Readings in Money and Banking Part 9

The reasoning of the preceding paragraphs bears also on the second part of the bimetallist indictment--that, namely, as to the depressing effects of falling prices on industrial enterprise. Whether a simple rise in the value of money, unaccompanied by any other circ.u.mstance, would have the depressing effects which the bimetallists predict and the cla.s.sic economists deny, is a question radically different from that which in fact presents itself. It may be that in this simple case the bimetallists might prove to be, in some degree at least, in the right, and that the cla.s.sic reasoning, here as on many other subjects, while sound in the long run, would need some qualifications and correction. In the long run, no doubt, it is immaterial whether prices are high or low, whether money returns fall or rise; and yet it might turn out that the habitual a.s.sociation of gain or loss with "making money" would cause a period of simple falling prices to be one of hesitating investment of capital and unenterprising conduct of business. But what the world in fact has seen has been the complex case of a fall in prices accompanied by great improvements in production. The business man and capitalist has had, to be sure, to deal with falling prices; but the same amount of capital and labor has turned out more commodities than before; and his total money returns, so far from declining, have generally increased.

The money incomes of the managers of industry have shown the same upward movement as the money incomes of the other cla.s.ses in society. So long as this is the case, it is idle to talk of a depressing effect on enterprise from the fall in prices, or of a strangling of the industrial organism from insufficiency of the circulating medium. In fact, the immediate cause of the fall in prices has been the pushing on the market for sale of larger and larger quant.i.ties of commodities, produced with profit at lower and lower cost: a state of things fortunate for the community, and surely not depressing for the business man....

This effect on the entrepreneur of improvements and of falling prices combined, doubtless accounts for the failure of the bimetallist agitation to secure any appreciable hold in the business world. The bimetallists, both in England and on the Continent, have labored zealously to engage support among the business men, but never with a degree of success at all proportionate to the energy displayed. The simple reason is that the business world has not been in any state of chronic depression. In the ups and downs of industrial activity there have been periods which seemed to confirm the pessimistic accounts of the bimetallist and of other persons malcontent with the present order of things; but in due time the tide has always turned....

On the whole, then, the fall in prices, when considered in connection with the other great changes which have accompanied it, does not afford so much countenance to the bimetallist proposal as at first sight it seems to. The rise in money incomes and the improvements in production disprove any intolerable burden on debtors, and make it highly improbable that the change has had any general depressing effect on industry.

THE CASE OF THE FARMER

Nevertheless, there is something more to be said, in explanation and justification of the discontent with falling prices, and of the silver agitation which rests on that discontent. While the effects of the fall in prices on debtors as a cla.s.s and on producers as a whole have not given real grounds for complaint, certain particular debtors and producers have undoubtedly been injured. The case of these latter have given plausibility to the general arguments of the bimetallists, and, what is more important at the present juncture, has given strength to the movement in the United States for more money and more silver.

The situation will be best understood if we contrast for a moment the different modes in which the improvements in production have been brought about in manufacturing industries on the one hand, in agriculture on the other hand. In manufactures the improvements have been better machinery, new processes, labor-saving inventions, the conduct of business on a larger scale, and so the greater and more effective division of labor. In agriculture the main cause of cheaper production has been different: it has been the opening up of new lands and new sources of supply. No doubt there are important exceptions to these general statements. In agriculture there have been advances in the arts--new plants, better fertilizers, improved implements, more effective ways of cultivating the soil. In manufactures, on the other hand, there have been important changes due to the discovery of new and rich mines of materials, such as coal, iron, copper. But on the whole, the difference holds good. In agriculture undoubtedly the opening of new lands through the improvements in transportation has been the most important single cause at work. The cheapening of agricultural products has been due not so much to the more effective use of the soil already under cultivation, as to the development of soil not formerly available for the supply of the market.

The changes in production and prices have consequently affected the producers in these two branches of production in very different ways. In manufactures all alike have felt them, and have been able to accommodate themselves to the effects. No doubt the shrewder producers adopt improvements and new inventions first, and, so long as they keep in the lead, have the advantage of their compet.i.tors. They gain by doing a large business at lower prices, while for the time being their slower compet.i.tors lose. But new processes and new inventions spread over the whole field in no long time. The opening of a new source of supply, on the other hand, cheapens production through a process which the holders of the old source of supply cannot avail themselves of. If wheat is raised in large quant.i.ties in Dakota, the price goes down as effectively as if the wheat fields of England and New York had suddenly become more fertile; but as those wheat fields produce no more than before, the farmer or land owner on the old soil has nothing to offset the lower price. This is the explanation of the agricultural distress of which so much has been heard in Europe in recent years, and which has been the main occasion of the revival of protectionist feeling in France, Germany, and other countries of the Continent. The farmer on the old lands does not find in improvements in production any compensation for lower prices. If he owns the land, he must pocket the loss, and perhaps in the end abandon his land and turn to something else; such has been a common case in New England. If he is a tenant on the land, he will probably, after a period of struggle and hardship, get lower rents, leaving the landlord as the permanent sufferer; such has been the outcome in old England. If he was in debt before the change took place, he will find his debts growing more burdensome as his money income goes down; such has been the result with many a Western farmer.

It is in causes of this sort that we find the explanation, in part at least, of the restlessness among the Western farmers of which the silver agitation is one sign. The fall in the prices of wheat, corn, and other staples has been due to enormously increased production in regions which were formerly out of reach of the market: in India, Australia, Russia, as well as in California, Dakota, Washington, Oregon, and the Far West generally....

It is probable that some of the complaints in regard to the burden of debt on the farmers are simply a legacy from the old days of inflated paper money. Not a few of the debts of the present [1891] go back to the years before 1870, when we had prices high in terms of over-issued paper money. These debts have been renewed and continued, in whole or in part; and the fall in prices has made them heavier and heavier to bear.

The evil here again is real, and a remedy is now hard to find. The only conclusion which can be laid down with perfect conviction is that we should make sure of preventing the recurrence of a new era of excessive paper money.

... Another important circ.u.mstance is the general transition in agricultural methods inevitable in those western states which have been settled for a generation or more. When new land is first taken into cultivation the most effective use of it is found in the continuous production of some staple crop like wheat and corn, which can be grown, so long as the cream of the soil is not exhausted, year after year with large returns. After a while, however, the land begins to show signs of exhaustion. The staple crops do not yield as largely as before, and less crude methods of using the soil must be resorted to. Manures have to be applied, and the rotation and selection of crops practised. Meat and dairy products, vegetables, fruits, and the miscellaneous agricultural articles, must take their place in rural economy. This change has been carried through very largely in states like New York, Pennsylvania, and Ohio. In the heart of the Mississippi Valley it is now under way; but the transition is trying, and to some of the farmers it is impossible. A good share of the American agricultural population has been so steadily bred to the easy and careless use of virgin soil that it cannot accommodate itself to more intensive methods. It is constantly moving westward; settling for a generation in one spot, and then, as the land shows signs of exhaustion, moving farther west. The more intelligent and versatile stay behind, adapt themselves to new conditions, and in time prosper under them. The least active also stay behind, and flounder hopelessly in the old ways. But a large number are always moving west.

In every state between the Alleghanies and the Missouri river there are large tracts formerly cultivated by native settlers, who have sold their lands, as they showed signs of giving out, to German or Swedish immigrants. These latter have not infrequently paid good prices for the lands: but they have been bred to intensive farming, to careful and varied use of the soil, and they have prospered where their native predecessors have been unwilling or unable to adapt themselves to the new conditions. The period of transition is a hard one for all of the native farmers, whether they stay behind or move on, and the lesson of using the soil with more skill and care is learned only under the pressure of necessity. In such periods all sorts of remedies for hard times make their appearance and have their run.

THE REPEAL OF THE SHERMAN SILVER PURCHASE ACT AND THE FINANCIAL AND ECONOMIC CONSEQUENCES OF SILVER LEGISLATION

[29]For fourteen years, 1878-1892, only an insignificant amount of gold was paid out of the Treasury in the redemption of legal-tender notes; the total amount of gold in the Treasury increased almost steadily and continuously from $140,000,000 on January 1, 1879, to $300,000,000 in 1891. In 1890 the new issue of Treasury notes, together with a change in commercial conditions, placed heavy burdens upon the reserve, the rapid diminution of which is shown in the following figures:

_Date_ _Net gold reserve_

June 30, 1890 $190,232,405 June 30, 1891 117,667,723 June 30, 1892 114,342,367 June 30, 1893 95,485,413 June 30, 1894 64,873,025

The reasons for the fall in the gold reserve are too various and complicated to be treated here: the failure of the great English banking-house of Baring Brothers in 1890 brought about a considerable withdrawal of English capital invested in the United States; and an unhealthy and inflated industrial development in this country was stimulated by the new tariff. To outward appearances the country was very prosperous; expenditures were large, imports increased, and a failure of the crops in Europe in 1891 enlarged our grain exports. For a brief season only, were the natural effects of the Sherman law delayed: Europe soon recovered, American exports fell, and in the six months ending June 30, 1893, the balance of trade against the United States was $68,800,000. The tariff of 1890 was followed by diminished customs receipts. The revenue from customs was as follows:

1890 $229,668,000 1891 219,522,000 1892 177,452,000 1893 203,355,000 1894 131,818,000

... Fortunately the internal revenue receipts maintained their customary level with something to spare; but increased appropriations, due largely to the pa.s.sage of a dependent pension bill in 1890, cut deep into the funds of the Treasury. In 1890 the surplus was $105,344,000; in 1891, $37,239,000; in 1892, $9,914,000; in 1893, $2,341,000; but in 1894 appeared a deficit amounting to $69,803,000. The Treasury had been weakened by the reluctance of Secretary Windom to deposit government funds in national bank depositories, and by his preference to rely entirely upon the purchase of bonds for getting money back into circulation. In the earlier years of Harrison's administration, bonds were purchased freely--too generously in view of the impending strain upon the resources of the Treasury.

Another element of concern was due to the change in the kind of money received by the Government in the payment of revenue. Before the pa.s.sage of the Sherman Act nine-tenths or more of the customs receipts at the New York custom-house were paid in gold and gold certificates; in the summer of 1891 the proportion of gold and gold certificates fell as low as 12 per cent., and in September, 1892, to less than 4 per cent. The use of United States notes and Treasury notes of 1890 correspondingly increased....

The reason for this subst.i.tution of notes for gold was partly due to a reversal in Treasury practice. For many years it had been the custom of the Sub-Treasury in New York to settle its clearing-house balances almost exclusively in gold or gold certificates. For example, in the fiscal year 1889-1890 the Sub-Treasury paid gold balances to the banks of nearly $230,000,000, and in the next year $212,000,000. The banks were thus daily supplied with gold which they in turn could furnish to their customers either for customs purposes or export deliveries. In August, 1890, the Treasury began the policy of using ... the new Treasury notes in the settlement of New York balances, and in the year ending June, 1891, Secretary Foster, apparently convinced of the need of a larger gold reserve to support the credit of the Treasury notes, increased the use of the older United States notes and held on to the gold reserve. The unexpected result was that the banks, deprived of their usual supply of gold for trade purposes, sought for it at the Treasury by the presentation of government notes....

In March, 1893, Cleveland for a second time entered upon the presidency.

He demanded as the first condition of relief the suspension of silver purchases. The silver advocates, however, were still powerful in both parties, and President Cleveland was at a disadvantage in not having the undivided support of his own party. Even the position of Secretary Carlisle was ... doubted: it was publicly declared that he stood ready, if expediency demanded it, to redeem the Treasury notes of 1890 in silver instead of gold, and, while standing upon the letter of the law which demanded their redemption in _coin_, practically to cut asunder the parity of gold and silver which had thus far been maintained.

Although the President attempted by a specific declaration to make clear the harmonious purpose of the administration that redemption would continue in gold, public apprehension would not be allayed. Whatever might be the wishes of the administration, it was feared that it would not have power to carry them out; particularly when it was announced in April, 1893, that the gold reserve had been drawn down to $96,000,000 by redeeming the Treasury notes of 1890.

At this juncture of financial and commercial difficulties, in June, 1893, the British Government closed the mints in India to the free coinage of silver. The price of silver bullion fell promptly and rapidly, and, while such a decline might on another occasion have produced no immediately serious consequences to the Treasury, it came at a moment when public opinion, at least in the Eastern States, was aroused to a belief that the entire financial problem was a.s.sociated with the coinage of silver; and it thus furnished one of the contributory forces which drove the commercial community into a state of panic.

It was not until June 30, 1893, when the panic was well under way, that a special session of Congress was called for August 7; only by the most strenuous efforts could an adequate support, composed of elements in both political parties, be rallied to uphold the President's insistence that purchases of silver by the Government should cease. The House quickly acquiesced, and on August 21, by a vote of 239 to 108, pa.s.sed a bill for the repeal of the purchasing clause; but the Senate was stubborn, and not until October 30 could a favorable vote, 43 to 32, be secured. So far as the Treasury was concerned, the mischief had been done; although the Government was relieved from further purchase of silver which increased the volume of the obligations to be supported by gold, the old burdens still were sufficiently heavy, in connection with the low state of commerce and industry, to exhaust its immediate revenues. Thus on December 1, 1893, the actual net balance in the Treasury above the gold reserve, pledged funds, and agency accounts was only $11,038,448. Trade and industry had been disorganized; the panic of 1893 extended into every department of industrial life. In December, 1893, the Comptroller of the Currency announced the failure during the year of 158 national banks, 172 state banks, 177 private banks, 47 savings banks, 13 loan and trust companies, and 6 mortgage companies.

Some of these inst.i.tutions afterwards resumed business, but the permanent damage was great. The fright of depositors was general and the shrinkage in deposits enormous; bank clearings were the lowest since 1885; clearing-house loan certificates were once more resorted to, this time on a much larger scale than ever before, and extended to cities throughout the country.

The production of coal, both anthracite and bituminous, fell off; the output of pig-iron, which had been about 9,157,000 tons in 1892, fell to 6,657,000 tons in 1894; new railway construction almost ceased; in 1894 there were 156 railways, operating a mileage of nearly 39,000 miles, in the hands of receivers; among these were three great railway systems,--the Erie, Northern Pacific, and Union Pacific. The total capitalization in the hands of receivers was about $2,500,000,000, or one-fourth of the railway capital of the country. The earnings of railroads and the dividends paid to stockholders were seriously affected; securities fell to one-half and even one-quarter their former value; commercial failures increased from 10,344 in 1892, with liabilities of $114,000,000, to 15,242 in 1893, with liabilities of $346,000,000. The problem of the unemployed became general; special committees were organized in nearly all of the large cities to provide food, and in many places relief work by public bodies was inst.i.tuted. In the spring of 1894 general want and distress led to labor strikes and riots, as in Chicago, and even to more abnormal outbreaks, as seen by the march of c.o.xey's army of unemployed from Ohio to Washington. The distress was increased by the failure of the corn crop in 1894; the demand for wheat in Europe fell off and wheat was sold on the Western farm for less than fifty cents a bushel.

SALE OF BONDS FOR GOLD

Under these adverse conditions it was inevitable that the revenues of the Government should continue to decline. In the six months, January to June, 1893, the excess of expenditures over receipts was $4,198,000, and during the fiscal year ending June 30, 1894, this excess increased to $69,803,000. It was even necessary to encroach upon the gold reserve for current expenses, and for months this fund was far less than caution and prudence demanded. When the integrity of the gold reserve was first a.s.sailed, both Secretary Foster, in the closing months of Harrison's administration, and Secretary Carlisle, at the beginning of Cleveland's term, endeavored, with some success, to tide over emergencies by appealing to the banks to exchange gold for legal tenders. The banks recognized that the instability of Government credit seriously affected the value of all securities in which they were interested; and in February, 1893, they handed over to the Treasury about $6,000,000 in gold, and in March and April about $25,000,000 more. The expedient was not enough to stop the continued drain upon the Treasury. At the very moment that the Government was relieved of notes through the exchange of gold by the banks, other notes were presented to the Treasury for redemption, largely to draw gold for exportation in the settlement of trade balances....

The only way to protect the fund of gold reserve under the circ.u.mstances was borrowing--that is, the sale of bonds for gold--yet some people who were opposed to the overthrow of the gold standard consistently urged that borrowing be postponed until the last moment, so as to add as little as possible to the resources available for purchases of silver.

Some of the gold party would even have permitted the drain to go on to the end, notwithstanding the inevitable evils, in the belief that the country could be convinced of its errors in no other way.

Eventually, to prevent a suspension of specie payments in gold, the Treasury Department made successive issues of bonds for the purchase of gold. These issues are very interesting to the student of finance. No administration wishes to add to public indebtedness in times of peace; and Secretary Carlisle had scruples against selling bonds, except with the authority of the Congress then sitting; hence the issue of bonds was put off to the last possible moment. The only existing authority for selling bonds was the resumption act of 1875; this provided only for ten-year 5 per cent., fifteen-year 4-1/2, and thirty-year 4 per cent.

bonds, all of which would command a premium so high as to diminish their attractiveness as an investment, and, taken in connection with the length of time which they ran, to hamper the Treasury in purchasing or refunding the debt when the crisis was over. The administration asked for the issue of low-rate bonds, but Congress, inspired in part by free silver arguments, and in part by political intrigues to discredit the administration, paid no attention to the recommendation of the Secretary. Finally, in January, 1894, without special legislation, but under the ancient authority of the resumption act, $50,000,000 of 5 per cent. ten-year bonds were sold, yielding $58,660,917; and again in November an equal amount of bonds with like conditions were marketed, yielding $58,538,500. The sale of the first issue was on the whole creditable, considering that at about the same time the President was obliged to veto a bill providing for coining the silver seigniorage, and that an effort had been made in the courts to enjoin the Secretary of the Treasury from selling bonds under the law of 1875.

In each case the sale of bonds called for subscriptions in gold, but the new supplies were quickly exhausted by fresh redemption of notes. The fluctuations in the volume of gold in the Treasury as a consequence of the bond sales is seen in the following figures:

_Date_ _Gold in Treasury_ January 31, 1894 $65,650,000 February 10, " 104,119,000 _Bond issue._ November 20, " 59,054,000 November 30, " 105,424,000 _Bond issue._ February 9, 1895 41,393,000

The endless chain appeared to be in full and unceasing operation; not only was gold being withdrawn for export but also for individual h.o.a.rding, in fear of an impending suspension of gold payments. The Treasury finally recognized the futility of selling bonds for gold, most of which was drawn out of the Treasury itself, by the presentation of legal-tender notes for redemption. A new device was tried: in February, 1895, the Secretary of the Treasury entered into a contract with certain bankers for the purchase of 3,500,000 ounces of standard gold at the price of $17.80441 per ounce, to be paid for by the delivery of United States bonds having thirty years to run and bearing 4 per cent.

interest; not less than one-half of this gold was to be procured abroad, and the parties with whom the contract was made stipulated that they would "as far as lies in their power exert all financial influence and make all legitimate efforts to protect the Treasury of the United States against the withdrawals of gold, pending the complete performance of this contract." An ounce of standard gold was worth $18.60465, and the difference between that sum and the contract price represented the premium received by the Government on the bonds, making the price at which the bonds were accepted $104.4946. A condition was affixed to the contract, by which, in case Congressional authority could be secured, a 3 per cent. _gold_ bond might be subst.i.tuted, and for this the syndicate agreed to pay a higher price.

In view of the unfavorable terms of the bargain imposed by this contract, the administration hoped that Congress would promptly act and authorize the issue of the lower and more remunerative bond. Faithful in its adherence to silver, Congress could not be swerved; it defeated the bill authorizing the sale of a low-rate gold bond, and then engaged in an angry debate denouncing the Executive for his subserviency to the gold standard banking interests in entering into a contract not only disgraceful but illegal. In reply it could be shown that the New York Sub-Treasury was within forty-eight hours of gold exhaustion....

At first the syndicate was successful, because of some slight improvement in trade, but later it practically failed to control the price of exchange. It once more became cheaper for merchants to ship gold than to purchase bills, and gold continued to be withdrawn from the Treasury. On December 3, 1895, the gold reserve stood at $79,333,000, and after the commercial apprehension caused by President Cleveland's Venezuelan message a fortnight later, the reserve was still further reduced. Once more the administration resorted to a bond sale, and again the action was preceded by a special message from the President to Congress asking for a grant of authority to issue gold bonds instead of coin bonds, and also for the retirement of the legal-tender notes which continued in an endless chain their journey to the Treasury, and drove off gold to the commercial market. As Congress still refused to act, the Treasury resorted to a fourth issue of $100,000,000 4 per cent. bonds.

The Treasury now carefully avoided any appearance of dealing through a syndicate and publicly advertised for offers, with the encouraging result of 4,640 bids, amounting to $684,262,850. Seven hundred and eighty-one bids were accepted and the premium yielded about $11,000,000.

The relief obtained by the Treasury, however, was meagre, for it is estimated that $40,000,000 of the bonds were purchased with gold withdrawn from the Treasury by the redemption of notes. This was the Government's penalty for its endeavor to separate itself from all dealings with a banking syndicate.

In spite of this sale of bonds the reserve remained near the traditional danger line. In July, 1896, it fell to $90,000,000 because of h.o.a.rding due to popular apprehension as to the success of the silver movement in the November presidential election. Fearful that a new bond issue might strengthen the claims of the silver advocates, bankers and dealers in foreign exchange voluntarily combined to support the Treasury by exchanging gold for notes. The effort succeeded, and the reserve was placed in safety. After the elections in November gold came out from its hiding-places, and was turned into the Treasury in large amounts.

Business and revenue improved and the difficulties of the Treasury Department were tided over.

Many Republicans held the earnest conviction that the issue of bonds would not have been necessary if the revenue had been sufficient. Not only had industry and commerce been unsettled by the tariff act of 1894, but the operations of the endless chain must certainly continue, it was held, until there was a generous income in excess of expenditures, whereby a considerable part of the credit currency might be covered into the Treasury and thus lessen the possible claims for redemption. The administration emphatically replied that at no time when bonds were issued was there intention of paying the expenses of the Government with their proceeds, and that the Treasury Department had no authority whatever to issue bonds for such purposes. President Cleveland was insistent that on each occasion of a bond issue there were sufficient funds in the Treasury to meet the ordinary expenditures of the Government. The proceeds of the bonds sold for the maintenance of the national credit were, however, turned into the general fund of the Treasury, and consequently, though not originally designed for that purpose, employed to meet indiscriminately all demands made upon the Government, whether for redemption of notes or the payment of debts....

There was a series of deficits beginning with 1894, but the deficit by no means equalled the amounts of bonds sold.

FOOTNOTES:

[16] Adapted from A. D. Noyes, _Forty Years of American Finance_, pp.

2-6 G. P. Putnam's Sons, New York and London. 1909.

[17] _Ibid._, pp. 35-44.

[18] F. W. Taussig, _The Silver Situation in the United States_, pp. 8, 9. G. P. Putnam's Sons. New York. 1893.

[19] I have stated the price here, for simplicity, in terms of so much per ounce of standard silver, _i. e._, silver containing 10 per cent. of alloy. The usual quotation in the United States is per ounce of fine silver. [Thus, the New York price, March 10, 1916, was 56-3/4 cents per ounce of fine silver.]

[20] _Ibid._, pp. 9, 10.

[21] _Ibid._, pp. 10, 11.