor in the Senate, and passed
by both houses. The resolution explicitly declared that in the opinion
of Congress, all the bonds of the United States, "issued or authorized
to be issued," were payable in the silver dollars of the Bland Law. The
extraordinary character of this resolution may be judged from the fact
that it was proposed and passed in both houses while the Coinage Act was
still pending, and while, therefore, there was not in existence the coin
which was duly declared a legal tender for settlement with public
creditors. To the conservative portion of the public, the resolution
seemed a piece of financial lunacy; to the Treasury, it was not only
embarrassing but humiliating. Hardly a month before, in his annual
report to Congress, the Secretary had repeated his official statement,
previously made to bond subscribers, that payment of the bonds in gold
might safely be anticipated. The publication of this statement in New
York and London had been followed by greatly increased subscriptions to
the bonds, in payment of which gold was required by the Government. The
Matthews resolution amounted, so far as Congress was concerned, to
repudiation of a formal bargain of which the Government had already
obtained the fruits. The debate was such as might have been expected on
a measure of the sort. It centred repeatedly on denunciation of
Government bond investors. Foreign subscribers were treated with
especial scorn; indeed, our foreign customers in general were not
spared. It was this debate which drew forth Senator Matthews's somewhat
celebrated query: "What have we got to do with abroad?"--a remark which
was perhaps as typical of the session's deliberations as any utterance
made from the floor of Congress.
The situation, during the early months of 1878, was extremely critical.
For the time the three direct assaults on the public credit were warded
off. The Matthews resolution was "concurrent," and hence a mere
expression of opinion without binding force. The bill repealing the
Resumption Act of 1875 was killed by disagreement in the Senate.
Meantime the Silver-Coinage Act was modified by the Senate into a
compromise requiring purchase and coinage by the Government of two to
four millions' worth of silver monthly. Even thus modified, it
encountered the veto of the President, but was passed over his veto,
without a day's delay, by the requisite two-thirds majority. Executive
conservatism seemed to be fruitless; nevertheless, there is no doubt
whatever that the steadfast policy of Mr. Hayes did much to stem the
current of reaction.
Congress adjourned on June 19th. Even before Congressional adjournment,
the canvass for the November State elections had begun. The State
Convention platforms in the summer of 1878, were not in all respects
such as the session's work in Congress would have suggested.
The opposition had gone too far in Congress, and popular opinion to that
effect was expressed with sufficient emphasis in November, 1878. The
Administration party gained what amounted to a decided victory. There
were but four States, East or West, where opposition majorities were
increased in 1878 or Administration majorities diminished, and these
were agricultural States, where the season's sharp decline in wheat had
stirred up discontent. There was not much danger from the closing
session of a Congress whose earlier ventures had received this response
from the people.
PROVISIONS OF THE ACT OF 1878
[18]Although the silver dollar of which the coinage was resumed in 1878,
dates back as a coin to the earlier days of the Republic, its reissue in
that year marks a policy so radically new that the experience of
previous years throws practically no light on its working. The act of
1878 provided for the purchase by the Government, each month, of not
less than two million dollars' worth, and not more than four million
dollars' worth of silver bullion, for coinage into silver dollars at the
rate of 412-1/2 grains of standard silver (or 371-1/4 grains of fine
silver) for each dollar. The amount of the purchases, within the
specified limits, was left to the discretion of the Secretary of the
Treasury. As every Secretary of the Treasury, throughout the period in
which the act was in force, kept to the minimum amount, the practical
result was a monthly purchase of two million dollars' worth of silver
bullion.
The act is sometimes described as having called for a monthly issue of
two million silver dollars; but this was not the exact situation. The
amount of silver obtainable with two million dollars obviously varies
according to the price of the metal in terms of the dollars with which
the purchases are made. In February, 1878, when the first purchases were
made, those dollars were the inconvertible United States notes, or
greenbacks, worth something less than their face in gold. The amount of
silver bullion obtainable with two million such dollars depended, on the
one hand, on the price of silver bullion in terms of gold, and on the
other hand on the value of the dollars themselves in terms of gold. When
specie payments were resumed, on the first of January, 1879, and the
greenbacks became redeemable in gold, the measure of value in the United
States became gold, and the extent of the coinage of silver dollars
under the act of 1878 became simply a question of how much silver
bullion could be bought with two million dollars of gold. The price of
silver in 1878 was, in terms of gold, not far from a dollar for an ounce
of standard silver. Since 1878 it has gone down almost steadily, and ...
in 1889 was barely above 80 cents an ounce.[19] The silver dollar of
412-1/2 grains contains less than an ounce (480 grains) of standard
silver. The monthly purchase of two million dollars' worth of silver has
therefore always yielded more than two million silver dollars, the
amount being obviously greater as the price of silver went lower. On the
average, the monthly yield [was] not far from two million and a half of
silver dollars.... Thirty millions of silver dollars a year was roughly
the addition to the currency of the community from the act of 1878.
SILVER CERTIFICATES
[20]An important provision of the act of 1878 was that authorising the
issue of silver certificates against the deposit of silver dollars. This
authority was limited at the time to certificates in denominations only
of ten dollars and upward: a restriction which ... proved to be of great
importance. At the time it does not seem to have been expected that the
silver certificates would enter directly into the circulating medium; we
may infer from the restriction to large denominations that no such
expectation was entertained. But in fact, it has been chiefly in the
form of certificates that the silver has entered into circulation. These
certificates, it is true, are not, like the dollars themselves, a legal
tender; but they are receivable for all public dues, customs included,
and they pass from hand to hand at least as readily as the bulky pieces
which they represent.
CAUSES OF THE ACT
[21]The passage of that act was due to causes easily described. It was
part of the opposition to the contraction of the currency and the
resumption of specie payments which forms the most important episode in
our financial history between 1867 and 1879. The resumption of specie
payments had been provided for by the act of 1875, and was to take place
on January 1, 1879. In the meanwhile, the long-continued depression
which followed the crisis of 1873 intensified the demand for more money
and higher prices. That demand led to the inflation bill passed by both
Houses of Congress in 1878, and killed by the veto of President Grant.
The same feeling led to the silver act. The great fall in the price of
silver, beginning in 1873, and showing itself markedly in 1876, made
silver, at the old ratio, a cheaper currency than gold, and so caused
the opponents of the return to specie payments to prefer silver to gold,
as they preferred paper to either. No doubt some additional force was
given to the movement in favor of the use of silver from the desire of
the silver-mining States and their representatives, that the price of
the metal should be kept up through a larger use of it for coinage....
WHEREIN PECULIAR
[22]Although the specific measure passed in 1878 thus rested on a long
train of historical causes, it contained details that were essentially
new, not only in our own experience, but in that of the world at
large.... It ... provided for a regular mechanical addition of large
amount to the general circulating medium. No precise experiment of this
kind had ever been tried. It is true that Germany and the countries of
the Latin Union possess, in their circulating medium, large quantities
of overvalued thalers and five-franc pieces which are exactly like our
silver dollars. They also are legal tender without limit; their total
quantity is limited; and it is only by this limitation of the quantity
that their value is kept above that of the bullion contained in them.
But the thalers and francs in these countries are not new additions to
the currency. They are remnants from an earlier period, when Germany had
a silver standard, and the Latin Union a complete bimetallic standard.
No addition whatever to the thalers is made in Germany; and if some
coinage of five-franc pieces takes place in France and in other
countries of the Latin Union, the additions are meant merely to fill the
place of abraded coins, to provide for the ordinary losses from daily
use, and to make any additions to the supply which may be needed for
convenience in making small change. No other country has ever entered on
an addition of overvalued coin to its circulating medium having the
object and extent of that made by our silver act of 1878. This
characteristic of the measure, it need hardly be said, was the result
not of any deliberate intention to try a new experiment, but of the
spirit of compromise which explains so many anomalies in the legislation
of democratic communities. The silver act, as passed by the House of
Representatives, provided for complete bimetallism--for the free and
unlimited coinage of the silver dollar at the old
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