Recollections of Forty Years in the House, Senate and Cabinet Part 26

I next stated the objections to local banks. The first was the great number and diversity of bank charters. There were 1,642 banks in the United States, established by the laws of twenty-eight different states, and these laws were as diverse, I might say, as the human countenance. We had the state bank system with its branches. We had the independent system, sometimes secured by local bonds, sometimes by state bonds, sometimes by real estate, sometimes by a mixture of these. We had every diversity of the bank system in this country that has been devised by the wit of man, and all these banks had the power to issue paper money. With this multiplicity of banks, depending upon different organizations, it was impossible to have a uniform national currency, for its value was constantly affected by their issues. There was no common regulator; they were dependent on different systems. The clearing house system adopted in the city of New York applied only to that city. There was no check or control over these banks. There was a want of harmony and concert among them. Whenever a failure occurred, such as that of the Ohio Life Insurance and Trust Company, it operated like a panic in a disorganized army; all of the banks closed their doors at once and suspended specie payments.

Another objection to these local banks was that of their unequal distribution among the states. In New England the circulation of the banks was about $50,000,000, while in Ohio, a state with three- fourths of the population of all New England, it was but $9,000,000.

The contrast, if made with other states, was still more marked.

I called attention to the fact that the circulation of banks in the eastern states had then reached about $130,000,000, and of that amount, $40,000,000 was circulating in the west. If these notes were driven out of circulation and the United States notes subst.i.tuted, a contribution would be made to the treasury of the United States of $2,400,000 a year, for the mere interest of a currency which the west did not prefer, but was compelled to use.

I called attention to the loss to the people by counterfeiting, which could not be avoided when we had such a mult.i.tude of banks.

It then required experts to detect counterfeits. It was impossible to prevent counterfeiting. An expert could save the banks, but the loss fell upon the people. By the subst.i.tution of national currency we substantially could lose nothing by counterfeiting.

The notes would be few in kind, only three or four of them, all issued by the United States, all of a uniform character, that could not be counterfeited. I described, with some detail, the loss to the people of the United States by bills of broken banks, computed them to be equivalent to five per cent. per annum of all the bills issued. On an average, every twenty years the entire bank circulation ceased to exist or deteriorated.

The loss of exchange from the west to the east on local currency was one per cent. This loss was usually made a gain to themselves by the bankers and "shavers." Under the most favorable state of trade between the east and west an exchange of one per cent. was demanded from drafts and bills of exchange. With a national currency, uniform and equal throughout the country, this cost for exchange would not exist or would be greatly reduced. I called attention to the then increasing volume of local currency in the United States. When the United States had issued $250,000,000 of notes, the banks had largely increased their circulation. This tended to depreciate both United States and bank notes.

I discussed at similar length the proposition that, as the states were forbidden by the const.i.tution to authorize the issue of bills of credit, they were equally forbidden to authorize corporations to issue circulating notes, which were bills of credit. Upon this point it seemed to me that the authorities were absolutely conclusive.

That position was taken by the most eminent members of the const.i.tutional convention, by Joseph Story in his "Commentaries,"

by Daniel Webster, and other great leaders of both parties since that time. It was in reference to these bills that Mr. Webster used the language often quoted:

"A disordered currency is one of the greatest of political evils.

It undermines the virtues necessary for the support of the social system, and encourages propensities destructive of its happiness.

It wars against industry, frugality, and economy; and it fosters the evil spirits of extravagance and speculation. Of all the contrivances for cheating the laboring cla.s.ses of mankind, none has been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man's field by the sweat of the poor man's brow. Ordinary tyranny, oppression, excessive taxation, these bear lightly on the happiness of the ma.s.s of the community, compared with a fraudulent currency, and the robberies committed by depreciated paper."

In speaking of the bank circulation then afloat in the country, he further said:

"It is further to be observed that the states cannot issue bills of credit; not that they cannot make them a legal tender, but that they cannot issue them at all. Is not this a clear indication of the intent of the const.i.tution to restrain the states, as well from establishing a paper circulation as from interfering with the metallic circulation? Banks have been created by states with no capital whatever, their notes being put into circulation simply on the credit of the state or the state law. What are the issues of such banks but bills of credit issued by the state? I confess, Mr. president, that the more I reflect on this subject, the more clearly does my mind approach the conclusion that the creation of state banks, for the purpose and with the power of circulating paper, is not consistent with the grants and prohibitions of the const.i.tution."

I insisted that if there was no money in this country but United States notes, the process of funding would be going on day by day.

Whenever there was too great an acc.u.mulation of these notes they would be converted into bonds; the operation would go on quietly and silently. I quoted the authority of Secretary Chase that it was his deliberate judgment, after watching this process with all his conceded ability, that but for the influence of this local bank paper he would be able to carry on the war without the issue of more paper money, that the currency then outstanding and that which by law he was authorized to issue would be sufficient to carry it on. Such a currency would lead to the conversion of the notes into bonds, and by this process the people would absorb the national loan and enable him to carry on the government without any sacrifice to them.

It was not strange that Mr. Jefferson, near the close of the War of 1812, stated more clearly than I could do the conflict between local bank paper and United States notes. He, who during his whole life was so mindful of the rights of the states, and so jealous of paper money, in brief and terse language designated the only way in which our country could carry on war. In his letter to Mr.

Cooper, dated September 10, 1814, just at the close of the war, he said:

"The banks have discontinued themselves. We are now without any medium, and necessity, as well as patriotism and confidence, will make us all eager to receive treasury notes, if founded on specific taxes.

"Congress may now borrow of the public, and without interest, all the money they may want, to the amount of a competent circulation, by merely issuing their own promissory notes of proper denominations for the larger purposes of circulation, but not for the small.

Leave that door open for the entrance of metallic money. . . .

Providence seems, indeed, by a special dispensation, to have put down for us, without a struggle, that very paper enemy which the interest of our citizens long since required ourselves to put down, at whatever risk.

"The work is done. The moment is pregnant with futurity, and if not seized at once by Congress, I know not on what shoal our bark is next to be stranded. The state legislatures should be immediately urged to relinquish the right of establishing banks of discount.

Most of them will comply, on patriotic principles, under the convictions of the moment, and the non-complying may be crowded into concurrence by legitimate devices."

I also quoted another extract to show that this matter filled the mind of Mr. Jefferson. He said:

"Put down the banks, and if this country could not be carried through the longest war, against her most powerful enemy, without ever knowing the want of a dollar, without dependence on the traitorous cla.s.ses of her citizens, without bearing hard on the resources of the people, or loading the public with an indefinite burthen of debt, I know nothing of my countrymen. Not by any novel project, not by any charlatanry, but by ordinary and well-experienced means; by the total prohibition of all paper at all times, by reasonable taxes in war, aided by the necessary emissions of public paper of circulating size, this bottomed on special taxes, redeemable annually as this special tax comes in, and finally within a moderate period--even with the flood of private paper by which we were deluged--would the treasury have ventured its credit in bills of circulating size, as of five or ten dollars, etc., they would have been greedily received by the people in preference to bank paper."

On the 26th of January, 1863, I introduced in the Senate a bill to "provide a national currency, secured by a pledge of United States stocks, and for the circulation and redemption thereof." This bill took the usual course, was referred to the committee on finance, was reported favorably with a number of amendments, and was fully debated in the Senate. On the 9th of February, 1863, a cursory debate occurred between Mr. Collamer, of Vermont, and myself, which indicated a very strong opposition to the pa.s.sage of the banking bill. Various amendments were proposed and some adopted. I became satisfied that if a strong effort was not made the bill would either be defeated or postponed. I then, without preparation, made a long, and as I think, a comprehensive, speech covering the general subject and its princ.i.p.al details. It was the only speech of considerable length that was made in favor of the bill in the Senate. There seemed to be a hesitancy in pa.s.sing a measure so radical in its character and so destructive to the existing system of state banks.

I said the importance of the subject under consideration demanded a fuller statement than had as yet been made of the principle and object of the bill. It was the misfortune of war that we were compelled to act upon matters of grave importance without that mature deliberation that would be secured in peaceful times. The measure affected the property of every citizen of the United States, and yet our action for good or evil must be concluded within a few days or weeks of that session. We were to choose between a permanent system designed to establish a uniform national currency based on the public credit, limited in amount, and guarded by all the restraints which the experience of men had proved necessary, and a system of paper money without limit as to amount, except for the growing necessities of war.

I narrated the history of the bill, of its introduction in December, 1861, its urgent recommendation by the Secretary of the Treasury in two annual reports, and the conditions that then demanded immediate action upon it. I stated the then financial condition of the country. Gold was at a premium of between fifty and sixty per cent. and was substantially banished from circulation. We were in the midst of war, when the necessities of the government required us to have large sums of money. We could not choose as to the mode in which we should get that money. If we pursued the ordinary course, the course that had been sufficient in times of peace to raise money, of putting our bonds into the market and selling them for what they would bring, it would be at a great sacrifice. We knew this from the history of other nations and from our own experience. We therefore must look for some system of finance that would give us all the aid possible, either in the form of paper money or by the agencies of a.s.sociated banks. We knew very well that after the war was over the government would still be largely in need of money.

I then reviewed the various financial measures since the commencement of the war. We were then in the peculiar condition of a nation involved in a war without any currency whatever which by law could be used in the ordinary transactions of public business. Gold was withdrawn by the suspension of specie payments. The money of the banks could not be used because the laws of the United States forbade it, and we were without any currency whatever. Under these circ.u.mstances, Congress had authorized the issue of $400,000,000 of United States notes. That this measure was wise but few would controvert. We were compelled, by a necessity as urgent as could be imposed upon any legislature, to issue these notes. To the extent to which they were issued they were useful; they were a loan by the public and without interest; they were eagerly sought by our people; they were taken by our enemies in the south, by our friends in the north; they were taken in the east and the west.

They furnished the best subst.i.tute for gold and silver that could then be devised, and if we could limit United States notes to the amount then authorized by law they would form a suitable and valuable currency.

We had but four expedients from which to choose. First, to repeal the sub-treasury act and use the paper of local banks as a currency; second, to increase largely the issue of United States notes; third, to organize a system of national banking, and fourth, to sell the bonds of the United States in the open market. I discussed each of these expedients in considerable detail. The practical objection to the further issue of United States notes was that there was no mode of redemption; they were safe; they were of uniform value, but there was no mode pointed out by which they were to be redeemed.

No one was bound to redeem them. They were receivable but not convertible. They were debts of the United States but could not be presented anywhere for redemption. No man could present them except for the purpose fo funding them into the bonds of the United States. They were not convertible into coin. They lacked that essential element in currency.

Another objection was that they were made the basis of state bank issues. Under the operation of the act declaring United States notes to be a legal tender, the state bank circulation had increased from $120,000,000 to $167,000,000. The banks sold their gold at a large premium, and placed in their vaults United States notes with which to redeem their own notes. While the government had been issuing its paper money some of the banks were inflating the currency, by issuing paper money on the basis of United States money. Ill.u.s.trations of this inflation were given of existing banks, showing enormous issues based upon a comparatively small amount of legal tender notes. The issue of United States notes by the government, and the making them a legal tender, was made the basis of an inflated bank circulation in the country, and there was no way to check this except by uniting the interest of the government, the banks, and the people, together, by one uniform common system.

I said that during war local banks were the natural enemies of a national currency. They were in the War of 1812. Whenever specie payment was suspended, the power to issue a bank note was the same as the power to coin money. The power granted to the Bank of France and the Bank of England to issue circulating notes was greatly abused during the period of war. It was a power that ought never to be exercised except by the government, and only when the state was in danger. It was the power to coin money, because when a bank issued its bill without the restraint of specie payments, it substantially coined money and false money. This was a privilege that no nation could safely surrender to individuals or banks.

Upon this point I cited a number of authorities, not only in our own country, but in Europe. While I believed that no system of paper money should depend upon banks, I was far from objecting to their agency. They were useful and necessary mediums of exchange, indispensable in all commercial countries. The only power they derived from corporation not granted to all citizens was to issue notes as money, and this power was not necessary to their business or essential to their profit. Their business connected them with the currency, and whether it should be gold or paper they were deeply interested in its credit and value. Was it not then possible to preserve to the government the exclusive right to issue paper money, and yet not injuriously affect the local banks? This was the object of that bill.

But, it was asked, why look at all to the interest of the banks, why not directly issue the notes of the government, and thus save to the people the interest on the debt represented by the notes in circulation? The only answer to this was that history taught us that the public faith of a nation alone is not sufficient to maintain a paper currency. There must be a combination between the interests of private individuals and the government. Our revolutionary currency, continental money, depreciated until it became worthless.

The a.s.signats of France, issued during her revolutionary period, shared the same fate. Other European countries which relied upon government money alone had a similar experience. An excessive issue of paper money by the government would produce bankruptcy and repudiation, not only of the notes abroad, but of bonds also.

The government of the United States had in circulation nearly $400,000,000 United States notes. We had a bank circulation of $160,000,000. If we increased our circulation, as was then proposed, it would create an inflation that would evidently lead to the derangement of all business affairs in the country. Whatever might be the hazards, we had to check this over expansion and over issue.

If a further issue of United States notes were authorized, it would be at once followed by the issue of more bank paper, and then we would have the wildest speculation. Hitherto the inflation had not extended to many articles. Real estate had not been much affected by it.

The question then occurred whether the bank bill proposed by the Secretary of the Treasury, and introduced by me into the Senate, would tend to secure a national currency beyond the danger of inflation. This, the princ.i.p.al question involved, was discussed at length. I contended that the notes issued would be convertible into United States notes while the war lasted, and afterwards into coin; that the currency would be uniform, of universal credit in every part of the United States, while the bank bills, which it would supersede, were current only in the states in which they were issued. It would furnish a market for our bonds by requiring them to be held as the security for bank notes, and thus advance the value of the bonds. The state bank bills would be withdrawn, and the state banks would be converted into national banks with severe restrictions as to the amount of notes issued, and these only issued to them by the general government upon ample security. The similarity of notes all over the United States would give them a wider circulation. I insisted that the pa.s.sage of the bill would promote a sentiment of nationality.

The policy of this country ought to be to make everything national as far as possible. If we were dependent on the United States for a currency and a medium of exchange, we would have a broader and more prosperous nationality. The want of such nationality, I then declared, was one of the great evils of the times; and it was that principle of state rights, that bad sentiment that had elevated state authority above the great national authority, that had been the main instrument by which our government was sought to be overthrown. Another important advantage the banks would derive from this system, I urged, would be that their notes would be guarded against all frauds and all alterations. There would be but five or six kinds of notes in the United States, instead of the great diversity there was then. In 1862 the number of banks existing was 1,500, and the number whose notes were not counterfeited was 253. The number of kinds of "imitations" was 1,861. The number of kinds of "alterations" was 3,039. The number of kinds of "spurious" was 1,685. This was the kind of currency that was proposed to be superseded. Under the new system, the banks would be relieved from all this difficulty.

Other advantages to the banks would be that they might become depositaries of the public money, that their notes, being amply secured, would be received in all payments due to or from the United States, while the notes of state banks could not be so received, as they were dishonored and disgraced from the beginning, being refused by the national government.

This is an imperfect view of the question as it was then presented to my mind. I knew the vote upon the pa.s.sage of the bill would be doubtful. The New England Senators, as a rule, voted for the bill, but Senators Collamer and Foote had taken decided grounds against it, and it was believed that Mr. Anthony and his colleague would do likewise. I informed Secretary Chase of my doubt as to the pa.s.sage of the bill, and especially whether Mr. Anthony would vote for it; without his vote I did not think it would pa.s.s. Mr. Chase called at the Senate and had an interview with Mr. Anthony, in my presence, in which he urged him strongly, on national grounds, to vote for the bill, without regard to local interests in his own state. His remarks made an impression upon Mr. Anthony who finally exclaimed that he believed it to be his duty to vote for the bill, although it would be the end of his political career. When the vote was taken his name was the first recorded in favor of the bill. It pa.s.sed by a vote of 23 yeas and 21 nays, so that I was entirely correct that if he had voted against the bill it would have been defeated by a tie vote.

These two measures, the absorption of the state banks, and the establishment of the system of national banks, taken in connection with the legal tender act, were the most important financial measures of the war, and, tested by time, have fully realized the antic.i.p.ations and confident a.s.surance of their authors.

This system of national banks has furnished to the people of the United States a currency combining the national faith with the private stock and private credit of individuals. They have a currency that is safe, uniform, and convertible. Not one dollar of the notes issued by national banks has been lost to any person through the failure of a bank. We have a currency limited in amount, restrained and governed by law, checked by the power of visitation and by the limitation of liabilities, safe, uniform, and convertible in every part of the country. Every one of these conditions prophesied by me has been literally realized.

Next in importance to a national currency was the problem of the public debt. The issue of $50,000,000, demand notes, authorized in 1861, was a forced expedient to meet immediate demands. A prudent man, engaged in business, would not borrow money payable on call unless he had securities which he could immediately convert into money. Such liabilities are proper in a stock exchange or in a gambling operation, to be settled by the receipt or payment of balances on the rise or fall in the market of stocks or produce.

These demand notes gave Secretary Chase more trouble than any other security, and they were finally absorbed in the payment of customs duties.

On the 17th of July, 1861, Congress authorized the Secretary of the Treasury to borrow, on the credit of the United States, within twelve months, $250,000,000, for which he was authorized to issue bonds, coupon or registered, or treasury notes, the bonds to bear interest not exceeding seven per cent., payable semi-annually, irredeemable for twenty years. The treasury notes were to be of any denominations fixed by the Secretary of the Treasury, not less than fifty dollars, and to be payable three years after date, with interest at the rate of seven and three-tenths per cent. per annum, payable semi-annually. He was also authorized to issue, in exchange for coin, as a part of the loan of $250,000,000, treasury notes payable on demand, already referred to, or treasury notes bearing interest at the rate of three and sixty-five hundredths per cent.

per annum, and payable in one year from date and exchangeable at any time for treasury notes of fifty dollars and upwards. These forms of security were the most burdensome that were issued by the government during the war. The terms of these securities were somewhat altered by the act approved August 5, 1861.

These laws were superseded by the act of February 28, 1862, which may be regarded as the most important loan law pa.s.sed during the war. It authorized the Secretary of the Treasury to issue, on the credit of the United States, $150,000,000 of United States notes, commonly called greenbacks, already described. Of these, $50,000,000 were to be in lieu of the demand treasury notes authorized to be issued by the act of July, 1861, above referred to. It also authorized the Secretary of the Treasury to issue $500,000,000 of coupon, or registered, bonds, redeemable at the pleasure of the United States after five years, and payable twenty years from date, bearing interest at the rate of six per cent. per annum, payable semi-annually. These are what were known as the 5-20 bonds. In reference to these securities, Secretary Chase, in his report of December 4, 1862, said:

"These measures have worked well. Their results more than fulfilled the antic.i.p.ations of the secretary. The rapid sale of the bonds, aided by the issue of United States notes, furnished the means necessary for the conduct of the war during that year."

On the 3rd of March, 1863, the Secretary of the Treasury was authorized to borrow, from time to time, on the credit of the United States, a sum not exceeding $300,000,000 for the current fiscal year, and $600,000,000 for the next fiscal year, payable in coin, at the pleasure of the government, after such periods as may be fixed by the secretary, not less than ten, or more than forty, years from date. These bonds, known as the 10-40's, bearing five per cent. interest, were exempt from taxation by or under state or munic.i.p.al authority. This act also provided for the issue of a large increase of non-interest bearing treasury notes, which were made lawful money and a legal tender in payment of all debts, public or private, within the United States, except for duties on imported goods and interest on the public debt. Additional 10-40 bonds were authorized by the act of June 30, 1864. But it may be said that the 5-20 and 10-40 bonds became the well-known, recognized securities of the United States, the sale of which at par, in connection with the treasury notes of different forms, furnished the United States the money to carry on the war. In the sale of these securities the secretary was actively a.s.sisted by the banks and bankers of the United States, and especially by Jay Cooke, who was the most effective agent of the government in the sale of 5-20 bonds.

Secretary Chase, in his report of December 10, 1863, discussed at length the objects to be kept studiously in view in the creation of debt by negotiations of loans or otherwise: First, moderate interest; second, general distribution; third, future controllability; and, fourth, incidental utility.

The first loans were made upon the extravagant rate of interest of seven and three-tenths per cent. The reason for this was the fact that there was no currency the secretary could receive in exchange for bonds. As already stated, specie payments were suspended by the banks December 31, 1861. He was forbidden by law to receive bank bills, and he knew that Congress would not and ought not to repeal this law. After such suspension coin was scarce and difficult to obtain. Afterwards, when the legal tender notes were authorized and issued, he sold his bonds bearing six per cent. interest at par for notes, but these notes had already largely depreciated compared with coin. Still, they were money, readily taken for all supplies, and enabled him to sell securities running a shorter period. A diversity of securities maturing at different times were exchanged for notes, and finally he was able to sell five per cent.

bonds at par, so that, on the 30th of September, 1863, two months previous to his report, securities and notes then outstanding amounted to $1,222,113,559. The fist bonds were irredeemable for twenty years. The second bonds were redeemable in five, but payable in twenty, years. The third bonds, bearing five per cent. interest, were redeemable after ten years. It will be perceived that under this arrangement the rate of interest on securities issued was constantly reduced. The notes received in payment of bonds depreciated or advanced in sympathy with the progress of our armies and the prospects of success. The general purpose was to secure as low a rate of interest as possible, to distribute the securities among the largest number of persons possible, to provide the best mode, time and terms for redemption, and to put the securities in such form as to be used as a currency. No one can question the wisdom of the management of the public debt by Secretary Chase.

The origin and development of the present system of internal taxes must be interesting to every student of finance. The policy of the government had been to confine, as far as possible, national taxes to duties on imports, and, in ordinary times, this source of revenue, exclusively vested in the United States, together with the proceeds of the sale of public lands, was ample to defray the current expenses of the government. During and shortly after the War of 1812 resort was had to direct taxes apportioned among the states respectively, and to internal taxes authorized by the const.i.tution under the name of excises, but the necessities of the treasury becoming more urgent, and the reliance on the public credit becoming more hazardous, Congress, at the special session which convened in May, 1813, determined to lay the foundations of a system of internal revenue, selecting in particular those subjects of taxation which would be least burdensome. These taxes were at first limited to one year, but were extended from time to time, so that they acquired the name of "war taxes." A direct tax of $3,500,000 was laid upon the United States, and apportioned among the states respectively for the year 1814. Taxes were imposed on sugar refined in the United States, on carriages, on licenses to distillers of spirituous liquors, and other forms of internal production. It was estimated that the internal taxes and the direct tax would yield $3,500,000. For the fiscal year ending June 30, 1815, internal taxes yielded $5,963,000. In 1816 they yielded $4,396,000. In 1817 they yielded $2,676,000, after which there was no revenue from internal taxes except from the collection of arrears, amounting in 1818 to $947,946, the law providing for such taxes having expired by limitation. A comparison between the receipts from this source then and the receipts subsequently derived from internal revenue, is a significant indication of the difference in population and wealth between 1812 and 1862.

When the Civil War commenced and the necessity of a large increase of revenue became apparent, Secretary Chase, in his report to Congress of the date of July 4, 1861, called attention to the necessity of provision for a gradual increase in the revenue to maintain the public credit, and to meet the current demands. His recommendation as to internal taxes has already been referred to.

The act of August 5, 1861, previously mentioned, levied a direct tax of $20,000,000 and an income tax. This act proved to be a crude and imperfect measure, and it was modified or superseded by the act of July 1, 1862. This act, carefully framed, was the basis of the present system of internal revenue. It created a new office in the treasury department, to be called the office of commissioner of internal revenue. No less than thirteen acts of Congress were pa.s.sed prior to August 1, 1866, enlarging and defining the duties of the office, and prescribing the taxes imposed by these several laws. When this act was first framed we antic.i.p.ated much greater difficulties in the collection of the tax than actually occurred.

We had doubts whether the taxation imposed by this law would be patiently submitted to by our const.i.tuents, but these misgivings soon disappeared and the taxes imposed by that act were cheerfully and promptly paid. I gave to the study and consideration of this act, and the various amendatory acts, a large portion of my time.